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Sonus Networks, Inc. (NASDAQ:SONS)

September 13, 2012 10:00 am ET

Executives

Patti Leahy

Raymond P. Dolan - Chief Executive Officer, President, Director and Member of Corporate Development & Investment Committee

Todd A. Abbott - Senior Vice President of Worldwide Sales & Marketing & Business Development

Anthony Scarfo - Senior Vice President of Technology Development

David W. Tipping - Vice President and General Manager of The SBC Business Unit

Maurice L. Castonguay - Chief Financial Officer and Senior Vice President

David Roy

Analysts

Catharine Anne Trebnick - Northland Capital Markets, Research Division

James Kisner - Jefferies & Company, Inc., Research Division

Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division

Patti Leahy

Well, good morning, everyone. Thank you very much for joining us for our 2012 Investor Day here at the NASDAQ MarketSite. My name is Patti Leahy, Vice President of Investor Relations at Sonus Networks. We're really happy to have you here today, and I'd like to also extend a warm welcome to those of you listening in via webcast.

So just to take you briefly through today's agenda, Ray Dolan, our CEO, will kick things off momentarily; Todd Abbott, our Executive Vice President of Strategy & Go-To-Market, is going to provide an overview of the market and our growth opportunities; Tony Scarfo, Senior Vice President of Technology Development, will give some tangible examples that will provide a connection of our technology road map to our growth opportunities; and David Tipping, our General Manager of SBC, will give some tangible examples of why and where we're winning in the market. Todd is going to join us, again, for a discussion on our Go-To-Market strategy; and then Moe Castonguay, our Chief Financial Officer, will take us through the financials, including a review of our outlook, which we have affirmed today. This will make our organic and our consolidated financial expectations with NET very clear for you. And then Ray is going to wrap things up and summarize today's key messages.

We do have 2 breaks set aside for Q&A, so we'd ask that you please ask your questions at the appropriate time. We're also accepting questions via email today for those of you that are listening in on the webcast and that email address is sons2012@sonusnet.com. So we'll do our best to accommodate your questions during the Q&A portion of the agenda.

So just turning briefly to the Safe Harbor statement. Some of our remarks today will be forward-looking in nature. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligations to do so unless required by law. Also, a reconciliation of our non-GAAP to GAAP outlook in the statement on the use of non-GAAP financial measures is included in today's press release.

So it is now my pleasure to introduce the Chief Executive Officer of Sonus Networks, Ray Dolan.

Raymond P. Dolan

Thanks, Patty. So welcome. Can everybody here me? Is the mic on? Welcome to the 2012 Investor Analyst Day at Sonus Networks. It's a beautiful day in New York for those who are listening in or webcasting in. And we had a tremendous opportunity as a team this morning to ring the opening bell at NASDAQ. Some of you saw some of those photos on your way in. For probably tens of millions, if not, hundreds of millions of people around the world, that bell symbolizes the beginning of trading.

For me and for our team, it carries far more symbolism. To me, it symbolizes milestones achieved along a journey for the multi-year transformation that I signed up for almost 2 years ago. We're making great progress.

For me, when I think about runners that run a journey, they ring that bell. And it says not only this is the time to focus, the stakes are raised. This is the final lap. And it's not a final lap for us by any means because it is a multi-year journey. But it is a time where the attention is on our progress.

The market is looking it up to see, can we make this pivot. I'm here to share with you our story. I believe we are making that pivot. And I've asked 4 members of our leadership team to share their part in that story underneath the umbrella that I'm going to kick off with you.

My messages are as follows: We are making great progress shifting to an SBC company, which is our growth engine. Our investment thesis is the shift to SBC, the growth at or above those markets as that SBC category continues to grow 20% a year, meaning it's a $1-billion category in 2015 and continues to grow from there. That we're investing in the right technologies. In fact, the big strategy on top of the SBC is cloud-based UC. You're going to hear a lot about that today. Cloud-based unified communications. It is the big market opportunity, that being a substantial player in the SBC market enables us to pivot to, okay? That we're investing in the technologies that matter there, in UC. And I'd say that VoLTE, even VoLTE, it's voice over LTE, it's really UC over LTE. LTE is simply another media fabric that happens to be a wireless link that when rendered reliably will allow UC to port through. It just like it does in the enterprise over ethernet or any other media player, okay?

We're going to explain here the NET deal. And I want to be clear. A lot of the feedback I got is, and this is the tired story that's out there, okay? NET is about execution risk. I want to clearly address that in the next few slides, okay? And I want to help you draw the conclusion that this is our year. That bell is the wake-up call to the emergence of Sonus as the market leader through our SBC growth into the UC category.

Now in order to understand where we are and where we're going, you got to know where we've been. This has been a 2-year journey for me, 18 months for Todd. And very -- as I introduce the speakers, I'll let you know how long they've been here. We said at the beginning that this was a multi-year journey. It remains so. After 2 years, we've made a number of major, major rewiring to Sonus.

First, we are moving from a media gated company to an SBC company. So that's obvious. That's the headline question and the headline answer in almost everything that people ask us.

But underneath that, there's a number of important transformations that are going on. We've moved from a highly customized complex solution, which was woven into the culture of how we went to market with gateways into a streamlined, whole product, transactional emphasis, and that is the key enabler in our technology side and our product side to move to go-to-market strategy, from service provider centric to service provider and enterprise centric. UC will be delivered to the enterprise through the service provider, okay? It will also help us move from direct-only, which is 98% of our results before I joined Sonus and remains a very high level of our results, to a complex go-to-market strategy that is both direct and channel centric. And a lot of these strategies have been driven by Todd. You saw the announcement today that he's moving to an Executive Vice President. And I'm thrilled that Todd is doing that, taking not only the sales and marketing relationship through that [ph] organizations, but the strategy functions so that we can unify strategy to go to market. And Tony will deliver the production engine, okay?

We've moved from voice-based company to a complex voice data, text, chat, video, UC-based company. The solution is moving beyond voice. And we're moving with that market. And SIP, by the way, is the enabler for that to move. So if you've got in your head, that's been said 100 times, why would it happen now? The answer is the SIP adoption is the catalyst, and a lot of that is going to be driven in Todd's piece. From fixed network solutions, which was the majority of our initial deployments to mobile core and ultimately closer to mobile edge over time as we follow the spend in the marketplace,okay?

And then here's the real punchline. You heard this commitment from me on our last call. You'll hear this repeatedly from me. From a profitless company to a profitable company next year. We're not issuing guidance. When we guide to 2013, we'll guide to 2013. But when I had my own decisions as to where I fit in this company at a visceral level, that's the commitment that I'm making personally. And we're going to drive to that. Every member of the leadership team understands that's the commitment that I've made. And as a result, they've made that commitment with me.

So the first thing that people look at Sonus to do is demonstrate traction in the SBC category. If you're saying you're making this pivot to SBC, how material is it?

Two aspects. One, we're outgrowing the marketplace on a product basis by about 3:1, okay? Two, it is shifted over 40% of our results. And next year, will become more than 50% of our results on a product basis. By next year, we will be an SBC-based company with a legacy business that we will cash cow.

The other question that we get all the time, and this goes back to -- with the perceptions that hang over Sonus. And what I'm asking you today here is, as you walk in here and your mind says, "I'm going to hear the Sonus story for the fifth time, or the 10th time, or the 100th time." What I'd like you to understand from my perspective is you're going to hear the Sonus story for the first time, okay?

I'd ask you only to open your mind and to hear what we're saying. We bought NET for speed and breadth. You're going to hear from Tony. We had several things on our plate. Move beyond trunking by basically streamlining that, broaden the SBC portfolio and drive software development to go after major markets.

The NET acquisition in one fell swoop broadened our product portfolio. There are 7 link-certified SBCs in the marketplace, 4 are brought to you by Sonus. We are the only end-to-end enterprise SBC solution from the highest to the lowest end. That's what it's about. The breadth and speed. And with it came a talented team that will play a meaningful role in our growth as we focus on UC in the cloud.

So execution risk, I believe it derisked our plan, accelerated our plan and allowed us to focus even faster on the things that matter for value creation. This NET company, despite that it lacked scale, had an overhang on its balance sheet and could have easily lost control of its own destiny, was going through the same transformation we were going through. From an old gateway solution, in that case focused principally on the government sector, to a new SBC solution focused on the low end of the enterprise. It was the same company with small [ph]. And by combining the strategies, we created tremendous synergies. Moe will talk about financial synergies that had been achieved and will continue to be achieved. But at the core, this is a strategic play to accelerate the strategy that we've been going after for the last 18 months together.

So we will cross over as Sonus standalone the 50% at the same time that NET would have if it was successful as a stand-alone business, crossed over it's 50 percentile market. So we will accelerate both sides of that and drive financial synergy.

So the acceleration on the SBC side that we've had already in place at the midpoint of our guidance for 2012 will be accelerated as the UX product line, which we're going to relabel SBC just for simplicity. And you will see that in David's slides and some of Todd's strategy and Tony's slides. It will drive us to even greater SBC penetration. It will drive us to even greater channel opportunity in the important UC category, and it will allow us to drive greater operating leverage across the bigger revenue base. All of that leads to a simple, clear strategy. Sonus will enable businesses through cloud-based unified communications to be faster, smarter, more collaborative and more productive. Productivity will drive GDP growth, and that will drive value. We will be an important part of that telecom, datacom landscape as we move the world to unified communications in the cloud.

So my suggestion to you here before I hand it off to this team is our story is ready. We have the right team. I'll introduce them to you shortly. We are on the right strategy, and we are going after the right markets. And these markets are big.

The folks that I'll ask you to talk -- to meet with today include Todd Abbott, who is our EVP of Strategy & Go-To-Market; Tony Scarfo, who runs our technology and development organization; David Tipping, who is our General Manager to the SBC market; and Dave has been focused on that for the last year; and it's no mistake that the focus that comes from dedicated leadership drives results. He'll talk to you a lot more about that. And then, Moe will give us a financial review of not only our prior quarters, but our going forward quarters and give you some view as to what we're driving on synergies for NET.

Before we introduce Todd, I'd like to show you a 90-second video of where Sonus is going. And I'm told that will be just 1 minute before the 90-second start, so it's a 2.5-minute video, which starts really slow.

[Presentation]

Let's go right to our first speaker. Why don't you put that back on slide. Okay. So I'd like to introduce Todd Abbott. Todd is -- Todd joined the organization 18 months ago. I asked him to lead the sales organization. He then took on the marketing organization, which we were doing very little of. And hopefully, you've seen a great deal of change there. He then took on business development and now owns the strategy function. The entire front end of our strategy through the go-to-market, with all of those transformations that I talked about have been led by and will continue to be driven by Todd Abbott. Todd came from a wealth of experience in Cisco, IBM, Avaya, a number of other places. And I couldn't be more thrilled to hand it off now to one of my principal partners driving this transformation, Todd Abbott.

Todd A. Abbott

Thanks, Ray. Okay. I want to do a few things. First what I want to do is give you a quick perspective on -- a little more detail relative to how we -- where we are relative to our transformation because as Ray set the stage, this is a big strategy and execution and transformation for the company. And there's a lot of rewiring going on underneath.

And I also want to share with you kind of what are the key milestones and proof points that we're progressing well through that. And then, I want to give you a perspective on the market. A lot of debate relative to the growth segments within the SBC, what's driving the SBC growth, I'm going to share with you those key segments and how we're aligning to those. And then some of the follow-on technology and product discussions will help you understand where we're focusing our R&D efforts to be able to compete in the 5 key growth areas of SBC. And then, I'll leave you with what I believe or we believe are the proof points that you should be looking for going forward on the continued progress of the transformation, so what we're holding ourselves accountable. Some of the key transitional proof points.

We shared this slide last year at the analyst conference. This is, in essence, really the technology shift that Sonus has really been navigating through. We were the fundamental market leader in media gateway and trunking business to help telcos make that transition from TDM to IP. That transition in the Western markets is now past the flipping point. There are -- this year or next, there will be more IP lines than there will be TDM lines. There's a tremendous amount of gateway capacity in the market. And that market now is beginning to decline. There's some growth in some of the international markets. But fundamentally on a global level, the trunking business is starting now to reach its maturity and starting to decline, as more and more of the world is moving to the pure IP space. And that's really where we fit relative to moving into the SBC space.

The traditional trunking space, for us, is a tremendous source of strength and experience because in that market is where we gained the experience of scaling some of the largest voice over IP networks in the world, some of the largest SIP networks in the world. And so a lot of our transformation is about bringing that experience base into the pure IP world and into the enterprise world. Because it is going to be enterprise, as Ray talked about, that's really going to now drive the next level of adoption of SIP-based applications, of which you see really is at the forefront of adoption.

