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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
July 29, 2004
Date of Report (Date of earliest event reported)
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SONUS NETWORKS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 000-30229 04-3387074
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(State or Other (Commission File Number) (IRS Employer
Jurisdiction Identification No.)
of Incorporation)
250 APOLLO DRIVE, CHELMSFORD, MASSACHUSETTS 01824
(Address of Principal Executive Offices) (Zip Code)
(978) 614-8100
(Registrant's telephone number, including area code)
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Item 12. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The information in this Current Report on Form 8-K and the exhibits
attached hereto shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or incorporated by reference in any
filing under the Securities Act of 1933, as amended, or the Exchange Act, except
as shall be expressly set forth by specific reference in such a filing.
On July 29, 2004 at 8:15 a.m., Sonus Networks, Inc. will host a conference
call and simultaneous webcast to discuss its financial results for the quarter
and fiscal year ended December 31, 2003, and for its quarter ended March 31,
2004. A copy of the script for this conference call is attached as Exhibit 99.1
hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 29, 2004 SONUS NETWORKS, INC.
By:
/s/ Albert A. Notini
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Albert A. Notini
President and Chief Operating Officer
Exhibit Index
99.1 Script of Sonus Networks, Inc. for conference call and simultaneous
webcast on July, 29, 2004 to discuss its financial results for the
quarter and fiscal year ended December 31, 2003, and for its quarter
ended March 31, 2004.
Exhibit 99.1
Final Full Script
Sonus Networks Reports Financial Results For Q4 FY2003,
Fiscal Year 2003 And Q1 FY2004
Jocelyn Philbrook, director of investor relations:
Thank you. Good morning everyone. Thank you for joining us today as we
discuss our financial results through the first quarter of fiscal 2004,
including our restated results for fiscal 2001, 2002 and the first three
quarters of 2003. With me today are Sonus' Chairman and CEO, Hassan Ahmed and
President and Chief Operating Officer, Bert Notini. Also on the call today is
Sonus' Chief Accounting Officer and Controller, Brad Miller.
The press release announcing our financial results for the fourth quarter
and the year ended 2003 and the first quarter of 2004 and our restatements was
issued yesterday on Business Wire and on First Call. The text of this release
also appears on our Web site at www.sonusnet.com.
Before Hassan offers his opening remarks, I would like to remind you that
during this call, we will make projections or forward-looking statements
regarding items such as future market opportunities and the company's financial
performance.
These projections or statements are just predictions and involve risks and
uncertainties such that actual events or financial results may differ materially
from those we have forecasted. As a result, we can make no assurances that any
projections of future events or financial performance will be achieved.
For discussion of important risk factors that could cause actual events or
financial results to vary from these forward-looking statements, please refer to
the risk factor section of our annual report on Form 10-K/A dated July 28, 2004
and the "Cautionary Statements" section of our quarterly report on Form 10-Q
dated July 28, 2004.
Risk factors include, among others, the possibility that we may be delisted
from Nasdaq, risks associated with the investigation of the Company by the SEC,
difficulties or delays encountered in the completion of the preparation of our
financial statements for the second quarter, the continued adverse effect of
developments in the telecommunications industry, Sonus' ability to grow its
customer base, dependence on new product offerings, market acceptance of its
products, competition from large incumbent vendors, rapid technological and
market change and manufacturing and sourcing risks. In addition, any
forward-looking statements represent Sonus' views only as of today and should
not be relied upon as representing Sonus' views as of any subsequent date. While
Sonus may elect to update forward-looking statements at some point, Sonus
specifically disclaims any obligation to do so.
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In addition, because we were unable to give several days notice of this
call, the statements that we make on this call are not considered valid public
disclosure for purposes of Regulation FD.
To address this, we have filed a Form 8K with the SEC containing our script
for this call. However, because it was obviously impossible for us to include in
that script the responses to questions asked on this call, our responses to
questions must be limited to the information covered in our prepared remarks.
