Sonus Networks, Inc. (SONS) September 13, 2012 10:00 am ET Executives Patti Leahy Raymond P. Dolan - Chief Executive Officer, President, Director and Member of Corporate Development & Investment Committee Todd A. Abbott - Senior Vice President of Worldwide Sales & Marketing & Business Development Anthony Scarfo - Senior Vice President of Technology Development David W. Tipping - Vice President and General Manager of The SBC Business Unit Maurice L. Castonguay - Chief Financial Officer and Senior Vice President David Roy Analysts Catharine Anne Trebnick - Northland Capital Markets, Research Division James Kisner - Jefferies & Company, Inc., Research Division Andrew Uerkwitz - Oppenheimer & Co. Inc., Research Division Presentation Patti Leahy
We do have 2 breaks set aside for Q&A, so we'd ask that you please ask your questions at the appropriate time. We're also accepting questions via email today for those of you that are listening in on the webcast and that email address is firstname.lastname@example.org. So we'll do our best to accommodate your questions during the Q&A portion of the agenda.So just turning briefly to the Safe Harbor statement. Some of our remarks today will be forward-looking in nature. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligations to do so unless required by law. Also, a reconciliation of our non-GAAP to GAAP outlook in the statement on the use of non-GAAP financial measures is included in today's press release. So it is now my pleasure to introduce the Chief Executive Officer of Sonus Networks, Ray Dolan. Raymond P. Dolan Thanks, Patty. So welcome. Can everybody here me? Is the mic on? Welcome to the 2012 Investor Analyst Day at Sonus Networks. It's a beautiful day in New York for those who are listening in or webcasting in. And we had a tremendous opportunity as a team this morning to ring the opening bell at NASDAQ. Some of you saw some of those photos on your way in. For probably tens of millions, if not, hundreds of millions of people around the world, that bell symbolizes the beginning of trading. For me and for our team, it carries far more symbolism. To me, it symbolizes milestones achieved along a journey for the multi-year transformation that I signed up for almost 2 years ago. We're making great progress. For me, when I think about runners that run a journey, they ring that bell. And it says not only this is the time to focus, the stakes are raised. This is the final lap. And it's not a final lap for us by any means because it is a multi-year journey. But it is a time where the attention is on our progress.
The market is looking it up to see, can we make this pivot. I'm here to share with you our story. I believe we are making that pivot. And I've asked 4 members of our leadership team to share their part in that story underneath the umbrella that I'm going to kick off with you.My messages are as follows: We are making great progress shifting to an SBC company, which is our growth engine. Our investment thesis is the shift to SBC, the growth at or above those markets as that SBC category continues to grow 20% a year, meaning it's a $1-billion category in 2015 and continues to grow from there. That we're investing in the right technologies. In fact, the big strategy on top of the SBC is cloud-based UC. You're going to hear a lot about that today. Cloud-based unified communications. It is the big market opportunity, that being a substantial player in the SBC market enables us to pivot to, okay? That we're investing in the technologies that matter there, in UC. And I'd say that VoLTE, even VoLTE, it's voice over LTE, it's really UC over LTE. LTE is simply another media fabric that happens to be a wireless link that when rendered reliably will allow UC to port through. It just like it does in the enterprise over ethernet or any other media player, okay? We're going to explain here the NET deal. And I want to be clear. A lot of the feedback I got is, and this is the tired story that's out there, okay? NET is about execution risk. I want to clearly address that in the next few slides, okay? And I want to help you draw the conclusion that this is our year. That bell is the wake-up call to the emergence of Sonus as the market leader through our SBC growth into the UC category.
Now in order to understand where we are and where we're going, you got to know where we've been. This has been a 2-year journey for me, 18 months for Todd. And very -- as I introduce the speakers, I'll let you know how long they've been here. We said at the beginning that this was a multi-year journey. It remains so. After 2 years, we've made a number of major, major rewiring to Sonus.First, we are moving from a media gated company to an SBC company. So that's obvious. That's the headline question and the headline answer in almost everything that people ask us. But underneath that, there's a number of important transformations that are going on. We've moved from a highly customized complex solution, which was woven into the culture of how we went to market with gateways into a streamlined, whole product, transactional emphasis, and that is the key enabler in our technology side and our product side to move to go-to-market strategy, from service provider centric to service provider and enterprise centric. UC will be delivered to the enterprise through the service provider, okay? It will also help us move from direct-only, which is 98% of our results before I joined Sonus and remains a very high level of our results, to a complex go-to-market strategy that is both direct and channel centric. And a lot of these strategies have been driven by Todd. You saw the announcement today that he's moving to an Executive Vice President. And I'm thrilled that Todd is doing that, taking not only the sales and marketing relationship through that [ph] organizations, but the strategy functions so that we can unify strategy to go to market. And Tony will deliver the production engine, okay? We've moved from voice-based company to a complex voice data, text, chat, video, UC-based company. The solution is moving beyond voice. And we're moving with that market. And SIP, by the way, is the enabler for that to move. So if you've got in your head, that's been said 100 times, why would it happen now? The answer is the SIP adoption is the catalyst, and a lot of that is going to be driven in Todd's piece. From fixed network solutions, which was the majority of our initial deployments to mobile core and ultimately closer to mobile edge over time as we follow the spend in the marketplace,okay?
