Ribbon Communications Inc. (RBBN) Q1 2011 Earnings Report, Transcript and Summary

Good afternoon, and thank you for standing by. Welcome to the Sonus Networks First Quarter 2011 Financial Results Conference Call. At this time, I would like to remind everyone that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Fran Murphy, Vice President of Finance at Sonus, for opening remarks and introductions. Please go ahead, Mr. Murphy.

Thank you, Jason, and good afternoon, everyone. Welcome to Sonus Networks First Quarter 2011 Results Conference Call. Thank you for joining us today. With me on the call this afternoon is Ray Dolan, our Chief Executive Officer; and Wayne Pastore, our Chief Financial Officer. Before we get started, I'd 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 Sonus Networks' future 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 neither promises nor guarantees and instead are predictions based on management's current beliefs and involve various risks and uncertainties, such that actual events or financial results may differ materially from those we have forecasted. As a result, we can make no assurances that any projections or future events or financial performance will be achieved. For a discussion of important risks or uncertainties that could cause actual events or financial results to vary from these forward-looking statements, please refer to our recent filings with the SEC, including the risk factors described in our Form 10-K for the year ended December 31, 2010, and Form 10-Q for the quarter ended March 31, 2011. 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 or revise forward-looking statements at some point, we specifically disclaim any obligation to do so, unless required by law. And finally, please note that during our call, we will be referring to certain GAAP and non-GAAP financial measures. Our reconciliation of non-GAAP to comparable GAAP financial measures is available in the Investor Relations section of our website found at www.sonusnet.com. A recording of this call and the instructions for accessing it are available on the Sonus Networks Investor Relations website as well. Before I turn the call over to Ray, let me briefly bring to your attention several of our upcoming investor events. On May 12, we will be at the Jefferies Global Technology Conference in New York, and on May 25, we will be at the Barclays Capital GMT Conference, also being held in New York. For more details on our IR outreach plan for the first half of 2011, please feel free to contact me. I would now like to turn the call over to our CEO, Ray Dolan. Please go ahead, Ray.

