Buckingham on Sonus
THE BUCKINGHAM RESEARCH GROUP
EQUITY RESEARCH
Research Note for January 4, 2006
Sonus Networks (SONS-Accumulate; Tgt: $8.00) –
• Vonage, an independent residential VoIP supplier, announced a major contract for SONS
softswitches, likely to provide required 911 and other “lifeline” services for their IP network.
• We estimate this to be a 12 month contract worth $5-10 million. This about 20% to 35% of our
projected 2006 softswitch revenue of $28 million.
• This is SONS’ third major softswitch (VoIP) agreement in a year, with the potential for at least two
more to be announced – Verizon (VZ – Neutral – $30.51) and BellSouth (BLS – Accumulate – xxx).
• We are maintaining our above consensus estimates, which assumes softswitch revenue of under $1
million in 4Q05, ramping to $28 million for 2006 as service providers choose SONS’ new Class 5
softswitch for their network upgrades to VoIP.
• We advise taking advantage of any weakness in SONS stock due to this announcement. We continue
to expect SONS to announce a large Class 5 softswitch contract at Verizon, which should drive
softswitch revenue into 2006 and benefit the stock price.
SONS – Vonage win continues softswitch streak
• We are maintaining our Accumulate rating and price target of $8 per share, which is based on
a multiple of 36x our above consensus 2006 EPS estimate of $0.22. This is in line with our
estimated growth rate for SONS.
• While SONS stock has moved on anticipation of today’s Vonage deal, we continue to
recommend taking advantage of any weakness in the stock for the following reasons:
Sonus Networks (SONS) Page 2 of 6
o Vonage, similar to other residential VoIP service suppliers, must upgrade their networks
to comply with federal mandates to supply 911 and other “lifeline” services. SONS is
the leading provider of these full capability softswitch-based systems.
o We expect at least two more softswitch contract announcements, aggregating to our $28
million softswitch revenue estimate for 2006. The other likely confirmations should be
from Verizon and BellSouth (see our 11/08/05 note), adding to SONS’ three major
(VoIP) wins last year.
§ We estimate the Vonage win to be worth $5-10 million over 12 months, beginning
in 1Q06. This represents about 20% to 35% of our projected 2006 softswitch
revenue of $28 million.
§ We estimate the BLS leg to be worth under $1 million in 4Q05 and ramp to under
$5 million per quarter over the next 12-18 months (see our note of 11/03/05).
§ The T-Systems (Deutsche Telecom) deal, to support IP services and VoIP, is
estimated to grow to $2-3 million per quarter into 2007.
§ An unannounced win of a large Class 5 softswitch contract at Verizon makes up the
balance of our 2006 softswitch revenue projection. Our checks indicate that SONS
has completed testing and we continue to expect the deal to be announced shortly.
• We are maintaining our above consensus estimates, which are driven by softswitch sales
ramping to $28 million (11% of revenue) in 2006. We are maintaining our Accumulate,
versus a Strong Buy, due the risks associated of SONS’ highly concentrated customer base
(top 5 customers generated 68% of 2Q05 revenue), lumpy quarterly revenue related to the
long sell and delivery cycles, vague guidance and fluctuating quarterly book-to-revenue
ratios.
– Software-intensive softswitches placed at large service providers may be dependent on
deployment and acceptance schedules.
– Revenue recognition issues are consistent with contract payment timing issues that we are
seeing at larger telecom system equipment vendors such as Lucent (LU- Neutral; $2.80)
and Nortel (NT – Neutral - $3.18). |
