Sonus Networks Reports 2012 Fourth Quarter and Full Year Results

WESTFORD, Mass.-- Sonus Networks, Inc. (Nasdaq: SONS), a global leader in SIP-based communications, today announced results for the fourth quarter and full year ended December 31, 2012.

Results are reported on a consolidated basis and include the full fourth quarter financial effect of Network Equipment Technologies, Inc. (“NET”), an acquisition which closed on August 24, 2012. A table providing stand-alone Sonus and stand-alone NET results is provided in the “Supplementary Financial and Operational Data” located on the Investor Relations page of the Company’s website.

Fourth Quarter 2012 Highlights

• Total revenue was $75.1 million.
• Total SBC revenue, including product, maintenance and services, was $26.1 million.
• SBC product-only revenue was $20.6 million.

Full Year 2012 Highlights

• Total revenue was $254.1 million.
• Total SBC revenue, including product, maintenance and services, was $87.6 million, representing a 69% increase over 2011.
• SBC product-only revenue was $67.6 million, representing a 79% increase over 2011.

Revenue for the fourth quarter of 2012 was $75.1 million, compared to $57.0 million in the third quarter of 2012 and $74.3 million in the fourth quarter of 2011. The GAAP net loss for the fourth quarter of 2012 was $16.4 million, or $0.06 per share, compared to a GAAP net loss of $15.6 million, or $0.06 per share, in the third quarter of 2012 and GAAP net income of $3.7 million, or $0.01 per diluted share, in the fourth quarter of 2011. Non-GAAP net income for the fourth quarter of 2012 was $1.8 million, or $0.01 per diluted share, compared to a non-GAAP net loss of $6.3 million, or $0.02 per share, in the third quarter of 2012 and non-GAAP net income of $5.4 million, or $0.02 per diluted share, in the fourth quarter of 2011.

Revenue for fiscal 2012 was $254.1 million, compared to $259.7 million in fiscal 2011. The GAAP net loss in fiscal 2012 was $50.2 million, or $0.18 per share, compared to a GAAP net loss of $12.7 million, or $0.05 per share, in fiscal 2011. The Non-GAAP net loss in fiscal 2012 was $17.4 million, or $0.06 per share, compared to a non-GAAP net loss of $4.4 million, or $0.02 per share, in fiscal 2011.

2013 First Quarter and Full Year Outlook

The Company’s outlook is based on current indications for its business, which may change during the current quarter. Gross margin, operating expenses and EPS are presented on a non-GAAP basis. A reconciliation of the non-GAAP to GAAP outlook and a statement on the use of non-GAAP financial measures are included at the end of this press release.

First Quarter 2013											Current Guidance
Total Revenue											$60 to $62 million
SBC Total Revenue											$26 to $27 million
SBC Product Revenue											$21 to $22 million
Gross Margin											61% to 62%
Operating Expenses											$45 to $46 million
Basic EPS											$(0.03)
Cash & Investments											$280 million
Diluted Shares											281 million
Full Year 2013											Current Guidance
Total Revenue											$267 to $271 million
SBC Total Revenue											$120 to $124 million
SBC Product Revenue											$98 to $102 million
Gross Margin											64% to 65%
Operating Expenses											$171 to $172 million
Diluted EPS											$0.00 to $0.01
Cash & Investments											$280 to $285 million
Diluted Shares											285 million

Restructuring

In August 2012, the Company initiated a plan to streamline operations and reduce operating costs, including a corporate-wide restructuring plan. In the third quarter of 2012, the Company recorded restructuring expense of $2.0 million for severance and related charges and facility-related charges. The Company recorded additional restructuring expense of $5.7 million in the fourth quarter of 2012, comprised of $4.1 million for facility-related charges, $1.3 million for severance and related charges and $0.3 million for the writedown of property and equipment. The Company expects to record additional restructuring expense of approximately $2 million in the first quarter of 2013, comprised of severance and related charges.

Quote

“Sonus made tremendous progress during 2012 in our transformation to become a pure-play SBC company,” said Ray Dolan, president and chief executive officer. “We grew our total SBC revenue by 69% over 2011 and gained substantial market share in the service provider segment. We also considerably enhanced our go-to-market strategy with the addition of our new channel program, Sonus Partner Assure, and with the expansion of our SBC product portfolio. Additionally, the acquisition of NET during 2012 significantly increased our exposure to the enterprise SBC market. Sonus now has the market’s broadest SBC portfolio, including the most Microsoft Lync SBCs, enabling us to address the entire SBC market opportunity.” Dolan continued, “Sonus has also made solid progress streamlining operations. Our restructuring initiatives, coupled with ongoing improvements in operating efficiencies, are expected to drive significant improvements in our operating leverage and gross margins this year. The team is focused on accelerating our SBC transformation in 2013, driving toward long-term profitability, and enhancing shareholder value.”

Conference Call Details

Date: February 28, 2013
Time: 4:30 p.m. (EST)
Dial-in number: 800-354-6885
International Callers: +1 303-223-2680

Replay information:

A telephone playback of the call will be available following the conference call until March 14, 2013 and can be accessed by calling 800-633-8284 or +1 402-977-9140 for international callers. The reservation number for the replay is 21646000. A webcast replay of the conference call will also be available shortly following the conference call on the Company’s Investor Relations website in the Events & Presentations – Archived Events section.

Accounting Period:

As of the beginning of fiscal 2012, the Company began reporting its first, second and third quarters on a 4-4-5 basis, with the quarter ending on the Friday closest to the last day of each third month. The Company's fiscal year-end is December 31.

Tags:

Sonus Networks, Sonus, SONS, 2012 fourth quarter, earnings, results, IP-based network solutions, SBC, SBC 1000, SBC 2000, SBC 5100, SBC 5200, SBC 9000, session border controller, session border control, session management, SIP trunking, Cloud VoIP communications, unified communications, UC, VoIP, IP, TDM.

About Sonus Networks

Sonus helps the world's leading communications service providers and enterprises embrace the next generation of SIP-based solutions including VoIP, video and Unified Communications through secure, reliable and scalable IP networks. With customers around the globe and 15 years of experience transforming networks to IP, Sonus has enabled service providers to capture and retain users and both service providers and enterprises to generate significant ROI. Sonus products include session border controllers, policy/routing servers, subscriber feature servers and media and signaling gateways. Sonus products are supported by a global services team with experience in design, deployment and maintenance of some of the world's largest and most complex IP networks. For more information, visit www.sonus.net or call 1-855-GO-SONUS.

Important Information Regarding Forward-Looking Statements

The information in this release contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to a number of risks and uncertainties. All statements other than statements of historical facts contained in this report are forward-looking statements. Without limiting the foregoing, the words “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “seeks”, “projects” and other similar language, whether in the negative or affirmative, are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Examples of forward-looking statements include, but are not limited to, statements in the section “2013 First Quarter and Full Year Outlook” and other statements regarding the following: plans, objectives, outlook, goals, strategies, future events or performance, growth in market share, trends, investments, customer growth, operational performance and costs, liquidity and financial positions, competition, estimated expenditures and investments, impacts of laws, rules and regulations, revenues and earnings, performance and other statements that are other than statements of historical facts. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They are neither statements of historical fact nor guarantees or assurances of future performance. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, the timing of our recognition of revenues; economic conditions; our ability to recruit and retain key personnel; difficulties supporting our strategic focus on channel sales; difficulties retaining and expanding our customer base; difficulties leveraging market opportunities; the impact of restructuring activities; our ability to realize benefits from acquisitions (including with respect to our acquisition of Network Equipment Technologies, Inc.); litigation; actions taken by significant stockholders; difficulties providing solutions that meet the needs of customers; market acceptance of our products and services; rapid technological and market change; our ability to protect our intellectual property rights; our ability to maintain partner, reseller, distribution and vendor support and supply relationships; higher risks in international operations and markets; the impact of increased competition; currency fluctuations; changes in the market price of our common stock; and/or failure or circumvention of our controls and procedures. Important factors that could cause actual results to differ materially from those in these forward-looking statements are discussed in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations", Part I, Item 3 "Quantitative and Qualitative Disclosures About Market Risk" and Part II, Item 1A "Risk Factors" in the Company's most recent Quarterly Report on Form 10-Q. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. We therefore caution you against relying on any of these forward-looking statements, which speak only as of the date made.

