Patti Leahy – VP, IR Raymond Dolan – President and CEO Mark Greenquist – CFO.

James Kisner – Jefferies Michael Latimore – Northland Capital Dmitry Netis – William Blair and Company Ryan Hutchinson – Pacific Crest Securities Paul Silverstein – Cowen & Co. Ted Moreau – Barrington Research.

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2014 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday July 30, 2014.

I would now like to turn the conference over to Patti Leahy, Vice President, Investor Relations. Please go ahead, ma’am..

Thank you and good morning. Welcome to Sonus Networks second quarter 2014 financial results conference call. Joining me on the call today are Ray Dolan, President and Chief Executive Officer and Mark Greenquist, Chief Financial Officer.

Today’s press release and supplementary financial and operational data have been posted to our IR website at sonus.net and submitted to the SEC. A recording of this call and the transcript will be available on our IR website after the call. During our prepared remarks, we will be referring to a presentation with supporting information.

Please take a moment to locate this on the IR webpage. As shown on slide two, please note that during this call, we will make forward-looking statements regarding items such as future market opportunities and the company’s financial outlook.

Actual events or financial results may differ materially from these forward-looking statements and are subject to various risks and uncertainties including without limitation, economic conditions, market acceptance of our products and services, the timing of revenue recognition, difficulties leveraging market opportunities, the impact of restructuring activities, and our ability to realize the benefits of acquisition.

A discussion of these and other factors that may affect future results is contained in our most recent Form 10-Q filed with the SEC and in today’s earnings release, both of which are available on our website. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so.

During our call, we will be referring to certain GAAP and non-GAAP financial measures. A reconciliation of the non-GAAP to comparable GAAP financial measures is included in our press release issued today, as well as in the Investor Relations section of our website.

So with that, it’s now my pleasure to introduce the President and Chief Executive Officer of Sonus, Ray Dolan..

Thank you, Patti, and good morning everyone. I am pleased to report another strong set of results for the second quarter of 2014 which met or exceeded all of our guidance metrics. Please turn to slide four of the presentation.

I’ll review the highlights from the quarter including our financial results, commercial traction and continued progress returning excess capital to shareholders.

I’ll then provide some context around the organizational changes contained in today’s press release before turning it over to Mark for a more detailed discussion about financial results and outlook. Turning to slide five.

Total revenue grew 9% compared to the second quarter of last year, which sets this up nicely to deliver the 10% top-line growth we are targeting for 2015. This quarter, our growth related revenue was up 34% year-over-year, which was driven in large part by the early success of our newest product the SBC 7000.

The channel was also a strong contributor to our results representing 29% of product revenue, the highest contribution from the channel to-date. Enterprise was 20% of product revenue also a nice driver of our growth this quarter.

The difference between these two metrics 29% and 20% would tell you that the channel is getting traction with Tier 2 and Tier 3 service providers which is very encouraging. Gross margins trended in the right direction this quarter were up 40 basis points versus the second quarter of 2013.

Operating margins also showed a nice 160 basis point improvement year-over-year. This resulted in a non-GAAP profit of $0.02, ahead of our guidance and march to the fifth straight quarter profitability for the company. We ended the quarter with approximately $150 million in cash.

I am very proud of our team for delivering these solid financial results which positioned us well to deliver on the full year guidance outlined in today’s press release. To that point, I’d like to provide a quick comment on our revenue guidance before moving onto additional highlights.

As noted in today’s press release, our full year revenue guidance of $300 million remains unchanged. It also takes into account the potential that a large order recently expected to score this year is now likely to score in 2015.

Based on our experience carriers can led up a little on their spending in the third quarter before we accelerating in the fourth. This general trend coupled with the likelihood for further capacity requirements on this particular project being pushed into next year is included in our revenue guidance in second half of 2014.

The implications of this timing to our growth related revenue this year is about $10 million which otherwise would have been incremental to annual growth related revenue guidance of $186 million this year. Mark will take you through more details on our guidance in just a moment.

Let’s turn to our second quarter commercial highlights that is on slide six. As I mentioned in the SBC 7000 was a nice part of our Q2 results contributing just over $5 million. This is especially impressive since the product only began shipping late in the quarter.

We’re very pleased with the markets response to this product which we believe is technically well ahead of anything else in the market today. It’s already been selected by multiple Tier 1 service providers from a variety of geographies as well as a leading North American call center provider.

This month we also received JITC certification on our SBC 5K. A major milestone for the company. JITC stands for Joint Interoperability Test Command and is the organization which oversees the test and certification products eligible to support the military need for IT products.

We already had JITC certification on our low end SBC which we bought from NET and called the SBC VX and we’re expecting additional certification on the SBC 7000. I am optimistic that these certifications will broaden our market opportunity with federal government overtime. Let me now talk about customer growth which was also strong this quarter.

In Q2 we recognized revenue from almost 800 customers including those that we integrated after a full quarter of PT in our results. This is terrific progress as we diversify into the high volumes, smaller deal size in the channel. We are also making important progress on the high end of the market.

Since we get asked from time to time about our progress selling it to the world’s top service providers, we’ve calculated our penetration of the top 50 global service providers. We estimate that over 40% of the top 50 global service providers are buying our growth related products today.

