Sonus Networks: Market Continues To Ignore Fundamentals

Last week, Sonus shares unexpectedly dropped $.66, or 9.00%, to $6.67 on heavy volume of 9.7 million shares. The market reaction was a result of panic selling as investors capitulated on news surrounding Sonus' option scandal. The company announced that it was unable to file its Form 10-K for the year ended December 31, 2006 and it disclosed that it expects the Securities and Exchange Commission to issue a formal order of investigation. When such an order is issued, SEC staff is able to compel witnesses by subpoena to testify and produce books, records, and other relevant documents. Following the investigation, the Commission can authorize the staff to file a case in federal court or bring an administrative action if warranted.

However, this is all unlikely. Though the market might be indicating otherwise, the company's audit committee completed its investigation of stock option practices and accounting and found no improper conduct or violation of company policies by any member of the current management team.

So let's concentrate on the fundamentals, which the market continues to ignore. The company's recent preliminary earnings report blew away analyst expectations. This should bolster the case for those holding long positions. Revenues for the fourth quarter of fiscal 2006 were $79 million compared to $75 million in the third quarter of fiscal 2006. Analysts were expecting revenue of $68.2 million. Revenues for the full year fiscal 2006 were $279 million. Cash, cash equivalents and investments increased by $47 million during 2006, to $361 million.

Looking ahead, the future is bright. Last Monday's Annual Institutional Investors Conference featured Sonus Chief Technology Officer Vikram Saksenal who gave a pretty good outlook on Sonus. Here are some notes; 2006 was a good year in which Sonus continued to dominate with IP traffic over their networks exceeding thirty billion minutes per month, four times greater than their nearest competitor. Industry growth is continuing as migration into IP voice occurs. 2007 prospects look equally bright as existing customers launch into IP voice. Sonus as an incumbent in the new carriers, gives the company a good position in the new consolidated AT&T (T). Partnership with Motorola (MOT) in WIMAX networks paying off. Not worried about Ericsson (ERIC) competition in IP services. Large carriers in trunking space, Verizon (VZ) and KDDI migrating entire IP core network using Sonus technology over the next couple of years.

The stock has since rebounded, trading up today by $.10, or 1.40%, to $7.23, though still off its recent 52-week high of $8.05 as the market continues to ignore the fundamental picture. However, Wednesday's Citigroup Small and Mid-Cap Conference in which Hassan Ahmed, Chairman and CEO of Sonus, is giving a presentation should help to change investor sentiment and spread the word about Sonus.

SONS 1-yr chart: