Ribbon Communications Inc. (RBBN) Q4 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning and thank you for standing by. Welcome to Sonus Networks fourth quarter and full year, 2008 final results conference call. (Operator Instructions) As a reminder, this call is being recorded. Today is February 26, 2009. I would now like to turn the conference over to David Roy at Sonus. Please go ahead Mr. Roy.

Thank you, Mara, and good morning everyone. My name is Dave Roy, and I handle investor relations for Sonus. With me on the call this morning are Richard Nottenburg, our President and Chief Executive Officer and Rick Gaynor, our Chief Financial Officer, who will both address you shortly. Also with me today is Guru Pai, who joined Sonus in December as Senior Vice President of Sales and Services, Business Development, and Strategy. Earlier this morning we issued a press release announcing our results for the fourth quarter and full year, 2008. The text of this release, along with the accompanying income statement, balance sheet, and operating statistics, as well as a reconciliation of the most directly comparable gap financial measures, to any non-gap financial measures used during this call, and for certain prior periods, are available on the investor relations section of our website. Before Richard 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 remarks about the company’s expectations, plans, and prospects constitute forward looking statements for purposes of the safe harbor provisions under the private securities litigation reform act of 1995. These projections or statements are just predictions, and involve risks and uncertainties, so 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 factors section of our most recent annual report (inaudible) which is on file with the FCC as of this morning. Any forward looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward looking statements at some point, we specifically disclaim any obligation to do so, unless required by law. During this call we will be referring to non-gap financial measures. These non-gap measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-gap financial measures to the most directly comparable gap measures is available in the investor relations section of our website. I would now like to turn the call over to our CEO, Richard Nottenburg. Rich?

Thank you David and good morning everyone. Thank you for joining us on the call today. 2008 was a challenging year. By now we all see the magnitude and the scope of the global economic downturn. The consensus is that this downturn is going to be deeper and longer in duration than many of us envisioned last year. Our customers are not immune and some have adjusted spending to manage the impact on their business, due to their higher cost to capital, and their reduced spending by their consumer and business customers. The continued downturn will cause our revenue to decline substantially in 2009. In our Q3 call, I outlined the three guiding principles for managing our business through the current economic environment. First: right-sizing and realign the business to the market opportunity. Here we’ve already undertaken some restructuring actions and accelerated our move to lower cost geographies. These actions will produce net cash savings of approximately $9 million dollars per year. Second: aggressively managing our balance sheet. Balance sheet strength is an important factor to customers on our industry as they plan multi-year network projects. With $388 million in cash and liquid investments with no debt, we have the resources to support our strategy and improve our market position. Third: focusing a larger percentage of our R&D investment on innovation to build category leadership in the IP session management space. To this end we are investing nearly $20 million in 2009 in our Network Border Switch platform and proprietary network tools and services to drive network transformation for our customers. While we have made progress in each of these areas, we have plans to do more work during 2009 to ensure we continue expand our portfolio, products and services, and position the company for profitable growth by building position operating leverage into the business. In addition to these principles, we recognize the need to strengthen the leadership team at Sonus, and we have achieved this through a combination of internal promotions of talented individuals and external hires to my executive team, to bolster our commitment to delivering customer needs. Guru Pai Joined Sonus as a senior vice president in December to lead our sales and services organizations, and focus on business development activities. You’ll have the opportunity to talk to Guru during our Q & A session. Through our restructuring actions, we have substantially flattened our organizational structure and increased the span of management. This has improved the overall visibility into our business operations, and our ability to act quickly. Better accountability and speed of decision making will enable us to take advantage of the opportunities ahead. Before Rick goes into the financial details, I want to share some key take aways from the year overall. Total revenue for 2008 was $313 million, down about 2% from 2007. Non-gap operating income was $175,000 for the year compared with operating income of $26.8 million in 2007. We maintained a strong cash position of $388 million at year end with no debt. Finally, having spent the past eight months assessing our business and meeting with customers and employees, I remain confident in the future of Sonus. We are taking a practical view of the business as evidenced by the actions we have taken so far. We still have much more work to do, but we have a plan to see us through this difficult period, and emerge as a stronger competitor. I will now hand the call over to Rick to review the financials in more detail. Then I will come back to describe our strategy and direction for 2009. Over to you, Rick.

