Sonus Networks Reports 2010 Fourth Quarter and Full Year Results

Wayne Pastore

Senior Vice President and Chief Financial Officer

978-614-8291

[email protected]

Fran Murphy

Vice President, Finance and Investor Relations

978-614-8148

[email protected]

SONUS NETWORKS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

Three months ended

December 31,

September 30,

December 31,

2010

2010

2009

Revenue:

Product

$        54,118

$         19,391

$        47,009

Service

28,861

23,348

21,703

Total revenue

82,979

42,739

68,712

Cost of revenue:

Product

17,805

7,231

11,852

Service

12,491

11,730

11,481

Total cost of revenue

30,296

18,961

23,333

Gross profit

52,683

23,778

45,379

Gross profit %

Product

67.1%

62.7%

74.8%

Service

56.7%

49.8%

47.1%

Total gross profit %

63.5%

55.6%

66.0%

Operating expenses:

Research and development

16,514

16,226

13,869

Sales and marketing

13,211

11,836

12,911

General and administrative

11,119

17,157

10,958

Restructuring

387

1,114

-

Total operating expenses

41,231

46,333

37,738

Income (loss) from operations

11,452

(22,555)

7,641

Interest expense

(138)

(10)

(89)

Interest income

320

439

592

Other income, net

-

1

47

Income (loss) before income taxes

11,634

(22,125)

8,191

Income tax benefit (provision)

(224)

(153)

2,118

Net income (loss)

$        11,410

$       (22,278)

$        10,309

Earnings (loss) per share:

Basic

$            0.04

$           (0.08)

$            0.04

Diluted

$            0.04

$           (0.08)

$            0.04

Shares used to compute earnings (loss) per share:

Basic

276,659

275,412

274,359

Diluted

278,096

275,412

275,152

SONUS NETWORKS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

Year ended

December 31,

December 31,

2010

2009

Revenue:

Product

$      146,583

$      136,276

Service

102,724

91,220

Total revenue

249,307

227,496

Cost of revenue:

Product

48,163

38,893

Service

47,992

44,467

Total cost of revenue

96,155

83,360

Gross profit

153,152

144,136

Gross profit %

Product

67.1%

71.5%

Service

53.3%

51.3%

Total gross profit %

61.4%

63.4%

Operating expenses:

Research and development

62,786

59,864

Sales and marketing

51,033

48,929

General and administrative

49,391

43,217

Restructuring

1,501

3,510

Total operating expenses

164,711

155,520

Loss from operations

(11,559)

(11,384)

Interest expense

(191)

(183)

Interest income

1,740

4,105

Other income, net

12

71

Loss before income taxes

(9,998)

(7,391)

Income tax benefit (provision)

(693)

2,459

Net loss

$      (10,691)

$        (4,932)

Loss per share:

Basic

$          (0.04)

$          (0.02)

Diluted

$          (0.04)

$          (0.02)

Shares used to compute loss per share:

Basic

275,470

273,730

Diluted

275,470

273,730

SONUS NETWORKS, INC.

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

December 31,

December 31,

2010

2009

Assets

Current assets:

Cash and cash equivalents

$        62,501

$      125,323

Marketable securities

258,831

239,223

Accounts receivable, net

52,813

47,998

Inventory

22,499

21,925

Deferred income taxes

408

562

Other current assets

16,474

17,508

Total current assets

413,526

452,539

Property and equipment, net

21,284

14,646

Intangible assets, net

1,600

341

Goodwill

5,062

5,053

Investments

87,087

49,598

Deferred income taxes

1,271

711

Other assets

26,124

17,849

$      555,954

$      540,737

Liabilities and stockholders' equity

Current liabilities:

Accounts payable

$        16,936

$          5,337

Accrued expenses

29,999

19,292

Current portion of deferred revenue

42,776

74,748

Current portion of long-term liabilities

338

753

Total current liabilities

90,049

100,130

Deferred revenue

42,811

25,242

Long-term liabilities

4,138

1,127

Total liabilities

136,998

126,499

Commitments and contingencies

Stockholders equity:

Common stock

277

277

Additional paid-in capital

1,301,285

1,286,326

Accumulated deficit

(889,501)

(878,810)

Accumulated other comprehensive income

6,895

6,712

Treasury stock

-

(267)

Total stockholders' equity

418,956

414,238

$      555,954

$      540,737

SONUS NETWORKS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Year ended

December 31,

December 31,

2010

2009

Cash flows from operating activities:

Net loss 

$         (10,691)

$           (4,932)

Adjustments to reconcile net loss to cash flows provided by operating activities:

