Sonus Networks Reports 2013 Fourth Quarter and Full Year Results

Delivers Record SBC Revenue for Fourth Quarter and Full Year

Fourth Quarter 2013 Highlights

• Total revenue was $76.2 million, up 1% compared to the fourth quarter of 2012.
• Total SBC revenue (including product, maintenance and services) was $41.6 million, reflecting growth of 59% compared to the fourth quarter of 2012.
  • Represented 55% of total Company revenue and marks the first time total SBC revenue has represented more than half of the Company’s total revenue in any quarter.
• SBC product revenue was $32.2 million, reflecting growth of 56% compared to fourth quarter of 2012.
  • Represented 70% of total product revenue, a record high for the Company.
• GAAP gross margins were 63.5%; non-GAAP gross margins were 64.7% representing an increase of 570 basis points compared to non-GAAP gross margins in the fourth quarter of 2012.
• GAAP earnings per share was breakeven; non-GAAP diluted earnings per share was $0.02.

Full Year 2013 Highlights

• Total revenue was $276.7 million, up 9% compared to full year 2012.
• Total SBC revenue (including product, maintenance and services) was $129.9 million, reflecting growth of 48% over 2012.
  • Represented 47% of total Company revenue.
• SBC product revenue was $97.4 million, reflecting growth of 44% over 2012.
  • Represented 58% of total product revenue and marks the first time SBC product revenue has represented more than half of the Company’s total product revenue for the full year.
• Enterprise sales contributed 27% of total product revenue.
• Channel sales contributed 20% of total product revenue.
• GAAP gross margins were 62.3%; non-GAAP gross margins were 63.6%, representing an increase of 360 basis points compared to non-GAAP gross margins in 2012.
• GAAP loss per share was $0.08; non-GAAP diluted earnings per share was $0.02.
• Announced stock buyback program to repurchase up to $100 million of the Company’s common stock; executed approximately $59.3 million through December 31, 2013.
• Announced industry’s first full-featured, unlimited scale software-based SBC.
• Successfully integrated the acquisition of Network Equipment Technologies, Inc. (NET), extending the Company’s SBC product portfolio into the enterprise.
• Announced the acquisition of Performance Technologies, Inc. (PT) in December 2013; announced the successful closing of the transaction in February 2014.
  • Acquisition expected to strengthen the Company’s mobility and virtualization strategies.
• Added several prominent leaders to the Company’s Board of Directors and management team.

Quotes

“2013 was an unprecedented year of transformation for Sonus,” said Ray Dolan, president and chief executive officer. “We had record SBC results whereby SBC product revenue represented more than 50 percent of our total product revenue for the full year – a first in the Company’s history. We expect this trend to strengthen in 2014 when our total SBC revenue, including product, maintenance and services, is expected to represent more than half of our total Company revenue, further underscoring our successful transformation”.

Dolan continued, “During the year, we also significantly expanded our product portfolio including adding important multi-media and IMS capabilities, launching the industry’s most-scalable software-based SBC, and announcing our plans to expand into diameter signaling, arguably the fastest growing market in networking. The pace of our product innovation has accelerated and we’re not done yet. We plan to make another significant product announcement in the coming week and look forward to sharing this news during Mobile World Congress in Barcelona. As a testament to our strong performance and our future potential, we also recently added several prominent leaders to our management team and Board of Directors. In short, we have entered 2014 with, we believe, the industry’s strongest team and most competitive product portfolio. It’s an exciting time to be at Sonus.”

Mark Greenquist, chief financial officer, added, “Our solid financial performance and balance sheet have enabled us to invest in our business, both organically and through acquisitions, in order to fuel our growth engine, while also returning approximately $59 million to our shareholders through our stock buyback program. We believe that the Company is very well positioned for continued growth and value creation in 2014.”

Key Management and Board Member Additions

The Company recruited several recognized leaders to its management team and Board of Directors, including Mark Greenquist, former chief executive officer and chief financial officer of Telcordia Technologies, Inc., who joined as our chief financial officer in November 2013; Pamela D.A. Reeve, former president and chief executive officer of Lightbridge, Inc., who joined the Board of Directors in August 2013; Matthew W. Bross, chairman and chief executive officer of Compass-EOS and former chief technology officer of Huawei, British Telecom and Williams Communications; and Richard (Dick) J. Lynch, former executive vice president and chief technology officer of both Verizon Communications and Verizon Wireless. Messrs. Bross and Lynch joined the Board of Directors in February 2014.

Performance Technologies, Incorporated

On February 19, 2014, the Company announced the successful completion of its acquisition of Performance Technologies, Incorporated (PT). PT adds Diameter Signaling capabilities required in all-IP, IMS 4G/LTE (Long Term Evolution) networks, and is expected to fortify the Company’s mobility and virtualization strategies.

