Ribbon Communications Inc.
Q4 2007 Earnings Call Transcript

Published: 29 Feb 2008

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2007 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded today Thursday February 28, 2008. It is my pleasure to turn the conference over Ms. Jocelyn Philbrook, Vice President of Investor Relations. Please go ahead Ma'am.

[Jocelyn Philbrook:]

Thank you. Good afternoon everyone. Thank you for jointing us today as we discuss our business performance for the fourth quarter and fiscal year-ended December 31, 2007. With me today are Sonus' Chairman, President, and CEO Hassan Ahmed, and CFO Rick Gaynor. The press release providing an overview of our business performance in the fourth quarter and fiscal 2007 was issued this afternoon at 4

[Hassan Ahmed:]

Thanks Jocelyn. Good afternoon everyone and thank you for joining us. To vigorously pay off Sonus we achieve strong Q4 revenue and order activity with our customers yielding fantastic financial results. However, we have to wait a little longer to share the results with you as the audit of our financial statements is not yet complete. As a result, we are not able to report full financial results during our Q4 conference call. I appreciate you share the frustration that you all feel associated with this delay, but we cannot report results to our stakeholders without knowing that they are accurate and have been fully audited and approved by our auditors. We believe the financial statements are substantially complete. Rick and I are working very closely with all parties involved to make sure we complete any final items quickly. We are eager to get our results out to you. With that said, I want to host today's call to provide with some financial results that would help you gauge the accomplishments of our company while you await full results. So I will review our performance in Q4 and provide an outlook on Q1 and the full year 2008. And Rick is going to provide some comments on the financial results. We will open the call for questions at that point. I know you all have many question related to our financial and the process that led us to this delay, but I am going to ask you the whole boost until we are able to report full results which we expect to do within the next 15 days. Okay, now let’s get into the quarter. Overall it was an outstanding quarter for Sonus. I am pleased to report that we achieved our objective and had a tremendous close to 2007. We broadened our customer base with major operators. We expanded our market share leadership in North America, Europe, and Japan. We delivered important growth with our wireless solutions. Order significantly exceeded revenue during the quarter and were approximately equal to revenue for the year. We received orders from BT from their 21 CN project in the quarter. Q4 deferred revenue which does not yet include the benefit of BT 21 CN is expected to increase from Q3. In Q4, we generated strong cash from operation bringing our cash balance over $390 million, and our solid execution during the quarter resulted in our strong financial performance. All of this demonstrates that we are all on the way to our goal of establishing Sonus with the incumbent vendor in next-generation voice networks worldwide. Now looking more specifically at our financial performance for the quarter, Q4 revenue is expected to be a record $97.1 million. This was expected to be an approximately 27% sequential increase in consistent with our expectations for robust growth in Q4 that we had shared with you previously. At the same time, our order-to-revenue ratio is expected to be above one leading to an order-to-revenue ratio that was approximately one for the year. Profitable growth is one of my priorities, and I am very pleased that we expect our non-GAAP net income to increase this quarter. Non-GAAP operating income is expected to be moderately below our target range of 17% and a significant improvement from our non-GAAP operating income of $3.9 million in the prior quarter. And our expected strong cash generation during the quarter brings our total cash balance to over $390. These results were driven by healthy and diverse growth across all our regions and from both our wireline and wireless customers. The rollout of IP and Broadband are unstoppable. Around the globe, operators are turning to Sonus as they leverage the investments that made in their networks and this is showing in our results. AT&T and Deutsche telecom T-systems each represented more than 10%of our revenues in the fourth quarter reflecting the diversity in our results. I am exceptionally proud that these Sonus customers are two of the world five largest operators and are emblematic of the growth in our business globally and in the wireline and wireless markets. For the full year 2007, I am pleased that Sonus again outpaced the market with revenues that are expected to increase approximately 15% annually to $320 million. This is ahead of revised industry analyst projections from Synergy Group that put 2007 market growth at about 12%, reflecting the change in carrier CapEx for the year. Sonus is a growth company in regardless of how fast the market grows you can continue to expect us to outperform it. Now look at where this growth is coming from. We now have five distinct product portfolios designed for dispersate portion of the carrier IP voice market including wireline trunking, wireline access, carrier pairing, wireless core voice and our newest product portfolio for the wireless edge. This expanded product line and our growing geographic presence are extending the importance of Sonus solutions globally in our key factors and our continued market leadership. As evidenced with the success across our product lines, we have announced that our ASX product has been selected for consumer and business access voice services with a wide spectrum of customers including Allestra, AT&T, BT, Cable and Wireless, Carphone warehouse, JCOM, NTT and the Qwest. Perhaps our most noteworthy announcement this year was BT selection of the ASX for the Access Gateway Control Function in BTs 21CN. Following our announcement earlier in Q4 that Sonus have been chosen as a 21CN vendor, we began receiving order from BT in the fourth quarter as anticipated. The 21CN project with BT has the potential to be a significant contributor to our business on a scale similar to our deployment with Qwest and AT&T, and equally important being selective for the AGCF now garners as an important seat at the 21CN. BT selection underscores the success of our access portfolio. This has become our fastest growing solution set. Operators are deploying our access portfolio to differentiate themselves with rapid time to market for IP voice consumer services and unparalleled service quality. Our ASX is one of the industries highest capacity class V feature servers capable of supporting over a 100, 000 subscribers on a single computing platform. Compared to other products available in the market today, the ASX is more efficient and has more global features than any other platform. Sonus has customer deployments with operators in the United States, Mexico, the Caribbean, The United Kingdom and Japan demonstrating that operators trust the ASX as a critical network component. Carphone warehouse for example has over a million subscribers on their Sonus based access network. And for customers that have deployed our trunking solution they can add the ASX to launch access services and start generating revenue in just a matter of days without service interruption. While demand for our wireline access products is accelerating, our wireline trunking products remain our flagship solution set. This product portfolios continuing to generate growth. To give you the data point on this, Independent Market Research drive workers currently estimate. The total worldwide trunking traffic is about 360 billion minutes per month. About 25% of those minutes are carried on IP networks, was about 36 billion per months or 40% of those IP minutes been carried on networks both with Sonus. In the drive for constant innovation our network orders withstands out. This product transforms carriers business models by breaking down barriers between operators and enterprises and allowing operators to securely connect with others via IP. Demand for this product is not only coming from operators that have deployed the Sonus based trunking network, but also from operators that