A group whose name begins with citi says this:
To the extent that Sonus reported 3Q numbers, the numbers were strong. The company's Audit Committee has determined that Sonus will restate historical financials to reflect increased non-cash charges for stock-based compensation in order to appropriately account for the measurement dates of certain stock option grants. As a result, Sonus will not be able to file its 3Q 2006 10-Q by the official deadline of November 9th. As a reminder, Sonus has also not yet filed a 10-Q for 2Q 2006 and says that its individual financial statements from 2000-2006 should not be relied until they are restated or determined to cover periods that do not require restatement. The audit committee also determined that none of the current senior managers at Sonus intentionally violated company policy or committed improper actions.
In terms of the reported 3Q numbers, the quarter was strong. Revenues came in at $75 million against our forecast of $66.2 million and consensus at $66.4 million. This represents a 16.5% Q-Q increase and 64.3% Y-Y increase. Based on management's comments during the call, we believe GMs were above the long-term target model of 58%-62% and likely were close to 65%. Even including about $2 million in spending on the stock option review the operating margin looks to have come in at the low end of the long-term target range of 17%- 0%, up from an estimated 12% in 2Q and an all-time record for the company.
On the less positive side, B-B was below 1.0 in the quarter on typical seasonal order softness. Deferred revenues decreased $34.5 million Q-Q to $81 million as reported revenues increased by $9.6 million. However, Sonus is upbeat about the RFP activity and expects a strong 4Q for orders. While the quarter to quarter results remain subject to order and/or revenue lumpiness, Sonus remains a strong leader in next-generation carrier VoIP technology and remains the best pure-play for investment in the global service provider transition from TDM to IP networks.
Customer Highlights Of The Quarter
* KDDI was the largest customer in the quarter and the only 10% customer.Most of the revenues were associated with phase 1 of KDDI's project where the orders came in earlier periods. In 3Q Sonus started phase 2 and took additional orders from KDDI. KDDI's goal is to have a 100% IP network by the end of 2008.
* Top 5 customers in the quarter contributed 71% of 3Q sales, down from 80% in 2Q. There were a total of 54 revenue customers in the quarter,up from 53 in 2Q. International customers contributed 54% of sales.
* Sonus increased network expansion activity with Verizon, Cingular, Level3, and Qwest.
* Cable and Wireless International announced a multi-country deployment ofSonus' IP Multimedia Subsystem (IMS)-ready architecture
* RFP and trial activity in Europe was particularly strong.
* Sonus now has about 30% market share in high density media gateways. Sonus is also the global leader in IP LD trunking.
Other Financial Highlights Of The Quarter
* Sonus generated cash from operations, finishing the quarter with $346 million on the balance sheet, up from $318.3 million at the end of 2Q.
* Headcount at the end of 3Q was 817, a 35 person increase Q-Q.
* The DSO on earned receivables was flat Q-Q at 56 days.
* With the stronger 3Q performance, Sonus raised 2H revenue guidance to above 10% growth over 1H from 10% growth previously.
Tweaking Estimates
* 2Q 2006. Based on new information from management, we are raising our margin estimates for the June 2006 quarter. We now believe Sonus earned $0.04 per share compared to $0.03 previously.
* 3Q 2006. Based on the just reported numbers our revenue estimate increased to $75 million from $66.2 million and EPS goes to $0.05 from$0.03.
* 4Q 2006. We are slightly lowering our revenue estimate to $67.5 million from $69.6 million. EPS remains at $0.04.
* 2006. Our new 2006 revenue forecast is $266.9 million compared to $260.2 million previously. EPS is $0.16, up from $0.14.
* No other changes at this time.
VALUATION
On a P/S basis, our 12-month target price of $7.10 is based on a multiple of roughly 6.0x our 2006 sales estimate. The wireline telecom equipment vendors we cover closed today in the range of 0.8x to 8.0x our CY07 revenue projections, with the mean multiple at 3.0x. We believe Sonus is among the best positioned of these companies and believe it deserves a significant premium to the group in terms of P/S because of this as well as its relatively low operating margins today in relation to its potential margins. Generally speaking, our existing operating margin forecast for 2005 is 21%. We believe Sonus could achieve an operating structure with 30+% margins as revenues grow and sales of high margin softswitching software increases in the mix. We think the company deserves a meaningful premium valuation to its peer group given the added visibility brought about by its established international growth strategy and the robust RFP activity levels.
We also looked at Sonus on a P/E basis. Our target multiple is roughly 25x 2007 earnings. The wireline telecom equipment vendors we cover currently trade in the range of 16x to 32x our CY07 EPS projections, with the mean multiple at 21x. Generally, among this universe of companies we think Sonus is among the best positioned because it is a pure-play in carrier-class VoIP, a fast growing and strategically important next-generation product area. In addition, we think Sonus warrants a premium valuation since we target the company at a 35% long-term EPS growth rate, while we see the rest of the wireline companies in our coverage growing at 5%-15%.
We note, the changes in our estimates do not warrant a change in target price. |