Depreciation and amortization of property and equipment

11,205

10,104

Amortization of intangible assets

741

232

Stock-based compensation

15,285

12,810

Loss on disposal of property and equipment

106

241

Deferred income taxes

406

449

Changes in operating assets and liabilities:

Accounts receivable

(4,689)

27,790

Inventory

(9,506)

(2,456)

Other operating assets

6,218

(7,836)

Accounts payable

11,539

(4,229)

Accrued expenses

12,587

(9,803)

Accrued litigation settlements

-

(9,600)

Deferred revenue

(14,694)

20,987

Net cash provided by operating activities

18,507

33,757

Cash flows from investing activities:

Purchases of property and equipment

(17,295)

(6,612)

Purchase of intangible assets

(2,000)

-

Purchases of marketable securities

(392,343)

(268,971)

Sale/maturities of marketable securities

330,374

243,984

Net cash used in investing activities

(81,264)

(31,599)

Cash flows from financing activities:

Proceeds from sale of common stock in connection with employee stock purchase plan

1,353

1,119

Proceeds from exercise of stock options

976

51

Payment of tax withholding obligations related to net share settlements of restricted stock awards

(2,385)

(673)

Principal payments of capital lease obligations

(221)

(233)

Net cash provided by (used in) financing activities

(277)

264

Effect of exchange rate changes on cash and cash equivalents

212

694

Net increase (decrease) in cash and cash equivalents

(62,822)

3,116

Cash and cash equivalents, beginning of year

125,323

122,207

Cash and cash equivalents, end of period

$          62,501

$        125,323

SONUS NETWORKS, INC.

Supplemental Information

(In thousands)

(unaudited)

The following tables provide the details of stock-based compensation and amortization of intangible assets included in the Company's Condensed Consolidated Statements of Operations and the line items in which these amounts are reported.  Additional information regarding these items is available in the Investor Relations section of our website at http://www.sonusnet.com.  The information contained on our website or that can be accessed through our website should not be considered to be part of, or incorporated into, this press release.

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

2010

2010

2009

2010

2009

Stock-based compensation

Cost of revenue - product

$             104

$              105

$               63

$             369

$             361

Cost of revenue - service

401

396

449

1,620

1,784

Cost of revenue

505

501

512

1,989

2,145

Research and development expense

626

617

706

2,514

3,349

Sales and marketing expense

597

647

812

2,661

4,231

General and administrative expense

1,147

4,947

891

8,121

3,085

Operating expense

2,370

6,211

2,409

13,296

10,665

Total stock-based compensation

$          2,875

$           6,712

$          2,921

$        15,285

$        12,810

Amortization of intangible assets

Cost of revenue - product

$             228

$                37

$               48

$             341

$             232

Research and development

100

100

-

400

-

Total amortization of intangible assets

$             328

$              137

$               48

$             741

$             232

SONUS NETWORKS, INC.

Reconciliation of GAAP to Non-GAAP 2011 Guidance

(In millions, except percentages)

(unaudited)

The following tables include non-GAAP measures provided as guidance for 2011 derived from our GAAP (generally accepted accounting principles in the United States) 2011 expected results.  This non-GAAP guidance for gross margin and operating expenses is not presented in accordance with, nor is it intended to be a substitute for, GAAP.  In addition, our presentations of these measures may not be comparable to similarly titled measures used by other companies.  The non-GAAP measures provided as guidance should not be considered alternatives for, or in isolation from, the financial information prepared and presented in accordance with GAAP.

Range

Low

to

High

Revenue

$ 265

$ 285

Reconciliation of GAAP to Non-GAAP 2011 Guidance - Gross Margin

   GAAP expected results

58%

62%

   Stock-based compensation

1%

1%

   Amortization of intangible assets (A)

0%

0%

       Non-GAAP guidance

59%

63%

Reconciliation of GAAP to Non-GAAP 2011 Guidance - Operating Expenses

   GAAP expected results

$ 151

$ 155

   Stock-based compensation

(8)

(8)

       Non-GAAP guidance

$ 143

$ 147

(A)  The impact of expense for amortization of intangible assets on non-GAAP gross margin is expected to be less than one percentage point in 2011.  

SONUS NETWORKS, INC.

Reconciliation of Non-GAAP and GAAP Financial Information

(In thousands, except per share data)

(unaudited)

The tables below include non-GAAP financial measures derived from our Condensed Consolidated Statements of Operations.  These non-GAAP financial measures of Gross profit, Operating expenses and Net income (loss) are not presented in accordance with, nor are they intended to be a substitute for, accounting principles generally accepted in the United States of America (“GAAP”).  In addition, our presentations of these measures may not be comparable to similarly titled measures used by other companies.  The non-GAAP financial measures described below, should not be considered alternatives for, or in isolation from, the financial information prepared and presented in accordance with GAAP.

