Patti Leahy - VP, IR Mark Greenquist - CFO Ray Dolan - President and CEO.

Subu Subrahmanyan - The Juda Group James Kisner - Jefferies Ted Moreau - Barrington Research Paul Silverstein - Cowen Mike Latimore - Northland Capital Dmitry Netis - William Blair.

Ladies and gentlemen, thank you for standing by and welcome to the Third 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 today, Thursday, October 23, 2014.

I would now like to turn the conference over to Patti Leahy, VP Investor Relations, Sonus Netowrks. Please go ahead..

Thank you and good morning. Welcome to Sonus Networks third 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 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 web site 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 our IR web site. As shown on slide 2, 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 web site. 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 IR section of our website. So with that, it's now my pleasure to introduce Mark Greenquist, Chief Financial Officer of Sonus..

Thanks Patti and good morning everybody. Let me turn to slide 4 for the framework of our prepared remarks today. I will review the highlights from the quarter including our financial results and outlook, before handing off to Ray to discuss our commercial traction, and our continued focus on shareholder friendly initiatives.

Then we will open it up for your questions. Turning to slide 5; Sonus delivered another strong set of results this quarter. My comments are on a non-GAAP basis, which as Patti said, have been reconciled for you in today's press release.

Total revenue was up almost 8% compared to the third quarter of last year, and our growth related revenue was 41% year-over-year. We had two 10% customers this quarter, both at approximately 17% of revenue; they are CenturyLink and AT&T.

The channel, was a strong contributor to our revenue this quarter, up 50% compared to the third quarter of last year. Channel product revenue represented 38% of our total product revenue this quarter, which was another record high.

There were a number of large channel deals in backlog scored this quarter, so we expect the Q4 number to move back toward our year-to-date average of a bout 28%. So we are very happy to see our continued focus on growing our channel revenue is paying off this quarter.

Contributing to this success is excellent traction we were seeing with the business services arms of large telcos around the world. In fact, AT&T business services, which is included in our channel revenue, comprised 30% of AT&T's total revenue for the quarter, or around $3.7 million.

The business services arm of a large western European service provider also recently selected Sonus over one of our competitors to support the Microsoft Lync managed service deployment for a global company with over 90,000 employees.

Gross margins continued their upward trajectory this quarter, up over 400 basis points compared to the third quarter of 2013, and I will discuss gross margin progress further in just a moment.

Operating income was up 10% year-over-year, and net income was up 26% year-over-year, which represents the sixth straight quarter of profitability for the company. Now I will turn to slide 6; I have just covered most of this information, but here you also have our results compared to our guidance.

The takeaway here is that we have been consistently meeting or exceeding our top and bottom line guidance, and this would be a good time to mention that, going into 2015 when we provide our annual guidance on the February call, we will most likely move away from providing growth revenue guidance as a subset of total revenue, and will simply provide total revenue and EPS guidance for the full year, as well as total revenue, gross margin, OpEx and EPS for the next quarter out, and of course, we will continue to provide color on product, geographic and sales channel trends in our actual results, that drive our growth, so that you know where the business is gaining the most traction.

Let's turn to slide 7 for a deeper dive on our gross margins, which are a core part of what's driving our operating leverage. Here you can see a very nice improvement of 940 basis points over the past two years.

Services margins expansion has been a key driver of this improvement, and we have made a concerted effort to reduce costs in this area, while simultaneously moving the organization from a U.S.-centric support model, to a truly global organization, and now follows the sun 24/7, 365 days a year.

Another key driver of our gross margin expansion has been a product mix shift towards more software and license sales. Now today, this is primarily being driven by incremental licenses or cards on existing chassis deployments. You can think of this like the classic Razor, Razorblade model.

In the future though, as NFV becomes a bigger part of our customer's networks, we should also see higher margin software content increasing. And the last major gross margin driver is that we are moving to more standards based products, which are much less complex than the old Sonus model, which customized far more often and for far fewer customers.

In today's model, we are better able to scale with the channel and customer base that's growing rapidly. Let me turn to slide 8; slide 8 lays out our guidance for Q4 and the full year and please note that my comments now will now pertain to fourth quarter on a non-GAAP basis.

Total Q4 revenue is expected to be between $76 million and $82 million, as noted in today's press release, the fourth quarter historically is the biggest revenue quarter for Sonus, due in large part to service provider spending cycles, and the year end budget flush.

We are very pleased that our revenue linearity has improved this year, and I will show you some data behind that in a moment, and as we have improved our systems and forecasting tools, our sales visibility has also improved compared to prior years.

However, based on the current market environment, and what many of our peers have already suggested, we believe it is prudent to consider the possibility of limited to no budget flush from our North American service provider customers this quarter.