Thank you, Rich, and good morning everyone. Before I begin, you may have noticed a new voice on the call. Dave Roy joined Sonus at the beginning of January as our Vice President of Investor Relations. With more than 22 years of experience managing investor relations in a number of high tech companies, Dave will lead our (inaudible) program and work towards continually improving our communications with all of you. And welcome, Dave. Please note that throughout my discussion I will reference both gap and non-gap financial information. There is a reconciliation of gap to non-gap information in the investor relations section of our website. Please also note that our financial results can vary significantly from quarter to quarter, such as in Q4, so we encourage you to evaluate us in a longer term annual basis. As we discussed in our Q3 call, we had committed to a plan to sell our Zynetics subsidiary in the 3rd quarter, 2008, and we finalized the sale this past November. In accordance with (inaudible) the results of operations of Zynetics have been reclassified and reported as discontinued operations, and our statements of operations for 2007 and 2008. So they will be excluded from my discussion of the results of continuing operations. There are a couple of exceptional items in Q4 which I will discuss to provide better insight into our operating performance for the quarter. First: during Q4 we concluded a large multi-year project with T-systems in Germany, and recognized direct revenue from the project of approximately $21.3 million, which carried an unusually low gross margin profile. As we had indicated on our previous conference call, we expected to record this unusual transaction within the next year. And the fourth quarter was the period in which all requirements were met and the revenue was recognized. The direct cost of goods recognized on completion of this project was approximately $20.8 million, carrying a direct project gross margin of 2.1%. This project has been underway for some time, and accumulating deferred revenue since 2006. Given its accumulated size in low margin profile, it has a material affect on both our overall revenues and gross margin for the quarter. We have no other projects with T-Systems that have such a low margin profile, and we do not expect any other customer projects to create volatility of this nature in 2009. The second notable item is the timing of our AT&T revenue. In 2008, we consolidated all of our maintenance contracts with AT&T to a single contract term that goes to year-end, 2010. Due to changes in the terms of this particular contract in Q4, we no longer have vendor specific objective evidence of fair value or VISO on maintenance with this particular customer. As a result, product revenue that would have been previously recognized in each quarter going forward will instead be prorated and spread over the remaining contract term to year-end 2010. The net effect of this is that we expect product revenue for AT&T to ramp up from now through the fourth quarter of 2010, as the prorated amount of each quarter’s revenue is layered on. The initial effect of this contract change was felt in Q4, where $5.3 million of product revenue that previously would have been recognized in the quarter will now be prorated over the next eight quarters. This change in the contract has affected the way we recognize the related revenue, but has no impact on our relationship with AT&T, which continues to be healthy. Revenue for the fourth quarter was $89.5 million, up 44% from $62.2 million in Q3, 2008, but down 7.8% from $97.1 million in Q4, 2007. The concern we voiced over the past couple of quarters regarding the slow down in carrier capital spending in new orders is being born out in customer demand. Although our book to bill in the quarter was greater than one, customers have clearly slowed their spending. As is typical for our business, our Q4 bookings rate benefits from a high level of annual maintenance renewals. There are two customers who each contributed greater than 10% of total revenue in the fourth quarter, T-Systems and Quest. AT&T would have been a greater than 10% customer in the quarter if we had recognized the $5.3 million of product revenue that was deferred out of the quarter and will be recognized (inaudible) over the next eight quarters. Such AT&T revenue will appear in our deferred revenue bounds until such times as it is recognized over the term of the contract. Looking at revenue geographically, domestic revenue accounted for 40.2% of revenue versus 81.5% in Q3 and 57.3% in Q4, 2007. The $21.3 million T-Systems revenue had a meaningful impact on the geographic mix in the quarter. Excluding that from our international total revenue in Q4 would have resulted in domestic revenue accounting for 52.8% of total revenue. On an annual basis, domestic revenue was 70% of the total in 2008, compared to 73.7% of total revenue in 2007. Our top five customers represented approximately 58% of revenue in Q4, flat to Q3, and up from 54% in Q4 of last year. We reported revenue from 82 customers in the fourth quarter, compared to 86 in the third quarter, and 79 in Q4, 2007. Before I go into further details, I would like to point out that these are non-gap numbers that excludes dock based compensation related expenses, amortization and impairment of intangible assets, restructuring charges, and legal settlements in both 2007 and 2008, as well as the Zynetics earn out in 2008 and stock option review costs in 2007. Non-gap gross margins for the fourth quarter were 45.5% of revenue compared to 64.4% in Q3 and 60.6% in Q4, 2007. Excluding the $21.3 million of low margin revenue discussed earlier, and its associated direct costs of goods sold of $20.8 million, adjusted gross margin in fourth quarter would have been 59%, which is within our long-term target range. Product gross margin for the fourth quarter was 49.3%, compared to 69.5% in Q3, and 57% in the same period last year. Adjusting the low margin transaction out of the product side, product gross margins would have been 66%. Service gross margins were 39.7%, compared to 56.9% in Q3 and 68.8% in Q4 of last year. Again, excluding the low margin transaction service gross margins would have been 50.9%. While there may be some near term pressure on service gross margins due to industry pressure or maintenance pricing, we believe that overall long-term company gross margins will remain in our target range of 58 to 62%. Now, rather than going through all of the expense line items for the quarter and full year, I encourage you to go to the detailed information in the investor relations section of our website, where we reconcile our gap to non-gap information. Total operating expense for the fourth quarter was $47.6 million, up from $42.3 million in the fourth quarter last year, but down $3.3 million from the third quarter level of $50.9 million, reflecting some of the right sizing and realignment taking place in the business. Not fully reflected in that fourth quarter spending level are the savings benefits from the December and January restructuring actions we’ve announced. Once fully implemented, these two actions alone are expected to save $9.5 to $11 million on an annualized basis. Within our $47.6 million of operating expense in the fourth quarter, I do want to explain a foreign exchange expense contained within G&A. During the fourth quarter of 2008 we recognized $4.8 million non cash FX expense related to an inter-company account with our Atrius subsidiary in Canada, which we acquired in 2008. Due to the accounting rules we recorded an expense related to translating a Canadian dollar inter-company loan balance, even though there was and will be no cash impact on the company. In fourth quarter of 2008, we implemented measures to eliminate any significant future FX impact related to this inter-company account by reducing the size of the note and changing the terms of the outstanding balance. Now, taking a look at the full year, total revenue was $313.1 million, down 2% from $319.4 million in 2007. Excluding the $21.3 million from the large multi-year project recognized in the fourth quarter, full year revenue would have been $291.9 million, down about 8.6% from last year. All of this decline occurring since the slow down in the second half of the year. The multi-year project had been accumulating in deferred revenue since 2006. So we feel the $291.9 million is more representative of our actual 2008 revenue run rate. For the full year 