Description
Sonus Networks, Inc. 10% Owner Management, L.L Empire Capital bought 122,421 shares on 8-27-2012 at $ 1.9
BUSINESS OVERVIEW
Overview
We are a leading provider of voice and multimedia infrastructure solutions, including session border control, Voice over Internet Protocol, or VoIP, access and VoIP media gateway solutions for service providers and enterprises. Our infrastructure solutions allow efficient and reliable delivery of voice and multimedia sessions over IP (internet protocol) networks while allowing our customers to manage the flows of such sessions in their networks using business policies.
One of the first companies to leverage SIP (session initiation protocol) and IP as the mechanism to carry voice traffic, we have helped over 150 wireline and wireless service providers in over 50 countries to create and deliver value with their deployed networks. Our customer list includes some of the world's largest multimedia service providers including AT&T, Belgacom ICS, BT Group, CenturyLink (and Qwest), CITIC 1616, COLT, Interroute, KDDI, Level 3 (and Global Crossing), Orange (formerly France Telecom), Softbank Corporation, TalkTalk (formerly Carphone Warehouse), Tata Communications, T-Systems Business Services (a division of Deutsche Telekom Group), Verizon and XO Communications.
We deliver value to our customers through our flexible and distributed architecture. Our customers interoperate and peer with other service providers or large enterprises using either TDM (time division multiplexing), also known as circuit-switched telephony, or IP technology. Our products allow our customers to manage their network borders (or peering points) using either our GSX or NBS (network border switch) products to secure the borders, perform signaling interworking and media transcoding, and apply routing decisions. Our centralized policy and routing engine, or PSX, then manages the entire set of our GSX and NBS elements along a network's border, and provides a centralized view of the network. Business policies from the customer are transformed into routing and control decisions at these peering points, which secure the network from unwanted traffic and route the desired traffic efficiently while preserving quality of service and gathering data necessary for billing and accounting. Our VoIP Access solutions include the ASX Feature Server, which delivers residential Class 5 ("last mile," or exchanges to which subscriber and end-user telephone lines connect) and business VoIP, telephony to both TDM and IP devices for residential and enterprise subscribers in a geo-redundant architecture. The ASX solution can be delivered as a cloud-based VoIP service to end users anywhere in a secure and resilient manner. Our solution is ideal for companies wishing to create or take advantage of a number of service models including: PBX (private branch exchange)-to-Cloud migration, cloud/hosted, distributed, hybrid-hosted and/or managed IP telephony.
Our solutions help customers migrate their networks from TDM networks to all-IP networks. Our NBS9000 session border controller can operate in a hybrid environment, carrying both TDM-to-IP sessions and IP-to-IP sessions in the same platform, while managing and controlling traffic in a seamless way. Our NBS5200 session border controller operates in a pure-IP environment and is designed to operate at high performance without compromising on security or features. Both platforms support IPv6 (Internet Protocol version 6, which is designed to succeed Internet Protocol version 4, or IPv4) and are built to work within an IMS (IP Multimedia Subsystem) architecture.
Our target customers comprise both service providers and enterprises. Customers and prospective customers in the service provider space are traditional and emerging communications service providers, including long-distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers. Enterprise customers and target enterprise customers include financial institutions, retailers, state and local governments, and other multinational corporations. We collaborate with our customers to identify and develop new advanced services and applications that may help to reduce costs, improve productivity and generate new revenue.
We sell our products principally through a direct sales force in the United States, Europe, Asia-Pacific and the Middle East. We continue to expand our presence into new geographies and markets through our relationships with regional channel partners. We are in the process of establishing an indirect sales channel in order to address a larger share of the enterprise customer segment.
Industry Background
Deregulation of the telephone industry in the United States accelerated with the passage of the Telecommunications Act of 1996. The barriers that once restricted service providers to a specific geography or service offering, such as local or long-distance services, have been largely eliminated. The migration to IP-based last-mile technologies reduces the capital investments required to provide services over large geographies. The opportunity created by accessibility to the telephone services market has encouraged new participants to enter this market and incumbent service providers to expand into additional markets, both domestic and international.
Competition between new providers and incumbents is driving down service prices. With limited ability to reduce the cost structure of the public telephone network, profit margins for traditional telephone services have declined. In response, service providers are seeking new, creative and differentiated services as a means to increase revenues and reduce costs. The first wave of service differentiation, typified by triple-play bundling of voice, Internet and television, is now commonplace. Rapid adoption of Internet and broadband connectivity over the IP network has left service providers seeking more advanced solutions in broadband wireline-wireless converged services, video transport and services as well as innovative application of business policies over the traffic flows within a service provider's network.
We deliver the next two waves of differentiation for service providers. The first is the transformation of networks from TDM to all-IP at a pace that the customers are willing to adopt. This lowers the overall cost structure for transporting voice and data and helps the service providers to be more competitive in the market. The next level of differentiation comes in giving service providers fine-grained control over how IP sessions flow through their network, and applying business rules and policies to increase their return on investment on the network infrastructure. In addition, significant opportunities exist in combining traditional voice services with Internet or web-based services in a manner that allows the service provider to deliver and monetize powerful, high-margin experiences in partnership with over-the-top providers, large enterprises, and their peers around the world.
The transition of the public telecommunications network to an all-IP network is a complex and gradual process and is happening on several fronts, including the following: service providers are deploying VoIP to add capacity; they are retiring legacy equipment where the operational expense savings justify the investment in new IP technology; and they are utilizing SIP connectivity to directly reach their consumer and business customers to offer new and innovative services. As a result, service providers are typically operating hybrid networks that have a mix of old and new equipment. Issues like security, call control and quality of service now must be addressed over a converged IP connection that carries not just data, but also voice and multimedia. This has opened up a new world of opportunity, both to the existing telecommunications providers and the traditional data networking providers to provide efficient management of traffic flows and new services in this converged IP network, as well as multi-tenant, highly-scalable communication applications.
Enterprises and businesses of all sizes are responding to a number of key technology and social trends. The first is the cost-effective but robust delivery of applications from the cloud. As enterprises move toward hosted or cloud-based purchase models along with managed services or any combination thereof, service providers will be able to leverage their IP infrastructure and deliver applications from the cloud to enterprises. Telephony, video, IVR (interactive voice response) and recording are just a few examples of applications that are beginning to be delivered in this manner. The second key trend affecting both enterprises and service providers is the demand by users for increased communication modalities such as IM (instant messaging), SMS (short message service), video and web-sharing. These diverse communication tools must be unified so that businesses can communicate effectively and seamlessly. The third trend is to enable "bring your own device," or BYOD, network capabilities, allowing users to use their personal digital devices (such as PCs, tablets and smartphones) on enterprise networks. The shift in communication devices demands that the underlying communications infrastructure become even more reliable, scalable and flexible. Finally, businesses continue to decrease both capital and operational expenses wherever possible. These trends, combined with the accelerated adoption of Session Initiation Protocol, or SIP, underscore the opportunity for Sonus to leverage our network intelligence and product scalability, helping enterprises and service providers securely and cost-effectively manage their cloud-based communication and collaborative applications.
Network Requirements and the Sonus Solutions
Users demand high levels of quality and reliability from the public telephone network, while service providers require a cost-efficient network that enables the latest revenue-generating services. We develop, market and sell a comprehensive suite of voice and data communications infrastructure products, which are designed to effectively set-up, route, and securely manage the multitude of sessions traversing a service provider's network at any given time. We also sell a voice application that leverages this suite of infrastructure components to enable service providers to build cloud-based VoIP offerings. Our solutions are designed to scale to meet the security and performance needs of the largest packet networks and are compliant with the latest industry standards and best practices. Our solutions meet the following requirements:
Carrier-class performance. Service providers operate complex, mission-critical networks. Our products are designed to offer the highest levels of quality, reliability and interoperability, including:
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full redundancy, designed for 5-nine's (99.999%) availability;
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multi-tenant, geo-redundant Class 5 voice application capabilities;
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quality of service equal or superior to today's circuit-switched network;
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system hardware designed to comply with NEBS (Network Equipment Building System) standards Level 3;
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interworking between the numerous signaling and media formats existing worldwide; and
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sophisticated security, network monitoring and analytics capabilities.