We still have a lot of opportunity to win more global service providers and we’re making good progress. In fact I am pleased to report that we had another new Tier 1 win this quarter in Asia Pac for SIP trunking services. That brings us to six new Tier 1s we have won in the last four quarters but four of those being outside of North America.

Turning to slide seven, you can see the dramatic increase in our customers this quarter. Among these newly 800 customers where 227 brand new customers of which almost all purchased growth related products. The channel is really starting to gain momentum and should be an increasingly important driver going forward.

Turning to slide eight, we’ve shown you a nice progress we’ve made in reducing the concentration of our top five customers. Our top five customers this quarter represented 40% of revenue, which is down from 47% in Q2 2013 and down from 66% in Q1 of 2012.

The statistic can fluctuate a little quarter-to-quarter given the project nature of some of our carrier customers, but the trend is clearly moving in the right direction. We had won 10% customer this quarter which was AT&T at 20% of revenue.

As required by SEC reporting rules for 10% customers, we’ve included all affiliates of AT&T in this revenue calculation including resellers.

This quarter AT&T business services represented 3.5% or close to $3 million of our Q2 revenue up from just over $1 million in revenue last quarter as they are becoming an increasingly strategic reseller of our products. On slide nine, we have summarized the status of our share repurchases today.

So far, we have repurchased $42.4 million shares at an average price per share of 337. This has been accomplished to our stock buyback program as well as the underwritten offering in the first quarter led by Goldman Sachs, approximately $32 million remains available for future repurchase.

We’ve bought back about 15% of our total shares outstanding and substantially reduced concentration of our top two shareholders. Today, no shareholder owns more than 10% of our outstanding shares. This summarizes the highlights of the quarter.

But before handing back off to Mark, I’d like to take the opportunity here to provide some context around the leadership changes announced in today’s press release. Let me start by saying and I am grateful to work with such a dedicated and talented team at Sonus.

We’ve made tremendous progress over the past two years transitioning Sonus to the healthy growth business that we are today. My goal in making these organizational changes is simple, to pick up the pace and drive even faster growth and greater profitability. Tony Scarfo has assumed the role of EVP, Product Management and Corporate Development.

Tony has been with us for nearly three years most recently in the role of EVP, Technology Development. He has been instrumental and helping Sonus establish clear technology leadership in a number of important areas, most notably in video as well as [SDN-NFE].

We were the first company to deliver our entire SBC portfolio and software and we now stand ready to enable the cloud architectures of the future.

We have an integrated global development team that leverages our technology strengths in all major geographies and Tony’s new role is perfectly positioned to blend his technical knowledge with the market requirements of our customers.

Kevin Riley, our current CTO is taking over the day-to-day leadership with the engineering organization and he now reports directly to me.

Kevin has more than 20 years of experience in software development and engineering and has been instrumental in our efforts to drive in industry leading technology road map, including the award winning software SBC and the SBC 7000.

Todd Abbott has stepped down as our Executive Vice President in strategy and go to market, but will remain with the company in an advisory role until mid-October. He will assist with the transition of his responsibilities to Tony Scarfo as well as the new interim sales lead Mike Syad.

Todd has been an integral part of our transformation for more than three years and I personally thank him for his service. He has driven our efforts to create a more standardized, scalable set of products. He is also been a driving force behind the creation of our channel program which is help to extend market presence into the enterprise.

Mike has assumed the role of interim senior vice president, worldwide sales and marketing. Mike joined Sonus in May and brings extensive experience in leading global sales and marketing in the communication sector. He’s been leading the North America’s sales team since joining and he’ll continue to do so in this interim role.

Mike has held executive roles of Orktel Telecom, Alcatel-Lucent. Once again these changes are intended to accelerate our progress as we continue to build a world class profitable growth business at Sonus. So with that I’d now like to invite Mark to provide us commentary on the details surrounding our second quarter results and outlook.

Mark?.

Thanks Ray. Ray provided a good summary of our second quarter results so I’ll skip the next couple of slides which were there for your reference and the take away as you said is that we never exceeded all of the metrics regarding last two quarter and instead of ourselves that nicely to deliver the full year.

So, let’s take a quick look at slide 13 which provide the quarterly break down of our growth versus legacy revenue, both actual for Q1 and Q2 and once expecting in Q3 and Q4. Before going into our outlook can you notice there is a difference in the first quarter split between growth and legacy versus what was reported in last quarter.

So I want to take a minute to explain this before moving on. In short our growth related revenue should contain the solutions we provide which enable next generation network such as and 4G LTE. Those products primarily include such in border controller and diameter signal in controllers.

Our legacy related revenue should contain no solutions which were older networks such as TDM or 3G and those legacy products primarily include trunking and SS7 signaling. So for the purpose of this investor discussion and I try to keep it as simple as possible we’re moving to the general terminology of growth versus legacy.

It’s clear that the drivers of our growth revenue are evolving so it’s important to expand the way we look at our growth related revenue which brings me to top of Q1 revenue. The total Q1 revenue we recorded of 17.7 million has not changed.

However, the mix between growth and legacy has changed, 6.6 million of that originally attributed the legacy revenue in Q1 should have been attributed to growth related revenues instead and in Q2 3.3 million that we did not contemplate at the time we provide the guidance should have been considered as part of our growth related revenues instead of legacy.