Sonus is a registered trademark of Sonus Networks, Inc. All other company and product names may be trademarks of the respective companies with which they are associated.

Discussion of Non-GAAP Financial Measures

Sonus management uses a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, making operating decisions, planning and forecasting future periods, and determining payments under compensation programs. Our annual financial plan is prepared both on a GAAP and non-GAAP basis, and the non-GAAP annual financial plan is approved by our board of directors. Continuous budgeting and forecasting for revenue and expenses are conducted on a non-GAAP basis (in addition to GAAP) and actual results on a non-GAAP basis are assessed against the annual financial plan. We consider the use of non-GAAP financial measures helpful in assessing the core performance of our continuing operations and liquidity, and when planning and forecasting future periods. By continuing operations we mean the ongoing results of the business excluding certain costs, including, but not limited to: stock-based compensation, restructuring, write-off of prepaid royalties, acquisition-related costs, amortization of intangible assets and depreciation expense related to the fair value write-up of acquired property and equipment. We also consider the use of non-GAAP earnings per share helpful in assessing the performance of the continuing operations of our business. While our management uses these non-GAAP financial measures as a tool to enhance their understanding of certain aspects of our financial performance, our management does not consider these measures to be a substitute for, or superior to, GAAP measures. In addition, our presentations of these measures may not be comparable to similarly titled measures used by other companies. These non-GAAP financial measures should not be considered alternatives for, or in isolation from, the financial information prepared and presented in accordance with GAAP.

Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. In particular, many of the adjustments to Sonus’ financial measures reflect the exclusion of items that are recurring and will be reflected in our financial results for the foreseeable future.

Stock-based compensation is different from other forms of compensation, as it is a non-cash expense. For example, a cash salary generally has a fixed and unvarying cash cost. In contrast, the expense associated with an equity-based award is generally unrelated to the amount of cash ultimately received by the employee, and the cost to us is based on a stock-based compensation valuation methodology and underlying assumptions that may vary over time. We believe that excluding non-cash stock-based compensation expense from our operating results facilitates the ability of readers of our financial statements to compare our financial results to our historical operating results and to other companies in our industry.

We recorded $7.7 million of restructuring expense in fiscal 2012, comprised of $2.0 million in the third quarter and $5.7 million in the fourth quarter. We believe that excluding restructuring expense facilitates the comparison of our financial results to our historical operating results and to other companies in our industry.

In the fourth quarter of fiscal 2012 we wrote off $7.1 million of prepaid royalties for software licenses related to products from which we do not expect to derive future revenues. We believe that excluding the write-off of these prepaid royalties facilitates the comparison of our product gross margins to our historical operating results and other companies in our industry.

We consider certain transition, integration and other acquisition-related costs to be unpredictable and dependent on a significant number of factors that may be outside of our control. We do not consider these acquisition-related costs to be related to the continuing operations of the acquired business or the Company. In addition, the size, complexity and/or volume of an acquisition, which often drives the magnitude of acquisition-related costs, may not be indicative of such future costs. We believe that excluding acquisition-related costs facilitates the comparison of our financial results to our historical operating results and to other companies in our industry.

We exclude the amortization of acquired intangible assets from non-GAAP expense and income measures. These amounts are inconsistent in amount and frequency and are significantly impacted by the timing and size of acquisitions. Although we exclude amortization of acquired intangible assets from our non-GAAP expenses, we believe that it is important for investors to understand that intangible assets contribute to revenue generation. We believe that excluding the non-cash amortization of intangible assets facilitates the comparison of our financial results to our historical operating results and to other companies in our industry as if the acquired intangible assets had been developed internally rather than acquired.

As part of the assessment of the assets acquired and liabilities assumed in connection with the NET acquisition, we were required to increase the aggregate fair value of acquired property and equipment by $2.0 million. The acquired property and equipment is being depreciated over a weighted average useful life of approximately 2.5 years. We believe that excluding the incremental depreciation expense resulting from the fair value write-up of this acquired property and equipment facilitates the comparison of our financial results to our historical operating results and to other companies in our industry.