want to harness the benefit the benefits of the system level approach at the NBS brings. Another significant industry development is the transition of wireless voice networks to IP. This dynamic has been driven by the increasing number of mobile subscribers which shows no signs of slowing. Market research for Infonetics estimates there are 3 billion mobile subscribers worldwide today. These users are demanding more bandwidth intensive applications like video, music and file sharing, feeling the build in wireless data networks and driving the need for convergence. In seasonable demand for personalized services and high speed wireless applications is a primary driver in the growth of technologies such LTE and 4G. At Sonus, we are busy developing solutions that allow operators to maximize these investments. We envision Next Generation converged all IP networks but enabled consumers to have personalized services that meet their needs and desires. The wireless migration to IP is just beginning and we believe that this feature market opportunity will accelerate our growth and further differentiate us from others in the industry. We already have one of the world’s largest wireless IP Voice deployments with AT&T. With more than more than five years of working with wireless voice network, the Sonus team understands the complexities of mobile voice. And our building solutions that allow operators to handle the distinct attributes of voice and data. Less than a year ago to bolster our position in the emerging access edge in femtocell market we acquired Zynetix. At Mobile World Congress 2008, we launched the significant new product MobilEdge incorporating Zynetix Technology. The MobilEdge is purpose build for mobile networks for the focus on bridging femtocell in the wireless data network to bring the handset and high quality voice coverage. With access point expected t reach 8.6 million in just two years, we believe MobilEdge is one of the important femto based product announcements this year. Switching gears, I would now like to update you on our business from a geographic perspective. During 2007, we achieved market share gains according to synergy research in each of our key markets, the United States, Japan, and Europe. This underscores our commitment to these markets and our success in these regions. Let me now spend a moment on each of theaters. Starting first with North America, we continue to generate most of our revenue from this region. We have a significant install base here that is continuing to expand. AT&T remains our largest customer and this deployment is on going. There are multiple portions of their networks yet to be deployed and we are continually working with them on future initiatives. While AT&T is our largest customer in North America we have many other customers that are embarking on important initiative to advance their networks including global crossing, Qwest and Time Warner Telecom to name just a few. There is a lot happening in Asia Pacific. (Inaudible) and KDDI remain very important deployments for us. KDDI is working on the second phase of their LIT migration in the core of their network. And (Softlink) has multiple networks that they are converting to Sonus based IP voice and they are continuing their femto trials. One of our initiatives is to broaden our customer base in Asia Pacific beyond Japan. As we reported last quarter we are beginning to make strives with this objectives and are looking on several exciting opportunities throughout the region. I am expecting growth this region in 2008, Mohammed and the team are spending a lot time here to make that happened. Finally I’m exceptionally pleased with our progress in New York. We’ve seen the most demand for our Access portfolio in this region. From an order perspective, Sonus is achieving accelerated demand for solutions. Our revenue results which do not yet include the benefit of BT 21CN demonstrate the breadth and strength of our customer base. Sonus now has 25% market share in this important geographic region. We have announced deployments with some of the largest operators including BT, France Telecom and Deutsch Telecom. And I’m exceptionally pleased that after an extended deployment involving seven vendors one of our projects underway of Deutsch Telecom is now complete. In summary, Sonus is a very different company today than it was even a year ago for the global market share leader fueled by the world’s largest operators. We’ve expanded our products, services and solutions within the service provider market. And we are doing so with a singular focus on providing networks that work. That seems straight forward, but in the complex world of voice, it's an area where others have struggled and remains a key differentiator for Sonus. Looking ahead, we remain confident in our vision and strategy. The IP voice market is a growing segment of telecommunications with distinct guide post by which we can judge its growth such as the pace of broadband as option, penetration of new segments such as, access and wireless, growth of IP technologies and new geographies, and of course these option of IP voice networks by major operators. We believe that execution on our strategy will drive increased profitability and long-term and least as fast as the market, which is currently estimated to grow 20% to 25% annually over the long-term. In the near term, we have all seen the decline in the stock market and felt its impact on technology stocks including Sonus's market capitalization. However, I certainly believe the best companies in the industry are lots more than current prices suggest. We will continue to focus on what we do best, building the premiere Next Generation voice company and bringing best of lead solutions to our customers. We will focus on building the best company in the Next Generation voice market and believe that over time Wall Street will recognize and value the leadership. With that said, while we are not immune to Next Generation capital spending patterns or macro economic changes, we have not experienced changes in our customers ordering activities. We are continuing to monitor the situation when we see no reason why wouldn’t grow at least as fast as the market. Industry analyst currently estimate market growth to be in the low 20% range for 2008. We believe it's appropriate given the macro concerns to build our 2008 financial plan for approximately 20% revenue growth. If the market does grow faster than the 20% forecast, we certainly intend to go ahead of it. The 2008 plan that we are sharing today is based principally on the deployments we currently have underway and does not include BT 21CN revenue. We expect BT 21CN to be a material contributor to our business in 2008 with orders and shipments, but given the scope with the first time of the deployment we are not counting on revenues in 2008. Further, there are opportunities for exceeding this outlook and winning new customers are certainly one of them, which is why we are expanding our sales resources in 2008. It's clear from our market leadership results that wherever Sonus has a presence we excel. The market is expanding beyond our core geography and we are extending our sales rates to capitalize on this growth. Additionally, innovation camp stock will continue in advance development initiatives especially in wireless and access. It's clear from our market leadership results that wherever Sonus has a presence, we did very well. In closing we are organized for success and improved execution. The senior management team recognizes the opportunity and understands what this means for the company's future. For 2008, we are confident in our market leadership position an ability to execute on the opportunities ahead of us. Our objectives are clear. We are focused on accelerating our top line growth, expanding our market share, and generating increased profitability for our share holders. I'm confident that the remaining items that have caused the delay in the final review process of our full financial will be resolved quickly and I look forward to speaking with you again within the next 15 days. I want to thank our customers, employees, partners, and long-term shareholders for their continued support and dedication to Sonus. There have been some puts on the road, but it is Sonus is on road in accelerating towards becoming a major company in the Next Generation voice market. Let me now briefly turn the call over to Rick.