Scalability and density. Carrier infrastructure solutions face challenging scalability requirements. Service providers' central offices typically support tens or even hundreds of thousands of simultaneous sessions. To be economically attractive, modern infrastructure must compare favorably with existing networks in terms of performance, cost per port, space occupation, power consumption and cooling requirements. Our solution scales to build packet-based switch configurations that cost-effectively support a few hundred to hundreds of thousands of simultaneous calls. In addition, the capital cost of our equipment is typically lower than that of traditional circuit-switched equipment. At the same time, our equipment offers unparalleled density, requires significantly less space, power and cooling than that needed by typical circuit-switching implementations and is therefore much more environmentally-friendly.
Security. IP-voice security is as important for a service provider's network as the services it provides. Various standards bodies, such as ISO 27001, ITU, ANSI and NIST, and industry consortia, such as 3GPP and ETSI, have development frameworks and guidelines for securing IP and IP-voice networks. As carriers extend the network edge via IP, security is critical to provide manageable, predictable services at peering points between service providers while maintaining the integrity and privacy of subscriber information. We address security on three dimensions: security and access control at the network border (peering or access), security and integrity of the network border element itself, and security of all of our network elements (media gateways, route servers, etc.) and their inter-element communications. Based on these three areas, we have developed an overall VoIP security threat model and mitigation architecture that provides a holistic approach to total network security. This threat model guides our overall product development and solution delivery.
Simple and rapid installation, deployment and support. Infrastructure solutions must be easy to install, deploy, configure and manage. Our equipment and software can be installed and placed in service by our customers more quickly than circuit-switched equipment. By offering comprehensive testing, configuration and management software, we expedite the deployment process as well as the ongoing management and operation of our products. We believe that typical installations of our solution require only weeks from product arrival to final testing, thereby reducing the cost of deployment and the time to market for new services.
Our Products
Sonus GSX9000 Open Services Switch and Sonus GSX4000 Open Services Switch
The Sonus GSX9000 Open Services Switch, or GSX9000, enables voice traffic to be transported over packet networks by converting any type of voice signal into IP packets and transmitting those IP packets over a data network. It then converts whatever type of signal is necessary to be deposited back onto non-IP networks to be delivered to its intended destination. The GSX9000 is designed to deliver voice quality that is equal or superior to that of the legacy circuit-switched public network. Further, it supports multiple voice encoding schemes used in circuit switches and delivers a number of other voice compression algorithms. The GSX9000 minimizes delay, further enhancing perceived voice quality, and scales to very large configurations required by major service providers. A single GSX9000 shelf can support up to 22,000 simultaneous calls, while a single GSX9000 in a multiple-shelf configuration can support 100,000 or more simultaneous calls. The GSX9000 also operates with our PSX Policy & Routing Server and with softswitches and network products offered by other vendors. The Sonus GSX4000 Open Services Switch, or GSX4000, allows service providers and enterprises to realize the benefits of the GSX9000 in a smaller form factor.
Sonus NBS9000 Network Border Switch
With the adoption of IP-based networks and industry convergence around IMS architectures, the ability to securely interconnect IP peering partners, business enterprises and individual voice customers has become critical. Offered as an upgrade on the GSX9000 platform, the Sonus NBS9000 Network Border Switch, or NBS9000, permits service providers to gradually transform their TDM networks to IP by permitting both TDM-to-IP and IP-to-IP session management capability on the same platform and provides the potential for significant cost savings. The NBS9000 provides a robust suite of security features, including traffic policing. Supporting session border control (SBC) configurations for both peering and access, the NBS9000 allows operators to satisfy their security, session border control and media services requirements within an integrated and easily managed system. The integrated media services include media transcoding, recorded tones and announcements and support for data (modem) and fax relay or interworking. Combined with the Sonus PSX Policy & Routing Server, the NBS9000 leverages the same policy-based packet switching features that drive Sonus IP-based networks around the world. The NBS9000 also includes full access to our centralized routing, network voice features and management/provisioning tools.
Sonus PSX Policy & Routing Server
The Sonus PSX Policy & Routing Server, or PSX, is a primary element of a Sonus distributed deployment that consists of multiple GSX and NBS-based elements deployed at various peering points in a service provider network, along with a centralized PSX that includes the database determining how sessions get routed over the service provider network. The PSX plays an integral role in all of our network deployments and translates business policies into actual call control, routing and service selection decisions. The PSX acts as a central control point in a large Sonus network, permitting significant operational savings for our customers.
The PSX is based upon a modular architecture that is designed for high performance and scalability, as well as interoperability with third-party gateways, devices and services. It supports a broad set of features that routes traffic to minimize cost and delays. It interfaces with third-party databases maintained by numbering authorities to determine where a session needs to be routed. When there is a need to query a traditional database over the SS7 network, an SGX (signaling gateway) component is deployed in conjunction with the PSX. The PSX is an all-IP component and can perform most IP-based database lookups natively.
Sonus NBS5200 Network Border Switch
The Sonus NBS5200 Network Border Switch, or NBS5200, is the first product built on our next-generation ConnexIP platform. The NBS5200 complements our NBS9000 as part of our SBC solutions portfolio and provides SBC functionality, including media interworking, advanced routing and policy engine, and multi-access security gateway functionality. The ConnexIP platform is a platform for connecting, managing and securing IP session-based communications and represents a key element in our strategy to bring industry-leading performance and carrier-grade reliability to the session management market, and represents a new foundation for the next generation of our IP-based products. The NBS5200 includes local Sonus PSX server functionality for advanced routing in standalone mode or can be configured to access a centralized PSX or third-party softswitch.
Sonus ASX Call Feature Server
The Sonus ASX Call Feature Server, or ASX, functionality for residential and enterprise subscribers to offer residential Class 5 and business VoIP call features to both legacy TDM and IP devices in a geo-redundant architecture. The ASX is a call agent that handles call setup and both basic and advanced call features. The ASX provides local area calling features for residential and enterprise markets and regulatory features such as emergency services and lawful intercept. The ASX allows the same features to run over various transport technologies, including analog lines, Ethernet, voice over DSL, voice over cable, fixed wireless and LTE infrastructure. This flexibility enables a multitude of applications, such as residential access, cable access and business services, and new features available only on packet-based networks, such as unified messaging, multimedia conferencing and desktop integration. The Sonus ASX integrates with a variety of third-party desk phones, conference phones and IADs and enables TDM devices to connect to SIP networks. In addition, it supports a variety of voice mail, media server and other third party components.
Sonus Network Analytics Suite
The Network Analytics Suite of performance management products delivers advanced collection, monitoring, reporting and notification of performance metrics to help lower operational costs and maximize network performance. The suite is comprised of three products—NetScore Network Performance Analysis Tool, or NetScore; NetAssure Voice Quality Monitoring Tool, or NetAssure; and NetEng Network Audit and Visualization Engine, or NetEng. NetScore provides a real-time assessment of the state of a service provider's network, including quality of service, call delay, network effectiveness, congestion and efficiency, and allows network operators to analyze real-time and historic trends, aggregate data by trunk group or gateway, or monitor specific events. NetAssure is designed to deliver end-to-end service quality assurance for Sonus IP networks through active call monitoring and advanced analytics, then presenting this information through detailed visual reports and real-time alarms, so network operators can understand how well the network is delivering services and systematically isolate any quality degradations that may occur. NetEng provides visibility into the performance and capacity levels of our networks by collecting, analyzing and aggregating historical data from each network element and presenting the information through a visualization and reporting tool, providing a comprehensive reporting platform for on-demand network audits, capacity planning, forecasting, trending analysis and standardized element configuration. The products are available as individually licensed software packages or bundled with our comprehensive Professional Services offering.
The Sonus VoiceSentry system is an application-aware security system that protects voice networks against Telephony Denial of Service or TDoS, and other malicious attacks. The VoiceSentry system monitors voice traffic (both TDM and SIP) in real time to identify suspicious, malicious and machine-generated calls, then allows the network management team to take appropriate, real-time defensive actions.
Sonus Global Services and Sonus Professional Services
Sonus Global Services offers professional consulting and services that support our industry-leading IP communications solutions. Through a wide range of service offerings, our consultants provide the skill and expertise to help wireline, wireless and cable operators transform their communications networks, from network engineering and design through network integration and commissioning to network operations. In addition to end-to-end design, integration and deployment solutions, our Global Services team offers customized engagements, training workshops, interoperability/verifica tion testing and around-the-clock technical support worldwide.