Thank you, Fran. Good afternoon, everyone, and welcome to our Q1 2011 earnings call. Let me briefly touch upon our numbers, and then I'll let Wayne go into much more detail. Revenue for Q1 was $67.3 million, down from $83 million in Q4 of last year and up from $62.4 million in Q1 of last year. Our NBS revenue for the quarter was $2.3 million, down from $8.7 million in Q4 and down from $3.1 million in of Q1 of last year. Regarding our NBS-5200 product, during Q1 we booked orders from 8 customers, and we now have a total of 25 trials underway. This quarter, we recognized substantial revenue from a deal with Bahamas Telecom that was booked in 2008. As Wayne will discuss in a few minutes, this contract included a large percentage of third-party equipment, which drove gross margins for this quarter below our normal levels. This strategic relationship positions us to provide further future products and support to the customer, as their needs continue to expand and develop. The effect of this contract is isolated to the current quarter. To be clear, our gross margin outlook, as well as our revenue and OpEx outlook continue to be in line with the previous guidance we provided on our last call. Before I hand off to Wayne, I would like to share a few observations since my arrival. In just over 6 months, I've had the opportunity to meet with our customers across the globe that represent nearly 80% of our historical revenue base. These discussions reaffirmed the depth of relationships we have with our customers and the trust they've built with us over the years. As we look to expand into new markets and new geographies, it will be these trusted relationships and our expertise in IP networking that will leverage to drive product and service innovation around our customer needs. During the past 6 months, we've been busy building a world-class organization to drive our success going forward. As I stated on our October call, it really starts with the team and getting the right people and the right seats on the bus. On our last call, I introduced Rajiv Laroia as our CTO. Rajiv brings a great deal of experience to Sonus in the areas of data transmission and wireless communications, as well as speech, image and video compression. In our Bangalore facility, a few weeks ago, we welcomed back a Sonus veteran to lead the facility as our General Manager. Uma Reddy was the lead architect behind our PSX. The PSX is Sonus' centralized routing and policy engine. It is this PSX that makes us the network company we are today. Uma had left Sonus in 2005 to co-found Verivue, and he now brings back a wealth of expertise in the video and policy space. Several other talented and well-respected Sonus associates from the past have rejoined the team and others are following. This is a trend we see across all Sonus facilities. I'm excited by the increased energy and enthusiasm felt by the team, as we rebuild the culture of innovation at defying Sonus' technical leadership in the early years of the company. I'm also pleased to announce that we have concluded what was a very extensive search for our Worldwide VP of Sales. This is a key position and so is a role that has been vacant for the past 6 months. I wanted to ensure that we carefully balanced the urgency to fill it with the need to acquire the very best talent and fit for this position. Today, I am very pleased to announce that effective immediately, Todd Abbott joins us as our Senior VP of Worldwide Sales. Todd will report directly to me and joined us from his most recent role at Avaya, where he was the Senior VP of Sales and Marketing. In that role, Todd was instrumental in implementing their go-to-market strategy and their transition from a principally direct approach to include channel partnerships. He was also an integral member of the acquisition and integration team responsible for the purchase of the Nortel Enterprise assets. Prior to that, Todd successfully built and led sales teams with Symbol, Cisco and IBM. We're excited that Todd joined the team, and I look forward to his leadership going forward. On our last call, I remarked that our sales strategy needed to move beyond the direct-only approach to one that also embraces strategic channel partners. Our efforts to develop channel partnerships have had some initial success, and we'll talk with you in greater detail about this at our Investor Day in June. During Q1, we signed 2 North American Tier 1 carrier agreements to resell our entire product line, including the NBS-5200. Our conversations with these partners have reinforced the importance of what we bring to the table: our ability to support an end-to-end network solution and our established services organization, that has demonstrated the ability to help design and maintain complex networks. We realize it will be additional ramp-up time with each channel partner, but Todd's leadership of our worldwide efforts will accelerate our execution in this area. On the last call, I spoke about the focused innovation at our company and how this has supported our customers as the world evolves to a general IP environment. Now that I've learned more about our capabilities to customer interactions, I want to point out a couple of our key differentiators. First, we have a network solution, rather than a point-product offering. Second, we can help our customers migrate from a TDM world to an IP world. Customers and prospects are asking Sonus to lead them through the migration from the TDM world to a hybrid TDM/IP world and eventually an all-IP world. Customers are asking us to support them with solutions that they migrate from an IPv4 network, to a hybrid IPv4/v6 [IPv6] network to what will ultimately be an all-IPv6 network. And customers want our help guiding them through a myriad of codecs that make sessions work across complex networks. Complex networking has been Sonus' forte, and we have a lot of experience doing it. Our customers indicate that their networks will only increase in complexity in the future, and they will continue to have these multiple islands with increasing internetworking requirements. Going forward, I see us as a company that innovates around the needs of our customers and provides a network solution they have come to expect from us. Finally, I'd like to mention that I hope to meet and speak with many of you at our Investor Day on June 9 and introduce more of the Sonus leadership to you at the time. We've reached out to many of you already but if you've not heard from us or would like to be on the attendee list, please get in touch with Fran Murphy. Now I'd like Wayne to take us through the details of our financials.