When we left the analyst conference last year, and Ray and I were about 6 months and 9 months in, we were really beginning to chart the course. And what we said last summer in this transformation was really 3 fundamental things: We said that we were going to fundamentally shift the company to be an SBC company. That was from an R&D standpoint, from a sales standpoint, all with the objective to establish that we are a strong #2 in the space. At that point in time, there was a clear guerrilla and a lot of small players.

We also said we're going to move into the enterprise market. That was about investments in product, as well as investments in coverage. Our sales coverage up to that point had been predominantly all service provider related. We had started some enterprise coverage about a year before. But it was very, very early in our commitment levels to the enterprise.

We also said that to reach the enterprise, we needed to launch a channel program. Launching a channel program is not a marketing announcement. It is a rewiring of the capability to be able to transact business and support partners, so that they make the investments in your products and extending your reach out into the market.

Through that change, there was a couple of key actions that we took. You saw us take our operating expense up, about $5 million a quarter. We've had to continue to invest in our legacy business. We had some very big customers that were expecting innovation and continued support. And we had to double down in R&D and as well as in sales coverage to be able to make this transformation. It was something we had the ability to do frankly because of our balance sheet to organically invest. But it did require us to make some organic investments to be able to make this transformation.

We also launched the business unit structure. We were predominantly an engineering-driven company historically. And we knew that we had to become much more market focused in the introduction of business units for business units led by David in the SBC business unit, really as the -- as Ray talked about is putting executives and teams in place that wake up every day, focusing on those markets and what's required to be successful against this typically different sets of competitors and, in some cases, different aspects of the market. So we launched 4 business units a year ago. And we're well along the way of changing our culture to be very much a market growth-driven culture.

We also said that in order to be successful in the enterprise and in the channel, we had to introduce what we call a whole product. Our legacy is one of designing products for large telcos, where there's lots of customization, an 18- to 24-month investment cycles, installation cycles.

In the enterprise space, in the channel space, totally different market. The experience out of the box, the ability to deploy documentation, all of the things to make it a very easily -- easy to deploy and easy to manage technology for both enterprises and service provider was a very big change for our company. So those are 3 things that we started a year ago.

There's been a couple of very significant proof points on our success. The dedication from an SBC standpoint. There's no better measure from a success standpoint than market share. We've taken 13.3% share gain since Q1 of last year. And quarter-over-quarter in the most recent quarter, we increased 7%. So we are, the market is speaking. Customers are speaking. They like the initial introduction of what we've done with our products and our go-to-market. And there is a greater demand. It shows up as market share. And we feel very good about having been able to check the box that we are very clearly, the strong viable #2, and we expect to continue to strengthen that position going forward.

There were also a couple of other proof points. So we really launched a new strategy relative to moving from a voice over IP to an enabler of UC in the cloud. That strategy was really launched, both internally and externally only this past January. We started a lot of the work last summer. But it really started to then show up, both internally and externally in January. A lot of the investments that we made showed up in the first set of products. The SBC 5100 in June, as well as the new software release for the 5200, to make it now an enterprise-class SBC or an ESBC. That's all about the user experience, the ability to deploy, to manage very simply and quickly. It required a whole different set of interfaces.

We also once started channel program, which was 9 months in the making. It's a whole set of infrastructure, a whole set of hold-to-cash [ph] capabilities for partners and support capabilities. The Sonus Partner Assure was launched 2 weeks after we launched the 5100. And then, we also launched a new brand and an upgrade to our storefront on the web that was rather dated. And if you're going to be focused on a global scale to enterprise and to channel, you've got to have an up-to-date storefront to be able to support and sell and market your company. So a lot of change in June.

In July, we began to experience our trunking business starting to decline, and we also in anticipation of NET, we took that opportunity to do a restructuring, to rebalance our investments and be ready to absorb some of the synergies that were coming into NET. So we did that in July. And then as you know, we've finished the acquisition of NET in August. So a number of other proof points on top of the market share gains. But this transformation of Sonus is very alive and well. And it sets us up well for what we believe is a very strong growth market. This is a set of data from the Infonetics Research that the market is expected to grow for the next 4 years at a compound rate of 21%, and we believe that is a very sound growth number.

From a planning standpoint, there's 5 key drivers. I'm going to go through each of those 5. But we believe that this market, which will be over $1 billion by 2015, has a long life of growth ahead of it.

Now I'll give you some perspective on why we believe that's the case. Let's go into each of them. There's a lot of debate on this first one. SP interconnect has been the #1 grower, driver of growth for SBCs. This is simply the ability for service providers to consolidate voice and data and run voice over the wide area networks and in the interconnects between carriers and be able to deliver a voice quality service over an IP infrastructure. In order to do that, you've got to have the SBCs at the interconnect point to be able to manage call flows above the IP stack so that you can deliver high-quality voice over a packet-sized technology of IP. That's really the #1 driver, and there's a lot of debate whether that market is already saturated. And the answer is absolutely not. As all of the UC deployments and SIP-based deployments get deployed at the edge in the enterprise, it's only going to drive more and more traffic demand at the interconnects, because everything is going to be running across the IP backbones across the carrier networks. So Infonetics and Sonus absolutely believe that this is a strong growth market, a 20% to 22% compound growth rate over the next several years. It is where we are taking the majority of our share to-date and we where we expect to continue to take share based on the strength of our products and our sales coverage. So good strong market that we expect to continue to be a good source of our growth going forward.

The next little bit smaller market, much more focused in the U.S. and some parts of Europe is residential VoIP, the ability to register telephones and provide IP-based services. Think about Tripleplay Services in the U.S. These are the MSOs, in some cases the Tier 1 carriers, offering residential triple play where voice is a component of that. It's a relatively small market today, but growing nicely at 15% growth, also been a source of market share gain and our growth based on some of the successes we've had in this market. So this is also an area that we're going to continue to stay very focused on. Nice growth off of a much smaller base.

VoLTE, this is the one that gets a lot of discussion. We absolutely believe this is going to be a big market. But there's -- the hype on the market relative to SBC demand is way out ahead of its headlights. This is going to take a little bit of time. It's going to grow fast, 109% compound growth rate, but off a very small base. And it really becomes a meaningful market really in 2015 and 2016. And so our strategy is absolutely to be in position to be able to compete for this segment of the market. It is going to be a big market beyond the 2015, '16. There's no doubt about that, as more and more mobile devices get deployed for UC-based applications driven by the enterprise or consumer grade. It will drive a tremendous amount of SBC demand. But we're not going to get into the mode of talking about evals and tests for a market that's fundamentally doesn't become significant until 2015 and '16. We will absolutely be there and competing in those -- with those telcos -- or in those telco markets to be able to be in position for these markets, but it's not going to drive a significant amount of growth for the next 2 years. It is a '15, '16 market.

From a SIP standpoint, SIP trunking. Trunking, so the first big driver of growth was the interconnect for SP, continues to be a big source. The next big area of growth has been SIP trunking. SIP Trunking into the enterprise. This is nothing more than enterprises consolidating PRIs and data trunks into one SIP trunk. One consolidated set of trunk services. It's fundamentally been driven by cost reduction. Enterprises save a tremendous amount of money. It is also very cannibalistic to the revenue streams of existing carriers. So it has been a slow market relative to develop, but it is absolutely picked up speed in the U.S. and it's starting to pick up speed in Western Europe. Very limited deployments going on in Asia, but it will come.

Penetration market -- penetration rate in the U.S. is about 12% into the enterprise space. The rest of the world, it's below 5%. This chart talks about 2 -- the market is typically looked at in 2 different ways. On the left is the service provider spend to develop and deliver SIP trunks. Significant demand for SBC capability to be able to consolidate voice and data and enable high-quality voice service over those SIP trunks.

So the blue one in the left is what the service providers are spending. That's a market that we can expect to continue to grow at 21%.

On the right is the enterprise spend for their own deployments to do voice over IP or to do SIP-based deployments across their enterprise, across their private networks within their premises. So that would be off of their budgets, taking a SIP trunk and deploying UC SBC-based deployments across their enterprise.

Both markets are big. Both markets are growing quite significantly, 19% in the enterprise space, 21% in the telco space, so an area that we are very, very focused on given its size and its growth.

But the enterprise space is fundamentally going to go through a next phase. The first phase was all about trunk consolidation save money, driven a lot by some of the economic challenging times within -- the enterprise had been through over the last few years.

But the real money in SIP is the ability just to now go to the next class of applications. Unified communication is really a set of point applications today. You dial a number for a number -- one number for a videoconference. You dial a different number for voice mail. You dial a different number for a voice conference call. Very circuit-based, very point-to-point world. Nothing really unified about it, unless you're holistic on one vendor's platform.

The problem is, is that most large enterprises are not. They're very heterogeneous. They have some Cisco. They have some Avaya. And how do I now federate across all of these different architectures and introduce mobile devices and be able to federate to all my employees, as well as to my suppliers and customers? And so what SIP was designed to do was to move us from the circuit world to the session world, where I can now move between applications seamlessly and really start to enable unified communication to be unified. That's what the SIP protocol was designed to do. It's been utilized to date to enable voice to run on IP networks. A good first phase. The next phase is all about the next class of applications. And it's going to drive a tremendous amount of growth as we go from the first phase to the second phase.

So let me help you, try to help you understand a little bit more about what we're after. If you look at the typical enterprise today, very few enterprises are holistic on one UC vendor. Very few. They all have a desire to be holistic. Some of them may be picking Avaya, some may be picking Cisco, some may be picking Microsoft. There's a big competitive battle out there from a UC standpoint. But most large enterprises, they realize the ability to get to 1 is just not practical. They don't want to spend capital expenditures to rip out PBXs and go to one vendor. They have to live with this multi-vendor world. So how do I handle that multi-vendor world and introduce mobile devices and introduce applications consistently across those environments. How do I do simple things like the centralized directory? Very, very tough. And in fact, most enterprises, they've given up on the ability to do that. SIP has the ability to fundamentally change that world. To move the applications to the cloud, to introduce mobile devices and now federate across the multiple environments and start to give a set of services to all of your employees, irregardless if your desk happens to be on an Avaya switch or a Cisco switch or a Microsoft link. It doesn't matter. That's what SIP has the ability to do, is to fundamentally now start to deliver applications in the cloud, deliver them to desk phones, mobile phones in a very consistent manner, irregardless of the investment that you historically spent. That's what SIP is all about. And that's what SBCs enable, is the ability for those applications to move to the cloud, maintain the investments in the premise-based equipment, but now start to deliver new applications. And as that happens, it drives more and more SIP-based traffic in the core of the network, all the way back to the interconnects. So the development of these applications and SIP-based applications is all what's going to continue to drive demand for SBCs at the edge and demand for SBCs in the core. And from a UC perspective, we believe that fundamentally 45% of that business is going to be done hosted in the cloud, and that's why as part of our strategy, is to leverage our existing legacy with service providers, because service providers are going to be significant players in the hosted and managed and cloud world. So it's taking our experience base and helping them scale some of the largest SIP-based networks and now helping them with SIP trunking and helping them to monetize that SIP trunking with new class of services, UC in the cloud, which is going to drive a significant demand for SBCs and, hence, the growth rate in the markets that we just talked about.

So this is a big market. In the areas when you look at it from a relative standpoint as a percent of the TAM, the blue is the SP interconnect line, the green is the SIP trunking. And as you add UC in the cloud on top of trunking, it really is the guerilla component of the market. That's where the bulk of the spend is going to be. Yes, VoLTE is going to pick up steam in '15 and '16 and become significant. But right now, the battle is how do you make sure that you've got your share of the enterprise-UC and SIP trunking market because that's going to drive the fundamental demand for SBCs over the next several years and going forward, because VoLTE is just another delivery vehicle for the UC applications in the cloud.

So we believe we're positioned quite well in these markets. The transformation from a key strategy, we believe were the right ones. They're showing up in share gains today. They believe we've -- we believe that they position us extremely well to continue to attack those growth markets, both where we have been successful, as well as moving into more of an enterprise UC in the cloud focus. And we believe that there's 3 key measures of success on how we're doing, in addition to market share. Obviously, market share is always the best measure of success, relative to how well you're doing in the market. But there are a couple of milestones or data points that we look, and I would suggest that you watch to see how we continued to progress through our transformation in the execution of our strategy.