To be clear, we believe that we actually have a reasonable line of sight to reach the top end of our guidance, but we want to be conservative to the downside in this current environment.

Still, we remain confident in our ability to achieve our fourth quarter EPS outlook of $0.03 and our full year EPS outlook of $0.07, given strong year-to-date performance, the continued expansion of gross margins, and ongoing disciplined cost control.

To fill in the other pieces of guidance for Q4, gross margins are expected to be in the range of 65.5% to 66% and OpEx is expected to be between $43 million and $46 million. We also forecast $249 million diluted shares outstanding at the end of Q4, and $255 million diluted shares outstanding for the full year.

The difference between those two numbers is due to the fact that these are weighted average calculations over different periods of time.

And then one final comment on our outlook, based on the visibility we have now, we are also comfortable with the current consensus estimates for the first quarter of next year of $74 million in revenue and a penny of non-GAAP EPS.

I wanted to mention this, since there is understandably a fairly wide range of expectations out there right now, and of course, this view can change, and if it does, we will update it when we provide our annual guidance for 2015 on our February Q4 earnings call. Slide 9, provides the revenue linearity trends I mentioned a moment ago.

You can see that 2014 is shaping up to be the most linear or the most evenly distributed year that we have had in at least the last five years. The midpoint of our guidance assumes $79 million of revenue, which is about 26% of the full year's revenue.

The incremental revenue we need to deliver from Q3 to Q4 to achieve that midpoint is also less than what we have needed to deliver over the past few years. The average over the past three years, excluding the fourth quarter of 2010, which was abnormally high, has been about $11 million.

This quarter, we will need to deliver approximately $6 million of incremental revenue over Q3 in order to achieve the midpoint of our Q4 guidance.

The main point I want to make here, is that the hill this fourth quarter is not as steep in prior years, and the range we have provided derisk it further in order to account for potential reduced budget flush, which we estimate could be as much as a few million dollars.

So in short, we feel quite confident that we can achieve the bottom end of our revenue range, which we see as a conservative number, but let me tell you, we are targeting and have a reasonable line of sight to deliver the top end. Let me turn to slide 10; this next slide provides a good view of our year-over-year growth related revenue trends.

This progress is at the heart of what is driving our top line growth, and you can see good year-over-year progress on the next slide. You could see the sequential progress that we are making.

On slide 11, you can see that our growth related revenue for 2014 is now well over half of our total company revenue, and we expect this to further strengthen in 2015. I'd now like to hand it off to Ray for his prepared remarks.

Ray?.

Thanks Mark and good morning everyone. Let's turn to our third quarter commercial highlights on slide 13, and let's begin with a market perspective. A key leading indicator for our growth business is SIP trunking adoption. We continue to see robust growth in SIP trunking, which analysts project to grow about 35% in 2014.

North America is the leading market with about 20%, and we are seeing the markets in Asia-Pac and Europe developing nicely as well. Robust SIP trunking adoption leads to robust demand for UC applications in IP services, all of which is good for Sonus. The migration to SIP trunking is still in its early days, and we see no sign of it slowing down.

We made several announcements recently regarding enhancements to our partner ecosystem, in particular with Genesys, Microsoft and BroadSoft. Let me describe each of those in turn. Our entire portfolio of SBCs is now certified for interoperability by Genesys, a leading provider of customer experience and contact center solutions.

Sonus has also recognized as Genesys' Silver technology partner. Our SBC solution secure and enable real time communications across different PBXs, contact center platforms and endpoints, to help deliver an exceptional customer experience.

We help protect voice, video and other forms of online collaboration from interception and fraud, so that customer conversations and sensitive information are secured. This partnership is also a good indication of our strong position across the broader call center market.

In addition to Genesys, we announced that the Sonus SBC software addition, or what we call the SBC-SWE, achieved Microsoft Lync 2013 qualification for SBC deployments. The ability to deploy a Lync qualified software SBC via virtual servers already supporting Lync environments enables enterprises to rapidly deploy new networking resources.

With the software SBC, enterprises can quickly turn up SBC functionality within existing virtual environments to deliver built-in media transcoding, network security such as encryption, authentication and denial of service protection, SIP interworking, intelligent call routing and multi-vendor interoperability with linked deployments.

Sonus SBCs are installed at the border, between the internal linked enterprise voice network and SIP trunking services at the network border, to enable a more seamless flow of SIP-based media for UC.

Integrating these powerful network devices into linked deployments protects, secures, simplifies and standardizes real time communications such as voice and video. This month, we also announce that our entire portfolio of SBCs has completed interoperability testing with BroadSoft's BroadWorks platform.