Thank you, Ray, and good afternoon, everyone. Before I begin, please remember that our financial results can vary significantly from quarter-to-quarter. So as always, we encourage you to evaluate us on a longer-term basis. Also, while we're not profitable for the quarter, for reasons I'll explain shortly, we remain confident that we will achieve our previously stated guidance. In Q1 2011, we completed our previously announced long-term Class 4 and Class 5 networking implementation project with Bahamas Telecom. While our products and services were sold within our normal gross margin range, because we acted as a system integrator on this project, we recognized the cost of significant amount of third-party equipment at low gross margins. Total non-GAAP gross margins for this project were 33.5%, with product margins of 27.1% and service margins of 47.1%. These low gross margins had a material negative effect on our overall gross margin for the quarter, which, in large part, drove our Q1 2011 loss from operations. We expect these low gross margins to be a one-time event. Now let me recap our results. Total revenue for the first quarter was $67.3 million, down from $83 million in Q4 2010 but up 8% from $62.4 million in Q1 2010. While both our overall and total book to bill for the quarter was below one, our NBS product book to bill was greater than one. There was one customer that contributed greater than 10% of revenue in the first quarter, that customer was Bahamas Telecom, and the combined products and service revenue on that contract was 53% of our total revenue. Our top 5 revenue customers represented approximately 72% of revenue in this quarter, up from 50% in both Q4 and Q1 of last year. Bahamas Telecom was our only new customer in Q1 2011. We reported revenue from 96 customers in the first quarter, and this compares to 103 customers in Q4 2010 and 92 customers in Q1 2010. Looking at revenue geographically. Domestic revenue accounted for 36% of revenue in Q1 versus 72% in Q4 and 58% in Q1 2010. The drop in domestic revenue in the current quarter was a result of the Bahamas Telecom transaction, being classified as international revenue. Going forward, we expect our geographic revenue mix to be more in line with that what we have reported in previous periods. Before I go into further details on our financials, I'd like to point out that the following are non-GAAP numbers that exclude stock-based compensation and the amortization of intangible assets in both 2010 and 2011 and restructuring charges in 2010. Total gross margin for the first quarter was 40.3% of revenue compared to 64.4% in Q4 and 62% in Q1 2010. Product gross margin for the first quarter was 35.9% compared to 67.7% in Q4 and 66.4% in Q1 of last year. Service gross margins for the first quarter were 45.4% compared to 58.1% in Q4 and 56% in Q1 of last year. Total operating expenses for the first quarter was $36.5 million, which was down $1.9 million from $38.4 million in the fourth quarter and down approximately $100,000 from Q1 2010. Our net loss for the quarter was $10.3 million, compared to net income of $15 million in Q4 2010 and $2.5 million in Q1 2010. Looking at our headcount, we ended the quarter with 967 employees, effectively flat with our last quarter and up from 868 employees this time last year. The majority of the increase from the prior year has been within the research and development group. We ended the first quarter with total cash, cash equivalents, macro securities and long-term investments of $402.3 million. Our balances were down $6.1 million from last quarter, as we consumed approximately $2.7 million of cash from operating activities and invested $3.2 million in capital expenditures for the quarter. Total deferred revenue was $62.8 million, down from $85.6 million in Q4 and down from $83.6 million in Q1 of last year. The decrease from both periods was driven mainly by the recognition of Bahamas Telecom in Q1 of 2011. Also, because private revenue and new orders booked from AT&T are no longer being recognized ratably, we'll no longer be breaking out the amount of deferred revenue from AT&T, as we'll be in line with the way we defer revenue from all our customers. Now looking forward. We are reaffirming the guidance we discussed with you on our last call. We expect total revenue to range between $265 million and $285 million with revenue from our NBS products to be approximately $40 million. We expect total non-GAAP gross margins for the year to range between 59% and 63%. For Q2 through Q4 2011, we expect total non-GAAP gross margins to range between 63% and 68%. Total non-GAAP operating expenses for 2011 are expected to be in the range of $143 million to $147 million. We plan to grow headcount for the year at approximately 1,075 employees, with the majority's investments being made within both our customer-facing organizations, and our research and development team. For Q2 2011, we expect non-GAAP operating expenses to be between $35 million to $37 million. We expect our ending Q2 2011 cash and investments to be approximately $390 million. We expect to spend between $2 million and $4 million of CapEx in Q2, with the majority of expenditures related to our research and development efforts. Basic share count for Q2 2011 should be approximately 278 million shares. With that said, I'll now turn the call back to Ray for some messages for today.

Thank you, Wayne. In closing, I'd like to reiterate the following key points. First, after having met a large segment of our customer base, my confidence in Sonus' ability to execute is growing substantially. Second, we continue to build the right team to execute. I'm excited about some key hires we've made already, and more will follow. We have taken a great first step towards our channel partnerships, and Todd will help accelerate these efforts further. And finally, I'm excited about our coming Investor Day in June. I look forward to meeting you and introducing key members of the team to you all. Thank you for your time today, as well as your continued support of Sonus. Fran, would you transition us to the Q&A portion of the call, please.

Surely, Ray. Jason, would you please provide our callers with the instructions on how to ask a question.

[Operator Instructions] Our first question comes from George Notter with Jefferies. George Notter - Jefferies & Company, Inc.: I wanted to ask about the Bahamas Telecom transaction. I guess, I'd love to know more about the nature of the deal. It seems like it's certainly unusual in the context of Sonus' traditional deals that you guys have done. I guess, I'd love to know, again, why did this transaction in such low gross margins. What kind of product did you bundle in as part of the deal? And maybe, you could talk about how much revenue that -- are there vendor's products included in the bulk of the deal?