Software-based SBC

On October 9, 2013, the Company announced the Sonus SBC SWe (Software edition), the industry’s first software-based Session Border Controller that delivers unlimited scalability with the same advanced features and functionality of hardware on a virtualized platform. Sonus is the only vendor on the market with a common, hardened code base across its hardware and software SBC portfolio, providing customers with holistic investment protection. Scalable from as few as 25 to an unlimited number of sessions, the SBC SWe is feature equivalent to Sonus’ award-winning hardware-based Sonus SBC 5000 Series. The Sonus SBC SWe addresses service providers’ requirements for network functions virtualization (NFV) and software-defined networking (SDN)-enabled SBC technology to scale cloud-based delivery platforms.

Stock Buyback Program

During the fourth quarter of 2013, the Company repurchased a total of 7.7 million shares at a weighted average price of $2.87 per share, for a total of $22.3 million. Since the inception of the stock buyback program, which was authorized by the Board of Directors in July 2013, the Company has repurchased a total of 18.5 million shares for a total of $59.3 million as of December 31, 2013. Of this amount, 10.5 million shares were repurchased from the Company’s two largest shareholders, thereby reducing the concentration of its shareholder base in an orderly fashion. As of December 31, 2013, there were 266.2 million shares of the Company’s common stock, $0.001 par value, outstanding. Under the current plan, the Company is authorized to repurchase up to an additional $40.7 million of the Company’s common stock.

Cash & Investments

The Company ended the fourth quarter of 2013 with approximately $246 million in cash and investments, which includes the impact of the share repurchases noted above.

2014 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. SBC Total Revenue includes product, maintenance and services and, for the full year, also includes diameter signaling revenue relating to the acquisition of PT.

Investor and Analyst Day

The Company will hold a meeting for institutional investors and analysts at the Julia Morgan Ballroom in San Francisco, California on Thursday, March 13, 2014. In addition to discussing the Company’s growth strategy and financial outlook, management presentations will feature a technology workshop covering some of the key technologies and industry trends shaping the Company’s opportunity. Interested parties are invited to learn more and register online at http://info.sonus.net/investor-day. For those unable to attend, the meeting will also be webcast live via the Sonus Investor Relations website where a replay will also be available for six months.

Fourth Quarter and Full Year 2013 Conference Call Details

Date: February 20, 2014

Time: 8:30 a.m. (ET)

Dial-in number: 800 768 6727

International Callers: +1 212 231 2915

In connection with the conference call, the Company has posted on its website, www.sonus.net, the prepared remarks for the conference call, the accompanying presentation slides and supplementary financial and operational data.

Replay information

A telephone playback of the call will be available following the conference call until March 6, 2014 and can be accessed by calling 800 633 8284 or +1 402 977 9140 for international callers. The reservation number for the replay is 21703780. A webcast replay of the conference call will also be available shortly following the conference call at http://investors.sonusnet.com/events.cfm and will be available for six months.

Tags

Sonus Networks, Sonus, SONS, 2013 fourth quarter, year-end, year end, earnings, results, IP-based network solutions, SBC, SBC 1000, SBC 2000, SBC 5100, SBC 5200, SBC 9000, SWe, software edition, software SBC, session border controller, 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 over 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 release, including statements in the section “2014 First Quarter and Full Year Outlook,” statements regarding our future results of operations and financial position, business strategy, plans and objectives of management for future operations and plans for future product development and manufacturing, and statements regarding the impact of the PT transaction on Sonus’ financial results, business performance and product offerings, are forward-looking statements. Without limiting the foregoing, the words “anticipates”, “believes”, “could”, “estimates”, “expects”, “expectations”, “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.

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. 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 the NET and PT acquisitions; the effects of disruption from the PT transaction, making it more difficult to maintain relationships with employees, customers, business partners or government entities; the success implementing the integration strategies of NET and PT; 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. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. 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. Any forward-looking statement made by us in this release speaks only as of the date of this release. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. 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.

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, write-off of prepaid royalties for software licenses, amortization of intangible assets, impairment of intangible assets, acquisition-related costs, restructuring 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.

In the fourth quarter of 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 exclude the amortization of acquired intangible assets from non-GAAP expense and income measures. These amortization amounts are inconsistent in frequency and amount 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.

In the second quarter of 2013 we recorded $0.6 million of expense for the impairment of an intellectual property intangible asset which we determined had no future value as of June 28, 2013. We believe that excluding the impairment of intangible assets facilitates the comparison of our financial results to our historical operating results and to 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.

In August 2012, we announced that we had committed to a restructuring initiative to streamline operations and reduce operating costs by closing and consolidating certain facilities and reducing our worldwide workforce. In connection with this initiative we have recorded restructuring expense in both 2013 and 2012. 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.

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 in 2012 facilitates the comparison of our operating results to our historical 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.