[Richard Gaynor:]

Thank you Hassan. As Hassan noted, we are not in a position to provide GAAP financial results at this time. While we believe that our year-end financial statements are substantially complete, they are not final and audit work is still being included. Taking our fiduciary responsibility seriously is a top priority of mine, and while I understand the concern that have I am delayed filing causes to our shareholders, we cannot issue financial statements that have not been fully audited and approved by our auditors. Unfortunately, we are not able to push a more a detail time scale on this. I do want to share as much information as possible at this time to help you evaluate our business, our progress in the market, and to frame our view of Sonus moving ahead. Some of this financial information I will have to limit to directional trends until the audit work is completed. Please note that the non-GAAP numbers which I will now discuss and percentage increases are approximations. Our non-GAAP exclude stock base compensation and related expenses, stock option investigation costs, amortization of intangible assets related to the April 2007 purchase of Zynetix and the effects of the litigation settlement associated with our 2004 restatement. I would like to remind investors that for a variety of reasons our business is inherently uneven and we suggest that you consider our performance over longer time horizon, as our results will fluctuate from quarter-to-quarter. Revenue for the fourth quarter is expected to be $97.1 million, up 27% sequentially. This will be a new record quarterly result for Sonus. Product revenue is expected to be 67.3 million or 69% of total revenue. Service revenue is expected to increase to 29.8 million or 31% of the total. A portion of this increase relates to the professional services associated with the completion of the NSP project within our network with Deutsche Telecom T-systems. AT&T and Deutsche Telecom both contributed greater than 10% of our total revenue in the fourth quarter. Our top five customers represented approximately 53% of revenue in Q4 versus 60% in Q3. Our largest revenue contributing customers tend to rotate quarter-to-quarter as they move through their deployment cycles our acceptance milestones are met. This is underscored with Deutsche Telecom being recognized as a 10% customer for the fourth quarter. We expect to report revenue from a record 82 customers in the fourth quarter compared to 74 in the third quarter. This growing customer base is evidence of our success in broadening our market presence and increasing the diversity in our business. For the full fiscal year 2007 our revenues are expected to be $320.3 million compared to 279.5 million in fiscal 2006 or an increase of 15% ahead of the market growth rate of 12%. This will be our fourth year of revenue growth reflecting the strength and acceptance of our solutions and the irreversible trend toward IP voice. AT&T comprised more than 10% of our fiscal 2007 revenue. For the year as a whole, product revenue is expected to be 226.2 million compared to 203.6 million in 2006. Our service revenues are expected to be 94.1 million compared to 75.9 million in 2006, an increase of 24%. Looking at the fourth quarter geographically, the US is expected to contribute 57% of our revenue compared to 84% in the third quarter and 75% of the total in Q4 2006. International is expected to account of approximately 43% of total revenue in Q4 2007. International revenue for the full fiscal year is expected to represent 27% of the total compared to 28% for 2006. As we’ve indicated in the past, we are intent on capturing further growth in the emerging international markets which we expect to be reflected in our results over the longer term. As Hassan noted, our order to revenue ratio in the fourth quarter is expected to be greater than one and approximately one for the full fiscal year. In the fourth quarter, as we expected, we began receiving orders from BT for our new deployment within their 21 CN network for AGCF project. As we reported on our last quarterly conference call, we agreed to settle the class action litigation against Sonus in certain of our former and current officers and directors related to the restatement in 2004 of our historical finical statements. We recorded a $40 million charge on related liability in the third quarter to reflect this settlement. We recently reached an agreement with our insurance company that allows us to use 15.3 million of proceed insurance policies toward the cost of the settlement. This one time recovery will be reflected in our GAAP P&L for the fourth quarter. Although, we will be backing it out for non-GAAP purposes. Before I begin discussing our gross margins, I would like to point out that these are non-GAAP numbers that excludes stock based compensation and related expenses, stock option investigation costs, amortization of intangible assets related to the April 2007 purchase in Zynetix and the effects of the litigation settlement associated with our 2004 restatement. Our product gross margins will be somewhat negatively impacted this quarter due to product mix and an excess in obsolescence inventory charge. Earlier this year, we introduced new modules for the GSX and we have seen a much faster adoption of these new modules than we anticipated, creating some inventory obsolescence on the previous generation. Service gross margins are expected to increase this quarter compared to Q3 and for the full year. The expected increase in our services gross margins in Q4 primarily reflects the increase in professional services revenues this quarter associated with the completion of one our projects within Deutsche Telecom. Overall our non-GAAP gross margin for both the fourth quarter and for the full fiscal year are expected to be in our target range of 58 to 62%. Fourth quarter non-GAAP operating income is expected to increase to moderately below our target of 17%, reflecting a strong sequential increase from our Q3 performance of 5.1%. In Q4 our diluted r share count was approximately 280 million. Overall, Sonus ended the year with total cash, cash equivalence, marketable securities and long-term investments of more than $390 million, compared to 377.6 million at the end of Q3. With this amount available to us and no debt we have a very small balance sheet that gives us considerable strategic flexibility as we move forward in the market. Regarding our investment portfolio, Sonus has always had a conservative strategy. We believe