Session Border Controllers To Spearhead Development For Sonus Networks

| About: Sonus Networks, (SONS)

Sonus Networks (NASDAQ:SONS) makes the following eye-popping claim on one of its recent recruitment adverts: "Every day over 1 billion minutes of talk time are delivered using Sonus solutions - including 5 of the world's largest telecom operator's networks and several Global 500 enterprises." For a company which is yet to break into the $1 billion market cap glass ceiling, the above statistic speaks highly about its past growth trajectory and its potential to take on larger, well entrenched competition like Cisco Systems (NASDAQ:CSCO), Nortel Networks (OTC:NRTLQ), Oracle Corp (NYSE:ORCL) and smaller companies like Agilysis (NASDAQ:AGYS) and Acxiom corporation (NASDAQ:ACXM).

What is making Sonus Networks tick in the market?

Sonus Network offers top of the line network and infrastructure solutions which allows connectivity between any media to any device, securely and stably across both fixed and wireless networks. Sonus' key product offerings include the session border controllers (SBC), policy/routing servers, subscriber feature servers (NYSE:SFS) and media and signaling gateways.

Market Potential

The growth potential of the market space that Sonus is operating in can be gauged by the fact that software giant Oracle Corporation shelled out $2.1 billion to acquire Acme Packet (NASDAQ:APKT), a industry niche player in the "session border controllers" market in February 2013. "Session border controllers" is one of the key solution areas expected to grow exponentially over the next few years, slated to account for $400 million in revenue globally by 2017, as per a report Infonetics Research published in June 2013. In 2013, Infonetics predicts a 30% increase in revenue and a similar 27% increase in demand in US market for SBC solutions.

Chart Source: Infonetics Research (1Q13) Enterprise Session Border Controller report

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Market Share

Sonus competes head-on with industry behemoths Oracle and Cisco in the SBC solution space. It occupies the third spot after Cisco and Acme (Oracle) in global market shares for SBC solutions, according to the June 2013 Enterprise Session Border Controller report published by Infonetics Research. Sonus is averaging around 50% revenue growth YoY in the SBC space in 1Q13 and 2Q13, and in its full year outlook, has indicated total revenue of around $120 million in new SBC licenses and support in 2013.

Slated to gain year over year growth in 2013, Sonus is now a large SBC business that will grow larger each year as it out-sells legacy production declines. While companies urge users to change to cloud-based storage, bring together different platforms and allow customers to use their own devices, the demand for SBCs will become higher.

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Chart Source: Infonetics Research (1Q13) Enterprise Session Border Controller report

Sonus' current market rally and the underlying fundamentals fueling it

The share price of Sonus has seen a steady 48% increase over the last three months. At the close of business on Aug. 5, it was trading at $3.4 with total volume of 517,533 shares.

Sonus Network Share Price trends over the last 90 days

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Source: Sonus Network Investor Relations website.


On July 29, 2013, Sonus Network published its 2Q13 numbers. The market rallied behind the news of uptake in its revenue and narrowing of its loss. Its total revenue from new license sales and support for all product lines inched upwards to $69.2 million for its second quarter, of which $29 million was generated by SBC licensing and support. This reflects a 20% increase in YOY total revenue. Added attraction to investors is the fact that Sonus is sitting on a cash chest and investments totaling $304 million.

I find it significant that the Sonus SBC product line revenue in 2Q13 grew by 52% to $29 million which is the second consecutive quarter of double digit growth in this market segment. Of special significance is also fact that its enterprise space revenue and SBC product lines contributed 21% and 41%, respectively, of total Sonus revenue in the just concluded quarter. In 2Q13, Sonus also managed to significantly bring down its losses to a manageable $4.9 million, in comparison to 2Q12, wherein the net loss was $11.7 million.

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This can be primarily ascribed to its reduction in workforce and operation recalibration efforts which have been afoot since 2Q12. These overall healthy numbers have helped Sonus report a total gross margin of 63% in the just concluded quarter.

Looking Ahead

With the projected growth of the SBC market over the next couple of years into a $400 million revenue pie, I think Sonus growing its SBC business at a 50% YoY is well placed as the third biggest vendor in terms of revenue in this space to take advantage of and grow into an over $1 billion dollar market cap company.

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In its mid-year guidance for Fiscal 2013, Sonus management indicated that they expect to close out the year at around $275 million in revenue with $300 million in cash and investments. It has also set aside a additional $100 million for stock buy-backs. It expects to manage its gross margin at around 64%. For investors who are looking at Sonus Network's next three months outlook, their managements 3Q outlook will indicate a $68 million revenue generation and gross margin hovering around 64%. Analyzing the past performance and the positive outlook on the market space Sonus operates in, I believe that Sonus would be more than able to over deliver on its own predictions.


Expected changes in top management personnel, including a possible departure of Sonus CFO and its Senior VP for Global Services in the near future, might impact Sonus Network's ability to execute on its restructuring efforts which have been afoot since August 2012.

Being a market with lots of internal competition, inability to enter into new markets, customer concentration can spark price changes, as well as SBC adoption being slowed by macro weakness.


I believe investors will gain in the short term as well as the long term if they invest in Sonus Networks now. Given its current market capitalization of less than $1 billion, and its third place market share in terms of revenue in SBC space, I would even hazard a guess that it can be a prime candidate for acquisition similar to Acme. I recommend a BUY on Sonus Networks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice."

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