Please bear that in mind if we are unable to address certain questions you may
wish to ask on this call.
I would now like to turn the call over to Hassan.
Hassan Ahmed, chairman and chief executive officer:
Thanks Jocelyn. Good morning everyone and thank you for joining us. During
the last week, we have continued to work diligently to complete the final steps
required to file our 2003 Form 10-K/A and Form 10-Q for the first quarter of
2004. I am now pleased to report that last night Sonus filed its Form 10-K/A for
fiscal 2003 along with its quarterly report for the first quarter of 2004 and is
now once again in compliance with the SEC periodic reporting requirements.
Yesterday morning, Sonus reported that it was requesting an additional brief
exception from the Nasdaq to regain compliance with its listing requirements.
Prior to filing our financial statements last night, the Nasdaq notified Sonus
that our stock would be delisted from the Nasadaq National Market effective
August 2nd because we had not come into compliance with our filing requirements.
With last night's filings, Sonus has requested that its common stock remain
listed on the Nasdaq National Market because the Company is now in compliance
with Nasdaq's filing requirement and is awaiting a determination from Nasdaq.
As a result of our financial review, Sonus has restated its results for
fiscal 2001, 2002 and for the nine months ended September 30, 2003. Joining us
on the call today is Brad Miller, our new chief accounting officer and
controller, who will take you through the details of the restatement and our
most recent financial results later in this call.
As we reported to your earlier, Sonus has, over the last six months,
completed a thorough and exhaustive examination of our financial and accounting
records. This review, designed to ensure the integrity of our financial
reporting, initially focused on our financial statements for 2003 and 2002, and
in early April, we expanded this to include a full financial review of fiscal
year 2001.
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It is important to note the comprehensive scope and detailed nature of our
review. This has been a dedicated, non-stop effort by the Sonus team, our Audit
Committee, our auditors and other outside professionals. We have gone to
extraordinary lengths to analyze our customer arrangements and ensure the
accuracy of our accounting for them. Sonus and our auditors have reviewed not
only our customer contracts but also customer presentations, product roadmaps,
price lists and emails. The restatement of our historical financial statements
that we filed yesterday in our 10-K/A is the outcome of this extensive and
multi-faceted review.
I want to assure you that while we recognize this review period has been
lengthy, our review has been thorough and our actions have been deliberate to
ensure the integrity of our financial reporting. Because of this diligence, I am
pleased to be reporting to you results in which you can be confident and which
form a solid foundation for our company moving forward.
I would now like to spend a few minutes outlining the primary results of
our financial review and the factors that led us to today's restatements.
As we discussed on our last conference call, a major focus of our review
was on the timing of revenue recognition. Sonus recognizes revenue on all of its
products and services under the software revenue recognition rules, which
involve numerous judgments and the interpretation of complex accounting rules.
The largest restatement to revenue results from a change in judgment after a
detailed technical accounting evaluation for one particular customer
arrangement.
Sonus and its auditors completed a broad factual and accounting analysis of
the transactions with the customer including a review of our contracts,
presentations, product roadmaps and customer discussions. As a result of that
analysis, we have reached new accounting conclusions for this transaction. A
substantial amount of revenue was deferred from fiscal 2001 to 2002 based on the
interpretation that a specified product upgrade created as a result of a
presentation made to the customer which became part of the overall customer
arrangement and had not been appropriately accounted for in prior periods.
Accordingly, the revenue was deferred until a specific software release became
available.
We also have reached a new conclusion concerning a subsequent transaction
with this customer. In that case we determined that revenue had to be deferred
from the first three quarters of 2003 largely into the fourth quarter when a
particular software release became available. Under the accounting rules, this
was necessary because there was inadequate vendor specific objective evidence to
individually value a portion of the product being delivered and so all revenue
was deferred until the particular software release was delivered. As these
examples show, and as we have stated repeatedly throughout this process, revenue
reported to you was the result of valid transactions. While our reported revenue
declined in some prior periods, it resulted in an increase to deferred revenue
during those same periods. Our overall deferred revenue balance is significantly
higher than our previously reported level driven by several factors that Brad
will outline momentarily.