This pertains only the one customer in the first and second quarter of 2014 and it’s not currently expected to impact our results in our third or fourth quarter. Let me provide a bit more colors to why we [inaudible] to its revenue. So turn to slide 14, you can see a clear change in the purchasing pattern of this particular customer.

This chart shows you the volume of total GSX chassis purchase by this customer for their network going back over past 10 years.

The unusual spike and volume in the first half of 2014 caused us to look closer into the use case for this customer since it was very unusual to be adding GSX’s in such high volumes when our customers are transitioning to all IP networks.

The closer review we found that customer was adding capacity to their network in order to facilitate faster transition to all IP which allows them to offer more valuable IP services to their customers. Our products in the first and second quarter 2014 were purchased in order to facilitate this transition and handle all traffic to all IP network.

Well we cannot name the customer they have provided independent verification in their own reported results that shows clear correlation with our observation.

So to be clear when I’m suggesting all GSX revenue gross related the typical use of gateway is handoff to TDM where the customer has no benefit of IP services in that case it’s clearly still supporting a legacy network and it’s considered legacy revenue.

However by handing off to IP the customer does benefit from having IP services and this is simple but important difference between these cases and the reason we consider this revenue to be growth related revenue instead of legacy.

As I said when I currently forecasting this type of revenue Q3 to Q4 from this customer but in the future as they were other service provider more aggressively transition their network to all IP and Sonus with our broad product portfolio is very well positioned to help and do this.

Let’s turn out to our guidance for the remainder of this year on slide 15, for the third quarter we expect between 70 and 73 million of total revenue, up this approximately 39 to 41 million is expected to be growth related revenue.

And as Ray mentioned, this revenue guidance considers that our large order that we originally expected this in 2014 is now more likely this quarter next year. For the third quarter we expect gross margins of 65% to 66% in OpEx to 44 to 45 million.

This leads to our expectation for non-GAAP profiting of a penny based on approximately 249 million diluted shares outstanding. We’ve also provided the implied Q4 guidance the revenue in EPS for your convenience. Our full year 2014 total revenue guidance of 300 million remains unchanged from the original annual guidance provided on our February call.

Giving the potential timing associated with tier one order we mentioned we’re leaving growth related revenue guidance at 168 million for the year instead of it increasing it by the difference of about 10 million that Ray noted in his opening remarks.

We are raising our full year non-GAAP EPS guidance to $0.07 from our previous guidance of $0.05 based on the strength of our first half performance and a strong expected finish to the year again this is based on our backlog, strong funnel and history in dealing with carrier customers.

Let’s now spend a little time on slide 16 which admittedly is a very chart but addresses important questions that and I often get from investors. So we think it will be useful for you to have this data.

The questions that this chart attempts to answer or how fast is your legacy business declining and how fast is your growth related business growing, to answer this you need to separate a legacy product revenue from the legacy services revenue in particular because the trajectory for each of those components is very different.

Look at the grey bars first, the solid dark grey bar is legacy product revenue. This is the part of our business which has been declining the fastest and until this year was masking much of the momentum happening in our growth related business. We assume in 2014 that it’ll decline between 16% and 19%.

Legacy services revenue which is the light grey bar is much more stable because this is essentially supporting in main and installed base of more than $1.5 billion. So we’re seeing slow single digit declines in that business. This revenue is typically under contract a year in advance.

So we do have – looking at the growth business the green bars on the bottom the product and services more or less growing in were services represent plus or minus 25% of the total growth related revenue.

You can see our assumption which again is higher than the aggregated market growth from various industry analysts 20% this year and roughly in line with the 5 year, we outlined in our guidance of 25 to 30%.

The final point I want to make on this slide and this is critical to underpinning our 2015 targets is that our growth related revenue in 2014 is expected to be north of 50% of total revenue. You have seen slide 17 before which illustrates the turnaround that is taking place in Sonus.

There is nothing new here other than increased DPS guidance for the year that I noted a moment ago. The takeaway is that we are starting to see the potential of our operating leverage clearly emerge which brings me to my final slide, Slide 18.

We still expect 2015 to be the beginning of double digit revenue growth and operating income margins and are specifically targeting 10% revenue growth and 10% operating margins for 2015 as we laid out for you at our Investor day back in March, so with we would now like to open it up to questions.

Kelly, could you please give everybody instructions on how to ask questions?.

Thank you. (Operator Instructions) And our first question comes from the line of James Kisner with Jefferies. Please proceed with your question..

Hi, thank you, guys..

Hi, James..

My first question was on the channel strength, could you give a little more color on striving that and I was wondering if that was a big chunk of link growth in there or it was just broad sub-trunking options, is it both, could you give kind of color on the channel strength..

Sure, James, thanks, it’s Ray, and it is both. We had continued strength in the link environment as we see that globalizing nicely.

We saw it in all of our theaters, we have also seen the surf providers as a channel and adoption of sub-trunking accelerate not only in North America but we’ve seen some really good progress in Europe and especially good progress in Asia Pac. And so I think those trends are very favorable to continue channel expansion as a percentage of our revenue..

Yeah, James, and I would just like to add three other things.

