Lehman notes:-
Upgrading to 1-OW; Target Up
We are introducing '08 estimates for SONS and raising our price target to $7.50, or 25x our new CY08 EPS of $0.30 (+36% YoY). Our prior
target was based on 18x CY07 EPS of $0.22. We are also outlining key things that may go right and wrong for SONS in CY07. We note
that over the last 12 to 18 months, SONS has executed better than we expected and has successfully managed through potential negative
impact by the advent of IMS. While we clearly recognize lumpiness in SONS’ quarterly revenue streams, we continue to believe carrier
VoIP to be a key growth market. With more comfort regarding SONS' competitive positioning, we are raising our rating to 1-OW.
Furthermore, we highlight growth in the carrier VoIP market is expected to remain strong for the next several years, with a port revenue
estimated to grow at a 34.8% CAGR between 2005 to 2009, according to Synergy forecasts
As for CY07, things that may go right for SONS include: 1) carriers accelerate deployment of SONS' VoIP gear, including Deutsche
Telecom, KDDI, Cingular, etc; 2) faster than expected operating margin improvement; and 3) potential disruption in merger integration
among competitors (ALA & LU, NOK/SI) may allow SONS to take share.
Things that can potentially go wrong for SONS in CY07 include: 1) delay in revenue recognition on certain large deployments; 2) worse than
expected pricing pressure as larger competitors may re-focus on this market; and 3) carriers may move more aggressively to consolidate
vendor lists.
Overall, we highlight our checks suggest near-term business trends are strong, and our estimates for Q4 and beyond could potentially prove
conservative. Furthermore, we add that SONS’ options probe overhang is likely to be lifted soon. |