And those 3 are continued contribution growth from an SBC standpoint, as Ray talked about, how is the enterprise market contributing to our results and how is the channel contributing to our results. And I will give you a couple of data points of where we see us going from a percentage contribution from SBC, as Ray talked about, next year. And this year, we're at 50% -- 40% from a product standpoint. We expect over the next several years for a product from SBC to be over 60% and from an all-in perspective at 45%. There's a difference between product and service because of the significant amount of service maintenance business, service business we have from our trunking business. And that's why you see those differences. We expect that maintenance business to continue for some period. And it will take some time before the SBC business from a maintenance standpoint becomes larger than the trunking maintenance business. But from a product standpoint, that's Phase 1. Maintenance will follow as those boxes get deployed.

So we see continued contribution from our SBC business. We also see continued contribution from the enterprise business. It's a very small piece of our business today. In 2011, it was 6%. We'll exit this year with it being 16% of our business, aided a lot by NET, but also some success from the enterprise focus that we've had over the last year. We expect that will continue to 35% of our business by 2015.

When you look at it from a channel standpoint, again, we've had some transactional channel relationships internationally. It's contributed about 8% of our business last year. We're on track to that to be about 13%. As you've been following us, we've launched the channel program in June. We said it was going to be minimal to this year's results. It really starts to contribute in Q4 and positions us very well for it to contribute much more to our business in 2013, and that grows to a 45% mix by 2015.

So I suggest that those are 3 things to watch, in addition to share, on how well we're doing in executing the strategy. Because if we're growing our contribution from enterprise and growing it from the channel, because the channel is the key root to the enterprise, that will be an indicator that the strategies that we are deploying and executing are beginning to take hold and enable us to be positioned to continue to take share and be a very successful SBC company.

So we feel good about where we are. Proof points, we think we've done -- we've had some very good proof points in the last year. As Ray said, this is a multi-year transformation. We feel really good about where we are after 1 year. We've still got a lot more work to do. We think we're very well positioned for the 5 key growth markets in SBC. And those growth -- those markets all represent opportunities to continue to grow our business significantly. And we believe we have unique opportunity to continue to take share in those spaces. And I've identified 3 proof points on top of the market share for you to watch to see how we continue to execute. Okay?

So with that, let me hand it back to you, Ray.

Raymond P. Dolan

Thanks, Todd.

Todd A. Abbott

Sure.

Raymond P. Dolan

Okay, so, Todd walked us through strategy. He'll be back up later to talk about Go-To-Market as we wrap this together. But now, I'd like to introduce Tony Scarfo.

Tony joined the company a year ago this week, right? Just post 9/11, I remember that. And Tony joined and has worn a number of hats from business development to a lot of driving strategic things. I asked him earlier this summer to pick up the principal role leading our development organization. I'll ask him to really bring to you a couple of messages: One, it's about driving profits in trunking; two, it's about expanding our SBC portfolio; and three, it's about driving software development to capture big markets. It's what I said at the beginning. It's a simple message.

Tony is all about execution. Our strategy is within our capability to do it. This is not white space. These are within the scope of SBC and adjacent markets and something that we're very, very excited about. So Tony, if you'd come up and take us through that, I'd appreciate it.

Anthony Scarfo

Thank you, Ray. Good morning, everybody. What I want to do today is take you through our technology and our engineering strategy and just talk about where we are and where we're going. I'm going to focus on 3 areas: Driving operational excellence; also expanding and continuing to expand our SBC portfolio, which is industry-leading; and also accelerating our investment in new technologies to address the areas that Todd just talked to you about.

When we look at our traditional trunking business, we've spent the last 15 years developing a tremendous amount of features and functionality for our service provider customers to migrate from TDM to IP. What that's done from a delivery mechanism is we put a lot of releases out there, almost customizing them for a lot of the large carriers so they can go through this transition.

Over the last couple of years, we've seen them move more to IP and move more along standards. What that has allowed us to do is roll forward a lot of the features that we have in these other releases into a single load line. So we've moved from multiple releases that support multiple customers to a single load line so we can support our customers. So we're moving from customized individual releases to market-based releases. And what we'll do is we'll integrate and roll forward those features into releases and continue them down on that road line, and we'll start new developments and new feature development on a single load line, so we'll move them forward together. So that creates a large opportunity for us to shift resources to other areas of our business.

Secondly, when we look at our industry-leading portfolio, we started by putting the SBC inside the gateway. Many of our customers that moved from TDM to IP also wanted to support IP to IP, and they could do that from the core of their network by putting the SBC inside the 9000. We then took that software and put it on a purpose-built appliance that allowed us to scale up and also put features in to move us to the edge of the network. So moving us from the core, and that's when we introduced the 5200.

And a couple of months ago, we introduced the 5100, again on the same code base, that allowed us to move into the large enterprises.

So as we move in this path and moving towards the enterprise, our next set of developments was to build more feature functionality and drive into the enterprise. We made a decision to buy NET. And Ray talked about the breadth and the speed. And what it gave us was a full portfolio that allowed us to move down in sessions and provided us with a time to market. For me to go and develop that over the next couple of years would have taken a lot of resources internally within Sonus. So NET not only gave us breadth and speed, but it gave us a world-class engineering team that we can now utilize to continue to drive into the enterprise and allows us to use our resources again.

So by optimizing trunking and by bringing NET in, we've got a lot of resources to focus on the growth areas of the market.

So what does that mean for the portfolio? So with the NET resources, we continue to go down market and continue to address the service provider's need to deploy SIP trunking into the enterprise, and we also focus on the high end of the market. When Todd talks about UC in the cloud, video, voice over IP, voice over LTE, that's going to drive the need for the high end of the market and for larger interfaces. So we can now continue to expand our portfolio from where we are today to much on the high end, as well as on the low end of the market.

So let's talk about the technologies and where we are. We talked about optimizing trunking and really building some efficiencies around how we go to market and how we deliver releases. We've talked about expanding the portfolio around SBCs going into -- from the high end to the low end.

The other thing that our customers in the market are demanding is that we separate our software from our hardware. And then -- in a minute, I will talk about our strategy around virtualization. By separating our hardware from software, we can then allow our customers to put our software on whatever [indiscernible] platform they want and to virtualize it into the cloud if that's where they want to go.

The other area we're going to focus on, and Todd spent a lot of time on this, is driving into UC, supporting not only voice, but video and collaboration. So a lot of our resources we focus on addressing that part of the growth market. And as both Ray and Todd said from a voice over LTE, it's going to be voice over LTE, but it's going to be video over LTE. It's going to be UC over LTE. So that's where the market is going, and we'll be there when the market turns. And so the shift is from our traditional legacy into the SBC and into the growth market.

Let me spend a minute on virtualization. There's a lot of discussion in the marketplace. Our plan is to virtualize the SBC, take the software that we move down market into the other platforms and virtualize it and allow customers to put it on [indiscernible] platforms or to put it in the cloud on to a virtualized platform. So we will be virtualizing the SBC.

The second thing we're going to do is we're going to take our applications, our PSX, which is our policy routing engine; our ASX, which is our classified products; and we're going to virtualize it, so that customers can put it on any platform they want or into a blade server or into the cloud.

The third piece is our SBCs can actually host application. So if you have a virtualized application, you can actually drop it into our SBC and support and run it from within the SBC. And we can add security and we can enable the application. So that allows us to take functionality. And one of the first things that we'll be putting inside of the SBC is our PSX. We will take our policy engine, virtualize it and then drop it inside the SBC. So not only will you get the functionality of SBC, you also get the policy routing engine as part of the solution. And it will be in a virtual environment riding inside of our SBCs.

So again, to summarize, we're focused on operational excellence and optimizing our trunking business. We're going to continue to expand our SBC portfolio, and we will accelerate our investment into new technologies to drive our growth markets.

Thank you. And we'll -- I think we're going to move to Q&A.

Question-and-Answer Session

Raymond P. Dolan

Thanks a lot, Tony. Okay. To ensure that this is somewhat discussion-oriented, we'll pause here after those modules. We'll resume again after the break. But we'd like to take some questions, at least, focus on the information that we put out. I think, I see Catharine's hand going up. Am I supposed to say anything now Catharine? No.

Patti Leahy

Let me bring the mic to you. Just one second, Catharine.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Catharine Trebnick. Tony, I have a question on the timing on the virtualization on this road map. You guys have a timing for this when you're...

Raymond P. Dolan

We haven't really put out our road maps yet. We'll talk about that as we get closer. We're in the middle of a lot of development. So we don't have a schedule right now to provide for you.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Okay. But 2013? You know me, Tony.

Raymond P. Dolan

We haven't disclosed the road maps into the market yet, so at this point in time, we're not ready to talk about timing.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

All right. But the input into the road map is coming from, obviously, enterprise requirements or...

Raymond P. Dolan

No, there is market opportunity and market requirement. I wouldn't suggest that it is a critical gate to get through at this stage in the market. I think there's a little bit more hype in the requirement. But we do believe that the requirement is real and the world is going that way, and we will be ready as the market moves into that space.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Okay. And then to clarify the strategy, and this is for both of you, is on the voice over LTE opportunity. To me, it looks like you're positioning the mobility in the enterprise to help capture that in the carrier. Is that part of the...

Raymond P. Dolan

Say it again.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

It looks like you're positioning your enterprise products or the unified communication piece of it to draft off or enable voice over LTE for the carriers. I mean, is...

Raymond P. Dolan

I think the way to look at it is just as service providers are looking to monetize SIP trunks into enterprise. They're going to be looking for ways to monetize -- continue to monetize their mobile investments and drive new applications. And those applications are all going to be multimodal, UC-type applications that will reside in the cloud. So having a strong position in the cloud to enable UC-based applications gives us a strong position. But I'd also suggest that, that a lot of the decisions from a VoLTE standpoint infrastructure-wise are going to be technology decisions, not necessarily driven by an application in the cloud, right? So we will attack it from both avenues. Go ahead, Steve, and then we'll go to Paul.

Unknown Analyst

Can you give an update on the 5100 3 months after announcement in terms of quantification? How much -- how many wins you've got and what kind of customers they represent? How much revenues for you? Just flesh out where you are after 3 months.

Raymond P. Dolan

So we don't disclose specifics relative to products and won't be going forward, so it's part of our old 5000 lines. The products GAs [ph] at the end of July, so it's just now hitting the streets. We've had some very good success, both with service provider, as well as enterprise. A number of beta customers have converted and a nice pipeline funnel building. It is really the key platform that's going to drive the beginnings of that channel contribution in Q4 and into 2013. So we feel really good about where it is. It's the first whole product, first enterprise product, and all of the feedback we've gotten from beta in the early customers, both enterprise and channel, have been very positive that we hit the mark.

Unknown Analyst

Without getting to revenue details, but can you give in terms of percentages or just some estimation of how it's going?

Raymond P. Dolan

We're not going to go down the path of breaking out product contribution perspectives. We've -- a number of you have been part of this discussion relative to 9000s and 5000s, and we're not going to go down the path of breaking out the 5000 lines and the NET lines. It's all part of an enterprise architecture. And a lot of these deployments will consist of multiple elements of our product portfolio. But we are -- really, if you see the progress from enterprise and channel starting to pick up, you can absolutely assume that, that is the new software release for both 5100 and 5200 that makes it really channel and enterprise ready. Paul?

Unknown Analyst

Ray, hopefully, I didn't miss this is in your prepared remarks. If did, my apologies. But the slide you put up showing your goal or your expectation for SBC as a percentage of revenue, it's hard enough for all your companies to forecast a quarter out, let alone 3 years. But when you talked about SBC becoming 60% of the total revenue by 2015, I assume you've got a growth estimate in mind. And obviously, that number will also depend on the decline -- the ongoing decline of your media gateway business. What is the embedded in terms of growth expectation for SBC in that 60% number? Then I've got 2 others.

Raymond P. Dolan

Okay. So I'll do my best to answer that question, Paul, without guiding, especially to things that we can't predict and fully control anyway. So for anyone that didn't hear, the question was really what's embedded in the assumption that, that crossover point will not only happen next year, but it will go 65%, 35% on a product basis in 2015. All of your points are valid. There will be a continued erosion in the media gateway business. When we guide to 2013, we'll talk about that. We don't see that reversing, okay? And we've said the market will grow at 21 points CAGR. It may not grow linearly at 21, but over that 5-year cycle. And we think we'll grow at or above market. We're not going to define how far above market until we get closer view into the year, and year-by-year, we'll guide to that. But yes, when we look at that over multiple years, those are our aspirations offset in part by -- or aided in part mathematically by decline in our core business that gets us to be a greater and greater SBC company over time. Is that answering your question, Paul? I know it's not giving you the details, but it's inappropriate at this point for us to guide to next year.

Unknown Analyst

In terms of your sales reach, what percentage of the market opportunities do you think you've seen in SBC today? Obviously, you're somewhat resource limited from a sales standpoint. But can you give us some sense for -- do you think you're seeing 100% of the opportunities out there? What percentage of the opportunities you think you're seeing, and what percent do you think you're missing and you still need to beef up the sales staff?