There is, you know, it’s been pretty well documented that there is some, you know, disruption in the channel based on some actions that one of our competitors have taken, and I think you know, we are benefiting from that with expected, we have been working on that over the first half of the year.

And I think we are starting to see some results from that.

Like the second thing is that Ray mentioned, so that is not, you know, impacting current results but I would expect only forward as we get the entire product portfolio from low, you know, mid unto high certified we are going to be an excellent partner for channel partners that focus on government space and expect to see continued momentum there.

And then as Ray mentioned not only are the service providers becoming more important channels, but we’ve actually been working for some time on trying to develop specially internationally channels that can then get us 2 or 3 tier opportunities that we probably wouldn’t get be able to get to without direct sales force.

And we have started to, we started to see some correction there so that’s why you see the channels are 29% being quite a bit above what enterprise was in the quarter which was really around 20% of product revenue.

And as a result of that increasing gap is really that you know channel directed it to 2 tier or 3 tier service providers finally starting to kick in and get some traction..

It is interesting that you guys are talking about the channel business in Asia and Europe. It seems like you know, sub-trunking has been obviously a much stronger adoption in North America that’s where it should have been led. I mean we have seen kind of a change in the environment around sub-trunking in communications in these regions..

Yeah, James, I think we are. Still it is such small numbers, probably single digits in both those two other global theaters that it is a little early to call a major turn. But it feels like that’s what we are going through.

And it makes sense because it’s been several years since the smart phone has changed enterprise communications through BYOD the app layer is intuitive the cloud has gotten scale.

There is a lot of enabling capabilities and now you have some fairly large players in particular Microsoft though their Lyncin environment, it … entrance through the cloud that have really started it to … it out. Broad cloud is starting to emerge as a major player by … inside some service providers.

So there’s a lot of important ingredients that are starting to drive that sub-trunking. If we continue to see those play out another couple of quarters I think we will be able to call the turn later this year or early next year..

Right, thank you. And one final question, just on the order per share, you going to give us some color there. Would it be correct to assume that North America is related to just CapEx exercise, any kind of color on the push out of the large order would be helpful, thank you..

Yeah, James, it is in North America. We can’t name the customer but it is, I think it is standard seasonality and timing of CapEx dry down. And I also think that as we are moving more towards software related products it is easier for folks to wait until like almost just in time purchasing.

So I think we accurately forecast this into next year, and will continue to give visibility on as it plays out..

Great. Okay, thank you..

I was just going to add, you know, this is a reasonably big project that you know, we are working on. We actually already scored revenue on the project with the incumbent so we are highly confident we are going to get this revenue eventually on 2015..

Great..

It is really the timing..

Alright, thanks very much..

Thank you, James..

Our next question comes from the line of [Subu Subrahmanyan with The Juda Group]. Please proceed with your question..

Thank you, I have two questions..

Hi, Subbu..

Hi. The first question is just on the growth revenue side, with the way you have increased some of the allocations with growth revenue for the first half.

You have left it relatively unchanged and the entire difference is essentially the $ 10 million order that you have expected happening in third quarter which gets pushed out for kind of from an annual perspective, that’s my first question.

And second question, if you look at your revenue number remaining unchanged obviously with the $ 10 million legacy must have done so much better than you expected and it shows in some of the growth numbers versus the close to 30% decline you expected in past years.

I am wondering if the trend in legacy is a little bit more of a gradual decline than you have expected before..

So on the legacy I think we have talked about this before, you know, we think on the product side it’s going to be about 20% decline year over year going forward, you know, we think that’s the kind of average trend line. Your observation is correct, I think this year it might be a little less than that.

I mentioned that in my remarks, you know, we think that it is going to be more in the order of 16-19%. But we don’t think we are seeing anything there that is causing us to think differently about you know, kind of longer term trend line. It’s, you know, again the legacy can be very deal specific. It’s going to be a bit better this year.

But I would not read anything into that, we still think that kind of 20% decline year over year is more or less what it is going to average. It has been at that rate, you know, for the last couple of years and we think it is going to continue with that rate..

On the product side..

Exactly, thanks.

Does that answer your question?.

Yeah, I was just wondering from the growth products given despite the $ 10 million reallocation the full year number unchanged the delta pretty much that one deal which we had expected to score in third quarter now in 2015..

Yeah, that’s exactly right, I mean you know as we talked about, you know we are thinking we are getting a lot of traction on the growth side, not only through the channel but you know, we’ve also won another Tier 1 over an Asia Pac and again on the 7K introducing that and having it immediately contribute a few million dollars to revenue is being great.

But you know we do have, you know, one narrow problem which was the push out of this order and it is relatively, you know, large piece of business, you know, being about $ 10 million.

Like I said we are highly confident we are going to get that revenue because we won the deal incumbent where we actually scored revenue on that project, but we thought it was going to be in ‘14 it looks more likely now it is going to be in ‘15..

Great, and my other bigger picture question is, in terms of carriers and what they doing in terms of their architectural changes. Some of them have been public about it.

Are you seeing any impact on kind of near terms spending versus how they are thinking more strategically, and the other CapEx question is seems to be that this year especially in the US seems to be a little bit more, first half loaded versus the average year and I wonder if you are seeing any kind of changes in buying patterns in general from large carriers..