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I would now like to turn to our performance during the fourth quarter of
2003. In the fourth quarter of 2003 our revenues increased substantially to
$46.4 million. This was driven in part by the shift of $12.1 million in revenues
from prior quarters into the fourth quarter, but more importantly by the overall
progress in our business. Additionally, our deferred revenues increased in the
fourth quarter to $87.0 million. We grew our profits in Q4 as well, resulting in
earnings of $0.03 per share. Sonus also reported a positive cash flow in the
fourth quarter, with $4.7 million generated from operations, ending the year
with a very strong balance sheet of $305 million in cash, cash equivalents and
marketable securities.
Our revenue growth in the fourth quarter was fueled by a mix of new
customers and existing accounts that are expanding their adoption of Sonus'
voice over IP technologies.
We are very excited to note that our first wireless service provider
customer, AT&T Wireless, was a 10% customer for the full year 2003. We rolled
out our wireless product offering in early 2003, bringing to wireless operators
powerful opportunities for reducing their network costs and we are very pleased
to have the strength of our technologies recognized by one of the largest
wireless operators in the United States. Furthermore, there are already over 1
billion minutes per month of use running across Sonus solutions in wireless
networks today. On the wireline side, Qwest Communications, Global Crossing and
Verizon were also 10% customers for 2003 as they continued to roll out their
Sonus-based networks.
During the first quarter of 2004, Sonus continued to grow its business,
reporting revenues of $36.5 million and deferred revenues of $94.8 million. The
sequentially lower Q1 revenue result reflects the deferral of revenues from
prior periods into Q4 `03. For Q1, our 10% customers were Qwest Communications,
Verizon and Softbank Broadband in Japan. Sonus announced earlier this year that
Softbank Broadband began deploying a Sonus-based voice over IP network. We are
pleased that Sonus has been selected by one of the leading voice over broadband
providers in Japan. Net earnings in the first quarter were $3.0 million or $0.01
per share. Our cash and marketable securities balance was $308 million at the
end of Q1.
Turning now to our second quarter, there is an incredible amount of
excitement in our industry and at Sonus. I am going to reserve my comments on Q2
until we report our second quarter results. However, I do want to give you a
perspective on the progress Sonus is continuing to make in its business.
These are exciting times. Large carriers around the world are realizing the
power of voice over IP solutions and are reaping the benefits in their networks.
For Sonus, we already count many of these carriers as customers, and we continue
to focus on expanding our presence within these networks and to win positions
with new customers. During 2004, we have continued to grow our business, with
new customer activity and increased activity with our existing customers.
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Sonus has continued to build on the momentum we established during 2003,
with the expansion of our business in the wireless and access markets. Our
Motorola partnership has extended our wireless solution into the access portion
of wireless operators' networks. Through our partnership with Motorola, we are
already being deployed in wireless networks in Brazil, Russia and Bangladesh.
Additionally, Sonus continues to grow its access deployments. In addition to
Qwest's announcement of its network expansion at Supercomm, NTT also continues
to add subscribers to their Sonus-based packet voice access network. NTT was one
of our first access customers and we are excited that they continue to grow
their subscriber base.
We are pleased with our progress during this period and look forward to
providing you with a more detailed update on our progress in the second quarter
when we report our results.