Sure, George, this is Ray. First of all, the deal does predate me. It got done in 2008. We were the lead on our GSX/PSX entire suite of products. And there was a third-party in the deal with us that BTC wanted a prime on. And it was either us or them, and they picked us, because they wanted us to be the prime. And so it hung our revenue up longer than it held up by the third parties. Our margins were fine, but our products is probably about 1/3 of the deal, just to give you a general estimate of that. So it sat in backlog, and what we've done is we've performed everything in the existing agreement. We have a good relationship with the customer. I think, we'll grow from here, because we did the right thing in getting this closed and scored. But it was a one-time part of our backlog that, obviously, impairs our broader gross margins. So it's the nature of it. I hope that's responsive to your question, George. George Notter - Jefferies & Company, Inc.: Great. And just as a follow-up. I guess, just to confirm to us, 53% or 52% of sales in the quarter?

Yes, George, 53%. George Notter - Jefferies & Company, Inc.: 53%. And then just out of curiosity, why did you guys -- I mean, could you guys have disclosed this, heading into Q1, in terms of the nature of the transaction, how much revenue would be flowing that wasn't yours? I mean, any thoughts to kind of breaking it out, coming into the quarter?

Yes, George. First of all, we don't guide quarterly, but to the issue of transparency, this was in longer-term backlog going in, and the customer had asked a number of times for just some clarification roles and responsibilities. And then the resolution of the negotiations we had with them and third parties, this moved pretty quickly. Some relief of everybody's responsibilities under the contract and resolution in a way that could score under revenue rules. So it wasn't an issue of fully anticipating or failing to disclose. They're just moving around the line. George Notter - Jefferies & Company, Inc.: Great. And I guess just to be clear, so coming into the quarter you anticipated that it would flow through for revenue recognition this quarter? Or did you think it was more of a Q2 or Q3 type deal?

No, we didn't have a specific quarter on it, but we thought it was in the 2011 issue. At least I did, based on the discussions going in to the -- in with the customer. But there was no specific quarter that it was targeted on, because it required everybody to sign up on roles and responsibilities. And that wasn't clear by any means at the end of the year. George Notter - Jefferies & Company, Inc.: Got it. Okay. And then just to flip it around, the rest of the business looks softer this quarter, if we were to kind of parse out the Bahamas Telecom transaction. I mean, could you talk a little bit about the trends you saw in the quarter? And what kind of drove the sequential year-on-year weakness?

Sure. We did have a number of things that could have scored in Q1 that didn't but for customer sign off on a couple of things. Some of them were large, and some of them were small. But that made up, I'd say, at least 3 quarters of what you'd otherwise calculate as the delta if you just back out Bahamas Tel from the number and where you may or may not have had your number, George. So yes, I hope that's helpful in responding to your question. George Notter - Jefferies & Company, Inc.: Got it. Okay, great. Fair enough. I'll pass it along.

Our next question comes from Subu Subrahmanyan from Sanders Morris. Subu Subrahmanyan - Sanders &: I had 2 questions. First, on the NBS, can you talk a little bit to the numbers. I think, you mentioned it briefly, but if you could hit on kind of the numbers. And then the confidence in the $40 million number versus where we are, can you talk about kind of what the path you're seeing is, in terms of wins, how the competitor situation has been, and talk briefly about the 2 Tier 1 North American carrier opportunity. There are only 2 Tier 1 North American carriers as far as I'm aware, but if you can talk about that a little bit, that would be helpful.