Raymond P. Dolan

I don't know if I got a percentage I could give you off the top of my head. But I mean, if I look at the different segments, I would tell you from a Tier 1 standpoint, we see all the opportunities and we're engaged. From an interconnect relative to the Tier 2s, we've got a strong market position. But there is some percentage of the opportunities that we're not seeing from just our coverage. What percentage that is? That will be a tough one for me to gauge. Enterprise, we're not -- we're seeing just a small part of them. We've just really started our marketing and our reach. Channel absolutely extends that significantly. So we're taking baby steps at this point from the penetration standpoint into the enterprise. It's really all upside to us.

Unknown Analyst

Last one for me. With respect to R&D and your goal through the next couple of years, Ray, when you came on, if I remember correctly, 80% of R&D was shifted to India in terms of head count. And I think at the time you joined the company, there was a fair amount of staff turnover, which is not unusual given the situation in India with R&D. Has that stabilized in terms of head count retention in the R&D staff, and is it where you want it to be?

Raymond P. Dolan

So Paul, the point is we did a substantial amount of what people call traditionally outsourcing the R&D function in India for cost reduction. But yes, it has stabilized. The market unfortunately is a little higher in India than it is globally, but we're at market levels of retention, so I don't consider that to be a strategic risk. I think it's an appropriate opportunity that we've leveraged to drive talent on a global development organization. Tony leads that, and we're satisfied with where we are.

Patti Leahy

Ray, we'll take one quickly from the web, if you don't mind. On market share, it's well documented that Acme has lost share. Are there other vendors aside from yourself making progress that you find yourself going up against?

Raymond P. Dolan

Do you want to talk about that, Todd, or do you want me to?

Todd A. Abbott

Each of the markets is different. I mean, from an enterprise standpoint, it's a different set of competitors. You're typically competing against some of the traditional SBC guys, but also the premise-based PBX guys, the Avayas and the Ciscos. You don't see them really in the carrier space. Internationally, you see the Chinese players showing up. Don't see them much in the U.S. You see them strong in Asia. You see them strong in Europe. So it's very typically the same players in each of the markets, whether it be enterprise or service provider. The only difference really is where the Chinese players show up can vary. That'd be the only real modification I'd make.

James Kisner - Jefferies & Company, Inc., Research Division

James Kisner from Jefferies. Just on your enterprise channel strategy, it just seems like, at least based on the conversations I've had with folks, that a lot of the volume in the enterprise SBC space go through PBX vendors. And I'm just wondering how do you think about the PBX vendors in terms of your strategy in going to market and enterprises?

Todd A. Abbott

Actually most of the volume in the enterprise should [indiscernible] an awful lot through service providers at the end of SIP trunk. Up to this point, that's where the majority of it is gone. There are -- when you look at the sort of the PBX players, that is fundamentally a channel-driven business. And so there's a lot of desire and attempts in the channel space to diversify. They like the simplicity with which we're coming to market from a channel standpoint and the competitiveness of the product. So we feel really good about the adoption rate, the recruitment rate that we're getting from a channel standpoint. I mean, clearly, there is -- in the enterprise space, if you're holistically focused on either a Cisco or an Avaya, they clearly have a very strong advantage. If you're multi-vendor and trying to determine how do I handle and how do I federate across these different architectures? Then, you're typically looking for a vendor agnostic solution. And we play very, very well there. So listen, as I've said, the contribution of enterprise is very small. It's all upside to us. We've been building the foundation from a product and from a channel standpoint. The initial touch points we've got relative to recruitment and engagement with the enterprise is strong. It's now about just continuing to execute the plan and get more people selling our solutions through the channel and you'll start to see those results in '13.

Unknown Analyst

I think the other data points that we get on the SBC market do tend to come from Acme, and they're painting a very different picture themselves. They're talking about how service provider spending in general is slowing. It's not just that VoLTE is later than they might have hoped, but it's also depressing spending on the interconnect business. It contrasts a lot with the view that you've shared with us this morning. So could you help us just reconcile what you think is happening in the end markets?

Raymond P. Dolan

Do you want to take on the Acme comment [ph]?

Todd A. Abbott

I wouldn't necessarily say that the spend -- so we are clearly seeing capital constraints in the service provider space. It's absolutely contributing to the slowdown on the trunking side as they're very much focused on their capital, all being focused on revenue-generating infrastructure. And voice is not viewed as a revenue growth engine for them. So they're going to sweat the voice assets and sweat the trunking assets as long as they can. There's still a good business there, but that's fundamentally what's driving the decline. We're not seeing the interconnect being constrained in this market. They have to continue to consolidate networks to save cost. They have to have an infrastructure that's going to drive monetization of the SIP trunks, which is SIP-based applications, which drives more demand for SBCs. So our growth from an SBC standpoint and market share gain is very much into the service provider space to this point in time.

Unknown Analyst

Okay. And then secondarily, you talked a decent amount about hosted UC. How far into that market would you like to be? I mean, there's certainly a number of players who are do hosted UC, whether it's M5 now, ShoreTel or BroadSoft.

Todd A. Abbott

Yes, so let's be clear. When we say hosted UC, we're not going down the path of being an application-driven UC provider. There's plenty of solutions in the market today. What we are really is the enablement of those applications to work across a federated or a heterogeneous infrastructure that exists today. Premise-based UC and premise-based PBXs are not going to be ripped out overnight. This is a long transformation. And so enterprises are faced with how do I put applications into the cloud and enable it to be accessible to all of the infrastructure both wired and wireless that exists, and that's the challenge. And so we're really an enabler for those applications that come from ISP communities or from the existing UC players and enable it to be federated and accessible consistently across all those different mediums and all those different proprietary architectures. So that's a good question. I wanted to make sure we're clear. We're not going to be in the UC application business.

Unknown Analyst

Todd, you threw out some market growth or market numbers. It sounded like your aggregate number for this year for the SBC market is about $500 million-or-so, it sounded like. So this year, do you think it's a -- that 20% kind of average growth or do you think we're seeing that in the market this year? And your gaining share in the interconnect market, if all goes on -- by plan next year, will you be gaining share on the enterprise market and outgrowing the market?

Todd A. Abbott

So our plan is absolutely driven to continue to gain share. We're not playing this game to be #2 or #5 in the enterprise space. I mean, that's -- you all recognize in the technology space everything consolidates down to typically 2 or 3 players. This is a long market. And we are absolutely competing to be a major leader in this business. In the enterprise space, I've got nowhere to go but up. I'm very small today. I haven't had the products. We haven't had the coverage. We haven't had the channel. We've been spending the last 9 months getting all those in place, and we're now ready to begin to execute. So it's all upside.

Unknown Analyst

So is it fair to say that if it goes -- per plan, you'd expect to outgrow the SBC market?

Todd A. Abbott

All of our plans are share gain plans. We expect to be gaining share every year going forward.

Unknown Analyst

And Ray, do you think you have the right cost structure in place exiting the year to hit your profitability goals for next year?

Raymond P. Dolan

Yes, and we'll continue to make adjustments as we see opportunities, but fundamentally, yes.

Unknown Analyst

And would the adjustments be on the R&D side? Sales side?

Raymond P. Dolan

We'll just continue to organize for growth. Continue to drive top line growth that can either absorb our current cost structure or will fit into our revenue profile. It's difficult to forecast this marketplace, but I'm comfortable with the changes we've made this year position us for next year.

Unknown Analyst

As you go into the enterprise market and the hosted market and you sell both the high-end SBC at the hosted location and also the customer premise SBC, what advantage does that give you in terms of offering applications that would not be possible products from 2 different companies?

Todd A. Abbott

So it's not necessarily about an advantage relative to any specific application. It's really about enabling either an enterprise if it's their own private cloud and private deployment or service provider to be able to leverage a consistent set of technologies with a consistent set of policy capabilities to be able to scale that infrastructure to provide and meet their SLAs and provide the service. There's nobody in the market that has the breadth of product from the branch office to the core infrastructure from an SBC standpoint like Sonus does. There's also nobody that has the legacy from an expertise in policy in scaling large networks because our policy engine that has been developed over the last decade plus in the gateway business is a natural port to be able to apply to an SBC infrastructure. So in order to compete in this business, you've got to be very strong box-to-box. But you've also now as the market matures and you move from a couple SBCs here, a couple of SBCs there, very much like the early router days. Nobody really thought about scale. Nobody really worried about having to go to each box to change filters and do upgrades until you've got so many routers out there that you had an operational challenge with how do I scale this router infrastructure. And the SBC space is following the same kind of trend. Right now, nobody -- most enterprises are not thinking about how do I scale most of all these boxes. Because you're going to continue to need to update code for security threats and for new protocols and new applications. And so the ability to do that with our policy engine and be competitive in each box from a price-feature-function perspective, that's really what we're -- how we are tackling the market. Does that answer your question?

Unknown Analyst

Yes.

Patti Leahy

Catharine, did you have a follow-up?

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Yes, I did. Partners, how many partners do you have now? Roughly at 8, I think?

Raymond P. Dolan

We finished last quarter at 9. We're at 14 right now.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

9. And who are they?

Raymond P. Dolan

Who are they?

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Yes.

Raymond P. Dolan

We're going to get into that in Go-To-Market, right, Todd?

Todd A. Abbott

I'm going to talk about that. But...

Raymond P. Dolan

We have the Go-To-Market piece, I don't want to snuff the question, but we're going to come after -- David's going to go through the SBC update with a lot of use-case analysis explaining how we've won and how we'll continue to win and then Todd will take you through the entire Go-To-Market update.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Yes, the reason I'm asking is I think NET has well over 100 partners, but I wanted to understand the rationalization of that, so I can wait.

Todd A. Abbott

We actually had 315 [ph].

Patti Leahy

Okay, we have another one from the web. What has become of carrier Class 4 and Class 5 opportunities? Is there any relevance any longer to the transition and retirement of TDM switches?

Raymond P. Dolan

I think, as Todd said earlier, there are still probably some opportunities around the world doing that. I think there are fewer and fewer of those opportunities in the challenging world we're in. People are sweating their assets on TDM longer. And the TDM forward growth is really not there to justify it. So we'll go after those opportunities with the products we have and to our customer base that we have. But there's -- I don't think that's a meaningful opportunity for us or anybody else in the category.

Unknown Analyst

I don't know if you're going to go into it later, which hold events [ph], but in terms of NET and the integration and the synergies, I think, they came over with about 150 people. Where does that stand now? How -- where will that be at the end of the year?

Raymond P. Dolan

I'll take that. And Moe will get into this a little bit in his slides. But it's a little less than 150. We got a great team. We're very excited about integrating them, and we've made some adjustments prior to integration of our team to make room for them. We've taken a lot of synergies in Q3 and Q4, which Moe will get into, and then we'll continue to drive further in just driving cost out of the manufacturing side of the business. Their margins were substantially lower than ours and we need to drive that hard. So that's where we are.

Unknown Analyst

And Moe will go into the release [ph]?

Raymond P. Dolan

Moe will go into some of those numbers and then we'll disclose the rest as we report Q3 and Q4.

Unknown Analyst

You mentioned running the legacy business as a cash cow. Can you just talk about what type of cash flow you expect to generate over the next couple of years from that business?

Raymond P. Dolan

Probably we're not prepared to talk to that in detail right now. Remember it's a product -- it's a business that has about $60-plus million of services revenue associated with it and somewhere in the 90s on the product side if we finish the year on guidance. And if that service revenue stays stable and its margins are -- we disclose that somewhere in the 50% range and the product business continues to decline at its current trajectory, you can do the math from there, because the margins are strong from that product business. We'll adjust our cost structure. I'm not going to break -- we don't -- I haven't got the ability right now to just break this out with you to drive through cash. But the message is we will manage our cost structure so that we have a profitable legacy business as we drive a profitable growth engine.

Todd A. Abbott

Let me just provide one point of clarity, though because cash cow has a number of different meanings. We are continuing to invest in that platform, as Tony talked about. We've got 28 software trainings [ph] and we're continuing to invest to 1 strong set of releases with continued innovation. What we talked about in the context of cash cow is we're not going to aggressively go out to acquire new customers. And that typical business is extremely long from a sales cycle standpoint. It's typically very low margin outside the U.S. You're typically competing against some Chinese competitors that have a different set of margin profiles than we do. And the time to deploy and time to get revenue is typically 18 months to 24 months. So it is a long sales process and is not very profitable. So when we talk about cash cow, what we're really talking about is where are we going to direct our coverage and our growth going forward, but we're going to continue to support with innovation our current trunking customers because they are making the transition as well to an all IP world, and we're supporting them through that transition.