Yeah, thanks, Subbu. We have, it is possible this push out is that same first half second half coming on since it is North America based, but I think it is more project specific than it is.

Third quarter guide and our fourth quarter guide because in our results for the last three or four years we’ve seen the same kind of pattern of strong first half, a little weak Q3 and then a comeback in Q4. So we’ve tried to pattern that in our results and our guide.

With the regard to their architectural changes in whether it gives them any short-term impact I don’t believe so but as we’ve said on prior calls there are times where if they are moving to NFB and STN especially people go to Domain 1.0 and then Domain 2.0 there is a lot of in the spending patterns of these large operators as they are moving to the cloud.

I think that’s a real opportunity for us long-term and short-term impact I don’t see it as a major issue or a blip. But they are bidding out their cloud architectures right now. You’ve seen a lot of VoLTE starts and then slowdowns as people are really trying to think about what is it that they are really trying to accomplish with VoLTE.

Are they just trying to move voice over from LTE from 3G and 2G to LTE are they trying to enable real-time communications in one unified pipe that is both fixed and mobile and driving to fix all the conversions to small cell. So this is a time of tremendous flux, I haven’t seen impacting the short-term financials for us or the purchasing pattern.

But it is opening up a lot of opportunity and that’s tremendous for Sonus because we’ve moved to software before anybody else in this space, we’ve leveraged our real-time communication skills that come out of the gateway business and we’re opening up our access to these large projects which overtime is going to be a very healthy source of growth for us..

That’s helpful. Thank you..

Our next question comes from Michael Latimore with Northland Capital. Please proceed with your question..

Hi. Thanks a lot.

It sounds like most of the channel revenue relates to UC and SIP trunking I guess if you really look at the total revenue amounts what percent do you think arise from those categories?.

I think you are right Mike it’s very high from the standpoint of the channel revenue..

I guess I was saying in terms of total revenue came up related to the UC and SIP trunking?.

Well the channel revenue is 29% I’d say a very large percentage of that is obviously UC and SIP trunking as to how much of this service provider fees it’s probably more than half but I don’t have a specific number in mind..

Okay.

And then on what application is being envisioned there, is that a interconnect or a SIP trunking or what’s the application?.

Interconnect is well as some work in the wireless space right now and we will get into that I think over the coming quarters as we get deeper that project..

And then I guess on the change to growth related from legacy that one customer using our , is that sort of a unusual application or do you expect those think other service providers might use it help to move to network as well, I guess what is unique here?.

Well I think the unique thing is as we said when we look at the and what’s really driving the purchasing decision versus why they would have been purchasing as equipment in the past is what makes us conclude that this is something has changed in the first half of this year, it’s driven a big spike up in these purchases that related to really supporting the customers growth in this area and for them as well.

And so again when we look at it and we look closer at it, we concluded this really has more to do with the growth side of our business, the growth side of our customers businesses and the particular product that they are using to enable that not only does it have to do with the fact that the products got the capability to support their needs but it is they are one of our long standing customers and so therefore they would potentially tend to us this equipment versus let’s say some of the more recent SBC products that we’ve introduced..

Got it. And just last question.

The number of new customers was I’d imagine a lot of that is related to the enterprise, enterprise state is about 20% of revenue, so I mean can you guys sort of clarify that it seems to me that enterprise revenue might have moved up a little bit with that much new customer count?.

Well. So a couple of things going on there as we mentioned that reflects us bringing the PT customers into the so we got a little bit of help there but it also does represent the increase in channel revenue.

So I think one is correlated to the other, the more success we continue to have with the channel the more we’re going to drive new customer acquisition.

And why you are absolutely right a lot of it has to do with enterprise part of it also has to do with the phenomena that we were talking about where we’re finally starting to see our strategy to try to use this channel to get to Tier 2 and Tier 3 service providers kicking in as well.

So it’s a little bit I mean I don’t want to overstate that but it’s a little bit beyond just the enterprise space..

Alright. Thanks. Nice quarter..

Thanks..

Our next question comes from Dmitry Netis with William Blair and Company. Please proceed with your question..

Yes, thanks. Just again on the slow gentlemen it’s now slated for ‘15, can you give us sort of the timing of that is that the first half, Q1, Q2 how are you thinking about that, that would be great? Thanks..

Yeah. Dmitry I’d call it first half that’s our visibility right now. We hope it’s really is possible in the year but we will just follow the lead of the customer as they transform these networks..

Okay. Great.

And then on the Diameter sales, can you tell us what how much of revenue have you recognized from that function?.

Yeah, we didn’t really score any revenue in Diameter in the second quarter. We had bookings but we didn’t the score the revenue, the revenue from those bookings will come in the second half of the year.

And as we’ve been discussing we continue to think that that’s going to be relatively small this year and the guidance that we’ve provided and have stuck to we have roughly of $15 million of total revenue being contributed by PT with only $3 million of that being Diameter.

I think that as we look at what’s happened to-date and what we expect over the second half of the year those still seem to be reasonable numbers..

Right.

So the SS7 side the legacy side of PT is that sort of kind of a linear the fourth quarter of this year or are you seeing decline or a deceleration of that?.