And then here's the real punchline. You heard this commitment from me on our last call. You'll hear this repeatedly from me. From a profitless company to a profitable company next year. We're not issuing guidance. When we guide to 2013, we'll guide to 2013. But when I had my own decisions as to where I fit in this company at a visceral level, that's the commitment that I'm making personally. And we're going to drive to that. Every member of the leadership team understands that's the commitment that I've made. And as a result, they've made that commitment with me.So the first thing that people look at Sonus to do is demonstrate traction in the SBC category. If you're saying you're making this pivot to SBC, how material is it? Two aspects. One, we're outgrowing the marketplace on a product basis by about 3:1, okay? Two, it is shifted over 40% of our results. And next year, will become more than 50% of our results on a product basis. By next year, we will be an SBC-based company with a legacy business that we will cash cow. The other question that we get all the time, and this goes back to -- with the perceptions that hang over Sonus. And what I'm asking you today here is, as you walk in here and your mind says, "I'm going to hear the Sonus story for the fifth time, or the 10th time, or the 100th time." What I'd like you to understand from my perspective is you're going to hear the Sonus story for the first time, okay? I'd ask you only to open your mind and to hear what we're saying. We bought NET for speed and breadth. You're going to hear from Tony. We had several things on our plate. Move beyond trunking by basically streamlining that, broaden the SBC portfolio and drive software development to go after major markets.
The NET acquisition in one fell swoop broadened our product portfolio. There are 7 link-certified SBCs in the marketplace, 4 are brought to you by Sonus. We are the only end-to-end enterprise SBC solution from the highest to the lowest end. That's what it's about. The breadth and speed. And with it came a talented team that will play a meaningful role in our growth as we focus on UC in the cloud.So execution risk, I believe it derisked our plan, accelerated our plan and allowed us to focus even faster on the things that matter for value creation. This NET company, despite that it lacked scale, had an overhang on its balance sheet and could have easily lost control of its own destiny, was going through the same transformation we were going through. From an old gateway solution, in that case focused principally on the government sector, to a new SBC solution focused on the low end of the enterprise. It was the same company with small [ph]. And by combining the strategies, we created tremendous synergies. Moe will talk about financial synergies that had been achieved and will continue to be achieved. But at the core, this is a strategic play to accelerate the strategy that we've been going after for the last 18 months together. So we will cross over as Sonus standalone the 50% at the same time that NET would have if it was successful as a stand-alone business, crossed over it's 50 percentile market. So we will accelerate both sides of that and drive financial synergy. So the acceleration on the SBC side that we've had already in place at the midpoint of our guidance for 2012 will be accelerated as the UX product line, which we're going to relabel SBC just for simplicity. And you will see that in David's slides and some of Todd's strategy and Tony's slides. It will drive us to even greater SBC penetration. It will drive us to even greater channel opportunity in the important UC category, and it will allow us to drive greater operating leverage across the bigger revenue base. All of that leads to a simple, clear strategy. Sonus will enable businesses through cloud-based unified communications to be faster, smarter, more collaborative and more productive. Productivity will drive GDP growth, and that will drive value. We will be an important part of that telecom, datacom landscape as we move the world to unified communications in the cloud.
So my suggestion to you here before I hand it off to this team is our story is ready. We have the right team. I'll introduce them to you shortly. We are on the right strategy, and we are going after the right markets. And these markets are big.The folks that I'll ask you to talk -- to meet with today include Todd Abbott, who is our EVP of Strategy & Go-To-Market; Tony Scarfo, who runs our technology and development organization; David Tipping, who is our General Manager to the SBC market; and Dave has been focused on that for the last year; and it's no mistake that the focus that comes from dedicated leadership drives results. He'll talk to you a lot more about that. And then, Moe will give us a financial review of not only our prior quarters, but our going forward quarters and give you some view as to what we're driving on synergies for NET. Before we introduce Todd, I'd like to show you a 90-second video of where Sonus is going. And I'm told that will be just 1 minute before the 90-second start, so it's a 2.5-minute video, which starts really slow. [Presentation] Let's go right to our first speaker. Why don't you put that back on slide. Okay. So I'd like to introduce Todd Abbott. Todd is -- Todd joined the organization 18 months ago. I asked him to lead the sales organization. He then took on the marketing organization, which we were doing very little of. And hopefully, you've seen a great deal of change there. He then took on business development and now owns the strategy function. The entire front end of our strategy through the go-to-market, with all of those transformations that I talked about have been led by and will continue to be driven by Todd Abbott. Todd came from a wealth of experience in Cisco, IBM, Avaya, a number of other places. And I couldn't be more thrilled to hand it off now to one of my principal partners driving this transformation, Todd Abbott. Read the rest of this transcript for free on seekingalpha.com