Before I turn the call over to Bert, let me briefly remind you of the
important growth drivers for Sonus and our industry. The market is evolving
rapidly as carriers and service providers worldwide are transforming their
networks to packet voice. Sonus has been solely focused on this mission for the
last seven years. During that time, we have worked with some of the largest
carriers to build successful voice over IP trunking networks. While we have
built some very large networks, there is still a substantial amount of growth
yet to be realized in the trunking market. Today, service providers are also
starting to deploy voice over IP solutions in the access or local portion of
their networks. The strength of our access solutions was first proven outside
the U.S. where broadband penetration is highest. Driven in large part by recent
regulation, we are now starting to see service providers in the United States
adopt voice over IP solutions in the access portion of the network. This is an
exciting phase in the development of the market and we expect that access
revenues will be a meaningful component of our business in 2004. Additionally,
the wireless market continues to be an important growth driver for Sonus. We
expanded our focus beyond the core of the wireless operators' networks through
our partnership with Motorola. That partnership is already beginning to yield
results. Over time, we expect that the wireless market will be an important
component of our revenues. As the market expands beyond trunking applications,
Sonus' business is continuing to grow into new segments. In sum, this is an
exciting point in the development of the packet voice market. We are confident
in our leadership position and are working hard every day to continue to build
on it.
With that, I would now like to turn the call over to Bert.
Bert Notini, president and chief operating officer :
Thank you Hassan and good morning everyone. Since joining Sonus management
a little more than 100 days ago, I have been focused on keeping our growth
momentum going while improving our operational execution and controls
environment. As our growth expands our global enterprise, constantly enhancing
our operating practices and infrastructure is critical to our ability to scale
rapidly and meet the needs of our customers.
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The first aspect of this effort has been completing the review and audit of
our historical financial results and identifying areas where our control
environment needs improvement. By filing last night our 10-KA for 2003 and our
10Q for the first quarter of 2004, and becoming current on our SEC filings, this
first phase has been successfully completed.
As the next step, we have begun implementing a robust set of controls and
process infrastructure to support our business operations and financial
reporting, and in fact we have already made progress in that direction. For
example, Brad Miller our new Chief Accounting Officer and Controller joined us
in May and has led the effort to complete our financial review and filings. He
also has already added two other new, talented individuals to our finance team
and made improvements to the structure of the organization. In addition, we have
created a new centralized bid and proposal group to help us understand and
respond more effectively to our customer requirements, allocate our resources
and track activity from a financial reporting perspective. Finally we have made
some additional systems investments to streamline our operations. A number of
other initiatives are also under way which will strengthen Sonus and improve our
operations as we move forward.
Before I turn the call over to Brad to review the restatements and our
recent financial performance, I would also like briefly to comment on the SEC's
formal investigation of Sonus. As you know, Sonus announced in February that it
had voluntarily notified the SEC of our Audit Committee's independent
investigation following the delay in reporting our fourth quarter results. Since
that time we have been cooperating fully with the SEC and providing periodic
updates during our Audit Committee's investigation, which has now been
completed. The SEC has now begun its formal investigation process and we will be
cooperating fully with them. This process typically takes some time, but we look
forward to moving through it as quickly as possible. At this stage, there is
nothing further we can report so we will not be able to provide any additional
details in the Q&A.
Let me now turn the call over to Brad
Brad Miller, chief accounting officer and controller:
Thanks Bert. I will begin by walking through the major elements of our
restated financial statements for fiscal years 2001 and 2002, and for the nine
months ended September 30, 2003. For additional details, I refer you to the
restatement discussion in the 10K-A we filed last night. Please note that in my
review I will not be breaking out the results by quarter, although some of that
information is in the 10K-A. We will be filing as soon as practicable amended
10Qs for the first three quarters of 2003, which will contain the detailed
quarterly restatements for 2003, and for 2002 on a comparative basis, all of
which will be consistent with yesterday's filings.
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Following the summary of our restatements, I will review the details of our
financial performance for the fourth quarter of 2003 and the first quarter of
2004.
Turning now to the restatements, the changes we have made fall broadly into
six categories: first and foremost, revenue timing; second, accrual and reserve
balances; third, valuation of intangibles; fourth, restructuring; fifth, balance
sheet reclassifications; and sixth, equity. I would note that all of these
changes are non-cash adjustments, other than certain balance sheet adjustments,
which resulted in cash increasing at the end of certain periods.