I mean they have a similar type of seasonality that we would see where the fourth quarter is probably going to be the best quarter we have there and it’s kind of trending along as we would have expected in Q1, Q2 and Q3..

Okay. Great. And then I have to ask another question on the GSX re-class I mean if I remember you guys always included in your SBC number since it had this dual functionality both the trunking and the SBC.

So I don’t know when have you started sort of reclassifying per kind of customer deployment to customer application has it always been the case or you have just recognized revenue from the platform for say.

I am just trying to get some color around that if you could help me understand that?.

So I think you are alluding to the SBC9000 which was a hybrid product and could contain either trunking licenses or SBC licenses and therefore we could just look at the product and see basically how we would allocate it whether it be to trunking or to SBC.

In this case the customers bought a product that again contributes to the rollout of these IP services, they don’t necessarily have SBC licenses they have SIP licenses and so they are supporting SIP.

And again I’ll just go back to the when we look at the use case for why they are buying this and if you look at the chart you can see that obviously something changed in the first half of ‘14 versus what the purchasing pattern had been before.

When we went back and looked at that we concluded that they are actually using them somewhat differently than what they had originally purchased them for its again supporting roll-out and a continued expansion of this business for them which is growing business and it’s important strategy for them and so this product is playing a key role in doing that.

So again we concluded that it really is more growth related business versus what we would consider legacy which would be essentially the keep old networks declining over time..

Was the customer buying the 9000 or was it something else or some other function or platform?.

It’s as we mentioned it was the GSX, so it’s the 9K chassis..

The 9K, okay thank you. And then last question.

Any thought on the new buyback authorization guys?.

Nothing to report or talk about at this time..

Great. Thank you. Keep up the good work gentlemen..

Thanks..

Thank you..

Our next question comes from Ryan Hutchinson with Pacific Crest Securities. Please proceed with your question..

Hey, good morning guys..

Hello..

I just had a follow up on, on the last question I just wanted to be clear on this.

So you reiterate the 168, can you just give us color on what the expectation is for any additional GSX revenue that should be incorporated into that number?.

Yeah. As, as we said, we don’t expect to see any in Q3 and 4. We think, we think that you know this particular project that we’ve been working on so this year and you know what we’ve seen in the first half is going to do with it and then we’ll see the transpires next year..

And then I got two small ones. Just in terms of I am thinking about 18T for the back half.

Any expectations there would they drop below 20%?.

Yeah. We, as we said last, last quarter call and I think we think the same thing you know they have been of north of 20% customer in the first and second quarter, I would not expect that in the second half of the year..

Got it. Okay. And then just in terms of thinking about the diversification here on the top five customer trends you know overtime, how do we think about that as a percentage of revenue as you guys diversify the customer best? And that’s it from me. Thanks..

Yeah.

So Ryan, we, as we said we are down in the 40% range, I would think that it would stay there potentially trend lower it is the volatile number especially as we have seasonality in our total revenue you know but important project can spike as a percentage of 70 that wouldn’t spike as a percentage of 90 and a higher percent and a higher buy in quarter.

But with all that said I would hope that it would trend down into the 30s and then it would probably stay there because we are still predominantly service provider business as the majority of the spend and communications for the foreseeable future will be with service providers and those are all going to be project driven and they are going to be concentrated in any one quarter.

The goal would be to roll that concentration quarter-to-quarter so that it moves around the globe as these projects are drawn down.

So that our goal would be as it globalizes our total results globalize as well, our other theaters start to grow as a percent and our customer concentration comes down a little bit from that is at, but it’s been major progress together from the 60s down to the 40% where it is today..

I mean it’s, it’s.

Go ahead sorry..

No, I was just going to say it ranges 70 it’s clearly our intention to try to have that number trend lower I think the progress that we’re making on channel helps, I think the progress that we’re making on getting new tier 1 customer helps, I would say that it’s extremely difficult it’s not impossible to predict what it’s going to be in any one quarter but I, I think you should expect the trend line to you know continue to, to slowly go down..

Right.

But it sounds like in the near term I mean with the back half and with the order delay in 18T coming below 20% that you console we had the $300 million and then that could change in 2015 but in near term you’ve got some pretty good customer diversification?.

Yes, yes, right..

Thank you..

Thanks..

Our next question comes from Paul Silverstein with Cowen. Please proceed with your question..

Yeah.

Raymond, can you hear me out there?.

Yes, I can, you don’t Paul?.

I hear you. A couple of questions from me.

I noticed earlier like but can you tell me customers you have at this point?.

I don’t have that number on the top of my head Paul but it’s probably handful of customers..

Okay..

Just to give you ballpark..

Okay. I appreciate it.

Any thoughts on where gross margin can go in terms of peak level long term?.

Well I’ve been reluctant to call a number but what I’ve said is we should trend towards industry leadership and the only reason I want to put a specific number on it is that you know I think it’s , it’s hard to predict where that will go, but we are going more software centric, we’re definitely moving towards a more standard space product, which allows us to get some of the cost structure from customization out of our and as we get the higher volumes my guess is we should trend into the 70s and where it goes from there.

It really is an industry, it’s more of an industry level issue from there than it is a sound specific issue, but we still got some work to do from you know trending in the mid-60s to trending into the 70..

Okay.