CEO BACKGROUND
James K. Brewington , 68, has been a director since May 2009. Mr. Brewington is a veteran of the global communications market, with over 40 years of industry experience at AT&T Inc. and Lucent Technologies before his retirement in 2007. From mid-2004 until his retirement from Lucent Technologies, Mr. Brewington was President of the then newly-formed Developing Markets group, tasked with expanding the revenue base beyond domestic borders, reflecting his prior success in building out their global footprint. Prior to this, he was President of Lucent Technologies' Mobility Solutions division, where he was responsible for all wireless infrastructure for the mobility segment, including global wireless development and product architecture, project management, and business and product management. Mr. Brewington joined Lucent Technologies in 1996. He began his career at AT&T Inc. in 1968, and over the ensuing years held various executive management positions in the telecommunications industry, including overseeing Bell Telephone Wireless Laboratories. Mr. Brewington has served on the Board of Directors and the Nominating and Corporate Governance Committee of Kopin Corporation since 2006 and serves on the Board of Directors of four privately-held companies. He also advises several technology startup companies. He has served on the boards of the U.S.-Saudi Arabian Business Council and INROADS/North Jersey, Inc., a non-profit organization that trains minority youth for careers in business and industry. He is a member of the Cellular Telecommunications Industry Association, or CTIA, and the CTIA Wireless Foundation. Mr. Brewington has a Master of Business Administration degree from Seattle University, a Master of Science degree from Stanford University (Sloan Fellow) and a Bachelor of Arts degree from the College of Idaho.
Based primarily upon Mr. Brewington's extensive executive management and leadership experience and deep technical expertise in the telecommunications industry; strong risk analysis, corporate governance and administrative skills and experience; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Mr. Brewington, the Board has determined that Mr. Brewington is well-qualified to continue serving as a director of Sonus.
John P. Cunningham , 74, has been a director since September 2004. In 2002, Mr. Cunningham retired from Citrix Systems, Inc., a global leader in virtual workplace software and services. From 2001 to 2002, Mr. Cunningham was Senior Vice President, Finance and Operations of Citrix Systems, Inc. He joined Citrix Systems, Inc. in 1999 as Senior Vice President, Finance and Administration and served in that capacity until 2001. From 1998 to 1999, Mr. Cunningham served as Executive Vice President and Chief Financial Officer of Wang Global, a worldwide provider of network services. Prior to joining Wang Global, he served as Chief Financial Officer of Whirlpool Corporation from 1996 to 1998 and Chief Financial Officer of Maytag Corporation from 1994 to 1996. Mr. Cunningham has also held various management positions, including Controller, at International Business Machines. Since 2001, he has served as a member of the Board of Directors of Smart Disk Corporation as well as its Audit Committee. Mr. Cunningham has a Master of Business Administration degree from New York University and a Bachelor of Science degree from Fordham University.
Based primarily upon Mr. Cunningham's extensive executive management and leadership experience as chief financial officer of various companies; deep financial expertise, including extensive accounting, risk analysis, corporate governance and administrative skills and experience; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Mr. Cunningham, the Board has determined that Mr. Cunningham is well-qualified to continue serving as a director of Sonus.
Raymond P. Dolan , 54, has been our President, Chief Executive Officer and a director since October 2010, and is responsible for the strategic direction and management of our company. Mr. Dolan has nearly 25 years of experience in the telecommunications industry, having served in senior leadership positions at QUALCOMM Incorporated, Nextwave Wireless and BellAtlantic/NYNEX Mobile. From 2006 to 2008, Mr. Dolan served as Chief Executive Officer of QUALCOMM/Flarion Technologies, a developer of mobile broadband communications technologies, as well as Senior Vice President of QUALCOMM Incorporated. Prior to its acquisition by QUALCOMM in 2006, Mr. Dolan served as Chairman and Chief Executive Officer of Flarion Technologies. Before his role at Flarion Technologies, from 1996 to 2000, Mr. Dolan was Chief Operating Officer of NextWave Telecom. Prior to that, he spent eight years at BellAtlantic/NYNEX Mobile, serving in numerous roles of increasing responsibility, most recently as Executive Vice President of Marketing. He began his career in the telecommunications industry at PacTel Cellular as a Manager of Network Operations. Mr. Dolan also served as an officer in the United States Marine Corps, where he spent more than seven years as a tactical jet pilot. He has served on the Board of Directors and is Chairman of the Nominating and Corporate Governance Committee of American Tower Corporation since 2003, and the Board of Directors and Compensation Committee of NII Holdings, Inc. since 2008. Mr. Dolan will resign from the Board of Directors of NII Holdings, Inc. effectively immediately prior to the next annual meeting of stockholders of NII Holdings, Inc., which is scheduled to be held on May 9, 2012. Mr. Dolan graduated from the U.S. Naval Academy with a degree in Mechanical Engineering and also holds a Master of Business Administration degree from the Columbia University School of Business.
Based primarily upon Mr. Dolan's extensive executive management and leadership experience as our President and Chief Executive Officer and as the Chief Executive Officer of QUALCOMM/Flarion Technologies; strong financial, risk analysis, corporate governance and administrative skills and experience; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Mr. Dolan, the Board has determined that Mr. Dolan is well-qualified to continue serving as a director of Sonus.
Beatriz V. Infante , 58, has been a director since January 2010. Since 2009, Ms. Infante has served as Chief Executive Officer of BusinessExcelleration LLC, a business consultancy that she founded. From 2010 until its sale in 2011, Ms. Infante was the Chief Executive Officer and a director of ENXSUITE Corporation, a leading supplier of energy management solutions. From 2006 until its acquisition by Voxeo Corporation in 2008, she was the Chief Executive Officer and a director of VoiceObjects Inc., a market leader in voice applications servers. From 2004 to 2005, Ms. Infante served as Interim Chief Executive Officer and a director of Sychron Inc., which was sold to an investor group. From 1998 to 2003, Ms. Infante held various positions with Aspect Communications, a leading provider of call centers and unified communications solutions, including the roles of Chairman, President and Chief Executive Officer. Ms. Infante was also an Executive-in-Residence at U.S. Venture Partners, a leading Silicon Valley venture capital firm, from 2009 to 2010. She currently serves on the Advisory Committee to the Princeton University School of Engineering and Applied Science and is an advisor and investor in several early-stage technology companies. She has been a prior director at a number of privately-held companies as well as two non-profit organizations, Silicon Valley Leadership Group and Joint Venture Silicon Valley Network. Ms. Infante holds a Bachelor of Science and Engineering degree in Electrical Engineering and Computer Science from Princeton University and holds a Master of Science degree in Engineering and Computer Science from California Institute of Technology.
Based primarily upon Ms. Infante's extensive executive management and leadership experience as chairman and chief executive officer of various companies, including a telecommunications company; strong financial, risk analysis, corporate governance and administrative skills and experience; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Ms. Infante, the Board has determined that Ms. Infante is well-qualified to continue serving as a director of Sonus.
Howard E. Janzen , 58, has been a director since January 2006 and the Chairman of the Board since December 2008. Since 2002, Mr. Janzen has served as President and Chief Executive Officer of Janzen Ventures, Inc., a private investment business venture. Mr. Janzen was the Chief Executive Officer of One Communications Corp., a supplier of integrated advanced telecommunications solutions to businesses, from 2007 until its sale in 2011, and served on the Board of Directors of One Communications from 2007 until the 2011 sale. He served as President of Sprint Business Solutions, the business unit serving Sprint Corporation's business customer base with almost 10,000 employees and $12 billion in annual revenue from 2004 to 2005. From 2003 to 2004, he was President of Sprint Corporation's Global Markets Group, responsible for Sprint Corporation's long distance service for both consumer and business customers. From 1994 until 2002, Mr. Janzen served as President and Chief Executive Officer, and Chairman from 2001 to 2002, of Williams Communications Group, Inc., a high technology company, which filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in 2002 and emerged from bankruptcy six months later in 2002 as WilTel Communications Group, Inc. Mr. Janzen has served as a member of the Board of Directors, the Compensation Committee and the Corporate Governance Committee of Global Telecom & Technology, Inc. since 2006; a member of the Board of Directors, Compensation Committee and Strategy Committee of Macrosolve, Inc. since 2006; and a member of the Board of Directors and the Audit Committee of Vocera Communications, Inc. since 2007. Mr. Janzen also serves as a member of the Board of Directors of two privately-held companies, a member of the Executive Committee of the Global Information Infrastructure Commission, and a member of the Boards of Directors of the following non-profit organizations—Hillcrest Healthcare System, Morningside Foundation and Heart of America Boy Scout Council. Mr. Janzen received his Bachelor of Science and Master of Science degrees in Metallurgical Engineering from the Colorado School of Mines. He also has completed the Harvard Business School Program for Management Development.