we have not exposure to the sub-prime and option rate securities issues being reported in the media. Q4 interest income, net of interest expense is expected to be $4.7 million and 18.2 million for the year. Turning to tax, various discrete items such as the overall reduction in our blended state tax rate will actually help reduce our rates going forward which will comment on later. Please note that we have a significant NOL position at year-end, and our actual cash payments or taxes are much lower in the financial statement provisions. Also in the fourth quarter, we expect our total deferred revenue balance to increase to approximately $99 million from 92.6 million in Q3. I would note, that our deployment of BT 21CN is not yet reflected in deferred revenue. But we do anticipate this to occur in 2008. Looking at our headcount, we ended the year with 926 employees compared to 850 employees at the end of 2006. The largest increase was in our R&D organization. Now moving to our outlook for 2008, let me remind you again that we continue to focus on our long-term business fundamentals and the level of revenue recorded each quarter can be difficult to predict. We are managing our business to plan and would like to share that plan with you now. The outlook we are providing is a non-GAAP basis and is a forward looking statement. We entered 2008 with a strong competitive position, good visibility, and momentum in both the wireline and wireless markets. And so going forward, we believe we are positioned to grow at least to staff the market which over the long term is expected to grow 20% to 25% annually according to industry analysts. With that in mind, and given the concerns in the macro economic environment, we believe it is prudent to plan our business for approximately 20% revenue growth in 2008 over the expected 320.3 million for 2007. We expect the majority of this revenue growth to be recognized in the second half of 2008 in keeping with our historical patent. Additionally, our 2008 revenue forecast is primarily based on business from existing customers which we also believe is prudent. If the market does accelerate faster than this assumption we expect to grow at least in line with it, but at the current time we are building our financial structure and expense budgets around this 20% revenue growth number. We continue to believe that our gross margins over the longer term will be in our target range of 58% to 62%. Our current revenue forecast also does not assume 2008 revenues from our BT 21CN deployment. Despite the strong order and shipment activity we expect from this project in 2008. We do expect to record significant BT 21CN related period expenses that will impact our earnings in 2008 and this is factored into our operating expense outlook. Turning now to more detailed look at operating expenses for 2008. We will continue to devote a significant portion of our operating expenses to R&D and expect these expenses to increase on an annual basis from the absolute 2007 spending level, but down as a percentage of revenue. Further, we are adding sales resources to expand our market presence which will also results in an annual increase of sales and marketing expense on an absolute basis. But again down on a percentage basis. And looking at G&A, this is an area in which I intend to drive efficiency and I expect to reduce expenses on both on absolute basis and on a percentage basis. In total, we are planning for operating expense of between 178 million to 184 million in 2008. Looking now at interest income, we are pleased with our growing cash balance and our ability to generate cash flow from operations. Given the FEDs recent decisions regarding interest rates, we expect our interest income to be down somewhat from 2007 to approximately 11 million to 11.5 million. But this will be subject to future changes in interest rates. Our non-GAAP tax rate for fiscal 2008 is expected to be approximately 34 to 36%. In summary, we are planning for revenue growth of approximately 30%, on-GAAP gross margins of 58% to 62%, and non-GAAP operating expenses of 178 million to 184 million in 2008. Non-GAAP operating income is therefore expected to be in the 14% to 16% range according to our plan. And share count should increase to approximately 285 million shares by the end of the year. This 2008 operating income range is somewhat below our long-term target model, reflecting our growth rate expectations and the significant current year expenses associated with BT while revenue recognition is delayed beyond 2008. If the market accelerates, we would expect that additional revenue to continue to improve income performance. As then, the entire company and I are dedicated to increasing Sonus profitability as we focus on reaching our long-term non-GAAP target operating income model of 17 to 20%. Now turning to the first quarter. Following the seasonally strong Q4 and the inherent unevenness in our business, we expect Q1 revenues to be in the $72 to $76 million range. Non-GAAP gross margins are expected to remain in our long-term model range of 58% to 62%. Non-GAAP operating expenses are expected to be 43 million to 44.5 million. We will continue to invest in R&D, sales and marketing expenses in support of our annual plan, while G&A expenses should decrease materially. Interest rate expectations are lower in Q1 than Q4 and we expect interest income of approximately 3 million to 3.5 million. Our non-GAAP tax rate for the quarter should be approximately 36% and share count should increase to approximately 281 million shares. Reflecting the strong leverage in our business, we expect non-GAAP operating income to be at least break-even for the quarter. In summary, Sonus achieved strong 2007 results and secured a position in additional major networks around the globe. We are confident in our competitive position and growth potential moving forward. We are disappointed to not be able to share full and complete financials with you today. We know this is a serious issue and we are working extremely hard to complete the remaining elements of the close and look forward to providing you full GAAP and non-GAAP financials in the next 15 days. We hope this delay does not detract from a strong operational quarter or the growth we anticipate going forward. Now I would like to open the call to questions you may have.

[Operator:]

Thank you. (Operator Instructions). And our first question comes from the line of Brant Thompson with Goldman Sachs. Please go ahead sir.

[Brant Thompson:]

Great, hi guys.