We believe that providing non-GAAP information to investors, in addition to the GAAP presentation, will allow investors to view the financial results in the way management views the operating results. We further believe that providing this information helps investors to better understand our financial performance and evaluate the efficacy of the methodology and information used by our management to evaluate and measure such performance.

SONUS NETWORKS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except percentages and per share amounts)
(unaudited)
				Three months ended
				December 31,				September 28,				December 31,
				2012				2012				2011
Revenue:
	Product			$	45,809			$	33,520			$	47,082
	Service				29,327				23,529				27,190
		Total revenue			75,136				57,049				74,272
Cost of revenue:
	Product				26,121				11,768				13,646
	Service				13,412				12,839				13,282
		Total cost of revenue			39,533				24,607				26,928
Gross profit					35,603				32,442				47,344
Gross margin:
	Product				43.0%				64.9%				71.0%
	Service				54.3%				45.4%				51.2%
		Total gross margin			47.4%				56.9%				63.7%
Operating expenses:
	Research and development				16,247				15,612				17,384
	Sales and marketing				20,002				17,613				17,033
	General and administrative				8,981				7,939				8,431
	Acquisition-related				439				4,090				-
	Restructuring				5,683				1,992				-
		Total operating expenses			51,352				47,246				42,848
Income (loss) from operations					(15,749)				(14,804)				4,496
Interest income, net					155				20				251
Other income (expense), net					204				(2)				-
Income (loss) before income taxes					(15,390)				(14,786)				4,747
Income tax provision					(997)				(833)				(1,017)
Net income (loss)				$	(16,387)			$	(15,619)			$	3,730
Earnings (loss) per share:
	Basic			$	(0.06)			$	(0.06)			$	0.01
	Diluted			$	(0.06)			$	(0.06)			$	0.01
Shares used to compute earnings (loss) per share:
	Basic				280,773				280,145				279,293
	Diluted				280,773				280,145				279,565

SONUS NETWORKS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except percentages and per share amounts)
(unaudited)
				Year ended
				December 31,				December 31,
				2012				2011
Revenue:
	Product			$	153,326			$	154,373
	Service				100,808				105,323
		Total revenue			254,134				259,696
Cost of revenue:
	Product				58,109				57,929
	Service				53,431				55,646
		Total cost of revenue			111,540				113,575
Gross profit					142,594				146,121
Gross margin:
	Product				62.1	%			62.5	%
	Service				47.0	%			47.2	%
		Total gross margin			56.1	%			56.3	%
Operating expenses:
	Research and development				67,341				64,410
	Sales and marketing				76,341				59,279
	General and administrative				34,283				34,957
	Acquisition-related				5,496				-
	Restructuring				7,675				-
		Total operating expenses			191,136				158,646
Loss from operations					(48,542)				(12,525)
Interest income, net					612				1,287
Other expense, net					202				-
Loss before income taxes					(47,728)				(11,238)
Income tax provision					(2,441)				(1,465)
Net loss				$	(50,169)			$	(12,703)
Loss per share:
	Basic			$	(0.18)			$	(0.05)
	Diluted			$	(0.18)			$	(0.05)
Shares used to compute loss per share:
	Basic				280,090				278,540
	Diluted				280,090				278,540

SONUS NETWORKS, INC.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
					December 31,				December 31,
					2012				2011
Assets
Current assets:
	Cash and cash equivalents				$	88,004			$	105,451
	Marketable securities					161,905				224,090
	Accounts receivable, net					68,654				53,126
	Inventory					25,910				15,434
	Deferred income taxes					686				486
	Other current assets					15,401				12,246
		Total current assets				360,560				410,833
Property and equipment, net						23,767				22,084
Intangible assets, net						15,237				1,200
Goodwill						33,796				5,062
Investments						29,698				55,427
Deferred income taxes						1,011				1,137
Other assets						7,191				8,972
					$	471,260			$	504,715
Liabilities and stockholders' equity
Current liabilities:
	Accounts payable				$	10,580			$	12,754
	Accrued expenses					26,795				21,620
	Current portion of deferred revenue					37,094				38,565
	Current portion of long-term liabilities					763				1,275
		Total current liabilities				75,232				74,214
Deferred revenue						11,647				11,601
Deferred income taxes						249				-
Convertible subordinated note						2,380				-
Other long-term liabilities						5,706				3,599
			Total liabilities			95,214				89,414
Commitments and contingencies
Stockholders equity:
	Common stock					281				279
	Additional paid-in capital					1,321,385				1,309,919
	Accumulated deficit					(952,373)				(902,204)
	Accumulated other comprehensive income					6,753				7,307
			Total stockholders' equity			376,046				415,301
					$	471,260			$	504,715