I’m assuming in terms of the price environment what prices are coming down, I assume the rate of change is not changed?.

That’s correct. You know I do believe that ship adoption and global traffic growth and playing in the real time control playing side as opposed to the commodity best efforts IP traffic in the cloud are always for us to continue to grow and grow margin..

Okay. Right. Looking for more but early on when you all first got into the SBC market your pricing somewhat aggressively in order to gain territory.

Is that no longer the case in terms of pricing more like what used to show in terms of 80s, can you give us any sense on that?.

When you 80s you mean market.

I apologize those are going to gross margin, I apologize..

Yeah. So we’re not at product or gross margins in the 80s yet Paul but we’ll take it if it comes our way, I don’t think that it’s much a function of pricing, as it is just deployment entities. So well it may have been your perception it was never mind that we were driving adoption to pricing.

We were definitely allowing people to make rational decisions at low densities and anticipating that if they drop more software content that we would improve our margins and we’re seeing that in our results.

So I don’t think we are necessarily a price based competitor or ever have been, we, we try to drive to value add pricing but as we compete you know and try to describe someone you know we’ll be aggressive as we need to be so that we can look at something over the entire lifecycle of the deal..

Yeah Paul I mean I would just add that obviously when you are trying to break into some place new and it’s a competitive RSB process I mean it’s obviously more aggressive there and you are proving your work you know your, you know the businesses is more profitable.

So I think we’re in an NVS position in a sense that we do have a good base of customers, we got a good margin that we’re working of it and you know frankly we can pick our battles and have the ability to be aggressive to break into new customers so that it you know kind of our results.

And so you know I frankly think that’s a big advantage that we have and we will continue to you know kind of use that tool going forward..

Right.

On your point about the densities does it follow at the 7000 or is much greater the capacity that would have naturally all content would of a higher margin relative to the lower volume products, lower capacity?.

That’s a good assumption Paul. It’s over the life like how they purchase it right I mean if they are buying, if the initial purchase of 7000 is coming at relatively the same density of with that initial purchase of 5000 would be I don’t know that the margin for going to be that remarkably different.

The advantage Paul is then overtime is they add capacity the 7000 because of its you know much higher capacity has the ability to support a much greater number of capacity that’s naturally where the margin is differential is and so again I’m, I’m kind of going on too long but you know the point being that with the higher capacity 7000 over the life of the purchase and as they fill up the box it’s going to be a more profitable piece of business for us even though the initial deal might not be that different..

Got it.

Some more quick ones and my, are you all cause of the enterprise?.

We didn’t do it on this basically we did it on total revenue and the enterprise is 20% of the revenue with the product base, channel was 29% was in less growth..

Alright.

Can you show those?.

Yeah. The enterprise was 27% from growth products..

So enterprise is 27% of SBC revenue. I appreciate that and last question.

Product, product revenues yeah..

Thank you Patti.

Last question right you showed the number on terms of any quantification progress with respect to the opportunity?.

Yeah. I’m happy to talk about Paul it’s not to quantify it but strategically and here is why we’re in a lot of discussions I’m not going to get into the trial aspects as you can remember that from years ago wasn’t very constructive.

But in those discussions first it’s important to understand why people are doing it, they are not just moving voice from 2G to 3G, they are trying to really open up a broader suite of real time communications otherwise they are not going to get incremental revenue.

I think real time and in this case I’m talking like Skype face time type of video applications are going to be one of the drivers of that. It would in early days but that’s where it’s looking so if you think about this problem simply and I think of it simply I’ll articulate it as quickly as I can this way.

I think LTE is basically mobile Ethernet alright that was the goal to make it look like a wire. So now what you’ve is in LTE you’ve got a native IP link all way out to the mobile we call it a handset but it’s basically a computer alright.

The radio portion is shrinking, but left or two major task mobility management which is really the domain of the big wireless players, we’re not going to play there for at least the foreseeable future, although small cells may in fact change architectures and we’re tracking that.

And then the second piece is managing IP flows in a congested network that is our bread and butter.

So as we, as the LTE market moves to embrace managing real time flows over that and as fix mobile conversions drives further there is a huge opportunity for Sonus to leverage our policy assets, our interworking assets and get embedded into those LTE solutions.

Now the reason that it’s early days is that used to be viewed as an IMS play and IMS has been the promise unfulfilled largely in the wireless base for at least five year.

Then it was an SBC play into a certain extent it is but it’s really evolving with STN into a cloud architecture and I think we’ve got a great chance as early as next year to start really driving some major progress in VoLTE as VoLTE moves into really that’s what we’ve been saying for the years it’s we’ve said it’s not in our results for this year, it won’t be material at least for this year, but we think it would be material as early as next year.

I hope that’s good enough to answer your question we’ll keep you posted as we make progress..

Thank you..

Our next question comes from Ted Moreau with Barrington Research. Please proceed with your question..

Great. Thank you and congrats on a, on a nice quarter guys. So it sounds like this 10 million order that was pushed out as heavily software piece of business. So I’m imagining that the margin profile there should be towards the higher end of your growth products view.

I mean can you, can you give us some perspective on, on the margin profile there and, and could it, could that bring up your overall gross margins into the, the range that you saw maybe in, in Q1?.