Unknown Analyst

Just a follow-up with the OpEx decline faster than the revenue growth degradation?

Todd A. Abbott

The OpEx in trunking?

Unknown Analyst

Yes.

Todd A. Abbott

We're not getting into the specifics relative to OpEx in each of the products. But you can absolutely conclude that we're aligning our investments to where the growth engines of the company are going to be.

Unknown Analyst

[indiscernible}

Raymond P. Dolan

On the services business in general -- it's actually a blended number for both the gateway and the SBC business side.

Unknown Analyst

[indiscernible]

Raymond P. Dolan

No.

Unknown Analyst

Yes, when you went through the markets, you broke them all out to the residential Class 5 IP, the cellular SIP trunking -- when you look at the access product, though, say at the Class 4 location or wherever, do you need to have a separate SBC for each for those markets? Or can one SBC accommodate all of those and so then, how do you break that out?

Raymond P. Dolan

I think, it's really varies depending upon the carrier. I mean, the large carriers have multiple networks and different access points. Many carriers only focus on one component of that market. So it's only the Tier 1s that would be playing in those multiple networks, and they're typically different decisions. Ultimately everything runs on one backbone. But typically, there are multiple competitive engagements within a Tier 1 carrier. Did that answer your question?

Unknown Analyst

Yes.

Raymond P. Dolan

We'll take one more and then we'll take -- we'll go to break and we'll continue the discussion and give people a chance to take a bio break.

Unknown Analyst

So my question goes back to some of the earlier comments on share. And you put up -- I think, Todd, you put up the pie chart showing your share has gone up from 9% to about 16% over the course of the last year, and we know your largest competitor, obviously, has lost share over that time period. Can you pinpoint as to what it is that has allowed you to take the share in service provider? Is it a new feature set that you've added over the last year? Is it just more of a focus on the carriers just showing up more? Have they been just waiting for a second large provider to come along and they've been dealing with one and you basically just had to show up and be halfway competent or what are the...

Raymond P. Dolan

A little more than halfway.

Unknown Analyst

There's nothing wrong with low hanging fruit and showing up to a party and actually being a viable alternative. But if you can just go over what had -- what do you think attributed to your ability to gain that share because that will, at least, help me understand as to whether that can go from 16% to 25% and what still has to happen to increase that?

Todd A. Abbott

So the #1 answer to your question is the better box. It's a second-generation box that scales much better than the competitor's box. And the proof point there is when we get into a lab competitive trial, we win. The vast majority of the time. They...

Unknown Analyst

You didn't win a year ago, so literally -- and you didn't win a year or 2 ago, so it was new features and scalability you...

Todd A. Abbott

The 5200 has only been out for 2 years and really came into its maturity point on the latter part of last summer. And hence, it's now been engaged in competitive situations and is starting to win. And that's fundamentally why we win. And I'd love to sit here and tell you that our legacy customers just give us the business. We compete in everyone of these engagements with all of the typical competitors, and we win. We have a better box that scales from a box perspective and then when you -- when the customer wants to talk scale of a network with policy, it is a huge differentiator.

Unknown Analyst

Then a final follow-up to that. Are most of these wins primary and exclusive wins at these carriers or are they -- you're being brought in as a second supplier?

Todd A. Abbott

It is -- the technology has not reached a point where vendors are dual sourcing as an element of their sourcing strategy. You all realize that large Tier 1s will dual source when it gets to be a certain size, so they don't want to be dependent upon any one particularly a vendor. I would not suggest that the SBC space has hit that inflection point yet. So when we win, we are becoming the strategic SBC player of these accounts.

Raymond P. Dolan

Okay. So we will continue the discussion with you, bring in 2 new modules. And then Moe will finish up with the financial piece and will come back, again, for Q&A. If you rejoin us at 10:30 in seats, we appreciate it. The rest rooms are at the -- 11:30.

Patti Leahy

11:30.

Raymond P. Dolan

11:30, okay. So yes, you can't join us an hour ago. 11:30 will great. Thanks for your time today.

[Break]

Patti Leahy

[Operator Instructions]

We're going to continue with our formal presentation for another hour and then we'll have another half hour for Q&A.

Raymond P. Dolan

Welcome back from the break. As Patty said, we've got about an hour left of content to cover, and then we'll come up for another broader Q&A session. I'd like to introduce David Tipping. [indiscernible] Had asked the question, "What's driving your results?" And Todd talked about it from a market point of view. One of the things he postulated was, "Is it just focus?" It's not just focus. But focus matters. We made this decision about a year ago to go to a business unit architecture. And I asked David Tipping, who've been in the company as he says since the earth cooled -- so David, I asked he'd grown up in the FC organization, led the FC global organization through the media gateway transformation that was successful for the company in our first generation. I asked him to lead our focus for the BU for SBC. Making your dates matter, driving your cost structure matter, hitting feature functionality by segment matters. David has led us through this. He's going to take you through why we won and why we will continue to win. Thanks, David. I'm reminded, first thing before we do that is we're going to roll a video.

[Presentation]

David W. Tipping

Good morning. So as Ray told you guys, about a year ago, Ray asked me to take over the business unit. And he asked me to go after and focus strictly on SBC. So being kind of a Type A personality and being -- wanting to be quantitative, we want to look at the business unit, how we're doing after the first 12 months. For the first 12 months, we feel as though as we're making progress in capturing market share. And lots of feedback. See? That's how energetic I am. But an essence is this is the start of our market share growth. And along the way is when you start to look at a market and you decide want to go after a leader, somebody that has a very large share of the market. What we wanted to do was focus on the market and focus on the different market segments to ensure that one, we had the right products; two, we have the right feature and functionality and the right go-to-market strategy. So an essence is you could take an approach, which is boil the ocean, and go after every single segment or two, is you can focus and execute and hopefully, get behind the parts of the market that are growing the largest, have the largest TAMS and properly address under your products and guidelines. So in essence, what I'm going to do is take you through a few examples of the market that we've gone after to capture in order to drive the success we've had over the last 12 months.

So the first one is SP interconnect. SP interconnect is the migration within the service provider market to move from tedium architecture over to IP. It started in the core of their network in order to reduce cost, both on an OpEx and CapEx model and it continues forward, moving forward, when they want to start peering with each other. So an essence is the cost even with core extends outward and now they're starting to use it.

So in lots of travel on airplanes, go and see customers, customers are now talking about, "Hey, by the way, I want all my international and national traffic no longer to be on tedium switches. I want to leverage SIP in order to make sure I can go on and off out of my country because of the cost savings." Right?

An essence is the requirements of this industry and the reasons why we believe we have market acceleration in this market is policy. Why is policy so important? Because just like in the tedium world, carrying a session from point A to point B, within the country or across the globe, is a game of arbitrage, right? Understanding is what's your cost points are is the best path from point A to point B makes a big difference. And having a policy engine and our key marketers are going to start off with that migrated into our SIP-based SBC architecture allows us to have a competitive advantage in end market. Because again, it still comes down to fractions of pennies driving margin for our SP customers in order to be successful.

Number two, something again, I think we're relatively unique in, media interworking. And that's a topic I'm going to talk about throughout the discussion. But media interworking is a discussion is being able to make sure is that communications using different technologies can seamlessly work together. The best way I can think about it after 3 years of trying to explain median to working is this: I come from a family that I had to call my mother, and I won't ask everybody to go raise your hand and tell me you had to call your mother. But an essence is the world of SIP, they're signaling and signaling can be thought of as the caller IDs. So I pick up the phone and I dial the number and caller ID shows my parent's house that David's calling, right? She picks up the telephone and now the media session doesn't work because of its incompatibilities between the voice codec using the wireless network and one delivered at the MSO that happens to service our home, right? I don't get credit for that phone call because of -- in essence, the medium come through and the communication doesn't happen.

One of the things we're unique in is our ability to interwork the media. When people move over to voice over IP, the number of mechanisms in order to deliver the media, the voice content grew exponentially. There is wireline CODECs. There's wireless CODECs. There's HD CODECs. There's [indiscernible] in CODECs. And the important part of the service provider is to take all those CODECs and say, "Yes, Mr. Customer. I will take your traffic and I will do the interworking in the core of my network in order so I can deposit it on the other side to a different customer that may or not may be using a different CODEC." Right? It's a differentiator for us.

The last one really is high session counts because in any kind of game that you're into that has low margin and high volume, obviously, is sweating the asset becomes very, very important, right?

We continually compete against all of the leading competitors, right? National, international carriers -- I mean, vendors, show up [indiscernible]. And in essence, we win because first and foremost, we show the people that we understand media interworking. And I know, again, if you're not delivering the content, you're not delivering the session, you're not getting paid.

Two is performance. They like to see carrier class. They're a service provider. Carrier class will make a difference to them.

Three is they want to see policy, because they want to operationalize it, and they want to make as much money as possible, carrying the sessions from point A to point B.

And the last point really is scalability because again, scale drives OpEx and CapEx.

The next one I'm going to talk about is a slightly different model, but it's one that I think is very, very important. This is wireless interconnect. I think in a lot of times when people talk about wireless, they take the category and put it under one umbrella and everything becomes wireless, right? The vast majority of SBC business today is wireless SPs using interconnect just like their wireline brethren would, right? What they're doing is they're trying to reduce cost because in essence is their -- a number of subscribers have capped out and they're trying to reduce the cost of carrying the local and long-distance across [ph]. So in essence is they really have the same kind of requirements they would under the wirelines, but this is in the wireless space. So in essence is we've been a leading vendor in order to go forward.

SIP trunking, SP settings. So in essence we'll talk about SIP trunking, 2 different delivery mechanisms as Todd brought up earlier. The first one is buying a service from the service provider. So in essence is I'm going to my service provider and say, "I see a need to move over to SIP-based trunks because of the operational and cost reductions in the facilities." Not the per minute session charges, but the facility charges, right? Getting rid of the T1s for voice and consolidating across the T1s that deliver the voice services and now delivers the audio behind it.

Here is the requirement in the SP layer is have a flexible SIP engine. Why is that important? As a service provider, your job is to say yes. "Yes, I'll take on vendor A, B, C and D and don't worry, Mr. Customer, I'll draw out into [ph]." In the world of SIP, that's a difficult task and one that we take on every single day. And I believe we deliver with a level of efficiency that's unmatched in the industry.

Two is they also want the median to working for something slightly different. Their biggest concern is that fax and IVR technology continue to work in the enterprise, right? As much as a lot of us would like to see fax go away, it's still predominant, and IVR technology is the front-end process for a lot of skills-based workers. This is a way they reduce cost.

An advance policy engine, what they want to be able to do as a service provider is not to offer a trunk and become a bit provider. But in essence, what they want to do is offer a solution. And one of the easiest solutions is be able to offer something as simple as an abbreviated dial-in plan across multiple sites within an enterprise, right? So in essence, is you pick up the telephone, you dial 4 digits and all of a sudden, someone in Tokyo is picking up the line without having to dial the plus signs or 65 as the country code to start off with, right? All available in our PSX technology.

And really the last one is obviously, they want to support the high-density customers. Again, service provider, they want the highest densities they can out of their equipment in order to get the best OpEx and CapEx. In this market, obviously, we compete against all the leading SBC vendors. And again, they choose us first and foremost a policy engine; two, our medium gateway capabilities, performance and scalability.

Now this is slightly different. What we're starting to see is a market emerge, where the enterprise is in essence bringing their own SBC in, in order to facilitate SIP trunking. And we've had some success with airlines, with health care. We've had success with financials. And in essence is the first and foremost they want to do is they want to migrate from SIP trunks. This is an opportunity for both the SBC 9000, as well as the SBC 5200 to offer a solution for the customer.

They also truly care about fax and median to working because in essence, if the IVRs fail, they cost more money, right? And all the cost savings go out of migrating from PRIs over to SIP trunks.

They care about our ability to integrate and interwork AT-23 [ph] to SIP. Why is it important? Because in the vast majority of enterprises, they have silos of technology already deployed that require us to step in and help them interwork those in order to make the unified communication happen within an enterprise.

And the last one is one that we're starting to see or starting to see more and more often, the need for security.

In the customers we're referencing behind, the need for security was paramount. They have call centers. And regulations now say that in essence, if you move over to a voice over IP infrastructure for your call center, you must encrypt the sensitive data like my birth date and social security number and my mother's maiden name from the ingress point all the way to the operator. So to be able to do security at high scale becomes more important. And for a lot of these customers, they chose us because in essence, our background is carrier class. And carrier class in a call center is something that actually makes sense and something they're willing to pay for. Along the way, obviously they chose Sonus because of our reliability and our experience, our policy engine, our security and investments, our media interworking skills.

