CSFB on SONS. As with QCOM way back when, only a small number of analysts get this.
3Q07 Results
Investment Thesis. SONS has emerged as the leading competitor in the fast
growing service provider Voice over IP market, which is still emerging from its
nascent stage of development. While SONS’s operating model suffers from a
fair degree of volatility, we believe its market leadership together with significant
market expansion will drive significant upside over the long-term.
Results. SONS reported 3Q07 rev. of $76.6mln v. our and Street consensus’s
prior estimates of $76.0mln. 3Q07 P/F EPS (ex- ESO) of $0.02 v. our $0.01
estimate, was driven by higher 61.5% GM and lower OpEx v. both our and
consensus’s estimates.
Guidance. SONS reiterated its prior CY07 Rev guidance of 14-17% Y/Y growth,
which translates to 4Q07 revenue of $95.4-$103.8mln v. our and Street
consensus’s prior est.s of $96mln and $96.7mln, respectively.
Highlights. (1)BT 21CN. SONS announced its selection by BT for a significant
Class 5 access deployment throughout the UK under its 21CN initiative. We
believe this new build-out, scheduled to commence in CY08, will generate in
excess of $100mln in rev over the next two to three years. (2) Visibility. While
Book-to-Bill was <1, SONS noted that currently, almost half-way through its
4Q07, without the benefit of any orders to date from BT, its order book is
already at a record level. (3) GM. GM rebounded to 61.5%, up 370bps Q/Q.
Estimates. We have revised our Rev/PF EPS estimates (ex-ESO) as follows:
CY07 to $318.3mln/$0.08 from $318.6mln/$0.06; CY08 to $454.6 mln/$0.28
from $454.5mln/$0.26 and CY09 to $606.5mln/$0.43 from $583.5mln/$0.38.
Our CY07 revenue estimate assumes 13.9% Y/Y growth, in-line with Sonus’
14–17% guidance. Our CY08 and CY09 revenue forecasts assume 42.9% (off
of the depressed CY07 forecast) and 33.4% respective Y/Y growth.
Valuation. We continue to believe that SONS offers one of the most compelling
small-cap comm. infra. investments. Our 12-month $13 price target (raised
from $12) is driven by applying an unchanged 30x multiple to our raised CY09
$0.43 PF EPS (ex-ESO) est.
Improving Visibility--Customer and Product Traction
Sonus disclosed that it has been selected by BT as an official 21st Century Network
vendor for a significant Class 5 access deployment. We believe this new build-out,
scheduled to commence in CY08, could generate well in excess of $100mln in revenue
over the next two to three years as our checks indicate that BT is planning to deploy
Sonus’s ASX access server in the majority of its 5,500 Central Offices. Equally notably,
the deployment is a Class 5 access application, which represents the fourth such major
Class 5 SONS win, and came at the expense of one of SONS’s much larger competitors.
More specifically, per Sonus’s press release announcing the award:
BT has selected Sonus as an official 21CN vendor to supply an Access
Gateway Control Function (AGCF) capability to support BT's 21st Century
Network program (21CN). The Sonus solution will enable communications
providers to interconnect with BT's 21CN and leverage its next-generation
capabilities to provide converged multimedia services to end user customers.
BT will deploy the Sonus' ASX™ Access Server to control the network's multiservice
access nodes (MSANs), devices that are installed in telephone
exchanges to connect end-users' telephone lines with the core nextgeneration
network (NGN).
BT Group plans to deploy the complete Sonus access solution, including the
ASX™ Access Server, a key component of Sonus' IP Multimedia Subsystem
(IMS) architecture, as part of its AGCF project plan.
With the BT announcement, Sonus has now announced wins with seven of the world’s top
11 service providers. Additionally the company cited continued traction with existing
customers, with growth at Qwest, Level 3, Carphone Warehouse and Cable and Wireless,
among others, each of which continue to expand their Sonus based networks.
Sonus’s top five customers accounted for 60% of total revenues during the quarter, with
AT&T its only 10% customer during the quarter. |