SONUS NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
						Year ended
						December 31,				December 31,
						2012				2011
Cash flows from operating activities:
	Net loss					$	(50,169)			$	(12,703)
	Adjustments to reconcile net loss to cash flows used in operating activities:
		Depreciation and amortization of property and equipment					12,891				11,629
		Amortization of intangible assets					2,773				400
		Stock-based compensation					9,003				7,865
		Write-off of prepaid royalties for software licenses					7,083				-
		Loss on disposal of property and equipment					344				24
		Deferred income taxes					785				66
		Changes in operating assets and liabilities:
			Accounts receivable				(8,924)				(217)
			Inventory				(7,713)				22,900
			Other operating assets				1,669				10,562
			Accounts payable				(4,949)				(3,537)
			Accrued expenses and other long-term liabilities				937				(7,377)
			Deferred revenue				(3,039)				(35,522)
				Net cash used in operating activities			(39,309)				(5,910)
Cash flows from investing activities:
	Purchases of property and equipment						(10,540)				(13,173)
	Business acquisition, net of cash acquired						(35,508)				-
	Purchases of marketable securities						(159,828)				(219,800)
	Sale/maturities of marketable securities						258,278				282,041
	Increase in restricted cash						-				(310	)
				Net cash provided by investing activities			52,402				48,758
Cash flows from financing activities:
	Proceeds from sale of common stock in connection with employee stock purchase plan						1,693				1,513
	Proceeds from exercise of stock options						254				818
	Payment of tax withholding obligations related to net share settlements of restricted stock awards						(342)				(1,439	)
	Principal payments of capital lease obligations						(120)				(88)
	Settlement of redeemable convertible subordinated debentures						(31,824)				-
				Net cash (used in) provided by financing activities			(30,339)				804
Effect of exchange rate changes on cash and cash equivalents							(201)				(702)
Net (decrease) increase in cash and cash equivalents							(17,447)				42,950
Cash and cash equivalents, beginning of year							105,451				62,501
Cash and cash equivalents, end of period						$	88,004			$	105,451

SONUS NETWORKS, INC.
Supplemental Information
(In thousands)
(unaudited)
The following tables provide the details of stock-based compensation, the write-off of prepaid royalties for software licenses, amortization of intangible assets and incremental depreciation expense resulting from the fair value write-up of acquired property and equipment included in the Company's Consolidated Statements of Operations and the line items in which these amounts are reported.
					Three months ended
					December 31,			September 28,			December 31,
					2012			2012			2011
Stock-based compensation
	Cost of revenue - product				$	32		$	41		$	81
	Cost of revenue - service					218			211			171
		Cost of revenue				250			252			252
	Research and development expense					524			524			480
	Sales and marketing expense					548			500			349
	General and administrative expense					1,141			1,124			476
		Operating expense				2,213			2,148			1,305
			Total stock-based compensation		$	2,463		$	2,400		$	1,557
Write-off of prepaid royalties for software licenses
	Cost of revenue - product				$	7,083		$	-		$	-
Amortization of intangible assets
	Cost of revenue - product				$	1,242		$	428		$	-
	Research and development					100			100			100
	Sales and marketing					527			176			-
		Operating expense				627			276			100
			Total amortization of intangible assets		$	1,869		$	704		$	100
Incremental depreciation expense resulting from the write-up of acquired property and equipment
	Cost of revenue - product				$	92		$	11		$	-
	Cost of revenue - service					77			22			-
		Cost of revenue				169			33			-
	Research and development expense					277			89			-
	Sales and marketing expense					16			19			-
	General and administrative expense					139			24			-
		Operating expense				432			132			-
			Total incremental depreciation expense resulting from the write-up of acquired property and equipment		$	601		$	165		$	-