Okay, so Subu, on the confidence of the $40 million, I still feel comfortable with that guidance because of looking at our existing backlog and our plans to do book shift revenue on -- across our product lines. But obviously, we're going to work very, very hard to make sure that we continue to look into that between now and our Investor Day and throughout the rest of the year, given that we posted a loss in Q1. But it remains, in my view, that's our best guidance to issue. With regard to wins on the NBS, we had a number of bookings. Seven of them went right -- took from initial discussion to bookings, and one of them came out of a trial. And we'll announce this, as soon as the customer releases those information. And we still have a number of active trials. The context that I've put around those trials are that: at least from my perspective, one, they're going very well; and two, as a networking company, it's more complex from the scoring point of view, getting to revenue recognition just selling a box, particularly, through a channel that has a direct sell-through model. We've got some performance issues, and this box interoperates with the core networks of a lot of our existing customers. And so we've got some sign-offs on feature sets and interoperability issues, that generate some complexity taking what is a lot of inertia -- positive inertia in the NBS category and bringing it through bookings and into revenue. And that's -- But I'm satisfied that one, the product is solid, it's working and it's working amongst our big customers. And it'll be part of our channel program, going forward, as Todd gets his feet on the ground here over there weeks ahead. Subu Subrahmanyan - Sanders &: And in terms of North American Tier 1s?

Yes, with regard to the Tier 1 customers, we work very hard to do 2 things: One, work within their systems; and two, help Sonus become far more channel-friendly than it's ever been. And we've got some ways to go there. We have been, and I've told you this in the past, largely direct sales model, having innovated ourselves in the media gateway business and sold that directly ourselves to our own team. And in trying to change that, we've done a lot of work getting ourselves ready, addressing contractual issues with Tier 1s, and now we've moved beyond contractual issues in Q1 into certification, interoperability and sales channel prophecies. And those are just as challenging as the initial contract negotiations. But we're going to work just as hard on those. Todd's experienced in the past doing that, and people we're bringing in to the organization that have experience in that. My hopes is that it will accelerate sufficient for us to show up in our results that we have planned later this year. Subu Subrahmanyan - Sanders &: [indiscernible] Tier 1. No, please go ahead.

I believe those channel opportunities are good evidence of our ability to respond to market opportunity. Now, of course, they're very heavily selling competitors products, and so we've got some work to do to get that business Tier to Sonus. We got the feature sets to do it, we've got technical credibility to do it. We just got a lot of channel work to do. Subu Subrahmanyan - Sanders &: And then on the Bahamas Telecom deal, I think, just to clarify, you said Sonus product was about 1/3 of the deal, and the rest was all -- was it one other vendor that was the rest of the deal? Was it multiple other products?

It was about -- it was one other vendor. That was it. If there was anybody else, it was de minimis. And Sonus was 1/3 third of the product. How much of the deal was product, Wayne, in services?

So the overall deal -- we're the 27% of the overall deal. Our product was about $5.6 million, and our services were about $4 million.

Okay. And the rest...

The rest was a third-party.

Just the third party. Does that answer your question, Subu? Subu Subrahmanyan - Sanders &: Yes, it does. And you've made a point in the last question that the deals that you could've scored in 1Q, and you tried to quantify that in terms of Bahamas Telecom, could you clarify what you've said about the 3 quarters of what that number was?

Yes. Well, I thought that George was going from -- if you didn't expect Bahamas Tel in Q1, of course, it depends on what number you were using, then there must've been some shortfall in whatever was the remainder of the business. And in accepting that point of view, I'd say roughly 3/4 of whatever that shortfall was, was legitimate slippage that we had opportunities to close in Q1 that just moved out. So really, there'll be Q2 or Q3 business. It really depends on customer sign-offs, and our ability to work through the general revenue recognition roles. But I don't see any material weakness beyond that. There is some GAAP that I'm concerned about, we're addressing that through our bookings process. I'll get my arms around that with Todd as he gets his feet on the ground on the sales side. But that's how I would represent George's question. And George, I hope I've adequately paraphrased your question.

And our next question comes from the line of Todd Koffman with Raymond James. Todd Koffman - Raymond James & Associates, Inc.: On the 5200 [NBS-5200], you called out 25 trials, is that -- how many of those are new trials that started in the quarter versus, I think, it was 20, was the number of trials you said were ongoing last quarter?

So there were 8 new trials in this quarter. Todd Koffman - Raymond James & Associates, Inc.: And then as it relates to these -- the 2 Tier 1 North American channel agreements you signed, can you give any more color about what type of carrier those Tier 1s are? And will they, generally, be universally considered Tier 1? Or what's your definition of Tier 1?