Based primarily upon Mr. Janzen's extensive executive management and leadership experience as president and chief executive officer of various telecommunications companies; strong strategic planning, risk analysis, corporate governance and administrative skills and experience; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Mr. Janzen, the Board has determined that Mr. Janzen is well-qualified to continue serving as a director of Sonus.
John A. Schofield , 63, has been a director since January 2009. From 1999 to 2005, Mr. Schofield served as President, Chief Executive Officer and Chairman of the Board of Advanced Fibre Communications, Inc., a leading supplier of next-generation edge access equipment and multi-service broadband solutions for the telecommunications industry. From 1992 to 1999, Mr. Schofield served as Senior Vice President and then President of the Integrated Solutions Group of ADC Telecommunications, Inc., a world-wide supplier of network equipment, software solutions, and integration services for broadband and multiservice networks. Since 2000, he has served as the Chairman of the Board of Directors of Integrated Device Technology, Inc., as well as a member of its Compensation Committee and its Nominating and Governance Committee. Mr. Schofield has a Bachelor of Science degree in Electrical Engineering from the NSW Institute of Technology in Sydney, Australia and is a graduate of Raytheon's Management Development Program.
Based primarily upon Mr. Schofield's extensive executive management and leadership experience as president of various companies; deep expertise in corporate governance, including strong risk analysis and administrative skills and experience, as evidenced by his accreditation as a Board Leadership Fellow of the National Association of Corporate Directors; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Mr. Schofield, the Board has determined that Mr. Schofield is well-qualified to continue serving as a director of Sonus.
Scott E. Schubert , 58, has been a director since February 2009. From 2005 until 2008, Mr. Schubert served as Chief Financial Officer of TransUnion LLC. From 2003 to 2005, Mr. Schubert served as Chief Financial Officer and, prior to that, Executive Vice President of Corporate Development of NTL, Inc. (now Virgin Media, Inc.). From 1999 to 2003, Mr. Schubert held the position of Chief Financial Officer of Williams Communications Group, Inc., a high technology company, which filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in 2002 and emerged from bankruptcy six months later in 2002 as WilTel Communications Group, Inc. Mr. Schubert also served as head of BP Amoco's Global Financial Services, leading the initial integration of BP and Amoco's worldwide financial operations following the merger of the two companies. Since 2011, he has been a member of the Board of Directors, the Audit Committee, the Compensation Committee and the Compliance Committee of Isle of Capri Casinos, Inc. Mr. Schubert also served on the Board of Directors and as Chairman of the Audit Committee of a privately-held company. Mr. Schubert is a graduate of the Krannert School of Business at Purdue University, where he completed his Master of Business Administration degree in Finance and Economics in 1976. He also earned his Bachelor of Science degree at Purdue University in 1975, with dual majors in Engineering and Accounting.
Based primarily upon Mr. Schubert's extensive executive management and leadership experience as chief financial officer of various companies; deep financial expertise, including extensive accounting, risk analysis, corporate governance and administrative skills and experience; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Mr. Schubert, the Board has determined that Mr. Schubert is well-qualified to continue serving as a director of Sonus.
H. Brian Thompson , 73, has been a director since October 2003. Mr. Thompson has been Executive Chairman of Global Telecom and Technology, Inc., a global telecommunications network integrator, since 2006. He continues to head his own private equity investment and advisory firm, Universal Telecommunications, Inc. From 2002 to 2007, Mr. Thompson was Chairman of Comsat International, one of the largest independent telecommunications operators serving all of Latin America. He also served as Chairman and Chief Executive Officer of Global TeleSystems Group, Inc. from 1999 to 2000. Mr. Thompson was Chairman and Chief Executive Officer of LCI International, Inc. from 1991 until its merger with Qwest Communications International Inc. in 1998. Subsequent to such merger, Mr. Thompson became Vice Chairman of the Board of Directors for Qwest Communications International, Inc. until his resignation in 1998. Mr. Thompson previously served as Executive Vice President of MCI Communications Corporation from 1981 to 1990. Prior to MCI Communications Corporation, he was a management consultant with the Washington, D.C. offices of McKinsey & Company for nine years, where he specialized in the management of telecommunications. He has served as a member of the Board of Directors and the Compensation Committee of Axcelis Technologies, Inc. since 2002; a member of the Board of Directors, the Compensation Committee and the Audit Committee of Pendrell Corporation (formerly known as ICO Global Communications (Holdings) Ltd.) since 2007; and a member of the Board of Directors, the Compensation and Management Development Committee and the Nominating and Corporate Governance Committee of Penske Automotive Group, Inc. since 2002. Mr. Thompson is a member of the Board of Trustees for the Lab School of Washington & Baltimore Lab. He was a former chairman of the U.S. Competitive Telecommunications Association and also served on the University of Massachusetts Chancellor's Executive Committee, as a member of the Boards of Trustees of Capitol College in Laurel, Maryland, and the St. Stephens and St. Agnes School Foundation in Alexandria, Virginia. He received his Master of Business Administration degree from Harvard University's Graduate School of Business, and received an undergraduate degree in chemical engineering from the University of Massachusetts.
Based primarily upon Mr. Thompson's extensive executive management and leadership experience as chief executive officer of various telecommunications companies; strong financial, risk analysis, corporate governance and administrative skills and experience; and contributions as a current Board and Board committee member, as well as those demonstrated attributes discussed above and the leadership skills and other experience of Mr. Thompson, the Board has determined that Mr. Thompson is well-qualified to continue serving as a director of Sonus.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are a leading provider of voice and multimedia infrastructure solutions, including session border control, Voice over Internet Protocol ("VoIP") access and VoIP media gateway solutions for service providers and enterprises. Our infrastructure solutions allow efficient and reliable delivery of voice and multimedia sessions over IP networks while allowing our customers to manage the flows of such sessions in their networks using business policies.
We sell our products principally through a direct sales force in the United States, Europe, Asia-Pacific and the Middle East. We continue to expand our presence into new geographies and markets through our relationships with regional channel partners. We are in the process of establishing an indirect sales channel in order to address a larger share of the enterprise customer market.
Our target customers comprise both service providers and enterprises. Customers and prospective customers in the service provider space are traditional and emerging communications service providers, including long-distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers. Enterprise customers and target enterprise customers include financial institutions, retailers, state and local governments, and other multinational corporations. We collaborate with our customers to identify and develop new advanced services and applications that can help to reduce costs, improve productivity and generate new revenue.
On May 17, 2010, we announced the general availability of our NBS5200 Network Border Switch (the "NBS5200") as the first product on our next-generation ConnexIP platform. The NBS5200 complements our NBS9000 Network Border Switch as part of our Session Border Control ("SBC") solutions portfolio and provides SBC functionality, including media interworking, advanced routing and policy engine, and multi-access security gateway functionality. The ConnexIP platform is a platform for connecting, managing and securing IP session-based communications and represents a key element in our strategy to bring industry-leading performance and carrier grade reliability to the session management market, and represents a new foundation for the next generation of our IP-based products.
On August 24, 2011, Maurice Castonguay ("Mr. Castonguay") accepted an offer of employment as Senior Vice President, Chief Financial Officer and Treasurer of the Company. Mr. Castonguay joined the Company on August 26, 2011. On August 25, 2011, Wayne Pastore ("Mr. Pastore") resigned as Senior Vice President and Chief Financial Officer, effective August 25, 2011.
On May 2, 2011, Todd Abbott ("Mr. Abbott") accepted an offer of employment as Senior Vice President of Worldwide Sales and Marketing of the Company. Mr. Abbott joined the Company on May 3, 2011.
On February 11, 2011, Dr. Rajiv Laroia ("Dr. Laroia") accepted an offer of employment and joined the Company as Senior Vice President, Engineering and Chief Technology Officer of the Company.
We reported losses from operations of $12.5 million for fiscal 2011, $11.6 million for fiscal 2010 and $11.4 million for fiscal 2009. We reported net losses of $12.7 million in fiscal 2011, $10.7 million in fiscal 2010 and $4.9 million in fiscal 2009.
