Customer Traction -
Sprint-Nextel
• Investment Thesis. SONS is one of the leading suppliers to communication
service providers of Voice over IP (VoIP) switching infrastructure. We believe
that the migration by SPs from circuit to packet (IP) voice infrastructure will
drive significant growth in SONS’s operating prof. over the intermediate to
long-term horizon.
• Sprint-Nextel. While neither announced nor confirmed by SONS, our
industry checks indicate that Sprint-Nextel is in the process of rolling out a
new nationwide VoIP network, based on SONS’ gateways and soft-switches.
Our checks indicate that Sprint-Nextel likely will deploy over 200 SONS
gateways to replace approximately 2,500 legacy Lucent/Ascend Comm. TNT
remote access servers in their network as part of Sprint-Nextel’s VoIP
network. Additionally, we believe that this network will be fully IMS compliant,
which would represent one of the first true IMS deployments in the industry.
• Implications--Financial. We est. that this deployment could generate $25-
50mln (approx. 7.5 – 15% of our CY06 forecast) over a 12-24 month period
and potentially 2-3x this amount. At the higher end of our $25-50mln
conservative estimate, we estimate this contract would contrib. approx. $0.05
of EPS based on our OM projections. Given our Street-high revenue and
EPS est. (FY07 $323mln / $0.26, options expensed, v. Street consensus.
$311.9mln / $0.17), we are not adjusting our forecasts at this time. This
award, however, further bolsters our confidence in our rev and EPS forecasts
and that consensus numbers will over time come up to our higher ground.
• Implications--Other. Sprint Nextel’s deployment also supports our
confidence in our outlook for both the growth of the VoIP market and SONS’s
competitive position therein. More specifically, we continue to forecast 30+%
annual growth for carrier VoIP infra. over the next three to five years. As for
our non-consensus view that SONS can capture its share of this fast growing
market, our checks indicate that the Sprint Nextel award was highly
contested, with Sprint evaluating all of the available competing solutions
before deciding on SONS. Moreover, Sprint Nextel joins a lengthy list of
other service providers that have turned to SONS as the exclusive, primary or
key supplier of VoIP infrastructure. This list includes, among others: NTT,
KDDI, Softbank BB, Japan Telecom and J-Com in Japan; DT, C&W, and
Carphone Warehouse in Europe; and AT&T, Bell South, Verizon, Qwest,
Level 3, Global Crossing, XO, Vonage, EarthLink, and AOL in the U.S.
• Valuation. We continue to believe that SONS offers one of the most
compelling small-cap investment ideas in the communications infrastructure
industry, with significant upside opportunity and limited downside risk. Our
12-month $7.50 price target is driven by applying a 26x multiple to our FY07
$0.29 P/F EPS (excl. options exp) estimate. |
