SBarney on the second quarter:
OPINION
Sonus Reports (Sort of) a Strong 2Q But Decided to Do a Back Dating Audit So Full Financials Delayed---We Think This Company Is Gaining Traction and Poised for Acceleration
Despite the financial reporting timing issues, Sonus is living up to expectations as the premier service provider VoIP company. The quarter showed strong revenue growth and a large increase in back log and had a book to bill above 1.0. Management expects revenues to increase 10% 1H to 2H which is slightly above the 9% increase we have and had modeled. Our estimates did not change meaningfully, with the penny decline in 2006 due to rounding error. Management expects to increase spending rates to facilitate the growth prospects and to build the infrastructure to support its growing customer base, but the rate of growth still leaves room for margin expansion.
We believe the outlook for 2007 is shaping up quickly as the large deployments internationally, particularly in Japan, at KDDI and, potentially, NTT in 07 should kick in. We think the taint of the option backdating issue will hold shares back temporarily, and is setting up a nice buying opportunity.
Based on strictly the fundamentals of the business, we think these shares would be considerably higher. We are reiterating our Buy Rating and think the fundamentals at Sonus are showing the clearest improvement of any of the companies in our coverage. Once the option issues are resolved, these shares should move nicely higher.
Sonus Appears to Be Gaining Against Nortel, Lucent, Alcatel, and NEC---Regional Coverage of Incumbents Should Play to Sonus' Advantage--Europe Number 2 in Regional Orders
While the revenues reported in the quarter primarily reflect business in the United States, we think the order books are much more heavily skewed into the international markets. In each geography Sonus is competing primarily with the local incumbents, for instance Nortel and Lucent in North America and NEC in Japan and Alcatel in Europe. We believe 2Q orders demonstrate a material shift toward the international markets with Europe surprisingly showing up as the number two market in terms of new orders, and Japan in process of building some large networks which are still in their earliest stages and thus show in the backlog and even pre-backlog business. The win at KDDI is a good example. We think KDDI will be one of the larger installations of Sonus equipment, yet to date, there is very little revenue on the books in either backlog or in reported revenues. Yet they have standardized on Sonus for both the wireline and wireless applications, wireless through Motorola. We think in each of these geographies Sonus is benefiting from the wrong steps the incumbents took trying to integrate VoIP with their legacy gear, which causes them to sub- optimize as compared to the IP only oriented solution. We think the distractions at Nortel and at Lucent Alcatel are also giving Sonus even more time and room to strengthen their lead. |