SONUS NETWORKS, INC.
Supplemental Information (continued)
(In thousands)
(unaudited)
					Year ended
					December 31,			December 31,
					2012			2011
Stock-based compensation
	Cost of revenue - product				$	162		$	398
	Cost of revenue - service					813			1,203
		Cost of revenue				975			1,601
	Research and development					2,297			2,045
	Sales and marketing					2,006			1,817
	General and administrative					3,725			2,402
		Operating expense				8,028			6,264
			Total stock-based compensation		$	9,003		$	7,865
Write-off of prepaid royalties for software licenses
	Cost of revenue - product				$	7,083		$	-
Amortization of intangible assets
	Cost of revenue - product				$	1,670		$	-
	Research and development					400			400
	Sales and marketing					703			-
		Operating expense				1,103			400
			Total amortization of intangible assets		$	2,773		$	400
Incremental depreciation expense resulting from the write-up of acquired property and equipment
	Cost of revenue - product				$	103		$	-
	Cost of revenue - service					99			-
		Cost of revenue				202			-
	Research and development expense					366			-
	Sales and marketing expense					35			-
	General and administrative expense					163			-
		Operating expense				564			-
			Total incremental depreciation expense resulting
			from the write-up of acquired property and equipment		$	766		$	-

SONUS NETWORKS, INC.
Reconciliation of Non-GAAP and GAAP Financial Measures - Outlook
(in millions, except percentages and per share amounts)
(unaudited)
					Three months ended								Year ended
					March 29, 2013								December 31, 2013
					Range								Range
Revenue					$	60			$	62			$	267			$	271
Gross margin
	GAAP outlook					59.5%				60.5%				62.7	%			63.7%
	Stock-based compensation					0.5%				0.5%				0.5%				0.5%
	Amortization of intangible assets					1.0%				1.0%				0.8%				0.8%
		Non-GAAP outlook				61.0	%			62.0%				64.0%				65.0%
Operating expenses
	GAAP outlook				$	49.8			$	50.8			$	186.8			$	187.8
	Stock-based compensation					(2.2	)			(2.2	)			(11.3	)			(11.3	)
	Amortization of intangible assets					(0.6	)			(0.6	)			(2.5	)			(2.5	)
	Restructuring					(2.0	)			(2.0	)			(2.0	)			(2.0	)
		Non-GAAP outlook			$	45.0			$	46.0			$	171.0			$	172.0
(Loss) earnings per share
	GAAP outlook				$	(0.05	)		$	(0.05	)		$	(0.07	)		$	(0.06	)
	Stock-based compensation expense					0.01				0.01				0.04				0.04
	Amortization of intangible assets					-		*		-		*		0.02				0.02
	Restructuring					0.01				0.01				0.01				0.01
		Non-GAAP outlook			$	(0.03	)		$	(0.03	)		$	-			$	0.01
* Less than $0.01 impact on earnings per share.

