Sonus Networks Reports 2012 Second Quarter Results

Exceeds SBC Revenue Expectations and Reaffirms Full Year SBC Revenue Outlook

WESTFORD, Mass. – Sonus Networks, Inc. (Nasdaq: SONS), a global leader in SIP communications, today announced results for the second quarter ended June 29, 2012 and provided its outlook for the third quarter ending Friday, September 28, 2012 and the fourth quarter and full year ending December 31, 2012.

Second Quarter 2012 Highlights

Total revenue was $57.6 million
SBC total revenue, including maintenance and services, grew 77% year-over-year, to $19.1 million, compared to $10.8 million in the second quarter of 2011 and $17.0 million in the first quarter of 2012
SBC product revenue grew 75% year-over-year, to $13.5 million, compared to $7.7 million in the second quarter of 2011 and $13.2 million in the first quarter of 2012
SBC product revenue comprised 42% of total product revenue, the highest percentage of quarterly product revenue contribution to date
Sonus won six new customers in the quarter, all of whom purchased SBC products and services
Launched first enterprise and channel-focused product, the SBC 5100, which became Generally Available on July 31, 2012
Launched Sonus Partner Assure, the Company’s first global channel program to extend coverage of the enterprise market
Announced intent to acquire Network Equipment Technologies, Inc. Proposed acquisition expands Sonus’ coverage of the enterprise SBC market

Revenue for the second quarter of fiscal 2012 was $57.6 million, compared to $64.3 million in the first quarter of fiscal 2012 and $51.8 million in the second quarter of fiscal 2011. The GAAP net loss for the second quarter of fiscal 2012 was $11.7 million, or $0.04 per share, compared to a GAAP net loss of $6.4 million, or $0.02 per share, in the first quarter of 2012 and a GAAP net loss of $5.9 million, or $0.02 per share, in the second quarter of fiscal 2011. The non-GAAP net loss for the second quarter of fiscal 2012 was $8.6 million, or $0.03 per share, compared to a non-GAAP net loss of $4.2 million, or $0.02 per share, in the first quarter of fiscal 2012 and a non-GAAP net loss of $3.6 million, or $0.01 per share, in the second quarter of fiscal 2011.

2012 Third Quarter, Fourth Quarter and Full Year Outlook

The Company’s outlook is based on current indications for its business, which may change during the current quarter. 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. All figures exclude the impact of the proposed acquisition of NET, which was announced on June 19, 2012, unless otherwise noted.

For the third quarter of 2012, management provides the following outlook on a non-GAAP basis:

Total revenue of $51 million to $53 million
SBC total revenue, including maintenance and services, of $17 million to $19 million, up 23% to 37% from the third quarter of 2011
SBC product revenue of $14 million to $16 million, up 35% to 54% from the third quarter of 2011
Gross margins between 58% and 59%
Operating expenses of $39 million to $40 million
Loss per share of $0.03
Basic shares of 280 million
Cash and investments of approximately $300 million, assuming the NET acquisition closes in the third quarter

For the fourth quarter of 2012, management provides the following outlook on a non-GAAP basis:

Total revenue of $84 million to $86 million
SBC total revenue, including maintenance and services, of $22 million to $25 million
SBC product revenue of $19 million to $22 million
Gross margins between 58% and 59%
Operating expenses of $38 million to $39 million
Diluted earnings per share of $0.04
Diluted shares of 282 million

Management reiterates the following outlook on a non-GAAP basis for the year ending December 31, 2012:

Total SBC revenue, including maintenance and services, between $75 million and $80 million, up 44% to 54% year over year
SBC product revenue between $60 million and $65 million, up 58% to 72% year over year

Management provides the following updated outlook on a non-GAAP basis for the year ending December 31, 2012:

Total revenue of approximately $257 million to $261 million
Gross margins of approximately 60%
Operating expenses reduced to between $165 million and $166 million
Loss per share of $0.04
Basic shares of 280 million
Cash and investments of approximately $290 million to $300 million, assuming the NET acquisition has closed

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 fiscal 2012 the Company expects to record restructuring expense of approximately $2.3 million for severance and related expenses. These initiatives are expected to reduce third quarter and fourth quarter 2012 non-GAAP operating expenses by approximately $2 million and $3 million, respectively, compared to second quarter 2012 non-GAAP operating expenses of $41.7 million.

Quotes

“Our team is effectively transforming Sonus, as evidenced by our strong SBC results this quarter, which exceeded our expectations,” said Ray Dolan, President and Chief Executive Officer. “Demand for our SBC solutions continues to grow, allowing us to reaffirm our SBC outlook for the year. Given the current environment, we are taking proactive cost reduction measures to ensure that Sonus has a business model which should accelerate our path to profitability while enabling us to continue to grow our SBC business,” Dolan continued. “We will continue to invest in SBC as we remain optimistic about our growth prospects, which are driven by a highly competitive portfolio of SBC products.”

NET Proposed Acquisition

The Company’s proposed acquisition of NET, which was announced on June 19, 2012, is projected to result in incremental revenue of approximately $5 million in the third quarter and $10 million to $12 million in the fourth quarter of fiscal 2012, assuming the transaction closes by the end of August as currently anticipated. The Company expects the acquisition to have a $0.01 dilutive to break-even impact on non-GAAP EPS for the balance of the year. As noted above, the previous Sonus outlook provided by management for the third and fourth quarters of 2012 and the full year ending December 31, 2012 excludes the impact of the proposed acquisition of NET except where specifically indicated.

Conference Call Details

Date: August 7, 2012
Time: 4:45pm (EST)
Dial-in number: 800 734 8592
International Callers: +1 212 231 2900

Replay information

A telephone playback of the call will be available shortly following the conference call until August 21, 2012 and can be accessed by calling 800 633 8284 or +1 402 977 9140 for international callers. The reservation number for the replay is 21599357.

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.

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 regarding the following: plans, objectives, outlook, goals, strategies, future events or performance, 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; our ability to recruit and retain key personnel; difficulties supporting our new strategic focus on channel sales; difficulties retaining and expanding our customer base; difficulties leveraging market opportunities; restructuring activities; our ability to realize benefits from acquisitions (including with respect to the proposed 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 consistent 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, amortization of intangible assets, acquisition-related costs and restructuring. We also consider the use of non-GAAP earnings per share helpful in assessing the organic performance of the continuing operations of our business. By organic performance we mean performance as if we had owned an acquired business in the same period a year ago. 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 operating results to our historical 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, and provides meaningful information regarding our liquidity.

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 organic continuing operations of the acquired businesses and accordingly, they are generally not relevant in assessing or estimating the long-term performance of the acquired assets. 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. By excluding acquisition-related costs from our non-GAAP measures, management is better able to evaluate our ability to utilize our existing assets and estimate the long-term value that acquired assets will generate for the Company.

We expect to record approximately $2.3 million of restructuring expense in the third quarter of fiscal 2012 for severance and related costs. We believe that excluding restructuring expenses facilitates the comparison of our financial results to our historical operating results and to other companies in our industry and provides meaningful information regarding our liquidity.

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 allows 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.

For more information:
Patti Leahy
978-614-8440
pleahy@sonusnet.com