Our revenue was $259.7 million in fiscal 2011, $249.3 million in fiscal 2010 and $227.5 million in fiscal 2009. Our gross profit was $146.1 million in fiscal 2011, $153.2 million in fiscal 2010 and $144.1 million in fiscal 2009. Our gross profit as a percentage of revenue ("total gross margin") was 56.3% in fiscal 2011, 61.4% in fiscal 2010 and 63.4% in fiscal 2009.
Our operating expenses were $158.6 million in fiscal 2011, compared to $164.7 million in fiscal 2010 and $155.5 million in fiscal 2009. Our fiscal 2011 operating expenses included $0.8 million of incremental costs related to the departure of our former Senior Vice President and Chief Financial Officer in August 2011 and $0.7 million of expense for the early termination of our lease in Freehold, New Jersey. Our fiscal 2010 operating expenses included $7.9 million of incremental costs in the aggregate related to the departures of our former President and Chief Executive Officer and our former Executive Vice President and Chief Operating Officer, as well as $1.5 million of restructuring expense. Our fiscal 2009 operating expenses included $3.5 million of restructuring expense.
We recorded stock-based compensation expense of $7.9 million in fiscal 2011, $15.3 million in fiscal 2010 and $12.8 million in fiscal 2009.
Lower portfolio yield on our investments, coupled with slightly lower amounts invested in cash equivalents and marketable securities resulted in lower interest income, which was also a factor in our current year net loss. Interest income from our investments was $1.2 million in fiscal 2011, compared to $1.7 million in fiscal 2010 and $4.1 million in fiscal 2009.
Effective in fiscal 2012, we will report the first, second and third quarters of each fiscal year on a 4-4-5 basis. Our fiscal year-end will continue to be December 31.
Revenue Recognition. We recognize revenue from sales when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectability of the related receivable is probable. When we have future obligations, including a requirement to deliver additional elements that are essential to the functionality of the delivered elements or when customer acceptance is required, we defer revenue recognition and related costs until those obligations are satisfied. Likewise, when fees for products or services are not fixed and determinable, we defer the recording of receivables, deferred revenue and revenue until such time as the fees become due or are collected. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specific return or refund provisions.
Revenue from maintenance and support services is generally recognized ratably over the service period. Maintenance revenue is deferred until the associated product is accepted by the customer and all other revenue recognition criteria have been met. Maintenance and support services include telephone support, return and repair support and unspecified rights to product upgrades and enhancements. Revenue from other professional services is typically recognized as the services are delivered if all other revenue recognition criteria have been met.
Our products typically have both software and non-software components that function together to deliver the products' essential functionality. Many of our sales involve multiple-element arrangements that include both software and hardware-related products, maintenance and various professional services. Effective January 1, 2011, we prospectively adopted the provisions of Accounting Standards Update ("ASU") 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements ("ASU 2009-14") and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements ("ASU 2009-13") for new and materially modified arrangements originating on or after January 1, 2011. ASU 2009-14 amends industry-specific revenue accounting guidance for software and software-related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product's essential functionality. All stand-alone software components will continue to be accounted for under the software revenue recognition guidance in Accounting Standards Codification ("ASC") 985-605, Software—Revenue Recognition ("ASC 985-605").
For transactions entered into prior to January 1, 2011 and prospectively for software-only sales, we recognize revenue in accordance with ASC 985-605. Under this guidance, revenue for any undelivered elements that are considered not essential to the functionality of the product and for which vendor-specific objective evidence of fair value ("VSOE") has been established is deferred and recognized upon delivery utilizing the residual method. If we do not have VSOE for each undelivered element we defer all revenue on the entire arrangement until VSOE is established or until such elements are delivered, provided that all other revenue criteria are met.
For transactions entered into subsequent to the adoption of ASU 2009-13 that include multiple elements, arrangement consideration is allocated to each element based on the relative selling prices of all of the elements in the arrangement using the fair value hierarchy as required by ASU 2009-13.
Consistent with the methodology under the previous accounting guidance, we establish VSOE based upon the price charged when the same element is sold separately or established by management having the relevant pricing authority. We have VSOE for our maintenance and support services and certain professional services. When VSOE exists it is used to determine the selling price of a deliverable. We have not been able to establish VSOE on any of our products and for certain of our services because we have not sold such products or services on a stand-alone basis, not priced such products or services within a narrow range, or had limited sales history.
When VSOE is not established, we attempt to establish the selling price of each element based on third-party evidence ("TPE"). Generally, our solution typically differs from that of our peers as there are no similar or interchangeable competitor products or services. Our various product and service offerings contain a significant level of customization and differentiation and therefore, comparable pricing of competitors' products and services with similar functionality cannot be obtained. Accordingly, we are not able to determine TPE for our products or services.
When we are unable to establish selling price using VSOE or TPE, we use estimated selling price ("ESP") in our allocation of arrangement consideration for the relevant deliverables. The objective of ESP is to determine the price at which we would transact a sale if a product or service was sold on a stand-alone basis. We determine ESP for our products and certain services by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional-specific market factors, profit objectives and pricing practices for such deliverables. The determination of ESP is a formal process within the Company that includes review and approval by our management.
We sell the majority of our products directly to our end customers. For products sold to resellers and distributors with whom we have sufficient history regarding the potential for product returns or refunds or any form of concession, we recognize revenue on a sell-in basis. For all other resellers and distributors, we recognize revenue on a sell-through basis.
Inventory Valuation. We review inventory for both potential obsolescence and potential loss of value periodically. In this review, we make assumptions about the future demand for and market value of the inventory and based on these assumptions, estimate the amount of any excess, obsolete or slow-moving inventory.
We write down our inventories if they are considered to be obsolete or at levels in excess of forecasted demand. In these cases, inventory is written down to estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technical obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in the cost of revenue in the period the revision is made. To date, we have not been required to revise any of our assumptions or estimates used in determining our inventory valuations.
We write down our evaluation equipment at the time of shipment to our customers, as it is not probable that the inventory value will be realizable.
Loss Contingencies and Reserves. We are subject to ongoing business risks arising in the ordinary course of business that affect the estimation process of the carrying value of assets, the recording of liabilities and the possibility of various loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We regularly evaluate current information available to determine whether such amounts should be adjusted and record changes in estimates in the period they become known. We are subject to various legal claims, including securities litigation. We reserve for legal contingencies and legal fees when the amounts are probable and reasonably estimable. Our director and officer liability insurance policies provide only limited liability protection relating to the securities class action and derivative lawsuits against us and certain of our officers and directors.
Stock-Based Compensation. Our stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period.
We use the Black-Scholes valuation model for estimating the fair value on the date of grant of employee stock options. Determining the fair value of stock option awards at the grant date requires judgment regarding certain valuation assumptions, including the volatility of our stock price, expected term of the option, risk-free interest rate and expected dividends. Changes in such assumptions and estimates could result in different fair values and could therefore impact our earnings. Such changes would not impact our cash flows. The fair value of restricted stock and performance stock awards is based upon our stock price on the grant date.
The amount of stock-based compensation expense recorded in any period for unvested awards requires estimates of the amount of stock-based awards that are expected to be forfeited prior to vesting, as well as assumptions regarding the probability that performance awards will be earned. Assuming it was probable that the performance conditions for all outstanding performance-based stock awards would be satisfied, we would have recognized $2.5 million of additional stock-based compensation expense in fiscal 2011.
Goodwill and Intangible Assets. Goodwill is not amortized, but instead is tested for impairment at least annually, or if indicators of potential impairment exist. Intangible assets with estimated lives and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of intangible assets with estimated lives and other long-lived assets is measured by comparing the carrying amount of the asset to future net undiscounted pretax cash flows expected to be generated by the asset. If these comparisons indicate that an asset is not recoverable, we will recognize an impairment loss for the amount by which the carrying value of the asset exceeds the related estimated fair value. Estimated fair value is based on either discounted future pretax operating cash flows or appraised values, depending on the nature of the asset. Considerable judgment is required to estimate discounted future operating cash flows. Judgment is also required in determining whether an event has occurred that may impair the value of goodwill or identifiable intangible or other long-lived assets. Factors that could indicate an impairment may exist include significant underperformance relative to plan or long-term projections, strategic changes in business strategy, significant negative industry or economic trends, a significant change in circumstances relative to a large customer, a significant decline in our stock price for a sustained period and a decline in our market capitalization to below net book value. We must make assumptions about future cash flows, future operating plans, discount rates and other factors in the models and valuation reports. To the extent these future projections and estimates change, the estimated amounts of impairment could differ from current estimates. Our annual testing for impairment of goodwill is completed as of November 30 of each year. Our testing for fiscal 2011, fiscal 2010 and fiscal 2009 indicated that no impairment of goodwill existed. At November 30, 2011, the fair value of our reporting unit was substantially in excess of the carrying value of our reporting unit.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We are a leading provider of next-generation session initiation protocol ("SIP")-based solutions, including Voice over Internet Protocol ("VoIP"), video and Unified Communications through secure, reliable and scalable Internet Protocol ("IP") networks. Our infrastructure solutions allow efficient and reliable delivery of voice and multimedia sessions over IP networks while allowing our customers to manage the flows of such sessions in their networks using business policies.
