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.