2008, AT&T accounted for 29% of revenue, down from 33% of total revenue in 2007. Our top five customers represented approximately 57% of 2008 revenue versus 55% last year. We had 98 revenue generating customers in total for the full year, 2008. Our non-gap gross margin for the year was 59.8% of revenue compared to 61.3% in 2007. Excluding the $21.3 million of revenue and associated costs of goods sold of $20.8 million, adjusted gross margin for 2008 would have been 64% above our expected long term range of 58 to 62%. Product gross margin for 2008 was 64.3% compared to 60.1% in 2007. Service gross margin was 51.4% for 2008 compared to 63.9% in 2007. Again, excluding the low margin transactions, service gross margin would have been 55.3%. Significantly higher third party installation costs in 2008 are substantially responsible for the rest of the year over year service gross margin difference. There are a few selected financial topics that I would like to expand upon. Our cash investment portfolio, accounts receivable balance, and the reserve taken out of deferred tax asset. Overall, we ended the quarter with total cash, cash equivalents, marketable securities, and long-term investments of $388 million, compared to $404.7 million in Q3. We indicated in the last call that we expected our cash balance in the fourth quarter to decline by $25 to $35 million, including a $9.5 million settlement payment related to a 2002 shareholder’s suit. That payment was delayed until Q1, and has now been paid. The decrease of $16.7 million in our cash balance was primarily the result of ending the third quarter with a relatively low AR balance, offering a more limited cash collection opportunity in the fourth quarter. It is probably worth taking a moment to explain our investment portfolio. We are extremely conservative and have a high quality portfolio. For instance, we hold no auction rate securities or other high risk investments. Almost 40% of our portfolio is in U.S. government agency paper. The rest is in cash and money market funds or in commercial paper and other corporate debt. Substantially all rated double A or triple A, in which we monitor closely. Some of this corporate paper is also FDIC guaranteed under the temporary liquidity guarantee program. We will continue diligent management of our portfolio with our main objective being the safe guarding of our capital. Accounts receivable was $75.8 million, up from $42.8 million Q3, and down from $85 million Q4, 2007. DSO at year end was 76 days compared to 62 days for Q3. I do want to underscore the quality of our receivables balance. Less than 1% was in the over 90 day category at year end, a result which we are clearly pleased with. Let me also explain the establishment of an additional valuation allowance we recorded in the fourth quarter. We took an $87.3 million non cash charge to record a deferred tax asset valuation allowance. During 2006, based upon our then improving operating results and the assessment of our expected future results, we concluded that it was more likely than not that we would be able to realize a substantial portion of our U.S. net deferred tax asset. As a result, we reduced our valuation allowance in 2006 by $82.6 million. Generally accepted accounting principles require that deferred tax assets be reduced by valuation allowance if, based on currently available information, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in a future period. As of December 31, 2008, the company has recorded an increase to its valuation allowance of $87.3 million on substantially all of its domestic net deferred tax assets, after considering all positive and negative factors as to the ability to utilize these assets. This determination was based on many factors, including the current and prior year losses, the prevailing economic recession, and our forecast of taxable loss for 2009. Looking at our head count, we ended the quarter with 991 employees, compared to 1042 employees at the end of Q3. As of today, our head count is 950. One comment I want to make is that as we realign the company, we are shifting resources to lower cost geographies as we outlined in September. In our third quarter conference call, we discontinued providing next quarter revenue guidance, due to declining visibility at that time. We do not anticipate change in this practice for the foreseeable future. Visibility today has not improved, but we have been talking to our customers in an effort to understand their needs and capital spending plans for the year ahead. And we wanted to give you some idea of what to expect in 2009. We expect revenue for 2009 to be substantially lower than the adjusted revenue of $292 million which we discussed earlier. Our 2009 gross margin is expected to be within, but at the lower end of our longer term target range of 58% to 62%, which we reconfirmed today. While we will have volatility within quarters, we do believe this to be a good planning assumption on a rolling, 12 month basis. Total operating expenses are expected to be in the range of $145 to $155 million for the year, down from $187 million in 2008, with the biggest percentage year-over-year declines in OpEx occurring in G&A and sales and marketing. We expect operating expenses in Q1 to range between $37.5 million to $40 million. We expect first quarter ending cash and investments in the $370 to $380 million range. Based on our current outlook, we do not expect to report a cash balance below $350 million for any quarter of 2009. Basic share count for Q1 should be approximately 273 million shares. Now as you consider these numbers, you will likely conclude that our outlook could result in an operating loss for 2009. That would be a correct assumption. Let me tell you why we would accept a plan for the year that results in an operating loss. First of all, from economic and industry perspective, we believe 2009 is going to be a difficult year. However, we are executing our strategy, and preparing our company for the economic and industry conditions we expect beyond this current downturn. Second, we have a product roadmap to build, and customers to support beyond 2009. Sonus needs to remain an innovator to succeed in the marketplace, so we must, and will, invest for our customer’s future. Third, irrespective of the current economic environment, we took significant actions in late 2008, and already in 2009, to restructure and realign the company with a lower cost base. We are improving our operational efficiency, and taking advantage of lower cost geographies, as we deploy our resources. These actions will mitigate, but not entirely eliminate a loss and negative cash flow for the year. Successful companies differentiate themselves during a downturn. In these situations, good companies find the right balance between cost cutting and investing, so that they are ready with highly competitive products when the market turns around. Our strong balance sheet gives us staying power, and the resources to invest, while others find they have to re-trench. We have positioned ourselves to come out of this recession, whenever it might end, a stronger company, and a more formidable competitor. We believe we are being realistic about 2009. We will be conservative in our spending, but will make the key and significant investments needed to take advantage of the return to normal economic and industry conditions, whenever that may occur. Finally, you may remember that in our 2007 10K, we reported two material weaknesses in our internal controls over financial reporting. Back then, having just joined the company, I communicated that the accuracy of our financial reporting was my highest priority. Good companies absolutely must have good financial controls. I am very pleased to tell you today, that we have made significant strides and improve in our internal controls, and as a result, have eliminated these two remaining material weaknesses. We recognize that we have further opportunities to improve our financial controls and procedures; therefore, we will continue our focus in this area. Going forward, we will also increasingly look to accelerating our reporting schedules, achieving the improvement in our financial reporting, and controls in 2008 was not easy; it took a lot of work by many people. I would like to thank all the employees at Sonus, across all functions, who contributed to this achievement for their hard work in embracing the new controls and making this happen. With that, let me turn it back to Rich.