We use a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of our business, in making operating decisions, planning and forecasting future periods, and determining payments under compensation programs.  We consider the use of these non-GAAP financial measures helpful in assessing the core performance of our continuing operations and liquidity, and when planning and forecasting future periods.  These items for the periods presented are Stock-based compensation expense, Amortization of intangible assets and Restructuring.  We do not include any income tax effect of non-GAAP adjustments as we were unable to recognize a tax benefit on domestic losses incurred in any of the periods presented; accordingly, no adjustment to income taxes for non-GAAP items is required.

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 the Company’s GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the Company’s financial results for the foreseeable future.

Three months ended

Year ended

December 31,

September 30,

December 31,

December 31,

December 31,

Notes

2010

2010

2009

2010

2009

GAAP Total gross profit

$          52,683

$            23,778

$          45,379

$        153,152

$        144,136

Stock-based compensation expense

A

505

501

512

1,989

2,145

Amortization of intangible assets

B

228

37

48

341

232

Non-GAAP Total gross profit

$          53,416

$            24,316

$          45,939

$        155,482

$        146,513

GAAP Operating expenses

$          41,231

$            46,333

$          37,738

$        164,711

$        155,520

Stock-based compensation expense

A

(2,370)

(6,211)

(2,409)

(13,296)

(10,665)

Amortization of intangible assets

B

(100)

(100)

-

(400)

-

Restructuring

C

(387)

(1,114)

-

(1,501)

(3,510)

Non-GAAP Operating expenses

$          38,374

$            38,908

$          35,329

$        149,514

$        141,345

GAAP Net income (loss)

$          11,410

$          (22,278)

$          10,309

$         (10,691)

$           (4,932)

Stock-based compensation expense

A

2,875

6,712

2,921

15,285

12,810

Amortization of intangible assets

B

328

137

48

741

232

Restructuring

C

387

1,114

-

1,501

3,510

Non-GAAP Net income

$          15,000

$          (14,315)

$          13,278

$            6,836

$          11,620

A  Stock-based compensation is different from other forms of compensation, as it is a non-cash expense.  A cash salary or bonus has a fixed and unvarying cash cost.  In contrast, the expense associated with the award of an option 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 enables the readers of our financial statements to more accurately compare our operating results to our historical results and to other companies in our industry.  

B  On January 15, 2010, we entered into an intellectual property asset purchase and license agreement with Winphoria, Inc. (“Winphoria”) and Motorola, Inc. (“Motorola”) to purchase certain of Winphoria’s software code and related patents and licensed certain other intellectual property from Winphoria and Motorola.  The purchase price included an initial payment of $2.0 million and future potential royalty payments dependent upon future sales of certain of our products  that include the Winphoria technology that was purchased or licensed.  In connection with this transaction we recorded identifiable intangible assets which we have classified as developed technology and that will be amortized on a straight-line basis over five years, the expected useful life of the technology.  The amortization expense for these identifiable intangible assets is included in Amortization of intangible assets.    

 On April 13, 2007, we completed our acquisition of Zynetix Limited (“Zynetix”), a privately-held designer of innovative Global System for Mobile Communications infrastructure solutions located in the United Kingdom.  In connection with this acquisition we recorded intangible assets consisting of customer relationships, intellectual property and a trade name.  A portion of the Intellectual property was allocated to the Sonus reporting unit.  During the third quarter of fiscal 2008, we committed to a plan to sell Zynetix, and completed the sale transaction on November 26, 2008.  The amortization expense for the intellectual property allocated to the Sonus reporting unit is included in Amortization of intangible assets.  

 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 and provides meaningful information regarding our liquidity.  

C  We recorded restructuring expense of $1.5 million in the year ended December 31, 2010, of which $0.4 million was recorded in the three months ended December 31, 2010 and $1.1 million was recorded in the three months ended September 30, 2010.  The amount recorded in the three months ended December 31, 2010 related to closing our office in Ottawa, Canada and the amount recorded in the three months ended September 30, 2010 was for a workforce reduction initiative that reduced our workforce by 12 employees.  We recorded $3.5 million of restructuring expense in the year ended December 31, 2009 for three headcount reduction restructuring initiatives that occurred in August, March and January 2009, and which reduced our headcount by approximately 193 people in the aggregate, or approximately 20% in the aggregate of our then-current workforce.  We believe that excluding these 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.