Why Sonus Looks Worse Than Anyone Expected

Things at Sonus Networks Inc. (NASDAQ: SONS) are far worse than the company’s headline might have suggested about its guidance and a companywide review of its cost structure. The headline tried to sound like a business review, but it was a crushing blow that took the stock down to a 52-week low. It could also signal further changes within the company.

Evaluating a small-cap company like Sonus is often hard enough, even with clear language. With the language that Sonus used — such as “longer decision cycles” and “moving the company through the current operating environment” — one has to wonder just how bad things have become on the actual orders front and how much to expect ahead. Maybe the guidance is bad enough that it has just spoken for itself.

Guidance for first-quarter revenue was updated to a range of $47 million to $50 million, compared to the previous guidance of $74 million. The company now expects a net loss per share in the range of $0.29 to $0.34, compared to its previous guidance of $0.03 in earnings per share (EPS).

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The company signaled that positive customer feedback indicated that it has the right product portfolio. Still, does that mean that all these orders and the current climate has indefinitely delayed orders, or that the orders it was expecting are gone? Perhaps we will know that answer in the next quarter or two.

The review of the cost structure is said to help ensure that the company is “well-positioned to continue investing in its technology development and growth initiatives, while also driving positive financial returns.” The company no longer expects to receive certain orders this quarter that had been expected.

Sonus will report its financial results on April 22, and Thomson Reuters has consensus estimates of $0.03 in EPS and $73.70 million in revenue.

The company expects to continue to benefit from a strong balance sheet, with at least $100 million in cash and marketable securities and no debt at the end of the first quarter. CEO Ray Dolan said that he sees strong fundamentals for the company in terms of the service it provides, its leading technology and its strong balance sheet.

Analysts had mixed views on Sonus just the day before it released updated guidance and its cost structure review:

  • Wedbush downgraded the company to a Neutral rating from Outperform and lowered its price target to $15 from $21.25.
  • Wunderlich reiterated a Buy rating but lowered its price target to $17, just less than double the price level on Tuesday.

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Arguably, many investors might just think that Sonus shares are having an overreaction to this warning. The company previously had strong quarters, and the message is that Sonus is fundamentally sound on paper. That being said, those same investors need to consider that Sonus shares hit a 52-week low at a time when the broad market is effectively at all-time highs. The stock has also lost more than half of its value just since the end of December. So, can Sonus shares find support now that the stock is close to the lows from 2012?

This updated guidance sets this quarter up as one of the worst dating back a few years. Note that the previous year’s same quarter had $0.05 in EPS and $70.74 million in revenue.

Shares of Sonus were down 31% at $9.10 in Tuesday morning’s trading session. The stock has a consensus analyst price target of $21.06 and a 52-week trading range of $8.80 to $21.25. As of 11:40 a.m. ET, Sonus had seen over 9.1 million shares trade hands, versus the daily average of 576,000 shares.

One last consideration is just how much the investing community was preparing for this announcement. Was it the analyst calls, or was the coming news flow already being factored in? Shares were at $15.36 last Thursday, falling to $14.44 on 2.6 million shares on Friday, and then down to $13.16 on almost 3.1 million shares on Monday. Sonus even conducted a one-for-five reverse split at the end of January, magically taking shares up to $19 from under $4.

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