Thank you Rick. Before I move on to the rest of the business, let me add to Rick’s comments on our improved financial controls. Controls are very important to me, and I want to offer my thanks to all the Sonus employees who worked diligently over the last year to achieve what we have to this point, and for their ongoing commitment to make us even better. During 2008, we made good progress in our market. We continued to expand our footprint in customer networks with a number of design wins that underscores the value of the Sonus portfolio. We grew our install base, and one business with tier-1 international customers, such as Belgium Com ICS (ph), Colt, and TalkTalk Communications throughout the year. We accomplished this by staying focused on our core business to provide customers with proven, integrated solutions that simplify carrier-grade voice networks, while reducing their total cost of ownership, and improving their ability to realize greater ARPU. We continue to build a company that is distinctly more market-focused today than it was a year ago. Since I joined Sonus in June, we have been assessing the market opportunity, determining our strengths and weaknesses, and identifying where we provide the greatest value to our customers. We believe that through our core routing, session management, and media capabilities, Sonus has the potential to become the leading infrastructure supplier in the session management space. Today, we see carriers and operators needing to connect; any-to-any network, and any-to-any media, using multiple protocols in both TDM and IP domains, all in a secure and policy-driven environment. Our customers are addressing this need with the Sonus Network border switch, as part of a secure, IP pairing solution. As we continue to invest and strengthen our solution offering, the combination of this technology, with our proven portfolio and experience of carrying great global deployments, will further differentiate us from our competition. I believe we will be best placed to help operate as cost effectively, transform their networks to realize the benefits of IP. It is this unique position that allows us to confidently address adjacent markets, bringing innovative solutions to wireless and cable operators. During 2009, our strategy is to continue to aggressively pursue placement and expansion opportunities in the core TDM network space, leveraging our proven ability to build highly scalable, highly reliable, carrier-grade, Voice-over IP networks that provide a low total cost of ownership, and best-in-class economics. Through our continued investment in our core routing and packet switching technology, combined with our proprietary, signaling and software tools, we enable customers, like Neutral Tandem, to complete the transition from a circuit-switch infrastructure, to an IP-based Sonus platform. Our commitment to increase our interoperability with industry standards enabled us to win contracts with international customers such as Belgacom ICS, PCV Telecom, and Telnet. Belgacom ICS, one of the top 10 wholesale voice carriers, shows Sonus as their partner to undertake a full-class 4 TDM replacement, deploying Sonus’s single architecture for both TDM and Voice-over IP services, including integrated session border control, and media transcoding. As subscribers across the world are choosing wireless as their primary voice connection, an increasing amount of global voice traffic originates, and terminates on wireless networks. Mobile carriers are seeing the benefits of moving to IP in their core networks for voice transport and interconnecting by our IP voice. Just last week, we launched our new solutions at Mobile World Congress in Barcelona, including a strengthening of our IP pairing solutions with the launch of the Sonus Mobile Secure Edge. This solution, which extends our network border switch platform into the mobile domain allows for IP pairing, media and signal interworking, and supports a broad range of mobile and landline protocols, and codecs. We are continuing our investment in transcoding and compression technologies that enable carrier customers to optimize their networks and meet the increasing bandwidth demands driven by new devices, air interfaces and applications. For the most part, Legacy TDM suppliers have failed to provide viable replacement options. We expect some carriers will need to accelerate the replacement of their core TDM networks during 2009. Some traditional suppliers will struggle to support these legacy products as sustaining engineering becomes increasingly expensive. Sonus is well positioned to capture the migration of these networks from TDM to IP without making significant R & D investments. Sonus has developed a wealth of domain expertise, and intellectual property around network design, complex policy and routing services for session-oriented networks, and network optimization and performance monitoring. As our customer networks grow in both size and complexity, we are in a unique position to leverage our expertise, to make these networks easier to manage. We are exploring ways to productize and monetize some of these in-house capabilities, and bring them to the broader market as new offerings by providing critical data that allows operators to optimize their network performance; we extend our value to customers. As I mentioned in my earlier conference calls, I believe from the onset, that Sonus could be managed at a lower expense structure irrespective of the economic environment. In this regard, we started making changes early in my tenure to improve line of sight, organizational efficiency, speed and agility. We have made good progress to date, and understand that the downturn creates additional pressures on the company. We have a plan we are executing against that keeps us responsive to the needs of the business, while maintaining a strong cash position. To that end, we have reduced our operating break-even point to approximately $250 million in annual revenue. Restructuring is a difficult process to go through for both the employees directly affected, and the remaining team at Sonus. We have had to make some tough decisions for the long-term health of the company, and we still have work to do. The actions we have taken are designed to reduce overall operating expense, while allowing us to maintain a robust product roadmap, and invest for our future. We are fostering a culture of greater accountability, and have driven a more disciplined approach through all our business operations, from product roadmap investments, to customer quality assurance, to deal reviews. We will ensure that each decision we make meets metrics that are consistent with our profitability objectives, and enables us to deliver long-term value to all stakeholders. We have not been sufficiently disciplined in these areas in the past, and have already seen our increased rigor make a positive impact to the business. During economic downturns, good companies, lower OpEx, sharpen R & D focus, and invest in opportunities that generate outside shareholder returns. We believe with the move to lower cost geographies, and the refocusing of our R & D spend on expanding our leadership beyond Voice-over IP, to IP session management, we will be better positioned in 2010 and beyond. In conclusion, and before we turn the call over to you for your questions, my view of this company and our opportunity has not changed. Great companies are built during tough times, and that remains my goal for Sonus. We are in one of the most challenging economics that I have seen, but I believe that I have the team, the plan, and the balance sheet in place to use 2009 as an opportunity to get a line to the addressable market, and invest in growth opportunities. I am committed to making Sonus a stronger, and more competitive company, focus on generating sustainable shareholder returns as we move through 2009 and beyond; back to you Dave.

