From Citi
Business fundamentals at Sonus are strong. We believe the company has the world’s best
carrier VoIP and IMS technology. The market acceptance of VoIP is accelerating and IMS is
just getting underway. Market trends are strong for Sonus across its end markets including
core trunking, access, wireless, and multimedia applications. While the company is
developing a strong stand alone-business model we think it’s likely the company will
eventually be acquired at a meaningful premium by a larger industry player such as Cisco
(CSCO--$25.94, 2H by Paul Mansky), Alcatel-Lucent (ALU--$12.83, 1H by Robin
Nazarzadeh), Ericsson (ERIC--$35.76, 1H by Has Malik), Siemens-Nokia, Juniper (JNPR--
$18.91, 1H)), Avaya (AV--$12.28, 2S), or Tellabs (TLAB--$10.48, 2H).
Sonus currently has significant business with many of the world’s leading carriers including
NTT, Deutsche Telekom, AT&T, Verizon, KDDI, Qwest, and Level 3. Orders from Level 3,
an infrastructure and application customer for Sonus, was particularly strong and the
network expansion there still provides good visibility in 2007.
In 4Q 2006 Level 3 and Opal Telecom (an access customer) were each 10% customers but
we believe most of the Opal orders were received in a previous quarter. In 4Q Sonus’ top 5
customers contributed 51% of sales compared to 71% (a different group of 5) in 3Q 2006.
There were a total of 64 revenue customers in 4Q compared to 54 in 3Q. In 2006 Cingular
(AT&T), KDDI, and Level 3 were 10% customers for the year. Sales to international
customers contributed 23% of sales in 4Q, 52% in 3Q, and 27% for the full year 2006.
We Are Buyers Of Sonus Especially On Any Weakness
Despite the strong quarter and the strong fundamentals Sonus shares could be down on the
report for several reasons. First, because of tax accounting and moving to a proforma (noncash)
35% tax rate, it’s very likely published sell side estimates for the company will move
down. Secondly, the expectations going into the 4Q report were quite high with some
analysts talking about $150 million in orders and a B-B close to 2.0. Finally, Sonus’ explicit
revenue guidance for 1H 2007 is not significantly much higher than the existing First Call
consensus.
We believe the fundamentals at Sonus are strong and are getting even stronger and we
recommend buying the shares, especially on any weakness or dips.
Strong 4Q Results
To the extent possible, given the ongoing stock option related restatements, Sonus reported
strong 4Q and full year 2006 results. 4Q revenues came in up 5% Q-Q and up 38% Y-Y to
$79 million compared to our estimate at $67.5 million and First Call at $68.1 million. For
the full year 2006 revenues of $279 million increased about 43% Y-Y even as the backlog
increased.
Sonus noted that its B-B for both 4Q and full year 2006 was above 1.0 and said orders for
4Q were “well north” of $100 million. Deferred revenues on the balance sheet, which are
just one component of the backlog increased by $13 million Q-Q to $94 million but were
down $28 million Y-Y.
4Q GMs were down sequentially from nearly 65% in 3Q but still at the high end of the longterm
target range of 58%-62%. Operating costs as a percentage of revenues were up slightly
Q-Q (to about 49% from 47% we estimate) but excluding nearly $4 million in restatement
costs would have been about 43%. We estimate operating margin came in down Q-Q from
a very strong 17% in 3Q to about 12% in 4Q.
It is not possible to accurately estimate a proforma EPS number for the quarter because
Sonus noted it will utilize a portion of its deferred tax assets and recognize a significant tax
benefit to earnings in 4Q, but did not quantify this amount. Ignoring this and,
conservatively, assuming a 10% cash tax rate we are now estimating Sonus earned $0.05 per
share in the quarter on a cash EPS basis. This compares to our previous estimate at $0.04
and consensus at $0.04.
In terms of a couple of balance sheet items, Sonus finished 4Q with $361 million in cash
compared to $346 million at the end of 3Q. 4Q DSOs were 43 days compared to 56 days in
3Q.
In terms of guidance, management noted that its end markets are growing 20%-25%
annually on a long-term basis and that the company expects to grow at least as fast as the
market. Management said for the first half of 2007, compared to the same period in 2006, it
expects revenue growth at the high end of this range and the second quarter to moderately
outpace the first quarter.
Rev ests are $74.8 for Q107, $342.2M for 2007, $415.2M for 2008 |