Revenue
Starting with revenue timing, we have indicated in the past that this was
the primary focus of our analysis. It is important to note, with the amount of
value added software in our solutions, we recognize revenue under Statement of
Position 97-2, which is the principal software revenue recognition rule. Most of
our sales transactions are generated from complex, multi-year contractual
arrangements with multiple elements requiring significant analysis with respect
to the facts surrounding the transactions, and accounting analysis under highly
technical accounting rules to determine the right period in which to record
revenue.
Taking that down one more level, when a contract involves multiple
elements, such as sales of products that include maintenance or additional
software releases or future or specified upgrade commitments, we allocate the
value of the total purchase to each item within the purchase arrangement based
on vendor-specific objective evidence of fair value or VSOE. If for accounting
purposes we are unable to determine the fair value of an undelivered element, as
defined by VSOE, revenue for the entire arrangement is deferred until all
elements have been delivered. Given that many of our contracts involve bundled
offerings, VSOE can be difficult to establish. For example, many of our large
customers receive maintenance as part of a sale that also includes product. We
historically have determined that portion of the sale to be classified and
deferred as maintenance revenue based on VSOE. As part of our financial review,
we have examined the amounts we have deferred for future maintenance and
determined that, in certain circumstances, a greater amount of the sale should
be deferred and recognized later over the maintenance period.
As part of our review, we also made accounting judgments after a
significant amount of technical and factual analysis on when a customer is owed
a specified software upgrade. There is a complex body of accounting literature
and guidance on this topic, which requires that we look at the total arrangement
with a customer and beyond the four corners of the contract including any
related product roadmaps, product development presentations and customer
discussions. Based on the circumstances surrounding a particular customer
arrangement, we may conclude that a customer's interest and expectation in
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receiving a future product enhancement constitutes a specified software upgrade,
which may then cause revenue to be deferred and recognized in a future period.
In our review that has resulted in our restatements, we have evaluated the
broader customer arrangement to determine if a specified upgrade existed. Under
SOP 97-2, unless VSOE can be established on a specified upgrade, all of the
revenue associated with the arrangement must be deferred until we can establish
VSOE for the upgrade, or it is delivered or generally available.
Looking at the total adjustments to revenue in our restated financial
statements, most of the revenue adjustments result in revenue being deferred
into subsequent periods, although there were a few adjustments that moved
revenue into prior periods. The only exception is approximately $741,000 that
was misclassified as revenue and has been corrected. That is less than one third
of one percent of the total revenues over the period. The deferral of revenue is
principally the result of our judgment that there is an additional obligation as
part of the customer arrangement that requires the revenue to be pushed out.
This would include items such as the existence of a specified upgrade, an
additional undelivered element of the product or the timing of final customer
acceptance. Revenue may also be deferred because the amount of maintenance or
other service revenue associated with a sale was understated and an additional
amount needed to be carved out of the product sale and spread across the
maintenance period, typically five years.
Where revenue recognition has been deferred and previously reported revenue
has been decreased, deferred revenue on the balance sheet has been increased to
reflect the movement. During the restatement period of January 1, 2001 to
September 30, 2003, we had previously recorded approximately $302 million in
total revenue. Our restated revenue total during this period is approximately
$270 million and approximately $32 million moved outside the restatement period
into the fourth quarter of 2003 or beyond, and as a result, the deferred revenue
account has increased.
The principle amount of all the revenue deferrals arose from one customer
arrangement, which is referenced in the 10K-A. We have performed a comprehensive
review of this arrangement, which we now deem to include specified product
upgrades. Such upgrades had not been accounted for in prior periods. After
applying a significant amount of technical accounting and factual analysis, we
also concluded that there was not adequate evidence to establish VSOE for the
separate products being delivered under this arrangement. As a result, we have
now deferred the revenue associated with all products shipped to this customer
under the arrangement in 2001 until the final software upgrade was delivered in
the second quarter of 2002. We also have deferred a greater portion of the
revenues associated with this arrangement as maintenance revenues, which are now
being recognized ratably over five years. We have reached a similar conclusion
regarding a subsequent transaction with the same customer that resulted in the
deferral of revenue in the first three quarters of 2003 until the final
specified software release was generally available in the fourth quarter of
2003.