SONUS NETWORKS, INC.
Reconciliation of Non-GAAP and GAAP Financial Measures - Historical
(in thousands, except percentages and per share amounts)
(unaudited)
		Three months ended
		December 31,				September 28,				December 31,
		2012				2012				2011
GAAP gross margin - product			43.0	%			64.9	%			71.0	%
Stock-based compensation expense			0.1	%			0.1	%			0.2	%
Amortization of intangible assets			2.7	%			1.3	%			0.0	%
Depreciation expense - fair value write-up of acquired property and equipment			0.2	%			0.0	%			0.0	%
Write-off of prepaid royalties for software licenses			15.4	%			0.0	%			0.0	%
Non-GAAP gross margin - product			61.4	%			66.3	%			71.2	%
GAAP gross margin - service			54.3	%			45.4	%			51.2	%
Stock-based compensation expense			0.7	%			0.9	%			0.6	%
Depreciation expense - fair value write-up of acquired property and equipment			0.3	%			0.1	%			0.0	%
Non-GAAP gross margin - service			55.3	%			46.4	%			51.8	%
GAAP total gross margin			47.4	%			56.9	%			63.7	%
Stock-based compensation expense % of revenue			0.3	%			0.4	%			0.4	%
Amortization of intangible assets % of revenue			1.7	%			0.8	%			0.0	%
Depreciation expense - fair value write-up of acquired property and equipment			0.2	%			0.0	%			0.0	%
Write-off of prepaid royalties for software licenses			9.4	%			0.0	%			0.0	%
Non-GAAP total gross margin			59.0	%			58.1	%			64.1	%
GAAP total gross profit		$	35,603			$	32,442			$	47,344
Stock-based compensation expense			250				252				252
Amortization of intangible assets			1,242				428				-
Depreciation expense - fair value write-up of acquired property and equipment			169				33				-
Write-off of prepaid royalties for software licenses			7,083				-				-
Non-GAAP total gross profit		$	44,347			$	33,155			$	47,596
GAAP research and development expense		$	16,247			$	15,612			$	17,384
Stock-based compensation expense			(524	)			(524	)			(480	)
Amortization of intangible assets			(100	)			(100	)			(100	)
Depreciation expense - fair value write-up of acquired property and equipment			(277	)			(89	)			-
Non-GAAP research and development expense		$	15,346			$	14,899			$	16,804
GAAP sales and marketing expense		$	20,002			$	17,613			$	17,033
Stock-based compensation expense			(548	)			(500	)			(349	)
Amortization of intangible assets			(527	)			(176	)			-
Depreciation expense - fair value write-up of acquired property and equipment			(16	)			(19	)			-
Non-GAAP sales and marketing expense		$	18,911			$	16,918			$	16,684
GAAP general and administrative expense		$	8,981			$	7,939			$	8,431
Stock-based compensation expense			(1,141	)			(1,124	)			(476	)
Depreciation expense - fair value write-up of acquired property and equipment			(139	)			(24	)			-
Non-GAAP general and administrative expense		$	7,701			$	6,791			$	7,955
GAAP operating expenses		$	51,352			$	47,246			$	42,848
Stock-based compensation expense			(2,213	)			(2,148	)			(1,305	)
Amortization of intangible assets			(627	)			(276	)			(100	)
Depreciation expense - fair value write-up of acquired property and equipment			(432	)			(132	)			-
Acquisition-related expense			(439	)			(4,090	)			-
Restructuring			(5,683	)			(1,992	)			-
Non-GAAP operating expenses		$	41,958			$	38,608			$	41,443
GAAP income (loss) from operations		$	(15,749	)		$	(14,804	)		$	4,496
Stock-based compensation expense			2,463				2,400				1,557
Amortization of intangible assets			1,869				704				100
Depreciation expense - fair value of acquired property and equipment			601				165				-
Write-off of prepaid royalties for software licenses			7,083				-				-
Acquisition-related expense			439				4,090				-
Restructuring			5,683				1,992				-
Non-GAAP income (loss) from operations		$	2,389			$	(5,453	)		$	6,153
GAAP net income (loss)		$	(16,387	)		$	(15,619	)		$	3,730
Stock-based compensation expense			2,463				2,400				1,557
Amortization of intangible assets			1,869				704				100
Depreciation expense - fair value of acquired property and equipment			601				165				-
Write-off of prepaid royalties for software licenses			7,083				-				-
Acquisition-related expense			439				4,090				-
Restructuring			5,683				1,992				-
Non-GAAP net income (loss)		$	1,751			$	(6,268	)		$	5,387
(Loss) per share/diluted earnings per share
GAAP		$	(0.06	)		$	(0.06	)		$	0.01
Non-GAAP		$	0.01			$	(0.02	)		$	0.02
Shares used to compute (loss) per share/diluted earnings per share
GAAP shares used to compute (loss) per share/diluted earnings per share			280,773				280,145				279,565
Non-GAAP shares used to compute (loss) per share/diluted earnings per share			281,236				280,145				279,565