Currently, we sell our products principally through a direct sales force in the United States, Europe, Asia-Pacific and the Middle East. We continue to expand our presence into new geographies and markets through our relationships with regional channel partners. In May 2012, we implemented our indirect sales channel program, which is focused primarily on enterprise customers, to capture a larger percentage of the Session Border Controller ("SBC") and Unified Communications markets.
Our target customers are comprised of both service providers and enterprises. Customers and prospective customers in the service provider space are traditional and emerging communications service providers, including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, international telephone companies and carriers that provide services to other carriers. Enterprise customers and target enterprise customers include financial institutions, retailers, state and local governments and other multinational corporations. We collaborate with our customers to identify and develop new, advanced services and applications that can help to reduce costs, improve productivity and generate new revenue.
We reported losses from operations of $11.8 million for the three months ended June 29, 2012 and $6.7 million for the three months ended June 30, 2011. We reported losses from operations of $18.0 million for the six months ended June 29, 2012 and $18.2 million for the six months ended June 30, 2011.
We reported net losses of $11.7 million for the three months ended June 29, 2012 and $5.9 million for the three months ended June 30, 2011. We reported net losses of $18.2 million for the six months ended June 29, 2012 and $18.3 million for the six months ended June 30, 2011.
Our revenue increased by $5.8 million in the three months ended June 29, 2012, compared to the three months ended June 30, 2011, and by $2.9 million in the six months ended June 29, 2012, compared to the six months ended June 30, 2011. Our gross profit increased by $2.9 million, to $32.8 million, in the three months ended June 29, 2012, compared to the three months ended June 30, 2011. Our gross profit increased by $18.0 million, to $74.5 million, in the six months ended June 29, 2012, compared to the six months ended June 30, 2011.
Our gross profit as a percentage of revenue ("total gross margin") was 56.9% in the three months ended June 29, 2012 and 57.8% in the three months ended June 30, 2011. Our total gross margin was 61.1% in the six months ended June 29, 2012 and 47.5% in the six months ended June 30, 2011.
Operating expenses increased $7.9 million, to $44.6 million, for the three months ended June 29, 2012, compared to $36.7 million for the three months ended June 30, 2011. Operating expenses increased $17.7 million, to $92.5 million, for the six months ended June 29, 2012, compared to $74.8 million for the six months ended June 30, 2011.
See "Results of Operations" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of these changes in our revenue and expenses.
On June 18, 2012, we and Network Equipment Technologies, Inc. ("NET") entered into a definitive agreement for Sonus to acquire NET in a cash merger. The purchase price of $1.35 per share values the transaction at approximately $42 million, excluding acquisition-related costs, and is expected to close in the third quarter of 2012, subject to NET stockholder approval, the satisfaction of customary closing conditions and any applicable regulatory reviews. The acquisition has been approved by the Boards of Directors of both companies.
On August 7, 2012, we adopted a restructuring initiative to streamline operations and reduce our operating costs. The restructuring plan will result in a workforce reduction of approximately 90 people worldwide. We expect to record a restructuring charge of approximately $2.3 million for cash expenditures for severance and related costs in the third quarter of fiscal 2012. This restructuring charge does not include any potential restructuring and related costs associated with the proposed acquisition of NET.
The increase in service revenue in the three months ended June 29, 2012 compared to the three months ended June 30, 2011 is attributable to $2.8 million of higher professional services revenue, partially offset by $0.1 million of lower maintenance revenue. The decrease in service revenue in the six months ended June 29, 2012 compared to the six months ended June 30, 2011 is attributable to $0.4 million of lower maintenance revenue and $5.3 million of lower professional services revenue. In the six months ended June 30, 2011, we recognized $11.5 million of service revenue from the completion of the Bahamas Telecom project described above, comprised of $1.2 million of maintenance revenue and $10.3 million of professional services revenue. The completion of this large, multi-year project accounted for the majority of the service revenue fluctuation between the six months ended June 29, 2012 and June 30, 2011. The timing of the completion of projects for revenue recognition, customer payments and maintenance contracts may cause our services revenue to fluctuate from one quarter to the next.
AT&T Inc. ("AT&T") contributed approximately 27% of our revenue in the three months ended June 29, 2012 and approximately 31% of our revenue in the six months ended June 29, 2012. Qwest Communications International, Inc. (now part of CenturyLink) contributed approximately 13% and AT&T contributed approximately 12% of our revenue in the three months ended June 30, 2011. Bahamas Telecom contributed approximately 30% of our revenue in the six months ended June 30, 2011. There were no other customers that contributed 10% or more of our revenue in the three or six months ended June 29, 2012 or June 30, 2011.
International revenue was approximately 27% of our revenue in the three months ended June 29, 2012 and approximately 22% of our revenue in the three months ended June 30, 2011. International revenue was approximately 26% of our revenue in the six months ended June 29, 2012 and approximately 45% of our revenue in the six months ended June 30, 2011. Due to the timing of project completions, we expect that the domestic and international components as a percentage of our revenue will fluctuate from quarter to quarter and year to year.
Our deferred product revenue was $9.4 million at June 29, 2012 and $8.9 million at December 31, 2011. Our deferred service revenue was $37.8 million at June 29, 2012 and $41.3 million at December 31, 2011. Our deferred revenue balance may fluctuate as a result of the timing of revenue recognition, customer payments, maintenance contract renewals, contractual billing rights and maintenance revenue deferrals included in multiple-element arrangements.
Cash used in operating activities in the six months ended June 29, 2012 was primarily the result of higher other operating assets and inventory and lower deferred revenue, accounts payable and accrued expenses and other long-term liabilities. These amounts were partially offset by lower accounts receivable. The increase in other operating assets is primarily related to pre-payments of royalties, licenses and maintenance. The decrease in accrued expenses and other long-term liabilities primarily reflects income tax payments. The increase in inventory levels is primarily due to purchases of materials to fulfill our expected shipments in the near-term. The decrease in accounts receivable primarily reflects our continued focus on cash collections. Our net loss, adjusted for non-cash items such as depreciation, amortization and stock-based compensation, used $8.0 million of cash.
Cash used in operating activities in the six months ended June 30, 2011 was primarily the result of lower deferred revenue, accrued expenses and other long-term liabilities, and accounts payable. These amounts were offset by lower accounts receivable, inventory and other operating assets. The reduction in deferred revenue was primarily attributable to the completion of the Bahamas Telecom project for which revenue had been previously deferred. The reduction in accrued expenses and other long-term liabilities primarily related to employee compensation and related costs, including payments made in connection with our Company-wide employee incentive bonus program and payments in 2011 related to the departures in 2010 of our former President and Chief Executive Officer and our former Executive Vice President and Chief Operating Officer. The decrease in accounts receivable primarily reflects payments in the quarter combined with lower revenue in the first quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010. The lower inventory levels were primarily related to the recognition of deferred cost of goods sold in connection with the completion of the Bahamas Telecom project, partially offset by increased inventory levels in anticipation of our transition to a new contract manufacturer.
Our investing activities provided $14.7 million of cash in the six months ended June 29, 2012, comprised of $19.1 million of net maturities of marketable securities, partially offset by $4.4 million of investments in property and equipment. Our investing activities provided $21.3 million of cash in the six months ended June 30, 2011, comprised of $28.6 million of net maturities of marketable securities, partially offset by $7.3 million of investments in property and equipment.