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As a result of all of these adjustments, our reported revenue in 2001
decreased by $44.4 million, in 2002 it increased by $31.4 million and for the
first nine months of 2003 it decreased by $19.2 million, and of this, $12.1
million was recognized in the fourth quarter of 2003. Again, most of these
adjustments relate to the customer arrangement I have just discussed.
Accruals and Reserve Balances
The next major set of changes in the restatement relate to accrued expenses
and reserves. As part of our financial review, we analyzed the supporting
documentation and analysis for each of our accrued expense and reserve accounts
for 2001 through 2003. We did that consistent with Statement of Financial
Accounting Standard No. 5, which requires that contingent liabilities for which
accruals and reserves are maintained be probable and estimable.
As a result of that process, we concluded that a number of our accrued
expense and reserve accounts did not have sufficient support to be maintained at
their previously reported levels. Accordingly, they were reduced. The majority
of adjustments occurred for the year-end of 2001, where the accruals and
reserves were reduced by $9.2 million, and our loss was reduced by a like amount
for that period. Following the adjustments made in 2001, the P&L impact for
accrued expense and reserve accounts in 2002 was a reduction in the net loss in
the amount of $424,000 and an increase in the net loss of $613,000 for the first
nine months of 2003.
Valuation of Intangibles
Let me now turn to the changes to our intangible assets value and related
amortization. In early 2001 we acquired telecom technologies inc., or TTI, for
approximately $550 million. Later in 2001, and again in 2002, we wrote off this
investment with an impairment charge following our restructurings, which began
in 2001. In re-auditing 2001, during which Arthur Andersen was our auditor and
conducted the initial appraisals, we obtained a new appraisal for the intangible
assets related to the TTI acquisition. Our new appraisal work determined that
changes to our prior appraisal, on which our asset values had been based, were
required.
These changes have the effect of increasing the value of our intangible
assets on December 31, 2001, which therefore had the follow-on effect of
increasing the related impairment charge we took in 2002. Finally, the changes
result in a remaining intangible asset value of $2.4 million on our books as of
the end of 2003, which will be amortized during 2004. In the first quarter of
2004 the amortization expense was $600,000.
Restructuring
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The next topic is restructuring. In 2001, we originally recorded a
restructuring charge of $25.8 million, which included $21.3 million related to
facilities, primarily to long-term lease commitments. In our 10-K for the year
ended December 31, 2001, we disclosed that in the first quarter of 2002 we were
reducing the previously reported restructuring charge by $16.6 million as a
result of reaching a favorable settlement on the related lease. We have
concluded that the reduction of this accrual should have been recorded in 2001.
In addition, we have reduced the restructuring expense and related accruals by
$1.9 million in 2001. The primary effect of these adjustments was to reduce the
restructuring expense in 2001 and adjust the restructuring item in 2002 from a
benefit to an expense.
Balance Sheet Reclassification
The next topic is balance sheet reclassification items. Due in part to the
revenue deferrals I have already discussed, our deferred revenue balance has
increased substantially from levels we previously reported to you. This is
primarily because previously reported revenue was derived from valid
transactions and is now recorded as deferred revenue. Deferred revenue increased
as of September 30, 2003 to $ 85.2 million from the previously reported amount
of $34 million. At December 31, 2003 the balance was $87.0 million, and at March
31, 2004, it was $94.8 million.
In addition to the deferral of previously reported revenue, the increase in
our deferred revenue account results from two other items. First, we have
changed our criteria for classifying deferred revenue. Rather than using the
receipt of cash as a triggering event for recording deferred revenue, we have
shifted to a model whereby we will record deferred revenue at the time when the
customer is billed pursuant to a contractual right and collection is probable.