[Jocelyn Philbrook:]

Hi Brant.

[Hassan Ahmed:]

Hi Brant.

[Brant Thompson:]

I guess a couple of questions just trying to square a few things, the first is if you are going to be – the end market next year is going to grow 20 to 25% I can understand being conservative at 20%. But, do you still expect to outgrow the market next year in your own business, just to kind of square that. And the second one is can you share any light on the nature of the auditing issue, that’s right that did the away and if that issue had impacted at all, your outlook, how you are thinking about your guidance, those few things will be helpful? Thank you.

[Hassan Ahmed:]

Sure thanks Brant for those questions. Let me take the first one and then I will ask Rick to pick up the second one. So, Sonus clearly has a very, very strong position in the market in fact the leading position in this market. And increasingly as you have seen, more and more operators are turning to us to help them build their networks if they migrate the networks type B, and this has certainly transitioned now into event in which major operators around the globe are taking that position. So one of the things that we are extremely confident in is as we've always described to you is to continue to grow at least as fast as the market in fact outpace the market as what we have done consistently for the last several years and we've seen us add market share quarter-by-quarter every year when the every year when the market share results come out. So, we were very, very confident doing that and we see the activity around the globe in order to be able to accomplish that. The end market is a very large opportunity and one that will generate growth for many years and so, over the long term it does expected to grow in the 20 to 25% range according to all the industry analysts. In any given year, the growth deviates from that, and I think for 2008 given the macro concerns that we see in the economy and analysts projection to have a sort of landed in the low 20’s and we’ve landed on 20% for our business we think that’s really good spot for us to be because it’s predicated largely on networks that we are building with existing customers for which we have tremendous visibility and then we see opportunities to exceed that as the market unfolds. Rick will cover the second question?

[Richard Gaynor:]

Yeah, I think as I stated in my first call with the company last quarter, the accuracy of our financial porting is my highest priority. This year end we have been very detailed and very diligent in working through our close procedures. And, at this time we believe our financial statements are substantially complete as we said on the call and which is why we feel comfortable to share revenue and other measures with you today. However, despite our best efforts and the best efforts from our auditors, we didn’t come to the conclusion that we needed more time to complete certain final quality checks before issuing for results. So, we know the seriousness of the situation, we continue to work diligently. We look forward to getting the final numbers out in the next coming days within 15 days. But you mentioned the nature of the issue, in my own mind there is no issue, it’s really a process that we need to work our way through, and it’s a quality issue we’re just trying to work away and make sure we take all the boxes and feel very comfortable with the numbers when we put them out. We are comfortable doing them I the next 15 days.

[Brant Thompson:]

Hassan, If I could just ask another quick question from the industry standpoint, we were ramping up our tech conference out here and there is a lot of focus on wireless data. When you look at the push of wireless carriers may be into all you need bucket minute plan, do you think its likely that we will see -- and it’s likely that we are going to see a major carrier shift to an all VoiceOver IP type platform in the next kind of 18 to 24 months or do you think that’s further out?

[Hassan Ahmed:]

That’s a really good question and it’s something that really you can see already in the deployments that we have been raking on. One of the major reasons for wireless operators to adopt IP Technologies in their networks and particular in their course is precisely the fact that they have gone through all the unique great plans, and as they go to all unique great plans what happens is that things like long and roaming that they used to charge you for become free, people use them more, traffic grows, network spill driven by the subscriber growth and of course, the only thing that operators can really do is cut costs in their network in order to support that traffic growth. That’s what Sonus’s solutions offer just a tremendous business justification for deployment’s alone. As we mentioned our largest network is a wireless infrastructure and it provides pay back period that are sublimed new residents as a result of being able to save those events. And now as operators have done fix rate models that are across any network you can imagine that the transformation to IP and the court and particularly IP peering between network is just something that’s going to take, really take whole than Sonus clearly leads in that arena. And by the way, I am jealous that because we are being in a call today that we are not out at your tech conference, sorry, we’re missing it for the first time, it is I think in our history, you put on a great conference.

[Jocelyn Philbrook:]

Thanks Brant. Next question please.

[Operator:]

Thank you. Our next question comes from the line of Troy Jensen with Piper Jaffray. Please go ahead.

[Troy Jensen:]

Hi couple of question here. First of all it maybe for Rick, ASX, could you talk about what the margins look like for that product and when do you think this ASX s solutions will be a larger percentage of your revenues?

[Richard Gaynor:]

Sure. I think I will I will led Hassan deal with that.

[Hassan Ahmed:]

Yes, actually so Troy, the first part of your question around ASX margins or access margins in general. Yes, there is a lot based on the script of the deployment and in particular the level of services that an operator deploys, but typically what happens in the access deployment system, there is a higher level of software content that goes into delivery of consumer facing services and so, as I mentioned, depending on the level of service deployed, Access networks typically becomes the software content and end up carrying some more higher margins. And access is certainly a growing portion of our business. As I described in my prepared remarks, that’s one of the fastest growing areas that we have today. We are not breaking that out separately, but it’s a solution center we are very, very excited about because that second phase of the market is really getting growing now in the access front.

[Richard Gaynor:]

You know we will see some that showing up in our results particularly of those as we start bringing RBT shipments through the P&L software, so we will start to see that.

[Troy Jensen:]

Alright. And then just sticking on kind of access here, if you had to gauge – what’s the two market access or wireless was going to be bigger for you guys over the next tw to three years?

[Richard Gaynor:]

That’s a very good question, because, which is bigger is largely a function of timing of the development of the segment. You know, when I have talked about this before, one of the things that you know is that each of these segments emerges at different times. Access is getting going. Wireless is also underway as a meaningful segment market. I think overtime particularly in the three years and beyond timeframe wireless will exceed access simply because of the shift of subscribers. Access services are primarily a subscriber based economic model, and clearly there are lot more subscribers on the wireless side growing than they are in the wireline side.