Residential VoIP. This is a discussion about customers moving to a triple-pay service with an alternative provider or in essence is they're downloading the application on their smartphones in order to deliver over-the-top voice services, right? And both these, it's important to have a flexible SIP engine. In essence, on the application side, you want to make a lot of different changes in order to offer the customer a different experience and you want to have the flexibility within the architecture to offer that experience.

Two is you want to have a policy engine in order so you could understand, especially when you're servicing 3.2 million subscribers, what your subscribers are, how to get from point A to point B and again, play that arbitrage game in order to least expensive path from point A to point B. And really, it's median to working. When you think about a smartphone and over-the-top in essence is sometimes you're on 3G, which requires a codec that is very efficient. Sometimes you're sitting under Wi-Fi. They implement a codec that offers a better definition of sound, but it requires more bandwidth. So in essence, you want to be flexible with the client and based on the amount of bandwidth you have. But at the head end, you want to make sure you can service both types of customers at the same time and offer communication services.

For this is in essence is we compete against all SBC vendors, usually show up to these kinds of discussions.

The last one we'll kind of go through is the unified communication study. This is one that I believe is not really followed by the analyst and something that Todd pointed out today. And it's something we want to go forward with.

Today, we believe that a lot of the SBCs sold into the enterprises are for a point of demarcation, right? In essence, I'm going to buy the SBC in order to maximize service provider and go forward. So in essence, this is my in-and-out platform out to the world.

But we're seeing a vast majority of technology-forward enterprises start to think about unifying communications. I know that sounds funny. But in essence is, as Todd talked about, they have silos. Cisco in the desktop, Avaya in a call center, they want to integrate links because of the business models behind it, right?

So they're starting to look at the SBC that they might have put into to begin with in order to offer the connectivity out to the carrier as being the leverage point in order to take silos of the unified communications and unify them. This, we believe, is something that's not really being tracked by the analysts and we think this can be the fastest-growing segment of the enterprise market going forward. Obviously, we think that moves to Microsoft Link is something that is shifting enterprises. We think that in an existing -- in working through TDM and IP technology is important to them and obviously, if you think of policy engine to dial-up-like [ph] unified communication and a dial-in plan makes a lot of sense here.

So everything we talked about today to this point has been in regards to last 12 months and what we've done. So if we step back a year ago in essence, I had one solution delivered by 2 platforms, my SBC 9000 and my SBC 5200. And in essence is these are large scale carrier class platforms. And Todd and I made decisions on where we were going to leverage these platforms to go down market and invest with customers. Because in essence we didn't have platforms to cover a very large part of the population that had lower density requirements that are serviced by the 5200 and by the SBC 9000.

Along the way, in the last few months, what we've done is introduce the SBC 5100, which was purpose design in order to offer a high availability to enterprises at a lower scale. And when I mean lower scale, I mean lower session count. And with the acquisition of NET, we bring on the SBC 1000, SBC 2000, which are purpose built for the branch small and reasonable location of service providers -- of enterprises.

So in essence across the bottom what I'm excited about this is I really have at the back I truly have a full breadth of product, one that is unmatched in the industry. Underlying the very bottom, you can see is medium to working is something that is inherent to all the platforms. Because we believe that medium to working is going to be a differentiator and win us an industry.

Two is the vast majority of our platforms are Microsoft Link-certified, right?

Some of our products will be designed for high availability situations and some of our products will be designed in order to operate in stand-alone mode because it's 2 distinct markets.

The last part is in our SBC 1000 and 2000, not only do these have Microsoft Link certifications, but they also have Microsoft survival branch appliance abilities. At a high level, that saying, as I rolled out a Microsoft Link application across my enterprise, I'm sitting in a regional site and all of a sudden, my WAN connectivity goes away. With survival branch appliance capabilities on the platform, there's no need in order to walk away from the work being done. In essence, the application still exists. You still are able to make phone calls in and out. You're still able to use presence and instant messaging. In essence, your day doesn't change because all of a sudden, you've lost a wide area link. We see a lot of requests, especially in large corporations as they move further, further out of the field to have this capability built in.

The most important part is I believe today, I have a product that can go from the branch office all the way to the central office with similar features and functionality, all under a common policy engine, my PSX, in order to offer service providers the ability to stretch out to their customers and enterprises so they can stretch out from the largest location out to the smallest branches.

So I'd like to tell you I'm done. But in essence is nothing ever stops. So in essence is we're working through 2 different paths. These are 2 very large markets. On the very, I guess, on your side, the left side, you have -- we're looking to go into the lower session count and to come down on our SBC market. Right now, the SBC 1000 is a phenomenal box to carry us from the 1 to 100 session range. We're looking in order to bring that down market once again. The reason is a vast majority of the enterprise market, greater than 35%, is per session count less than 250 sessions. We think this market is going to be [indiscernible]. Additionally, not only just for the product. But what we want to do is we want to put the right wrappers around this to make this similar to other experiences you have. When you think about 10 years ago, how much a Wi-Fi access point costs, right? And now you think about today as you can walk through any consumer of a place and buy that Wi-Fi. Now I'm not telling you we're going to a consumer, but I'm telling you we're going to be in Best Buy tomorrow. But in essence is I want to give my service provider and enterprise customers and my reselling channel a breadth of products that continue done forward.

On the other side is we're continuing forward with the notion of a 10-gig interface on an SBC product line. The reason is in essence is SBC traffic needs to grow, customers are saturating that the interfaces, the gig [ph] interfaces, they have today and the need to stay ahead continues to drive Sonus' innovation.

The most important part is one that I'm kind of going down to is we talked about leveraging our portfolio, the 5200 and the SBC 9000. And Todd and I made decisions, along with the rest of the executive team, in order to invest in customers going forward.

An important thing that I understand is I believe I have margin leverage going forward. If I look at the vast majority of my SBC some of them are [ph] -- most of them shift with less than 50% of the capacity. So in essence, I put the hardware on the customer prem and in essence, the customer through salesforce.com, through their account teams through the distributor can come in and purchase licenses and expand the number of sessions within the platform with a software key download, right?

This I believe will allow us going forward as session counts grow in service providers and enterprises to have the leverage point moving forward.

So the key takeaway is really -- our is -- we're focusing on parts of the market that we believe are the largest growing or the most closely to our knitting [ph].

Two is that we will believe that SIP sessions will increase based on the markets we've defined. An expanded SBC portfolio will allow me to have the right product set at the right price points in order to compete in the market.

And lastly is I believe my existing in-the-ground SBC deployments offer me a point of leverage moving forward. I'm going to turn it over to Todd. I'm sorry, back to Ray, back to Todd. Thank you for your time.

Raymond P. Dolan

He doesn't need another introduction, does he? So Todd's going to take us through the go-to-market piece which wraps the entire piece together and then we'll go to Moe. Thanks, Todd.

Todd A. Abbott

As I said earlier, not a lot of change from a go-to-market standpoint. It's a lot of continue the same with some minor tweaks. So let me just give you a quick update. As we said or as I said earlier, big change from a strategy standpoint kicked off in January. And it was really about moving from a voice over IP infrastructure-oriented company selling to telcos, to one that's really about enabling UC in the cloud. There's a lot of underlying elements of change with that strategy and much more enterprise-focused. We believe that our heritage strength in the service provider is going to serve us extremely well because as I indicated, they are going to be major players in delivering a hosted and cloud-based UC.

Channel is going to be critical. And it is all about both service provider and channels to enable.

Three fundamental elements from our go-to-market standpoint. Expand investment in the SPs. We said we're going to do that last year. We've continued that. And we're going to continue to make sure that we make the investments in all of the Tier 1s around the world, as well as those key Tier 2s that are going to be the enablers of UC in the cloud. We're going to continue to expand our sales coverage from an enterprise standpoint. All of the NET coverage that they bring now gets added to the enterprise coverage organization that we have been investing up to this point. And then also, the channel program and I'll talk a little bit about that.

So from an evolution standpoint, it's really all about leveraging our service provider install base. Helping them to make the migration to SIP-based traffic, first at the interconnect where we're getting tremendous traction. And then leveraging that into the SIP trunking business and ultimately, into helping them monetize those SIP trunks with UC services. All the while, enabling our business to keep growing by creating demand for SIP-based infrastructure SBCs. We are absolutely going to compete for voice over LTE. I know there's a lot of noise in the system on that. Make no mistake about it. While that business doesn't become significant until '15, '16, as I indicated earlier, we are absolutely going to be in those evals, in those early deployments. It's a critical market going forward, but it's not going to be measurable -- or not going to be meaningful from a contribution standpoint given the market size for the next couple of years.

We shifted our focus from a sales standpoint in January when we kicked off to be very much about SBC, to be very much about SIP enabling. This was a big change. Sales comp changed. A lot of messaging changed. I think we've made that transition well. I think the results of the sales focus of both from the service provider and the enterprise space really has shown up in our market share gain. But we've identified is we've got to continue drive a real hunter mentality in our sales force.

We've had, if you're familiar with the vernacular in sales, farming versus hunting, we've had a really strong farming sales team, supporting some big customers that have been customers for us for a long time. And they're still very valuable because those customers are still going to be very strong customers to us going forward. But we've had to introduce a much greater hunting mentality. Because it's what I'm going to talk about -- this is all about trying to drive new customers into our portfolio. New customer growth is going to be a critical component for us to continue to drive our growth. And then develop the channel ecosystem, which is the key route to market into the enterprise.

So let me give you a quick update on Partner Assure. When we launched this, we said what we're going to do is go after a few strong partners. This isn't about launching a channel program and recruiting hundreds or thousands of partners. I've been involved in many channel transition plans and the mistake a lot of companies make is overcover the market. When you have channels competing against each other and not making any money, then the investment in you as a vendor becomes challenged. We specifically chose to go for the strong either international or multinational partners. We targeted 20 for this year, 10 coming out of Q2 right after the launch and then 5 more. We're at 14 to date. We expect we will sign a few more by the end of the quarter, so we'll be ahead of target. You see a couple of the names down below. We've put a whole new infrastructure in place, a partner portal that frankly, we had invested in for about 6 to 9 months, a lot of infrastructure behind that.

From an NET standpoint, what we've done is we've said to those 350 partners. So if you look at the partner ecosystem of NET, they had a lot of transactional partners, partners that did one deal. And then they had a set of partners as well that had done repetitive business. And so we're going to be tiering those partners. Everybody immediately comes in as a partner or assure reseller. They can continue to resell the NET, now the SBC 1000, 2000, just as they did yesterday. Many of them -- many of those deployments are multiyear, multi-quarter kind of deployments. And you want to make sure that those partners can continue to serve their customers. And in fact, they've got additional business we want to make sure they can continue to sell.

So everyone of those partners comes in under the Partner Assure program as a reseller. No change. There's some partner that changes and process changes, but we try to make that very, very seamless. There'll be a class of partners that will then want to invest in skills and ability to sell the full product line, the full SBC product line, up to the 5100 and 5200. For those partners, we will put them through a certification program and they will be Sonus partners, sure-select partners. And we expect we'll have another 20 to 25 of those 350 that will in essence move up to the select category and sell the complete line. That's not a restriction at this point. It's just a strategy, a belief in the strategy what the end result would be and that will play out over the next several quarters. Okay?

New accounts. So if you are to look at the profile of our business, we have had a number of very large strong customers. But the partner -- the customer portfolio has been relatively small. 125 customers bought product last year of our legacy product. We began to sell the new products into those customers. The SBC 5200 and 9000 have had some good success. Historically, the legacy business has brought us about 5% of our product revenue from new gateway customers. That's typically how much we've done historically. Some years little less, some years a little more. We would expect that to be very, very small. It's not 0 this year given the shift is about all new customers from an SBC standpoint. As I talked about the sales cycle and the time to revenue for new trunking customers is just not commensurate with where we want to be from a growth engine standpoint. All new customers have to be fundamentally SBC-driven customers. And that was a shift that we began at the beginning of this year. It's what fundamentally drove the expectation or the realization that we needed much greater hunters to be able to go identify and close new business. Different types of sales characteristic.

We are modeling and expect that the plans we have in place will begin to drive revenue from new customers and new products, the SBC products to the tune of about 15% to 20% per year. That's what we're modeling. That's not going to happen immediately, but that is the business plan that we're driving to. So another milestone for you to watch is how many new customers we drive. And frankly, it was one of the key attractions to NET. NET drives 50 to 60 new enterprise customers a quarter in the last several quarters before we acquired them. So it brings a whole new portfolio of enterprise customers for us to be able to upsell and sell a broader range of solutions.

So this is going to be a very key focus for us. And frankly, this is all about the channel. Because the channel fundamentally owns the voice infrastructures in the vast majority of enterprises around the world.