This also has the effect of increasing our unearned accounts receivable balance
and total accounts receivable. Unearned accounts receivable increased to $2.1
million for the period ending September 30, 2003. Our gross DSO is now higher
than previously reported, but still well within industry norms. The final item
affecting deferred revenue was a reconciliation of cash collections at the end
of reporting periods, which had the effect of increasing our cash and deferred
revenue balances by $7.0 million at December 2002 and by $8.1 million as of
September 30, 2003.
Equity
The last major restatement area relates to shareholder equity and deferred
compensation. Note that all of the adjustments in this area are non-cash. We
previously adopted the accelerated method of amortizing all deferred
compensation defined under Financial Interpretation or (FIN) 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans. We
have now adjusted compensation expense to recapture the excess of accelerated
compensation expense from employees that were terminated in connection with the
restructuring we were doing at that time.
The net effect of this adjustment, and others primarily related to employee
terminations, is to decrease stock-based compensation by $2.6 million in 2002
and by $1.4 million in 2001, and to increase stock-based compensation by
$117,000 for the first 9 months of 2003 in our restated financial statements.
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Summary
There were several other less significant adjustments to our reported
income statement for 2001. In total, the summary of all adjustments resulted in
a decrease to our 2001 net loss by $9.8 million, to $635.6 million or a loss of
$3.68 per share. Taking the effect of all the adjustments together for 2002, our
net loss increased by $5.4 million to $73.8 million, or a loss of 39 cents per
share. For the first nine months of 2003, through September 30th, our net loss
increased by $15.7 million, to $22.0 million or a loss of 10 cents per share.
Quarterly Results
With that background on the major aspects of our restated financial
statements, let me now shift to a review of the financial results for the fourth
quarter of 2003 and the first quarter of 2004. In the interest of time and
getting to Q&A, I will keep my comments at a summary level, all of the detail
for which is in the filings we made last night.
Fourth Quarter
Starting with the fourth quarter of 2003, revenues were $46.4 million, of
which $11.8 million were service revenues. Of the total revenue recorded in the
quarter, approximately $12.1 million represents revenue that has shifted to the
fourth quarter from prior periods. International revenue contributed 8% in the
fourth quarter.
Qwest and AT&T Wireless were 10% contributors during the quarter. In total,
these customers comprised approximately 67% of our revenue in the fourth
quarter. We derived product revenues from a total of 21 customers in Q4.
Gross margins for the fourth quarter expanded to 62.7%. The increase in
gross margin reflects favorable product mix as well as the benefit resulting
from the sale of inventory previously written down of $3.9 million.
Our headcount at the end of Q4 had increased to 401 employees from 378 in
the prior quarter.
Q4 operating expenses were $21.1 million. Note that these expenses included
approximately $4.7 million in fees associated with the financial review we have
been conducting and the associated audit work by our independent auditors.
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Amortization of intangibles for the year was $2.4 million, reflecting the
restatement impacts of the tti acquisition appraisal.
Regarding share count, we ended the fourth quarter with fully diluted
shares used for EPS calculations of 259 million shares.
We reported net income for the fourth quarter of $6.9 million, or $0.03 per
fully diluted share.
From a balance sheet perspective, we ended the year with $305 million in
cash, cash equivalents and marketable securities. This reflects cash generated
from operations of $4.8 million during the year and the retirement of the $2
million we had outstanding under our equipment line during the fourth quarter of
2003.
Our total accounts receivable were $23.8 million, with unearned receivables
of $12.7 million. As a reminder, unearned receivables reflect the portion of our
deferred revenue balance for which we have not yet received payment. DSO on our
earned receivable balance was 22 days. If you were to include unearned
receivables, DSO for the fourth quarter was 47 days.
As the long-term component of our deferred revenues is now meaningful, we
have broken this out from the current portion on our balance sheet. Long-term
deferred revenues were $24.3 million at December 31, 2003. This balance includes
the portion of multi-year service contracts or the service portion of bundled
arrangements that will be recognized more than twelve months from the balance
sheet date. The current portion of our deferred revenue was $62.7 million in Q4.