[Troy Jensen:]

Got it. Alright, keep up the good work guys.

[Richard Gaynor:]

Okay. Thanks Troy.

[Jocelyn Philbrook:]

Thanks Troy. Next question please?

[Operator:]

Our next question please. Our next question comes from the line of Subu Subrahmanyan with Sanders Morris. Please go ahead.

[Subu Subrahmanyan:]

I just wanted to ask Hassan about order rates versus revenue growth revenue, I know for this year you would expect that order rate to grow at closely to 20 to 25% and lower revenue growth we had just reported to the back and loaded nature. I was wondering if that actually did happen because of book-to-bill for the full year came in closer to one I think and then, for the full year if you expect more of a correlation between order growth and revenue growth?

[Hassan Ahmed:]

Sure. That's a very good question Subu and thank you for actually reminding us all of that. The market overall is effectively amalgamation of all carrier spending that takes place in any given year. And one of things that we did see in '07 and as Synergy and others have reported when they've modeled the market for the full year is that growth in this market in '07 because of a lot of things associated with mergers and CapEx shifts and so forth, ended up being smaller in '07 than it was in '06 than what it is expected to be in '08. And, what I'm really proud of the Sonus team is that, sort of regardless of what the growth rate is in the market. Sonus’s succeeded in adding share everytime in outpacing the market and we did that in `07, we did that in `06, and we’re focused on doing that again in 2008. 2008 is expected to grow in the low 20s as I mentioned, we were planning our business based on what we believe is a proven posture of focusing on deployments with existing customers and we're planning it for 20% growth rate. Including our market, one of the key growth areas in telecom over the long-term and a big opportunity as operators involve above their networks away from the legacy. So this market as I mentioned earlier is going to generate a lot of growth for many years, and our focus is to continue to outpace the market growth by taking share, and that's what we've been doing, that's what we expect to do again in '08.

[Subu Subrahmanyan:]

Got it. And to follow up on BT, I know your typical cycle to turn revenues from all with shipments is usually like nine months or so is there, I think specific to the nature what’s going in there which was taking longer, I know things like key have taken longer in the past. So I am just trying to get a little bit more color on BT?

[Hassan Ahmed:]

Sure. What we’ve said in the past that we do have customers that come in faster than our typical or our average rate clearly. I know we have once that take longer, and typically, what tends to be longer from a conversion standpoint is a new large international because we built Sonus to be a very strategic supplier to the largest operators in the world. We're really being successful at that and so; operators are allowing us to do a lot more for them of course, that, from the revenue conversion standpoint, particularly in the first arm of the deployment that tends to take longer. And then as we get into expansions and what we refer to the subsequent shipments more or the same going into network expansion, those tend to convert much more quickly. So therefore, when we look at all that, we are expecting to see a lot of activity with BT during the course of '08 in orders, shipments, and so forth. But we're not anticipating recording any revenue in '08 for BT. On the other hand you look at some other customers like AT&T for example, what we have been expanding the network for sometime that tends to convert much more quickly simply because of the fact that its subsequent shipments on the existing network.

[Richard Gaynor:]

With related to that Subu, though as I said in the call, while we don't expect to score any revenue from BT this year and we do have several millions built into our OpEx plan. The work has already started. they (Inaudible) to receive the order in Q4 and work has commenced. So one another challenges we have is that in this coming year we don’t get the revenue, but we do have a lot of the expense particularly in R&D and services and that did weigh on our ability to hit our operating income goal of 17 to 20% this year and as we said we feel we are coming more towards the 14% to 16%. But I think you should consider the fact that we do have that drag on us in terms of BT expenditures.

[Subu Subrahmanyan:]

Got it. Thanks you. That’s helpful.

[Jocelyn Philbrook:]

Next question please?

[Operator:]

Our next question comes from the line of Paul Silverstein with Credit Suisse. Please go ahead.

[Paul Silverstein:]

Let me ask you for some clarifications for asking a question, first half on the BT comment look at the risk of asking obvious question, if you do drag this year, does it have a corresponding benefit, extraordinary benefit from ‘09 and when are you going to announce your recognizing revenue in terms of having less OpEx against the revenue from BT?

[Hassan Ahmed:]

Yeah I think that would be a true statement.

[Paul Silverstein:]

Okay.

[Richard Gaynor:]

We expect to get some benefit that you’re doing a lot of the engineer, core engineering work this year, we are not able to differ that expense. So next year when the revenue starts to flow in when we hope some of these expenses behind you.

[Paul Silverstein:]

Alright, in terms of new customers in the quarter, I apologize if you have already said, but how many were?

[Richard Gaynor:]

We said they were 82 customers in total. And we had the top five constituted 53%, and the two that were graded in 10% were AT&T and Deutsche Telecom.

[Paul Silverstein:]

Right. But, in terms of number of new customers?

[Hassan Ahmed:]

I don't think we put out this quarter the number of new customers Paul. That something you would like, I could see if we can look at that for the next call.

[Paul Silverstein:]

That will be great. Can you tell us what AT&T and DT were in the aggregate?

[Hassan Ahmed:]

No, I don't think I have that information available in front of me.

[Paul Silverstein:]

Alright. Now for the question. Did I hear you correctly Hassan that you think that BT has the ability the potential to be equal to or greater than AT&T or Qwest historically?

[Hassan Ahmed:]

Yeah Paul, you heard that correctly, we haven’t sized and when we say that we are speaking specifically about one contract. The AGCF contract, we haven’t specifically sized that, but we’ve given you a couple of our larger customers, AT&T for example or Qwest to help you think about the scope of what we we’re doing in this program. And, we were very excited about it, it’s certainly has the ability to contribute very significantly to our business model.