Thank you Richard. Operator, could you please provide our callers with the instructions on how to ask a question.

(Operator Instructions). Your first question is from the line of Paul Silverstein with Credit Suisse. Please proceed with your question.

Good morning. If I could ask two questions; first off, I think you mentioned it on the call, but I just want to confirm that there aren’t any additional customers in the nature of the two systems situation that would result in significantly lower gross margin down the road. Is that a one off or are there other—

That is correct Paul, that’s what we said.

Okay.

You know, mixed bag, we get some high or some low, but we’ve no outliers of the nature of this particular deal.

Okay. Secondly, to extend your focusing more and more on the network border switch, and your comment about $20 million of investment, can you give us some metrics so that we can track this business as it grows? What is the departure point? I know you all have been in the business for a while, you’ve got 30 to 50 customers, and can you give us the customer count? Can you give us where revenues are at, either quantitatively or qualitatively? Some—so we could track this on an ongoing basis?

Sure Paul, thanks for your question, and the net—the $20 million is really around—if you’ll think of it in the broad—take a big picture view, it’s really around out IP pairing solution. I think the network border switch is an element in that solution, but I think what we need to do, and we’ll come back to you with on some of the subsequent calls, is we’ll come back to you with some metrics, that I think the investment community can use to track our progress in this area. So let us come back to you with some of those metrics as we get further down the road with the investment, and some of the proof points that I think that you’re looking for.