First Quarter 2004
Turning now to our Q1 2004 results, revenues were $36.5 million, of which
$10.3 million was service revenue. This sequential decline from the prior
quarter is in part a result of the $12.1 million of product revenue recognized
in Q4 that previously had been recognized in prior periods, as already
discussed. Going forward, it is important to note that given that many of our
contracts involve complex multiple element arrangements, our reported revenue
may vary materially from quarter to quarter depending on when we receive
acceptance or have delivered all of the elements judged to be part of a customer
arrangement.
Qwest, Softbank Broadband or more commonly known as Yahoo! Broadband and
Verizon were at least 10% contributors during the quarter. In total, these
customers comprised approximately 67 % of our revenue in the quarter. We derived
product revenues from a total of 15 customers in Q1. International revenues in
the first quarter represented 29% of the total.
Gross margins for the first quarter were 66.1%. The increase over the Q4
result reflects a favorable product mix and the impact of supply chain
efficiencies.
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Our headcount at the end of the first quarter of 2004 was 438.
Q1 operating expenses were $20.6 million. The sequential decrease in
operating expenses reflects the accrual we established in Q4 for our
audit-related expenses. A detailed breakout of our operating expenses is
available in our press release.
Stock-based compensation was $379,000 for the first quarter of 2004.
Amortization of purchased intangibles was $600,000 in Q1, again reflecting the
restatement impact of our tti acquisition in 2001.
We ended the first quarter with a fully diluted share count of 256 million.
The share count is lower in Q1 than Q4 as a result of the effect that our
average share price has on the calculation of diluted shares.
For first quarter of 2004, we had net income of $3 million or $0.01 per
fully diluted share.
Our balance sheet remained strong in the quarter. We ended the quarter with
approximately $308 million in cash, cash equivalents and marketable securities.
This reflects cash generated from operations of $3.3 million in the first
quarter of 2004. CAPEX in the quarter was $2.2 million.
Our total accounts receivable were $32.1 million, with unearned receivables
of $21.2 million, which is the portion of our deferred revenue balance for which
we have not yet received payment. Our DSO on our earned receivable balance was
27 days. If you were to include unearned receivables, our DSO for the first
quarter was 79 days.
Long-term deferred revenues increased to $29.5 million in the first quarter
of 2004. The current portion of our deferred revenue was $65.2 million in Q1,
with $21.2 million representing product shipments for which we have not yet
received payment.
With that, let me now turn the call back to Hassan for some final comments.
Hassan?
Hassan Ahmed, chairman and chief executive officer:
Thanks Brad. Before we take some of your questions, I want to add some
final thoughts on the process we have just completed. At Sonus, we are committed
to building a long-term, sustainable business. When we discovered these issues,
we responded as quickly and as forcefully as possible. This process took several
months because we felt it was necessary to review all of our financial results
for these periods in great detail. We realize that this financial review process
caused a great deal of concern among our shareholders, as we were not able to
discuss the details. We are deeply grateful for your patience. Building
shareholder value is a top priority at Sonus and that starts with preserving the
integrity of our financials.
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With this process now behind us, we are able to continue to build the
momentum in our business unencumbered. Sonus has a strong position in a growing
segment of the market and we are enthusiastic about the future. As you can
imagine, we have focused a significant amount of time and energy on completing
our financial review and yesterday's filings. We are now able to turn our full
attention to finalizing our 10-Q for the second quarter of 2004 and completing
our second quarter results. Following the announcement of our Q2 results, you
will see us out on the road talking to our customers and shareholders about the
exciting things happening in our business.
I am tremendously appreciative of the support and dedication that we have
received from our customers, our partners, our shareholders and the Sonus team
during the last few months and for that, I would like to thank you all. With
that, now let's take a few questions. Operator?
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