Sonus Networks Delivers Solid Revenue in Quarter

Sonus delivered a slight upside in revenue in the third quarter while EPS were in line with our and consensus expectations. The better-than-expected top-line results and roughly undeterred outlook for the full year instilled greater confidence regarding the fourth-quarter ramp up, which now looks in line or better than historical norm, at 8%. The company reaffirmed its full-year EPS outlook of $0.07 and maintained its 10/10 operating model for 2015.

Calendar 2015 revenue goes down to $298.5 million from $300 million while EPS of $0.07 remains unchanged. Calendar 2016 revenue of $367 million and EPS of $0.20 are unchanged. The company is staying the course on margin expansion – operating margin is tracking at 6.7% for 2014 versus prior 6.5% estimate and 10% for 2015 -which remains the main tenet of our investment thesis. On 2015 price-to-earnings basis, the stock trades at 21.6 times. Based on our 2016 EPS scenario and 20 to 25 times straight price-to-earnings multiple, Sonus shares embed more than 40% upside to current levels, in our view, and we believe the stock deserves to trade at a premium multiple to the peer group given the company’s improving growth trajectory, operating margin leverage, and scarcity value.

SBC showed nice growth; will continue to grow but at a slower pace due to tough comparisons. Growth-related products (SBC/Diameter) registered $41.3 million in revenue beating our estimate and coming above management guidance of $39 million to $41 million. At midpoint of the guidance range, outlook for growth products for the year was $1 million shy of prior expectations of $168 million. Total SBC product and services revenue grew 6% sequentially and 41% year-over-year, up from 34% growth last quarter (though quality of this remains questionable, in our view, following last quarter’s reclassification). Critics may point out, however, that growth will slow to about 11% next quarter (in our estimation) and will likely remain less spectacular throughout 2015 given tough comparisons. While we agree, we note that the core SBC business will represent 56% of revenue exiting the year, and management not breaking out the growth products beginning in 2015 would make the task of tracking it nearly impossible.

Sonus Networks Delivers Solid Revenue in Quarter was last modified: October 29th, 2014 by Seth Talluto

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