Rich, is it fair to conclude that at this point, the NBS is still not greater than 10% of total revenue?

You know, I don’t want to—we don’t really break these things out, and I really don’t want to do that for a lot of reasons, which you could understand, but what I’d like to do is be able to tell you that look, we were making a substantial investment here, obviously it’s targeted, to some extent, to our existing customers, but we’ve got a lot of interest around IP pairing, specifically, not just with wiring (ph), but also with wireless carriers. So we’d like to paint the whole picture for you, and we’d like to kind of paint this picture over the next couple of quarters and (inaudible) on subsequent calls.

All right, if I could ask one last question if I may. We all recognize over our Q-macro (ph) economic environment, which we’re operating, that being said, there was an announcement the other day of an award—it didn’t go to you guys—but can you give us some sense of what the activity is out there, and whether there are new projects that you do expect to be awarded this year, or whether every thing’s essentially ground to all?

Well I know the announcement you’re referring to, and I think that it’s obviously referring to the LT announcement. I think the following thing is true here. We are participating already—we already participate with wireless carriers, and we’re coming at the market—if you look at it, we’re coming to market with our IP pairing solution. I think that’s a very good way for Sonus to use its domain expertise around session management, around media transcoding, around being able to interconnect to sparing networks, and playing that space. I think as time goes on, I think you’re going to see that there are a substantial number of opportunities that we have that we are responding to, and we’re going to get our fair share of that business. So I think that if you look at how LT is going to be won out there, LT is being won primarily from the radio access network side, and we really don’t play in the radio access network. I think that we’ve got a good, fair share of opportunities in wireless. I think we’ve got a good strategy in place around IP pairing, and I think that we’ve got an excellent opportunity space there as this thing rolls out.

Hi Paul, this is Guru, just let me add to Rich’s comments. A part of the metric side of the pace and volume of RFB activity, which we—while—and it stayed relatively on the same plane as it has in prior quarters. What is interesting is how much of those are feasible, will actually turn into actual opportunities, is something that we don’t have a lot of visibility into right now.

Okay, next question please? Oh, Paul did you have another one?

No, I’m good, thank you.

Thanks Paul.

Our next question comes from the line of Subu Natarajan Subrahmanyan (ph) with SMH, proceed with your question. Natarajan Subrahmanyan – SMH: Thank you, I have two questions. First, just on the annual revenue side, I know you’re not providing specific guidance, but I think you made a comment that break even, it’s now about $250 million. The big point of the range of OpEx and gross margin, and this year, you could have an operating loss of—I just wanted to understand is the central scenario at this point—understanding that there’s a range of outcomes—that the company will make an operating loss, as it operated (inaudible), but what kind of central scenario do you expect for the year. And then my second question was around emerging markets, you talked in the past about opportunities in emerging markets, and potential partnerships to address that opportunity, and I just wanted to get an update on that front.

Okay, I’ll handle the first piece, and then I’ll hand it over to Guru to handle the emerging markets question. So let me just repeat some of the data points that we gave. We did indicate that we thought $250 million was about our operating break-even point. We did also indicate that we did expect to have an operating loss this year. So while we’re working hard to get our cost infrastructure down. We don’t think we’re going to be able to get all the way there during the course of this year. I don’t know if that helps you Subu. We did say that revenues would be down substantially year-over-year, and that’s a hard thing for us to measure, and we’re going to have to keep a close eye on that as we go forward. But right now, what’s happened with the cost infrastructure, we’re realigning our resources, and then we’ll have to kind of monitor it as we go through the year.

Subu, before I let Guru answer the second part of the question, let me just amplify something Rick said. I think you have to at what our strategy for 2009 is, and what the strategy for 2009 is, how are we going to—how is this company going to look—what is it going to look like as we exit the year? And I think when we exit the year, we’re going to have the right cost structure, and we’re going to exit with a strong, competitive position. That’s what we’re doing here, and I think that’s how you should track us throughout the year. We’re going to give you updates on every quarterly call; give you some metrics by which you could measure, but that’s the overall strategy.

Yeah, I think it’s—just one more comment on it is, we are prepared to have an operating loss this year with our current projections internally, but that is probably because of major investments which we’re making in certain areas, such in the network border switch platform. Approximately a $20 million in that platform alone this year, is a significant investment for us, but we think that that is a way to build a company that will generate long-term shareholder value. So we are prepared to stand some modest operating loss this year to be able to position the company for 2010 and beyond. And so with that, I’ll hand it over to Guru to handle the emerging markets question.

Hey Subu, the—we’ve established, and like Rick talked about—we’ve established fairly rigorous processes around validating what business makes sense for us. In emerging markets, the two criteria that are sort of the most important for me are what are our customer acquisitions and what are the support costs. Wherever those things makes sense, we will continue to pursue business as long as it’s (inaudible) meets our internal metrics. Natarajan Subrahmanyan – SMH: And if I could have one quick follow up on the cost structure versus the revenue side. Obviously, you’ll be working through the year to get the cost structure to the point where $250 million is your break even. Is that part of the reason you will, not for the full year, be able to have the benefit of debt and have an operating loss? Or do you expect the revenue itself to fall below $250 million, I guess is my question.