SONUS NETWORKS, INC.
Reconciliation of Non-GAAP and GAAP Financial Measures - Historical
(in thousands, except percentages and per share amounts)
(unaudited)
		Year ended
		December 31,				December 31,
		2012				2011
GAAP gross margin - product			62.1	%			62.5	%
Stock-based compensation expense			0.1	%			0.2	%
Amortization of intangible assets			1.1	%			0.0	%
Depreciation expense - fair value write-up of acquired property and equipment			0.1	%			0.0	%
Write-off of prepaid royalties for software licenses			4.6	%			0.0	%
Non-GAAP gross margin - product			68.0	%			62.7	%
GAAP gross margin - service			47.0	%			47.2	%
Stock-based compensation expense			0.8	%			1.1	%
Depreciation expense - fair value write-up of acquired property and equipment			0.1	%			0.0	%
Non-GAAP gross margin - service			47.9	%			48.3	%
GAAP total gross margin			56.1	%			56.3	%
Stock-based compensation expense % of revenue			0.4	%			0.6	%
Amortization of intangible assets % of revenue			0.7	%			0.0	%
Depreciation expense - fair value write-up of acquired property and equipment			0.1	%			0.0	%
Write-off of prepaid royalties for software licenses			2.7	%			0.0	%
Non-GAAP total gross margin			60.0	%			56.9	%
GAAP total gross profit		$	142,594			$	146,121
Stock-based compensation expense			975				1,601
Amortization of intangible assets			1,670				-
Depreciation expense - fair value write-up of acquired property and equipment			202				-
Write-off of prepaid royalties for software licenses			7,083				-
Non-GAAP total gross profit		$	152,524			$	147,722
GAAP research and development expense		$	67,341			$	64,410
Stock-based compensation expense			(2,297	)			(2,045	)
Amortization of intangible assets			(400	)			(400	)
Depreciation expense - fair value write-up of acquired property and equipment			(366	)			-
Non-GAAP research and development expense		$	64,278			$	61,965
GAAP sales and marketing expense		$	76,341			$	59,279
Stock-based compensation expense			(2,006	)			(1,817	)
Amortization of intangible assets			(703	)			-
Depreciation expense - fair value write-up of acquired property and equipment			(35	)			-
Non-GAAP sales and marketing expense		$	73,597			$	57,462
GAAP general and administrative expense		$	34,283			$	34,957
Stock-based compensation expense			(3,725	)			(2,402	)
Depreciation expense - fair value write-up of acquired property and equipment			(163	)			-
Non-GAAP general and administrative expense		$	30,395			$	32,555
GAAP operating expenses		$	191,136			$	158,646
Stock-based compensation expense			(8,028	)			(6,264	)
Amortization of intangible assets			(1,103	)			(400	)
Depreciation expense - fair value write-up of acquired property and equipment			(564	)			-
Acquisition-related expense			(5,496	)			-
Restructuring			(7,675	)			-
Non-GAAP operating expenses		$	168,270			$	151,982
GAAP income (loss) from operations		$	(48,542	)		$	(12,525	)
Stock-based compensation expense			9,003				7,865
Amortization of intangible assets			2,773				400
Depreciation expense - fair value of acquired property and equipment			766				-
Write-off of prepaid royalties for software licenses			7,083				-
Acquisition-related expense			5,496				-
Restructuring			7,675				-
Non-GAAP income (loss) from operations		$	(15,746	)		$	(4,260	)
GAAP net income (loss)		$	(50,169	)		$	(12,703	)
Stock-based compensation expense			9,003				7,865
Amortization of intangible assets			2,773				400
Depreciation expense - fair value of acquired property and equipment			766				-
Write-off of prepaid royalties for software licenses			7,083				-
Acquisition-related expense			5,496				-
Restructuring			7,675				-
Non-GAAP net income (loss)		$	(17,373	)		$	(4,438	)
(Loss) per share/diluted earnings per share
GAAP		$	(0.18	)		$	(0.05	)
Non-GAAP		$	(0.06	)		$	(0.02	)
Shares used to compute (loss) per share/diluted earnings per share
GAAP shares used to compute (loss) per share/diluted earnings per share			280,090				278,540
Non-GAAP shares used to compute (loss) per share/diluted earnings per share			280,090				278,540