[Paul Silverstein:]

And Hassan that’s just for the Access application correct, when your taking about the size? So AT&T historically, if I just take the quarters on which you’ve disclosed and there is a 10% customer, it looks like since December 3 AT&T has contributed over a $160 million just based upon the 10% disclosure? Is that what you're talking when you say the magnitude of AT&T?

[Hassan Ahmed:]

Paul, I don’t have that number on top my head, but that’s exactly the (Inaudible) would go off and do.

[Paul Silverstein:]

Okay. I appreciate. Thank you.

[Hassan Ahmed:]

Yeah. You are welcome.

[Jocelyn Philbrook:]

Thanks, next question please.

[Operator:]

Our next question comes from the line of George Notter with Jeffries. Please go ahead.

[James:]

Hi guys. You guys hear me?

[Jocelyn Philbrook:]

Yeah.

[James:]

This is actually James (Inaudible) calling in for George. Hi guys.

[Hassan Ahmed:]

Hi.

[James:]

So, I guess just a follow up on it was Paul's question on AT&T and Qwest hearing that British Telecom that opportunity. And I think when you first announced this award you compared it just AT&T, and since we are talking about Qwest and just doing that that exercise of going through and looking at your 10% customer disclosures. I mean its kind of a big difference there. I mean is bringing Qwest in the comparison is that a change of expectation or how do we think about in terms of the BT deal?

[Hassan Ahmed:]

Sure James, there is no change. I think, let me surge me correctly. I believe when we first announced it and people asked us how to think about size we offered up both of those customers as something that would, for you to think about as part of range. In the case of Qwest when we announced, we actually did announce the size to the contract of this north 100 million I think at the time. And, in the case of AT&T it is, you can do the math what Paul was doing. So, and I believe we always talk about those two as part of it, there is no change in expectation now.

[James:]

Okay. So, also just on the pricing environment, I mean, how are things looking there (Inaudible) at you. Can you comment on that?

[Hassan Ahmed:]

Sure. We see particularly in the large networks that we are building, particularly since we have offered quite a lot of services and I don’t mean special services, I mean, the services that our switches are able to deliver we offered full networks solutions and that's the way people buy them. What we have seen from an equipment and product standpoint is pretty good price stability and generally, that’s because of the added capability that we continue to build into the product with new software releases and the ports effectively become more and more capable. An area that we have seen some price pressure is sort of emblematic in the industry is in maintenance rates as operators look more at consolidating their networks and getting on the single vendor. We actually think that's probably not a bad thing from our perspective because what we are seeing is networks being consolidate into more uniform technologies and certainly more expose to the growth technologies, and that’s the good thing from our perspective.

[James:]

Okay, thank you.

[Hassan Ahmed:]

You’re welcome.

[Jocelyn Philbrook:]

Next question please?

[Operator:]

Our next question comes from the line of Edward Jackson with Cantor Fitzgerald. Please go ahead.

[Edward Jackson:]

Thank you very much. I would like to ask for couple of questions just I guess around revenue and time you know kind of the results in the guidance back to some prior commentary in terms of your outlook. So, one thing I wanted to know on that is your services revenue was up you know substantially and the post sides were up substantially in the quarter but really tremendous amount on a sequential basis. And you commented to that fact that one of the things that you outlook was the completion it some deployment at Deutsche Telecom. And would you view a chunk of that services revenue increases, lets call onetime in nature because of that. And, in that case l lets call how much was that particular piece of the services and is that a significant portion of the decline and guidance relative to core revenue for first quarter and I do have a follow up question?

[Richard Gaynor:]

This is Rich. And – yeah, I think the answer is - it is the some degree part of the lumpy of our business and strong revenue on the 972. So Deutsche telecom has been an ongoing customer for period of time. We did completed project, it did allow us to score some revenue in the quarter. You know as we hit other milestones related to other projects going forward we will be able to do similar, but you have to creat some of the lumpiness of our business, what we cant say though is that, even if you backout Deutsche telecom and its entirety from the quarter, it’s still would have been a record setting revenue quarter for us. So it certainly did help, it helped in the quarter, as well as on the service side but it wasn’t in itself the account to made and break the quarter for us.

[Edward Jackson:]

I am not actually talking about the quarter itself, I’m just curious relative to the huge swing in services revenue essentially it was -- services revenue is lot more than it was expected to be, I am just trying to understand kind understand why you see that might have some impact relative to the decline and guidance given in the first quarter?

[Richard Gaynor:]

You know it did have a significant part of the uptick in services, particularly related to the professional services delivered to Deutsche telecom, and it does explain some of the stepdown in Q1 as we probably will not score as much, it is the lumpy nature and we got a favorable uptick in Q4 and its -- we are not looking at the same uptick in Q1.

[Edward Jackson:]

Okay. And then my second question going kind of on the same theme is, if I’ve gone back to my notes from know the last couple of conference calls and eventually you’ve been more or less the message that was being delivered as of August was that the company was looking for a robust fourth quarter from existing customers which was going to be beneficial for margin drive you towards your operating margin goals as we’ve just seen. And then that there would be continued solid performance into the first half of ’08 and that solid performance was going to be driven by activities with new customers and new those customers where going to be more of an international nature. And so, given the guidance has been put forward for the first quarter in ‘08 this include in some change relative to your outlook for your business and I was curious if you could talk a bit about what drove those changes. When you were looking at your business five quarters ago or five, six months ago, when you are looking at BT and saying that its being something that you will be to more, to drive some revenue for you in the first half and what caused shift if you void in terms of some of the revenue in your business in the first half of ‘08?