Well, we’re not giving specific range, but I think if you do the math Subu, you’ll figure out that with our current model—and the model will be subject to change—but we’re thinking that $250 is not achievable if we can’t get to operational break even in the year. We’re basically saying that when we say down substantially from the sort of $292 million adjusted range, $250 feels a little bit too high for our internal plan right now.

Yeah, and I think Subu, the other thing to kind of think about, and I think some of the analysts—one analysts pointed this out in one of the reports that issued in January, is that we’re affectively double-dipping on the R & D side. In other words, as we transition to lower cost geographies, we have to double up on some of our resources because we’ve got to train people into the transition, and so during this transition, you do have some of our—you have a little bit of dislocation in cost. What we’re doing is we’re taking advantage of 2009 as a rebuilding year, and we want to make that transition more securely, and obviously there will be a little bit of double-dipping going on there where we have to incur some extra costs. I think the other thing is—just to kind of amplify what Guru said is, if you think about the company, we have talked about the need to expand our—what I call our sales channel— so we’re not trying to push everything through our own SG&A footprint. I think to that extent—in that regard, you’re going to see a slight change in strategy here where we need to disaggregate some of our solutions set. And what I mean by that is that we need to be able to effectively present our products so that channel partners can basically, can effectively resell the products, and we’re in the process of doing that also. Therefore, there’s some investment around that. So I think 2009—to achieve some of that, what I call selling through channels which are basically not our direct channels, where we sell directly to carriers, we’ve got to make some investment to disaggregate our solutions to make it what I would call amenable too that type of scenario. Natarajan Subrahmanyan – SMH: Thank you very much for the clarification.

In the interest of time, can I ask each caller to limit themselves to one question.

Our next question comes from the line of Kenneth Muth with Robert W. Baird. Please proceed with your question. Kenneth Muth - Robert W. Baird & Co.: I just noticed on the balance sheet that the deferred revenues on the long-term basis were up about $18 million quarter-over quarter. Could you just give us any insights there, or is that kind of the British Telecom contract starting to come in?

Yeah, we do have—British Telecom is going into our deferred, long-term deferred right now. We have some other contracts that we’re working out way through. We are invoicing, we are getting paid, but we don’t—we haven’t hit all of the undelivered elements, so they will be accumulating into deferred revenue, and given where we are now, that effectively means they won’t score until 2010. Kenneth Muth - Robert W. Baird & Co.: Okay, and just a follow up, does that have any negative implication, or any implication at all for the gross margin profile in 2009? Or is that reflected in your current estimates?

No, I think it doesn’t impact the gross margin profile, although some of the deals will have some implication on our OpEx rate in 2009, because some of the costs to support those contracts are current year period expenses that we’re bearing, so it does have some drain on our operating earnings in 2009. Kenneth Muth - Robert W. Baird & Co.: Okay, thank you.

Our next question comes from the line of George Notter with Jefferies, please proceed with your question. George Notter - Jefferies & Co: If I do the math on AT&T, I think you said 27% of sales for the year, it looks like AT&T was around a million dollars in Q4, is that accurate? And then can you talk about the relationship going forward? I mean I understand the piece about deferring the 5.3 on an ongoing basis, but what’s the cause of no longer getting VSOE on services, and then at the same time, I mean AT&T historically has run at much higher revenue run rates. If the relationship’s not going to change, can we assume you’ll go back to those kinds of run rates going forward?

(Inaudible) there, yeah, I’m not—I don’t think your math works on this one George. AT&T while it’s below it’s (inaudible) percent threshold in Q4, we did indicate that if you added in the $5.5 million or so that we deferred out of the quarter because of the new (inaudible), it would have been a 10% customer, so you do some math there it’s definitely higher than $1 or $2 million, even in Q4 as scored. The other question on why did the accounting change? Well there are two or three factors, and I don’t want to go into all of the nuances of the accounting here, but the fundamental issues are we pulled together some legacy maintenance contracts with different elements of AT&T into a single contract. We renegotiated some terms of the contract in Q4, which is our annual maintenance contract renewal cycle for the most part, with most of our customers in that process, and the outcome of the negotiations of AT&T, there were certain terms in there that required us to change the accounting for that particular contract, and go the routable treatment (ph) on a go-forward basis. The relationship with AT&T stays very strong, and you shouldn’t read into that any fundamental change in the relationship. It’s a change in the contractual terms that have a ripple effect into accounting. So we’re still very happy with AT&T, and I think they’re very happy with us. In terms of overall health with AT&T, that’s more of a macroeconomic-type question, where AT&T is at account. We don’t go into many details there, but maybe Rich will want to comment.