I'm comfortable using the word universally view that way. These are companies that would view set as a service, as strategic to their enterprise strategy. And the world's moving very fast on them. We've won some business already, by winning the business with technical preference and introducing them as a channel partner. And the relationships are now evolving beyond that towards more their developing demand with us and looking at perspective opportunity with us. That's how I would describe that, Todd. Todd Koffman - Raymond James & Associates, Inc.: One last, quickie. Is the Bahamas Telecom deployment-finished?

Yes. Todd Koffman - Raymond James & Associates, Inc.: All the revenue is recognized, and that's behind us?

Yes.

Yes. That doesn't mean there's not future opportunity with the account. In fact, because the resolution of all these roles and responsibilities, I think, led to some very good constructive discussion about where the world's going. But for the purposes of this initial booking, it's completely realized.

And just to clarify, Todd, future business through Sonus, our margins on the price that we sold were at normal margins. So when we feature our business, the Sonus here should be at similarly normal margins. Subu Subrahmanyan - Sanders &: Very helpful. Good luck.

Our next question comes from Ari Bensinger with Standard & Poor's. Ari Bensinger - S&P Equity Research: So I'm just curious on the full year guidance. So was that inclusive of recognizing the Bahamas Telecom revenues sometime throughout 2011? And if so, then the top end sort of implies flat growth to something down year-over-year. If you could just clarify.

So Ari, yes, our guidance includes the revenue that we recognized in Q1 this year. And I disagree with you on your characterization of implying flat to down. I mean, because the nature of our business is to book, execute and recognize revenue, and we're doing all of those things this year, building momentum into our bookings side as well. So I will just leave it at that. The answer to your question though is yes, our revenue guidance and our profitability guidance includes what we've just posted.

Our next question comes from Thomas Nichols with Investors Capital Corp.

I was just curious about the growth in the total cost of revenue year-over-year, and I wondered if that was something that you were going to try to bring under control, or if that's going to continue to grow robustly?

So, Todd (sic) [Tom], this is Wayne. So as I mentioned in the remarks, the gross margin of the cost of sales in Q1 was really related to Bahamas Tel. Our overall yearly guidance is 59% to 63% on a longer-term basis. And we do -- I do plan or I do foresee Q2 to Q4 to range from 63% to 68% gross margins. Obviously, we're still a lumpy business, so that could be very well be varied, but they should be in that range going forward. And that's pretty consistent with prior periods.

Okay. So then the bulk of that $40 million, and that was Bahamas Telecom-related. Is that so?

Correct. That's what drove down our gross margins from prior periods. It was the Bahamas Tel deal.

[Operator Instructions] Our next question comes from the line of Catharine Trebnick with Avian Securities.

Could we do a couple of quick housekeeping items? One was what was the headcount expected by the end of the year?

1,075, Catharine.

Great. And what was it this quarter, flat?

967, flat from Q4.

Alright. And then quick question on gross margins, and we could probably carry this over to the post-call. Is it -- as you move into this channel strategy with these imminent Tier 1 carriers, are you -- even though you've guided gross margins in a certain range, are you expecting, since you're shifting from a more direct to an indirect channel, any other types of pressure in that? Or is that already precalculated and considered?

So Catharine, I will say the following. On the channels that we're signed up now, I don't believe we're going to experience substantial margin pressure, because I think we bring a lot of value to them. And I think the model plays on an economic basis, not that different than it does on a direct basis. It's just roles and responsibilities. I think it worked there. And it's a win-win. When we start to open up some OEM relationships, it opens up the possibility for margin pressure. I don't expect those to impact our results during 2011 in a material way, but certainly, if we learn more about that, we'll disclose it. But that's how I think about margins on third-party channels. I hope that's helpful.

No, that is very helpful. I so appreciate it.

[Operator Instructions] Our next question comes from Mike Sheehan with Empire Capital.

Ray, quick question on the carrier reseller agreement. How long do they take to ramp? And does that include the 5200 product line?

Yes, it includes all of our products by contract. To the extent they're selling it to the enterprise. The 5200 would be ideal there. And they love the idea of us being in the network, as well as in the enterprise, because bringing our both sides of the connection there is a lot of technical differentiation that shows up there. So I think it's a big opportunity for us. On the calendar side, it's very hard to tell, Mike. One, it's clear that Acme's got a pretty big head start in those channels, and it's hard to change behavior. I'll just be candid with you. And there's certification issues to get through the blocking and tackling of some pretty big organizations. But we're going to focus on it and if we can shed light on it at our Investor Day, we'll see if we can set some expectations as to where, what quarter that will start to impact our results. But I'm convinced that even with that pragmatic approach, we can hit our numbers this year, as we've disclosed. And as we learn more, I'll let you know. We're working very hard on it.