We also upgraded our website. I indicated that on the timeline before. We're now -- we've significantly upgraded our marketing capability. You'll have seen this in a couple of ways. One being the website, our store front. It gets -- it becomes international in the next couple of months. Today, it's English only. It will become multilingual so that store front would be much more effective on an international global scale. We have really taken our marketing capability up significantly. You'll also see that with more meaningful press releases on some of our successes over the last several quarters. You're going to see us continue to improve our marketing capability, given the fact that we're entering a market, the enterprise market, with not a lot of brand recognition.

So you'll see us continue to invest in the marketing capability to, both from our successes, as well as, attempt to reach out to customers and to partners, but we've now got a really good infrastructure. And this is more than just a pretty website. There's a lot of infrastructure behind it. That's why it took 9 months. A lot of infrastructure to be able to drive leads and distribute leads through partners and track for it to be an engine of growth for new accounts.

So key takeaways. This is all about a major shift from our traditional voice over IP infrastructure orientation, as a sales and as a marketing company, to one that's all about enabling UC in the cloud. To the enterprise, leveraging the service provider and leveraging a new channel capability to be able to extend that reach.

Partner Assure, we believe, is poised to contribute to our business in 2013. We'll get some contributions in Q4, minimally this quarter. But it begins to show up from a contribution standpoint, so watch the indirect percentage of product revenue as the indicator it that starting to scale. Sorry.

Major focus on new accounts as I said and we'll continue to enhance our marketing capability. So you understand and our customers and partners understand where we're going and how we're doing. Okay. That's a quick update on go-to-market.

Raymond P. Dolan

Sure. Okay. So finally, we'll put some numbers behind this. I asked Moe to join the company about a year ago, on August, so 13 months. Moe comes with a wealth of experience in public and private company CFO practices. The challenge that I said to him is, "Here is what we need to do, we need to sort this out, get our arms around where our cost structure is, where our revenue opportunities are, organize accordingly and get ready for growth in the future." We also need to be ready if we decided to do a transaction, to do one. We just did one. We would not have been able to do that a year ago if we weren't more organized and gone through the disciplined preparation for that. So I'll ask Moe to take you through a review of how we grade ourselves when we finished the quarter on Q2, a look into Q3 and Q4. Some indication what we're thinking next year without guiding, but what the themes are that will drive to the commitment we've made to profitability and cash flow generation, and then a review of the NET transaction. So Moe, thanks a lot.

Maurice L. Castonguay

Thanks, Ray. Well, welcome, everyone. Thank you again for taking time out of your busy schedules to listen to this. What we were hoping to do today is just to provide you with a brief update on our outlook for the business for the balance of the year. As you know, we've concluded our acquisition of NET on August 24, and we will be reporting their results going forward from that date forward. Our numbers, obviously, that we're going to be talking about. For the most part today are on a non-GAAP basis unless I specify otherwise. All of the numbers and forecast that you've heard earlier are on a non-GAAP basis.

One of the, obviously, prerequisites to any financial presentation is to remind you that a lot of my numbers and things you've heard today are forecast and estimates, which are subject to change. We strongly encourage you to read our 10-K and Q for a list of any of the risks and uncertainties in our business.

So just one slide on Q2, what we said we were going to do and what we did. I think if you look off to the right on these slides, what we were happy about is, obviously, we were either in line or beat the estimates that we provided. Total company revenue of $57.6 million, especially happy with total SBC revenue of $19.1 million as we grew faster than the market. We had cash of $363 million before our transaction closed this past month.

Looking at NET on a standalone basis, this is basically the guidance that we gave you before with a little more granularity. While we had provided you at our earnings call was that our net revenue would be approximately $5 million in our third quarter, $10 million to $12 million in our fourth quarter and $15 million to $17 million. All of that from August 25 forward.

We also indicated that we expected for the second half that the financial impact from an EPS standpoint would be either a breakeven to $0.01 loss.

I though it was important to give you a little more visibility into the segments of their business, where their pride is coming. We're obviously very excited about having their new SBC 1000 and 2000 to join our product family, as well as their legacy product. You can see the breakout between their SBC business. What we're forecasting is about $2 million of SBC revenue in Q3, $4 million to $5 million in Q4, $4.5 million to $5.5 million. And total revenue contribution as I mentioned of $5 million.

The legacy business consists of, obviously, some of the commercial business but obviously, they have government business, that has been in a state of decline. Our goals as you've heard, obviously, is to try to rejuvenate that government business. But what we're most excited about is the opportunity to grow their enterprise opportunity with their solutions.

If I look at us on a consolidated basis, we're looking at total revenue for Q3, $56 million to $58 million, $94 million to $98 million in Q4 and $272 million to $278 million. That's consistent with the numbers that we gave you on our last call. And if we look at EPS Q3, a $0.03 loss, $0.03 to $0.04 in Q4 and $0.04 to $0.05 -- $0.03 to $0.04 profit in Q4 and $0.04 to $0.05 loss in -- for the full year.

And then on margins for the full year of $59 million to $60 million.

Strongly encourage you to take the time to review our website where we'll provide the detailed reconciliation of GAAP to non-GAAP. And the important takeaways here is that we did have transaction cost. We exclude from our non-GAAP results, stock-based compensation, restructuring, transaction cost and obviously, amortization of intangibles. Some of those had occurred for NET prior to their transaction are in their opening balance sheet. Some of these are post acquisition and you can see those in these numbers.

So you heard Ray express some confidence in 2013. And what makes us feel confident in the numbers for 2013? Well certainly, we're very excited that the SBC revenue is expected to offset, more than offset the decline in the media gateway product revenue. As a result of new products, new channels, enterprise expansion, if you think about the NET acquisition, that brings to us the SBC revenue and that's also expected to offset the decline in their legacy product.

We're expanding our customer portfolio. There was a question earlier where people asked about the number of resellers. NET had about 350 resellers. So we're obviously looking for opportunities to cross-sell our products into their existing channels and vice versa.

We're going to see, obviously, a greater percentage of our revenue devised from enterprise. That should help us in a number of ways. One, it certainly should help in terms of the lumpiness. We'll also drive a lot more transactions as we move forward. And hopefully, it'll provide a lot more predictability in the numbers.

So less lumpiness within -- from a quarterly standpoint, given the numbers that we expect to see ramping through the channels.

From a margin and profitability standpoint, some of the drivers obviously, a more efficient expense structure. We've reduced our cost earlier this year for our business. NET had about 250 employees as they exited last year, that number at the end of December. They have reduced that number when we acquired them, they were approximately 160 and there's been some heads that have departed since that point. We expect to have ongoing expense synergies continue over the next few quarters as we continue the transition that we've been on.

We expect the SBC pricing to remain relatively stable over the next year and licenses to expand. So there's a significant opportunity for us over time to sell more licenses into those chassis we already have out there in the installed base.

One of the significant areas of opportunities for us as we've integrated NET has been the ability to integrate the manufacturing functions. They had a significant organization there as well as ours. Obviously, the goal is to integrate those 2, integrate where it makes sense to our contract manufacturers to get certainly economies of scale, not only in the manufacturing process, but also in the procurement of components. Those will result in operating margin improvements. And it has allowed us to go back and say that we expect to be profitable next year on a non-GAAP basis after our traditionally, seasonally weak first quarter. And we also expect to be cash flow from operations.

So some of the key takeaways we want to leave you with. The NET integration is going very well. SBC becoming a much more important component of our business and certainly, we're all very excited that we've made that transition and continue to work on driving that to an even bigger percentage of business. Our trunking product revenue declined. And we're going to plan on it being 20% going forward. Hopefully, we'll do better than that, but we're going to plan on it. So that's been factored into our estimates for this year. And obviously, we'll play into our thoughts as we later on provide guidance for 2013.

Operating expenses, spend lower to obviously accelerate our profitability. With our press release this morning, we reiterated our outlook for Q3, Q4 and for the full year. And obviously, we stated that we would be cash flow positive next year.

So with that, I'll turn it back over to Ray and then we'll open it up for questions.

Raymond P. Dolan

Okay, so we'll open it up for questions in a second. The conclusions are -- oh, I've got you. Is that a yawn, Paul, or a question coming?

So what we hope we shared with you and we're happy to take questions and meet with you over lunch. We've got the other members of the management team here that are available and really solid in their roles. The transformation proof points are now in our results. This is no longer a story. This is now about facts and passionate pursuit and focus going forward, so we continue to gain share. We're winning in growth markets, which means when we win, it matters. We will create value. If the SBC market will be $1 billion-plus in 2015 growing and UC comes on top of that, what we're doing will create value. It's really important. Okay. And that we are going to make the pivot to sustain profitability next year. We'll have seasonality. The business is still not as transactional as we like. All of the initiatives that Todd talked about remain works in progress. But as we diversify from the project nature of our Gateway business to the project nature of our initial SBC push to the transactional nature of the channel and the UCPs, we will become more predictable, slightly more linear and more consistently profitable. But that's our focus going forward, and we'd like to take your questions and open up for discussion at this point.

Unknown Analyst

This is a question maybe for David on SBC competitive differentiation. In response to an earlier question, you guys talked about scalability as being a big differentiator, which is pretty easy to measure I think in a lab and pretty easy to understand. Coming out of David's presentation is 2 things he seemed to highlight a lot were media interworking and policy as differentiators. So just wanted to get your sense of how significant they are, how significant your competitive advantages are in those 2 areas. They're clearly areas that Acme has talked about and seems like they're pretty confident, but what sort of sets you apart in those areas and how significant are they to you winning?

David Roy

Yes, in both median to working, as well as policy, it started with us in the trunking market so 13-plus years of development behind the architecture. So in essence is you take all the experience both in the policy, as well as all the complexity to do all the media interworking and it rolls forward on our SBC technology. So I think it's a quantum leap compared to our competitors.

Unknown Analyst

Then one on the NET guidance for 3Q and 4Q, is it -- the acceleration 3Q to 4Q just strictly the partial quarter effect or is there actually some underlying acceleration in the business?

Todd A. Abbott

The biggest element of the growth in those numbers is simply the partial quarter effect because you have 5 weeks of FX in Q3 obviously, a full quarter in Q4.

Unknown Analyst

Is there any acceleration though that you're seeing 3Q product momentum or anything?

David Roy

We sure hope there will be.

Raymond P. Dolan

So we'll go to back to Paul after that.

Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division

Just one quick question, guys. It seems like with a lot of the Link in implementations, a lot of the enterprises aren't in the SBC voice application part of it, what do you think is going to be the catalyst that will kind of drive that increase, which will then ultimately drive your business?

David Roy

So in the Link -- our Microsoft with Link has been attempted to really move into the enterprise voice space for a long time. Decade plus, their challenges had been being a server-based company moving into enterprise voice where [indiscernible] or the liability is a different deal. You don't reboot a PBX like you do a server. Right now, that's a statement, literally, 10 years ago. They've made a tremendous amount of progress. And Link now is gaining tremendous share. In fact, some of the latest market share reports that have come out, they are now very much near the top. So they've passed the inflection point and it's literally 10-plus years of development. So we're seeing some tremendous growth of Link's deployment. And it's not just Link licenses, but it's deployments. And those deployments are now starting to absolutely accelerate. And that's -- you can see that by the historic growth rates that NET has been able to drive of their that UX line because that UX business is 100% tied to Link deployment. So we believe fundamentally that just like I said before every technology kind of consolidates around 2 or 3, UC is going to consolidate around 2 or 3. There's no doubt in our mind that Microsoft is going to be one of those 2 or 3 and so that was a lot to do with why we picked up that asset.

David W. Tipping

If you look at Microsoft Link in essence it starts off as being an instant message chat session, right? And they've evolved in essence to make it truly unified communications. So understanding becomes more important to the average worker is one. And two, as the average worker becomes more mobile, 2 things are [indiscernible] securing it and providing mobility.

Unknown Analyst

From the SBC side, first off, I know periodically you give your customer counts. I was hoping you could update that in terms of total SBC customers, as well as the enterprise service providers split.

Maurice L. Castonguay

Can we get back to you on that? Paul, I don't have the number with me.

Unknown Analyst

Sure. Then the other question is, on cycle times, in terms of times to reward and time to revenue, on the SBC front, I know it's different depending upon service provider enterprise. But can you give us some sense for how long those deals are taking in...

Unknown Executive

It really does vary. And we're seeing some SBC deals that really depends upon where the customer is and is it an RFP and they're -- and then we're entering into and competing in -- it's pretty quick turnaround. It could be 90 days. So we've had some wins where it's literally, it's in that time frame. I would say that in most cases, you're talking 6 to 9 months. It really depends upon where they are in the buying cycle. If they're trying to figure out their architecture, trying to figure out what their UC strategy is and where SBC is playing, it's a much longer term, or longer strategy, or longer analysis period.