Yeah. So Ted this is right. It is heavy on the software side as our most second and third drawdowns of this large projects is they tend to be more software centric after the higher margin than our aggregate product margins and it will help us from the standpoint of overall profitability as we expend these projects..

I think Ted, it’s Mark. It will be tough to say whether it’s going to happen over a single quarter, next year or whether it’s going to be multiple quarters and please keep in mind that we’re talking about $10 million on a relatively large business. So well I think your characterization of it is correct.

I am not so sure of that in any particular quarter, it’s really going to move the needle that much but it certainly would be positive because you are right this would be revenue that would come with margin that’s above our average..

Okay. Sounds great. And then since I am talking about software a little bit here. Is there any way to provide any kind of I guess sizing of the overall business for Sonus and like to what extent software contributes today versus maybe how big software could be in the future.

Like is there a way to give a percentage terms really like 50% of the business is software or 25% or something like that and then high can they go? Unidentified Company Speaker So it’s a good question. We’re certainly interested in looking at more.

I think when we look at it now and of course it’s key in terms of like how you’re defining it, I’d say under 50% and probably frankly if you look at like pure software it’s probably closer down more like a quarter.

But I think we really need to do more work with regard how we’re defining it and so that we can be clear to you and give you some more precise numbers going forward. And I do think our intention would be do so because we said a numerous times that we do think that this is going to be a key driver of the business and profitability.

But like right now it’s not a huge driver and it’s a little premature to get into the specifics. But I’d like to think that as we go into the next year we can talk a little bit more intelligently about that and give you some more insight into how we think that’s trending over time and what we think the impact is going to be..

Okay. That would be great. And then finally on the new 7000 product.

Were you anticipating these very strong sales right at the end of the quarter there and then how does the 7000 introduction impact the growth trajectory of say like the 5200?.

Yeah.

So this is Ray, so we’ve brought in the general availability date for the 7K which was originally going to be early Q3, we brought that up because of the strong interest that we saw throughout the quarter and a couple of our large customers who wanted to standardize around that because it has tremendous amount of benefits including high density and 10 gig interfaces which opens up the video opportunity.

So it starts to future proof networks that are looking to explore video revenue in a real-time sense. As far as whether it cannibalizes I don’t think it does.

I think it’s a natural migration for people that have been using the hybrid 9K to move over to the 7K chassis and to continue to drive large projects and to drive large service provider network growth projects.

We’re also starting to see some large enterprise employee because to the extent they have very large densities in some of the Fortune 50, some of them are interested in 7K. So I don’t think it’s going to cannibalize the 5000 series, I think it’s going to operate on the high end and it’s very, very competitive.

We were pleased that it crushes the competition on all the major metrics out there.

So that when we get into labs one of the things that I am detecting is that what used to be sales cycle times they were much longer, we know get into a side-by-side back-off and demonstrate clear open order on a number of technical attributes and get more quickly through the lab process and into the sales cycle..

Sounds great. Congrats again. Thanks guys..

Thank you, Ted..

(Operator Instructions). Our next question comes from [Steve] Cowen. Please proceed with your question..

Hi. Two questions. First on Tier 1 customers I guess over the last four quarters or so you have spoken about I guess something on the order of 7 Tier 1 wins I was wondering if you could give some more color how many of those overlap with the 7000 win, geographic split, when they might score into revenue et cetera.

And second question is with the channel up to 29% of product revenue where do you see that going into long run it seems like it’s already trending higher than what you were looking for when you first launched the project 12 to 18 months ago..

So, Steve this Ray. The Tier 1’s we announced six so far this year. They are in all the large theaters. What I am encouraged is that we’re starting to see some take up Asia-Pac but we’ve also seen all around the world that SIP companies starting to evolve. So that’s our comment on the Tier 1.

It wasn’t 7K related although there was some 7K content in a couple of those Tier 1’s but it was principally just continued expansion in the 5000 series as we continue to penetrate there.

On the channel revenue of 29% of total product, I am really pleased I don’t expect to continue to grow too much more from there but I’d take it if it came because I am hoping that we can continue to grow both sides of the business.

And as the channel grows, the service provider grows because a lot of this is related, the service provider, SIP trunking market feeds into the enterprise market.

To the extent that we see continued growth in the Tier 2, Tier 3 and that comes through the channel or to the extent we see growth in the government business and that comes through the channel.

Some of those would be potential sources of higher percentage of revenue that comes in through the channel but I am really pleased with where we’re right now at 30% and I will take higher and if it came lower based on growth in the service provider side of the business that will be fine with me too..

Also just to add Steve I think with regard to the 6 or 7 Tier 1’s that you’re mentioning I mean none of the historical business was 7K. The 7K business that we did in the second quarter was that we did with a Tier 1 service provider that was a prior customer and not a new customer.

And as Ray said in the second half of the year definitely expect and actually know that at least of the top of my head at least one of those new Tier 1 wins that we had is going to be taking some 7K’s in the second half in the year..

Okay..

Any further questions, operator?.

We have no further phone questions at this time. I’ll turn it back over to you Ray Dolan..

Thank you very much Kelly and thank you all for participating on this call, for your continued support of Sonus. We look forward to sharing our results for the second half of the year as it evolves. Enjoy your summer folks..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line..