One other question. So they already have agreements with Acme, and now they're taking on your product line?

Yes. I mean, Acme's got a lot of channels, people out there selling for them. I don't know for sure, if they have an agreement, but I can't imagine that they don't have an agreement, since those are in result of various people's call, so yes.

Our next question comes from Ted Moreau with WJB Capital.

Looking at the gross margin guidance for the rest of the year, you said 63% to 68%. That's up from last year's levels. So what's driving that improvement year-over-year ?

So, Ted, this is Wayne. It's really just looking at what our backlog is and the deals that are sitting there. Some of these deals have been sitting there for a number of quarters, and it's just natural business. I don't think there's anything new or unusual that's describing that. As we do get into more NBS-related products in the future, you'd expect to see gross margins go up a little bit, but it's nothing that we haven't contemplated.

Okay. And with the NBS reiteration of $40 million for the year, and you did like $2 million in the quarter, so are you expecting like a real back-end year -- end-loaded year? Or do you think -- or is it going to ramp fairly steadily from here?

So it's kind of hard to say that it's going to ramp or hockey stick. I mean, the NBS business is just as lumpy as our other normal product sales. A lot of it's timing, with customer acceptance and such. So I think the remaining $38 million comes in over the 3 quarters. I can't say if it's back-end loaded or if it comes evenly. We know what it is. We contemplated it, but I can't pick at any one quarter.

Okay. And one follow-up question...

Ted, just to answer that question as well from my perspective, this is Ray. The lumpiness issue, I know, is frustrating to our investors. It certainly is, to us as well. We'd like to get far more linear. As we get into multi-channel approach, I think, we'll probably improve our linearity, because we'll have greater sell-through at higher volumes that is offsetting what is now a very lumpy direct approach. You may have a very large, say, financial institution deal that gets hung up, hung up, hung up, and score it all in one quarter based on the release. And those things are difficult to predict, because they're not necessarily all in our control, especially, when it's the last minute, someone asks you to take the deal, it's done, and put it through a channel partner for their purposes. And yes, obviously, you say yes to that. So those things create lumpiness. As we get better at executing ourselves internally, also diversified within our channel mix and get bigger as a company, some of that lumpiness will go away. So we're not trying to dodge your question or anybody else's question on the call, we're just trying to be as transparent as we possibly can. And those are the reasons behind that lumpiness.

Okay. So one final question. And that's you guys have had solid relationships, I think, in Japan in the past. So could you just offer some perspective as to what the environment is in Japan for you guys?

Yes. I would say, right now, it's very close to normal, if not normal. We went through -- we do have a substantial amount of our results that are linked to Japan. We have some very strategic customers there. So a couple of things. We had some minor office disruptions during the earthquake event, which went away very quickly after people worked from home for a little while. All of our customer networks ran, smoothly, flawlessly. And several of them thanked us for the robustness of our networks, which were mission-critical to some of their customers. It hung up a little bit of business but not so material amount of business, that I chose to introduce it in my prepared remarks, but a small portion of the flows that didn't get signed off in late Q1. We just gave the customer kind of relief, since we understood the situation. Then also through either the revenue or bookings that got hung up will be booked this quarter. So I don't consider the impact that it had on Sonus to be material, or we would've addressed it in our up-front remarks.

It appears we have time for one last question. It's a follow-up question from Mr. Todd Koffman from Raymond James. Todd Koffman - Raymond James & Associates, Inc.: Yes. Just quick follow up on -- as it relates to that pass-through revenues for Bahamas Telecom. Do you have any other outstanding contracts like that, where there are some pass-through arrangements that you expect to recognize in the current calendar year, when you gave the full year estimated expected guidance?

No, we don't, Todd. This is Ray Dolan.

Jason, do we have anyone else queued up for questions?

There are no further questions at this time.

Thank you, Jason. That does conclude this evening's conference call. We would like to thank you, all, again for joining us. We appreciate your interest in Sonus Networks. Jason, would you, again, please provide our callers with the replay instructions.