Unknown Analyst

[indiscernible]

Unknown Executive

The question is are most of these open RFPs? The vast majority are open RFPs. The vast majority.

James Kisner - Jefferies & Company, Inc., Research Division

Okay. James Kisner again from Jeffries.

I just want to clarify. Maybe this is for Ray, it could be for any of you. Your comments on VoLTE really not being meaningful until 2015. I guess I'm just sort of -- I mean Acme obviously said they didn't think it's going to have an impact on their business until 2013 and I'm sure there's a difference between the bulk of deployment and initial deployment, I understand that. But I guess I'm just sort of, maybe give us some insight into why you think it's going to be so long, because I think the back story about VoLTE, at least one of the portions of the back story was that carriers want to remain relevant and they're watching Whatsapp and Apple just dis-intermediate them with all these different applications and VoLTE is obviously a part of a suite of applications that could suddenly bring relevance back. So I guess my question is here, I mean if you're seeing carriers that say, "You know what, we can wait until then or is it just simply this is too expensive and whether we want to do it or not, we'll just have to wait?" Or is it because the technology isn't mature enough? Like just can you give us an insight into why it's so far away?

Todd A. Abbott

Right, sure. As I said voice over LTE is fundamentally different than LTE. LTE is a data service. Voice over LTE is delivering unified communication across that same infrastructure. Before an SBC gets involved, there's a lot work has to be done on the handsets, the radio sets, the infrastructure, the wireless build out. We think following that road map is our road map coincides when SBC technologies will be required in order to meet that market. So it really is -- you're talking about a very large build out that has to happen within these carrier markets before we become important.

Unknown Executive

So we think there are some technology challenges, but they'll get overcome and some of them are being overcome as we speak. Some of them are handset-driven as David said. But I think fundamentally the big compelling move will be when UC moves forward. Because we're just moving voice over to LTE to unify voice with the data services. It's important, but it's not like a principal driver. I still think the principal driver for this year for LTE is going to be monetizing the data byte [ph]. And stratifying the marketplace and improving QOS [ph] and just staying out in front of speeds and feeds [ph] for the wireless carriers. That's just our read on the pacing of the marketplace.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

[indiscernible]

Unknown Analyst

You spoke a lot about the indirect strategy for resellers. What's the company's attitude about OEM-ing products with either one or more of the major equipment suppliers?

David W. Tipping

So we're very open and we think we have a great box. As Todd said, when we get into the labs, Coke to Pepsi, we do great. I think there's a number of opportunities out there. I don't want to get ahead of that. There are a number of companies that are committed to the category, but nowhere near as committed as we are. So we are open. And at some point in time, that may become part of our results, but I can't really forecast that.

Unknown Analyst

The NET deals, can you give us a sense what the average deal size is for NET deals? Obviously, they're a lot smaller than the rest of the Enterprise business. And then when you break down the Enterprise business and you look at how you're putting your go-to-market strategy together, are you seeing the different parts of the enterprise market moving together or is the NET part of the market, which sounds that it's the lower-end smaller deal size market, is that moving faster now? Or is the higher-end Fortune 2000, let's say, or whatever, however you define those different pieces, moving faster, can you give us a little more granularity into those 2? And as you build out a bar [ph] channel sales force, is the channel -- is it more important to have a stronger channel at the higher end and midrange or is it more important to have it at the lower end. Just trying to get a sense as to how you look at the different tiers within enterprises?

Raymond P. Dolan

So I think what you have to be careful of is don't assume a low end entry point box is going to be focused on the low-end customer segment. Where these boxes are going is as components to an enterprise link rollout. So large Fortune 200 customers who require an SBC in their branch office or small regional office where the 5100 or the 5200 just doesn't provide the right price point to be able to provide that service. So the vast majority of the business that they're driving are to Fortune 1000 customers, not the low end of the market. So the beauty of this for us is that we've now got the ability to go into an enterprise and architect the full solution. How big's the office? What's the application portfolio? How many sessions do you need? What's the right price point to be able to now have an integrated architecture for that enterprise? These boxes -- the 1000, if you want to comment on some of the price points on the 1000, 2000?

Unknown Executive

So the price points, in essence it's a marginal architecture from a couple of thousand dollars up to tens of thousands of dollars, depending on what's in the platform.

Unknown Analyst

And the average deal size obviously similar or above [ph]?

Todd A. Abbott

So it depends on how you define deal size. Because these deployments, a Link deployment for a large enterprise can take 18 months to 2 years. And so what happens is it goes in phases. So the actual deal can be a very large multi-hundred million dollar deals. They'll flow in by quarter as they roll out the link deployments branch by branch or regional office by regional office. And that's typically, there are cases were it can be 2 or 3 years in a deployment on a global scale. John?

Unknown Analyst

I have a question on the service margin. If you're looking at your largest competitor, they seem to have substantially higher margins on their service side. Is that something we can expect on your SBC service maintenance as well?

Raymond P. Dolan

So it's certainly an area of focus on us. We certainly want to increase our margin moving forward. But if you think about our business, as we continue our transformation to selling more through the enterprise, you're going to actually see more of our products that, that really don't require as much professional services as a component to the total transaction. So as that diminishes over time, although maintenance will continue to grow, Professional Services component will decrease and our margins will actually increase over time. And it's been an area of focus again, trying to become even more efficient in the way we provide services. Certainly the NET acquisition allowed us the opportunity to look at their operations and ours and look where there were redundancies and look to combine those. And actually their margins are fairly high. So we're going to work diligently to improve our margins going forward.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

On the RFP activity that you're seeing, could you give us some color or is it some combination of IP PBXs, maintenance, UCs like Jabber, whatever and then SBC, are they pretty robust requirements from the larger financial institutions, the health care institutions, or are they purely strictly an SBC session routing type of RFP?

Raymond P. Dolan

So it really will vary. The reality is today in the enterprise space, most enterprise customers don't know what an SBC is. So we have as an industry a lot of educating to do. It's very much again like the early router days. I mean, the people didn't know what a router did. It just converted protocols from one LAN to another, file transfers. And then over time, it became much more strategic and understood. Today, as the SBC, in a lot of cases enterprises, their first orientation is as a CP on a SIP trunk and they don't even know what it is. They don't care. So there's a lot of enterprises that are now starting to get through that cycle and are now starting to understand its critical importance. And those situations tend to become much broader architectural-type RFPs. It's never in response to the deploying a specific vendor's FMC, Jabber, it's never in those -- driven by that. It's always driven by multivendor capability implementation. Trying to put SIP service to federate across those different vendors' UC architectures. So it's going through different phases. And I would say that the finance sector is most advanced like always, they're the quickest early adopters of most -- of all technology and so they're moving through that curve pretty quick and there's some pretty broad cross SBC architectural RFPs that we've been engaged in and will continue to be engaged in. If you go to some other industries, they're still in the first phase.

Patti Leahy

We'll take one from the web quickly. This is from Ryan Hutchinson from Lazard. Can you provide any commentary around the SBC price per session and what the declines have looked like over the last 12 months and what are the expectations for 2013?

Raymond P. Dolan

Yes. So I'd say we haven't seen, there's certainly no price wars that are opened up. We haven't seen any massive declines. They're pretty standard kind of price performance increases that you'd expect at this stage of the technology. There's some second-tier players that sometimes want to get in and buy a deal. I would not say at this stage that we're seeing any massive pressures or massive price erosions driven by pricing strategy.

Unknown Analyst

I have 2 questions. One is there a filling up session counts on the boxes you sold in the past? Is there evidence that customers do come back and add sessions or have you just sold some larger boxes, which maybe not what your experience has been around that? How should we think about revenue in gross margin for future license sales?

Raymond P. Dolan

Is there evidence of follow-on sales? Yes. How are the margins on follow-on software sales after you've already sold the chassis? High.

Unknown Analyst

Okay. Any sense of quantification? Are we still in the very early stages of seeing follow-on sales?

Raymond P. Dolan

Very early stages, I want to make sure the expectations -- David pointed to an opportunity to drive margin expansion post the investment cycle that we had to go through as we filled out our portfolio. That will take time. But there is already evidence that folks that are driving session-based strategies do grow those strategies as they consolidate the margin. The successful players are going to take on a lot more session density. Folks that start strategies and fail, they're generally not going to fill their boxes out.

Unknown Analyst

Okay. And as a corollary, do the smaller session kind of boxes go much more fully loaded and inherently have higher...

Raymond P. Dolan

Now that we have broader portfolio, we're fill in closer to the average margin fill outs, with more average lifecycles and rollovers. Okay?

Unknown Analyst

What's the average rate?

Maurice L. Castonguay

I think you're seeing it -- the lower end is we're not seeing any trends in the lower end that they're coming in higher density from a capacity standpoint than some of the data points that David has shared with you. So [indiscernible] the 5100 is not coming in fully loaded, any more than the 5200 is.

Unknown Analyst

And the other question was on the fourth quarter update, the math still suggests a pretty sharp uptick in revenue for your fourth quarter. Can you just give us some metrics, which give you the comfort around that sharp uptick?

Maurice L. Castonguay

This goes back to the seasonality and project nature of our Gateway business. This is just part of, if you will the next several years as that Gateway business matures is that there's projects that move in and out in time. It's not a fundamental uptick in the volume of business. It's the project nature of that revenue stream. We have a relatively stable growing still somewhat project-driven, but different SBC business that's growing in a much more healthy way and as it becomes more transactional that enterprise and channel-centric it will be even more linear. Right. And the Gateway business is still project driven.

Unknown Analyst

So the sequential uptick a lot of it is coming from the Gateway side?

Maurice L. Castonguay

The what?

Unknown Analyst

The sequential uptick in the fourth quarter.

Maurice L. Castonguay

If you do the math, it has to be that.

Patti Leahy

More questions?

Unknown Analyst

A real housekeeping question for Moe. How much of the deferred revenue hold you have as a result of the acquisition that you usually see some revenues that's not recognized for either company and like $1 million or $2 million, is it pretty much over in terms of the NET revenue contribution in Q4 and Q1?

Maurice L. Castonguay

If the question was specific to NET, there's actually very little deferred revenue at NET. Most of their transactions were actually booked and shipped and recognized in the same quarter. And also as you know, as part of acquisition accounting, you get a little haircut anyway on part of that. So it hasn't been a factor and will not be a factor with them, going forward. We have time for 1 or 2 questions and we are going to stay through lunch, so we're happy to deal with some questions less formally than this structure.

Unknown Analyst

This is building on the earlier question on the cloud you see opportunity. I think you said that it's $14.5 billion, 45% of that, so we're looking at what $7.5 billion -- $6.5 billion, $7 billion opportunity that builds on top of your $1.6 billion SBC TAM so I know...

Raymond P. Dolan

That's not all SBC TAM. That's the UC market.

Unknown Analyst

UC market, which is in addition to the $1.6 billion, 2015 opportunity for SBC. So the question is give us some concrete steps that you're taking to get to that. I mean the education that you need to do in the market, the channel relationships that you're building to attack that $7 billion TAM in addition to the SBC. And I know you have the product portfolio to get there. But what are some of the concrete steps. I mean to me that seems like it's going to be the major driver, I think you labeled it a guerilla opportunity going forward.

Maurice L. Castonguay

I think there's really 3 key targets in that space. One is that I've been saying I do believe that the Tier 1 is going to be a major player in that, so as the Tier 1 carriers look for strategy to monetize the SIP trunking deployments where they're cannibalizing revenue. They're going to be a major delivery of UC. There is a set of business partners, the traditional PBX players that have already looked to move into new businesses that have cloud offers. And that becomes part of the recruitment target less than our focus from our Partner Assure program. And I think the third is really focused on those Tier 2 service providers that are much more cloud oriented. May not have been some of our target customers in the past, but now very much are our focus. Those are the guys that are going to be delivering those services to enterprises. In some cases, also delivering it to Tier 1s. So it's going to be a very mix market. So Tier 1, Tier 2 service providers and the VaR channels, some of those that have moved into the cloud space.

Patti Leahy

I just want to remind everyone, we will have the presentation up on the website, so you can pull that down, this afternoon.

Raymond P. Dolan

Do we have one more?

Maurice L. Castonguay

No, do you want to close, Ray?

Raymond P. Dolan

Yes, I'll go ahead and close. Thank you very much for your time today. We look forward to this type of venue again. We don't have it formally planned. But we'd like to continue the dialogue of this multiyear transformation with you. Providing specific proof points of our journey along the way, the progress along the way. Thanks for your continued support and interest in Sonus.

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Source: Sonus Networks, Inc. - Analyst/Investor Day
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