Look, I appreciate the question, and I understand your concern. I think that AT&T, I think a lot of customers in the fourth quarter—there have been a lot of announcements in this space about reduce CapEx, reduce spending, you know, looking at 2009 through a different lens then you looked through at the 2008, and I think that this is just part of that macro environment. What our expectation is, is that if you think about the business in general, is that the transition from TDM to IP is a very—this is a long-term build out, and there’s still a lot of things that need to get done to pacatize (ph) both the core of the network and pacatize the edge, and I think that there’s still a lot of opportunity out there. But obviously, we’ve got to get—the overall economic environment has to change before we can get back on track where we need to be. George Notter - Jefferies & Co: Just directionally, is it fair to say that here in Q4 you produced these results despite a very small revenue contribution from AT&T in the quarter?

Small is relative George. No, I wouldn’t say it was—I think small than historical, I think just largely because of the economic environment. But still, as a percentage customer, it would have been a great (inaudible) 10% customer in the quarter if we hadn’t changed the accounting treatment. It’s still a meaningful account for us. George Notter - Jefferies & Co: Fair enough, thanks.

Next question please.

Our next question comes from the line of Troy Jensen with Piper Jaffray, please proceed with your question.

Hi guys, I’m just going to try to quick sneak in two short ones. The $20 million investment in R & D for the session management stuff, look at M & A side to get there quicker, and then just curious whether or not there’s going to be a better tail coming out of the T-systems business now that you’ve had the initial score.

I’ll take the first question. I think that one of the things that I looked at when I came in here, is I spent a lot of time looking at the intellectual property in the company, looking at a lot of the domain expertise, and one of the things that I realized is that we’ve got a very strong wealth of domain expertise, intellectual property. There’s been very significant R&D spend here over ten years. If you look at the investment that we’re doing this (inaudible). We’re really leveraging on a lot of things that we already have, and I think that this is most creative way to build the kind of product portfolio in the marketplace. I want to underscore, this is the most creative way. So we’re very internally focused right now, and on the other hand, if there was something very compelling, and it would have to be a compelling opportunity on the (inaudible) side, we’d look at it. But I’m very comfortable with the strategy we have, and the investment making in the portfolio, and I think that the returns that we’re going to get on this investment that we’re making, and then the time frame by which those returns would come. So I’m feeling good about that. That’s kind of my feeling about M & A activity right now.

I think the second part of the question was related to was there a tail on TSI?

Hey Troy, this is Guru. So I think the TSI was recently contemplated as a market entry strategy for Germany, and I think a lot of situations have changed, and I think in terms of follow on opportunities. We do have significantly smaller projects with better margin profiles for TSI, they’ve been working, but I think it’s safe to say from an overall perspective that the original charter from the market expansion in Germany will require rethinking on our part.

Okay, good luck on that gentlemen.

Operator we have time for one last questioner.

We have time for one last question, our last question comes from the line of Ted Jackson, with Cantor Fitzgerald. Please proceed with your question. Ted Jackson – Cantor Fitzgerald: Wow, the skin of the teeth. All the strategic ones were asked, could I ask a point question, and then one, just something on the balance sheet? I missed the settlement payment number that you’re going to see in the first quarter?

You should plan on $9.6 million in total. Ted Jackson – Cantor Fitzgerald: Thanks, and then just quickly on receivables and inventory. Receivables, as you commented, was up significantly, inventory actually was down pretty meaningfully. Can you just talk a little bit about where you expect receivables to go? I mean you would have been cash flow positive in the quarter if the receivables hadn’t jumped up like they had. So why is it up so much? It’s only (inaudible) a quarter, what can we expect in maybe the first quarter and beyond, and similar discussion on inventory. Thanks.

Yeah, I’m not going to project out accounts receivable. One of the reasons you see AR jump up traditionally in Q4 is most of our contract renewals are in Q4, so we invoice for those in the December time frame for the most part, so you will always see AR having a bit of a take off in the fourth quarter. In terms of inventory, you’ll see a drop in inventory. I think there’s two main—there’s probably multiple factors, but two main factors involved in that is one, the scoring of the TSI revenue. We have significant amount of inventory hung up in preferred COGS (ph), so that got relieved when we scored the overall revenue, so that was sort of an—you know, we internally look at revenue as on-hand, i.e. stuff that we keep in our manufacturing operation, sort of environment, and that stuff that we’ve shipped out to customers that’s at customer sites, but we haven’t scored the revenue yet. So when that scored, that brought our inventory balance down, and the other thing is that I think we’re just doing a generally better job with managing our inventory, particularly at period end, so I think we try to do better there. Ted Jackson – Cantor Fitzgerald: So receivables are just mainly service renewal contract.

That was the biggest mover in the quarter, yes. Ted Jackson – Cantor Fitzgerald: Great, thanks very much.

Okay, I want to thank everyone for joining us today. As is always the case, we’ll be available for any follow up questions you may have, just give us a call, and have a great day. Operator?

Ladies and gentlemen, this ends today’s conference call.