Our financing activities provided $0.9 million of cash in the six months ended June 20, 2012, comprised of $1.0 million of proceeds from the sale of our common stock in connection with our Amended and Restated 2000 Employee Stock Purchase Plan ("ESPP"), and $68,000 of proceeds from the exercise of stock options. These amounts were partially offset by $0.1 million of cash used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and $51,000 for payments on our capital leases for office equipment. Our financing activities provided $0.6 million of cash in the six months ended June 30, 2011, comprised of $0.8 million of proceeds from the sale of our common stock in connection with our ESPP and $0.8 million of proceeds from the exercise of stock options. These amounts were partially offset by $0.9 million of cash used to pay withholding obligations related to the net share settlement of restricted stock awards upon vesting and $48,000 for payments on our capital leases for office equipment.
Based on our current expectations, we believe our cash, cash equivalents, marketable securities and long-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures, including our proposed cash acquisition of NET and restructuring initiatives, for at least the next 12 months. However, it is difficult to predict future liquidity requirements with certainty. The rate at which we will use cash will be dependent on the cash needs of future operations, including changes in working capital, which will, in turn, be directly affected by, among other things, the levels of demand for our products, the timing and rate of expansion of our business, the resources we devote to developing our products and any litigation settlements. We anticipate devoting substantial capital resources to continue our research and development efforts, to maintain our sales, support and marketing operations and for other general corporate activities, as well as to vigorously defend against existing and potential litigation. See Note 13 to our condensed consolidated financial statements for a description of our legal contingencies.
Recent Accounting Pronouncements
On June 16, 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011-05"), which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires companies to report components of comprehensive income in either: (1) a continuous statement of comprehensive income; or (2) two separate consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income. On December 23, 2011, the FASB issued ASU No. 2011-12 , Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12"), which defers certain provisions of ASU 2011-05, including the provision that requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The unaffected provisions of ASU 2011-05 became effective for us in our reporting of the first quarter of fiscal 2012. The adoption of ASU 2011-05 did not have any impact on our results of operations, financial position or cash flows.
On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011-04"), which provides guidance on how (not when) to measure fair value and on what disclosures to provide about fair value measurements. ASU 2011-04 expands previously existing disclosure requirements for fair value measurements, including disclosures regarding transfers between Level 1 and Level 2 in the fair value hierarchy currently disclosed. ASU 2011-04 became effective for us on January 1, 2012. The adoption of ASU 2011-04 did not have any impact on our condensed consolidated financial statements.
CONF CALL
Patti Leahy - VP, IR
Thank you, Jamie. Good afternoon, everyone. Welcome to Sonus Networks Second Quarter 2012 Operating Results Conference Call. Thank you for joining us today. Before we get started, I would like remind you that a recording of this call will be available on our website at sonus.net.
Speakers on the call today are Ray Dolan, Chief Executive Officer; and Moe Castonguay, Chief Financial Officer. Todd Abbott, Senior Vice President of Worldwide Sales, Marketing and Business Development is also here to address your questions at the end of our prepared remarks. If you have questions following today’s call, please direct them to me at pleahy@sonusnet.com.
Please note for purposes of Safe Harbor provisions that during this call we will make projections and forward-looking statements regarding items such as future market opportunities and the company’s financial performance.
Actual events or financial results may differ materially from those projections or forward-looking statements and are subject to various risks and uncertainties including, without limitation, any statements relating to our acquisition of NET or their financial results and outlook, difficulties we may experience in expanding our customer base and in leveraging new market opportunities.
A discussion of factors that may affect future results is contained in our filings with the SEC, which are available on our website. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so unless required by law.
Finally, during our call, we will be referring to certain GAAP and non-GAAP financial measures. A reconciliation of the non-GAAP to comparable GAAP financial measures is included in our press release issued today, as well as in the Investor Relations section of our website at sonus.net.
It’s now my pleasure to introduce the Chief Executive Officer of Sonus, Ray Dolan. Please go ahead, Ray.
Ray Dolan - President & CEO
Thank you, Patti, and good afternoon, everyone. Sonus delivered a solid second quarter. The team again produced strong SBC results, which were 27% above the high end of our guidance and 77% above our second quarter last year. We are gaining increasing share and see no evidence of this market slowing down. So today, we are reiterating our SBC guidance for the year, which reflects growth almost three times the industry growth according to Infonetics.
We delivered total second quarter revenue in line with our expectations, despite a challenging macro environment. We also met our EPS outlook. So, overall, I’m pleased with our results for this quarter.
My prepared remarks this afternoon will focus on three areas: first, I’ll discuss our outlook in the context of the current environment; second, I’ll cover some of the key milestones we reached this quarter; and third, I’ll provide some proof points around the success we’re having in the SBC market and specifically with our 5200.
Turning to our outlook. As I said, despite a challenging environment, we have executed well and continue to grow our SBC business, as evidenced by our results and guidance. However, in the current environment, we believe it is prudent to take the more conservative view for the rest of our business.
Given this, we are now assuming approximately a 20% reduction in our Trunking product revenue this year versus the original assumption for a 10% reduction. To make this clear, this now translates to a potential decline in Trunking product revenue this year of approximately $20 million to $25 million, when compared to last year. The good news is that our expected SBC growth is sufficient to offset this decline.
In light of the current environment, we are taking proactive cost reduction measures, which we believe will ensure that Sonus has an appropriate cost structure that not only allows us to continue to grow our SBC business, but should also accelerate our path to long-term profitability and growth.
We have already begun to implement some of these actions and expect on an annualized basis to reduce our spend by approximately $12 million or 7%, when compared to the low end of our previous OpEx guidance of $168 million to $171 million. These savings will come from across-the-board initiatives to improve our efficiencies, the bulk of which will be realized as OpEx savings.
To put this in context, had we implemented these initiatives at the start of the year, we would reach breakeven profitability at around $260 million in revenue.
Now turning to our key operational milestones this quarter. In addition to exceeding our revenue expectations for SBC for the first half, we achieved a number of important accomplishments in the second quarter, which will fuel our growth. First, we launched our newest SBC product, the 5100, which is our flagship enterprise SBC.
Two weeks later, we followed up with the launch of our channel program, Sonus Partner Assure. These are significant milestones in our strategy to strengthen our competitive positioning for the enterprise SBC market, a market which grew 60% in 2011 and continues to grow rapidly as SIP Trunking increases in adoption, unlocking the true potential of Hosted UC in the cloud. So while it is early days for these new initiatives, we expect the 5100 and our channel program to be important drivers of our growth in the enterprise market.
Another important milestone in our move to compete more aggressively in the enterprise market was our announcement in June of our intent to acquire Network Equipment Technologies or NET, which is a leader in enterprise class networking solutions. NET has scheduled a shareholder meeting for August 23, at which time we expect to close the transaction.
The strategic rationale for this transaction is clear. NET expands our enterprise market opportunity for SBCs, with solutions optimized for SIP Trunking and cloud-based UC deployments, targeting the small office and branch office environment. NET also brings an established set of channels, which will be able to sell the complete Sonus SBC product portfolio, and they bring deep relationships with the U.S. Federal Government.
In their most recent quarterly results, which they provided on August 1, NET reported 77% of their product revenue from enterprise customers, which is up from 66% last quarter and up from 34% last year. NET also continues to see strong traction with their Lync-certified UC program, which they call the UX series.
While NET has struggled to gain scale on its own, it has clearly made the successful pivot from a legacy business to an enterprise-centric growth business. In short, this acquisition significantly accelerates the enterprise strategy we laid out last year. Combined with strong SBC results that Sonus is delivering, we believe we can help accelerate the positive trends underway NET and drive greater scale for both businesses.
Now I’d like to share a few more data points on the SBC progress that Sonus is making. To start, 42% of our total product revenue this quarter was driven by SBC. This is the highest percentage on record in our transition to becoming an SBC company. We won six new customers this quarter, all of which purchased SBC products and services from us. With the addition of our 5100 and NET’s UX capabilities, we more than double our exposure to the enterprise SBC markets.
Both our 5200 and 5100 are now certified for Microsoft Lync and can provide the secure connection between a Lync UC environment and a SIP Trunking service. Our SBC portfolio is becoming increasingly competitive and robust.
Today, I’d like to provide some additional color around our SBC 5200 revenue. You may remember last quarter that we disclosed that approximately 75% of our SBC 9000 revenue over the prior 13 quarters was from competitive wins in the marketplace, meaning, new chassis sales.
Over the past four quarters, our SBC product revenue has averaged 26% from our SBC 5200 and 74% from our 9000. In this last quarter, two-thirds of our SBC customer wins was for the 5200.