[Hassan Ahmed:]

This is Hassan I will take that one. Let me just try to give you some color on outlook for ‘08 rather than trying to tie it to the way you described commentary previously, because much of that quite 100%, but I think I will get to the point of what you are after, I think from our perspective the outlook in ‘08 is driven as we mentioned primarily by deployments that we have under everything and it’s been customers, it’s based on a lot of factors certainly and certainly one of them is change – one of the concerns about the macro economic outlook and the scale back growth for ‘08 that analyst are projecting to the low 20s.

[Richard Gaynor:]

But when you added all up, its actually pretty good, we came out of `07 and we have said to you we would with strong sequential revenue growth, strong increase in profitability and Q4 revenues were up, our deferred revenue was up and our orders are very strong. In fact, we love to be able to very strong backlog and we are based on not only that, but the ongoing work with our customers forecasting growth for the full fiscal year. Q1 and the decline in Q1 is to a large extent timing of how that growth is recognized. We have a pattern of recording more of our growth in the second half of the year than the first, that’s going to reflect themselves again in ‘08 and Q1 is probably more affected by timing and the completion of these project for anything else and just like as a whole as we mentioned is something we look forward to as a growth here.

[Hassan Ahmed:]

Sure. We have got a excellent relationship with Motorola. We participate with them in numerous geographies where Wi-MAX is being deployed and in fact I think one of the most successful and growing network that Motorola has announced and deployed (Inaudible) as a good example of work together on building the network, we’ve got a number of network on the road with Motorola and we do think actually that the delivery of voice services behind Wi-MAX is an excellent opportunity and one that the partnership dealers works very well together.

[Unidentified Company Representative:]

Sure. We have got a excellent relationship with Motorola. We participate with them in numerous geographies where Wi-MAX is being deployed. In fact I think one of the more successful and growing networks that Motorola has announced and deployed (inaudible) one we worked together on building a network. We have got a number of networks under way with Motorola and we do think actually that the delivery of voice services behind Wi-MAX is an excellent opportunity that the partnerships have been well together on it.

[Jocelyn Philbrook:]

Next question.

[Operator:]

Thank you. Due to time restraint, our final question will come from the line of Kenneth Muth with Robert Baird, please go ahead.

[Kenneth Muth:]

Hi guys on the British Telecom front, it sounds like there is a lot more RFPs kind of percolating there and you certainly have a piece of that going on right now for a potential deployment in the near term here. Can you just mention may be you talk about some other opportunities that you might be seeing in the RFP process right now and kind of how you feel your position with those.

[Hassan Ahmed:]

I guess Ken, we really can't be specific on anything in that regard, but I can give you the general view that we have is that a British Telecom has embarked on one of the largest network migrations in the world, certainly in Europe, and we are very excited to be a part of it, it’s a multivendor activity, and its from our perspective it's wonderful as BT defines, it's network billed and it thinks about new ways to rollout some of these wonderful to be one of the folks who gets to sit at the table figuring all this out, beyond that, I don’t think could tell you a whole lot.

[Kenneth Muth:]

Okay. Any other kind of geographic comment you can make may be on just kind of the IMS or kind of the NextGen architecture. You see more activity on the RFP side and any specific geography whether it's Europe, Asia, or US.

[Hassan Ahmed:]

Sure Ken. You know, one thing that’s really interesting when you dig into the geographies. The three main geographies that we participate in US, Europe, and Japan primarily, those have turned out to be one of the largest markets geographically in IT transformation, and Sonus has commanding market share leads there. As what we find is that whenever we play, we play it really well. And what we are seeing now is that the markets are expanding outside those three areas and so, we talked a little bit last time about a focus of ours to expand our presence. That's a focus area of ours for ‘08 by the way is expanding our sales presence beyond the three main markets, because we see opportunity developing there. We talked a little bit about our success in Canada, in Latin America. On the last call, we also talked a little bit about expanding beyond Japan and to other parts of Asia, where we had some success in Malaysia for example. And what we are seeing in general is good growth in the network migration happening not only in our traditional markets particularly in Europe, but also in emerging markets that are sort of neighboring the main market that we are in and we are expanding our focus to provide coverage there.

[Kenneth Muth:]

Okay. The last thing I have is, we’ve seen a lot in the news of all these guys going to kind of bucket plans and all you can eat plans and the implication that's going to have eventually over on the carriers margin and they have that incentive to now use your products more however, given that they are going to play this kind of margin contraction game potentially. Do you feel that you could may be like all the other vendors out there not signaling out Sonus, but any of that margin risk of price erosion additional to what has already been out in the market place?

[Hassan Ahmed:]

That’s good question Ken, I think you always have to look at these things over time horizons and where you add innovation and the equation, I think the biggest that Sonus brings in the scenario where you get all you can eat plants is that we provide among the fastest return on networks where cost has to come out of the network. And therefore, it’s being able to deal with the intricacies of voice particularly in the mobile setting and being able to do that in matter of this cost effective as opposed to the way. Typically, legacy technologies or migratory technologies that NextGen provide. We have that better day and I think that’s where our customer see the value in what we do and hence we get a verdict for that with good margins and what we do for them. We expect that to continue for a while.

[Kenneth Muth:]

Great, thank you.

[Hassan Ahmed:]

You are welcome.

[Richard Gaynor:]

Okay. With that I want to thank you all for joining us today. As you can we had a tremendous close to 2007 and we look forward to continued growth in 2008 as we build our leadership with operators around the world. I want thank your for your continued support at Sonus and I look forward to sharing our old results with you within the next 15 days. Thank you everyone.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation and we ask that you please disconnect your line. Have a wonderful afternoon everyone.