While I do not intend to continue providing our revenue breakdown from various products, I do believe this clearly demonstrates the momentum we have with our SBC product portfolio and with the 5200 in particular. The bottom line is that the SBC market is growing at a healthy pace. Sonus is taking share and we will continue to use the full arsenal of products within our competitive portfolio to win in the marketplace.
I now ask Moe to take us through our second quarter results and outlook in more detail. Moe.
Moe Castonguay - CFO
Thank you, Ray, and good afternoon, everyone. Total revenue for the quarter was $57.6 million, compared to $64.3 million in the first quarter of 2012 and $51.8 million in the second quarter of 2011. Our SBC revenue was stronger than expected in our second quarter. Total second quarter SBC revenue was $19.1 million, compared to $17 million in the first quarter and $10.8 million in the second quarter of 2011.
One customer contributed greater than 10% of our total revenue in the quarter and that was AT&T. Our top five revenue customers represented 53.6% of revenue in the second quarter, down from 65.6% in the first quarter and up from 46.4% in the second quarter of 2011. We reported revenue from 123 customers in the second quarter. This compares to 117 customers in the first quarter and 98 customers in the second quarter of 2011. Looking at total revenue geographically, domestic revenue accounted for 73% versus 75% in the first quarter and 78% in Q2 of 2011.
Before I go into further details on our financial results and outlook, I’d like to point out that the numbers I’m about to discuss are on a non-GAAP basis and exclude stock-based compensation expense, amortization of intangible assets, acquisition-related costs and restructuring.
Total gross margin for the second quarter was 57.4%, compared to 65.3% in the first quarter and 58.8% in Q2 of 2011. Second quarter gross margins were slightly lower than forecast, due to a less favorable product mix than previously forecasted. Product gross margins for the second quarter were 66.3%, compared to 77.9% in Q1 and 67.7% in Q2 of 2011.
Service gross margins for the second quarter were 45.7%, compared to 42.4% in Q1 and 47% in Q2 of 2011. Total operating expenses were $41.7 million, compared to $46 million in the first quarter and $34.9 million in Q2 of 2011.
Head count decreased slightly to 1,114 employees. Our net loss for the quarter was $8.6 million, compared to a net loss of $4.2 million in the first quarter and a net loss of $3.6 million in Q2 of 2011. We ended the quarter with total cash and investments of $363.8 million. Our DSO for the quarter was 65 days, compared to 46 days in the first quarter and 62 days in Q2 of 2011.
Now I’d like to provide our outlook, excluding NET’s financial impact. After I’ve completed providing the outlook for Sonus, I will provide a brief outlook for NET, under the assumption that proposed acquisition will close in late August. We are providing our outlook for Sonus’ third quarter ending Friday, September 28 and for our fourth quarter and fiscal year ending December 31, 2012.
Our total revenue outlook for the third quarter is between $51 million and $53 million. Our total revenue outlook for the fourth quarter is between $84 million and $86 million. Fiscal year 2012 revenue outlook has been reduced to the range of $257 million to $261 million. The revised outlook reflects anticipated reduced spending for media gateway product by service providers in the second half of this year.
Our total SBC revenue outlook for the third quarter is $17 million to $19 million. For the fourth quarter, it is $22 million to $25 million, and for the full year, we continue to expect total SBC revenue of $75 million to $80 million. Our SBC product revenue expectations for these same periods are included in today’s press release and, again, our outlook for the full year is consistent with our prior expectations.
For the third and fourth quarters, we expect total non-GAAP gross margins to range between 58% and 59%. For the full year, we expect non-GAAP gross margins of approximately 60%. This month the company initiated a plan to streamline operations and reduce operating costs, including a corporate-wide restructuring plan. In our third quarter, we expect to take a restructuring charge of approximately $2.3 million for severance and related expenses. These initiatives are expected to reduce our Q3 and Q4 non-GAAP operating expenses by $2 million and $3 million, respectively, compared to Q2 non-GAAP operating expenses of $41.7 million.
For the third quarter, we expect non-GAAP operating expenses to drop to between $39 million and $40 million. For the fourth quarter, we expect non-GAAP operating expenses to further drop to between $38 million and $39 million.
Total non-GAAP operating expenses for the full year 2012 are expected to be $165 million to $166 million. This compares to a previous expense outlook up of $168 million to $171 million, provided on our last call. For the third quarter, we expect non-GAAP loss per share of $0.03 and for the fourth quarter we expect non-GAAP net income of $0.04 per diluted share.
For the full year, we expect a non-GAAP loss per share of $0.04. Basic and diluted share count for the third quarter should approximate 280 million and for the fourth quarter diluted shares should approximate 282 million. For the full year basic and diluted shares should approximate 280 million.
We look forward to closing on our pending acquisition of NET in late August. If the acquisition closes, we expect NET revenues post close to result in incremental revenues of approximately $5 million in our third quarter and an additional $10 million to $12 million in our fourth quarter. The projected incremental NET revenues of $15 million to $17 million for fiscal 2012 are slightly lower than previous range, reflecting the later-than-previously-ant icipated closing date.
On a combined basis, assuming the deal closes, we expect combined revenue to be $272 million to $278 million. We expect the acquisition to have a $0.01 dilutive to breakeven impact on non-GAAP EPS for the balance of the year. We will provide an update on our acquisition-related costs and restructuring charges related to the proposed NET acquisition at our Investor Day.
Sonus expects to incur acquisition-related costs of approximately $1.5 million in the third quarter, which we will exclude from our non-GAAP operating results. We expect our Q3 closing cash and investment balance, assuming acquisition closes, to approximate $300 million. We expect Q4 closing cash and investments to be in the range of $290 million to $300 million.
I’ll now turn the call back over to Ray.
Ray Dolan - President & CEO
Thanks, Moe. In closing, I believe the proof points of our transformation are becoming clearer each quarter. As we described during our year-end call, which we held in February, you can hold us accountable to four things this year.
First, SBC growth; we are now halfway through the year and I believe we can check this box, given the performance we have delivered so far and our outlook for the remainder of the year. Second, channel momentum. As committed, we launched our comprehensive channel program this past quarter, along with our SBC 5100, as a key part of our strategy to drive growth in the enterprise. It’s early days since the launch of these initiatives, but we believe our new channel and SBC product. Combined with the enterprise focus that NET brings, position us very well to deliver on the commitment to drive the third key metric that we laid out for this year, which is customer growth.
We reported revenue from 123 customers this quarter, which is up 26% from the second quarter of last year and 97% of our new customers over the past four quarters have purchased SBC products and services from us. That’s excellent progress, particularly for our SBC growth engine, but we expect to see the customer needle really move as our enterprise strategy takes root.
Finally, we laid out the metric of consistent execution and delivering on our commitments. Part of this commitment is to provide greater transparency and predictability into our business. Clearly, predictability can be more challenging in this difficult environment.
We are taking proactive cost reduction measures, while also protecting the growth areas of our business, with the ultimate goal to drive long-term growth and profitability. To that point, while it is too early to provide guidance for next year, you should know that our team is laser-focused on reaching three key goals for next year: first, that more than 50% of our product revenue will be derived from SBC; second, that we will be profitable for the full year; and third, that we will generate positive operating cash flow for 2013.
Before we open up for questions, I have two other topics to share with you: one, about our potential uses of cash; and the other about my personal compensation. First, on uses of cash, given our strong cash position, we periodically receive questions about the possible uses of our cash, including whether we’ll consider a stock buyback.
Of course, our Board of Directors routinely considers this issue in the context of what would generate the highest total shareholder return. Our direction at this time is to concentrate on profitably expanding our business, which we believe is what will drive shareholder value. This view about the buyback could change as our business evolves, but we believe maintaining the flexibility of a strong balance sheet and focusing on profitable growth is the right approach at this time.
Now turning to my personal commitment. At my request the Compensation Committee of the Board has agreed to permit me to exchange my entire cash compensation, including salary and bonus, for restricted stock going forward. I requested this in order to demonstrate my unwavering conviction in Sonus and to make it perfectly clear that my interests are aligned with our shareholders. I firmly believe we are taking the right actions today that will allow us to drive to consistent profitability faster, while also growing our business. In short, Sonus is on the right path and I am thrilled to be part of the journey.
Thank you for your continued support. I’d also like to thank our more than 1,000 employees, who are working very hard here and in Westford, and around the globe, and that share my commitment to helping Sonus succeed.
Operator, would you please transition to the Q&A portion of the call?
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