This integrated solution from Sonus and BroadSoft will accelerate the deployment of secure, hosted cloud-based communication services by decreasing installation challenges.

BroadSoft service provider customers now have access to a complete portfolio of hardware and virtualized SBCs, scaling from low session count density serving the enterprise branch offices to the industry's highest density requirements to serve large service provider core infrastructures.

BroadSoft is deploying Sonus SBCs for access and peering as part of its broad cloud managed service offering. Giving BroadSoft the flexibility to deploy the SBCs virtually or as appliances, as well as the ability to easily scale business needs.

The traction we are seeing with our partners, and our results this quarter speak to the fact that our competitive mode is widening. I believe we are without question, leading the market in virtualization. I just mentioned the software-based SBC.

It recently received the 2014 unified communications product of the year award; and earlier this year and earlier this month, we introduced software versions of our centralized policy and routing engine, we call that our PSX, and our diameter signaling controller or our DSC.

These are the logical next steps in our overall virtualization strategy, as we widen our leadership in virtualization. Sonus is the only brand in the market to leverage a common hardened [indiscernible] base across our hardware and software portfolios for core communications networks, which gives our customers holistic investment protection.

These virtualized offerings address service provider and enterprise requirements for NFE and SCN enabled technology, in order to scale cloud-based delivery platforms for real time communications.

One very exciting and new development, is that we are now working on deploying our SBC in the Amazon Cloud, in order to provide SIP trunking termination, security and policy for hosted UC services. The commercial opportunity here was brought to us by a recognized link partner and systems integrator.

Based on our customer interest, we are working quickly to bring this solution to market. Moving to large scale SBC deployments, we continue to see strong market interest with the Sonus SBC 7K. As we discussed on the call last quarter, this was the fastest time to revenue for any new product in our history.

Q3 was a strong quarter for this 7K and we expect Q4 to be even stronger. We are seeing very broad interest for this product from all types of service providers, cable operators and even large enterprises.

Diameter remains a very exciting market opportunity for Sonus with a market that analysts now project will grow at a CAGR north of 50% from about $200 million in 2013, to nearly $2 billion in 2018.

We have seen some good early indications of success, having recently won a nice piece of diameter business together with Kapsch a distributor in Europe, at BICS, which is Belgacom International Carrier Services.

This is for the deployment and maintenance of a signaling network to carry BICS international wholesale traffic to more than 500 carriers worldwide. This quarter, we scored another new tier-1 customer win in Asia-Pac. This win was for SS7 signaling, with licenses to purchase diameter in the future.

Sonus in fact beat the incumbent singling vendor for this business, based on the strength of our product roadmap. This brings us to seven new tier-1 wins in the last five quarters, with five of those outside North America. For those tracking it, we are now selling growth related products to 44% of the top 50 ASPs around the globe.

This is solid progress, but we still have a lot of opportunity to penetrate more top service providers, particularly outside North America. Let's turn to slide 14; Sonus has a very strong balance sheet, with more than $150 million in cash and virtually no debt.

We are also now consistently generating positive cash from operations, and this positions us with total flexibility to build organically, continue to make opportunistic growth acquisitions and fund our ongoing stock buyback program.

We have repurchased approximately 44 million shares to-date, which represents about 16% of total shares outstanding since the buyback began. We bought these shares at an average price per share of $3.38, and we have approximately $26 million available for future repurchases under the current plan.

I'd like to spend a minute now on the topic of shareholder feedback, because we have taken some recent actions that I want to highlight for you today. You have heard me say before, that I believe I have the best commercial hand that I have ever been dealt in my roughly 30 years in the business world.

As I stand here today, I feel stronger about that statement than ever before. I base this on the fact that we are not just relevant, but we are increasingly strategic to some of the biggest service providers in the world. I love our odds, and I am incredibly proud of our team for getting us to this point.

That said, I am fully aware that it can be disheartening to our team and of course to our shareholders to see our valuation not yet fully reflect the progress we are making. We move forward with the perspective you would expect us to have, which is to ensure that the decisions we make today are also the right decisions for our business tomorrow.

We have worked hard over the past couple of proxy cycles to solicit shareholder feedback. Some of the things we have done recently in response to that feedback are to eliminate our shareholder rights plan or poison pill, which had been in effect since 2008. We have also enhanced our paper performance practices.

For example, by providing specific financial metrics for our cash bonus program; instituting share ownership guidelines for myself, direct reports and the board, and adopting a formal callback policy.

Most recently, you may have seen that we filed a definitive proxy to approve two proposals on December 2nd, one of which is to give our board the authority to do a reverse stock split. I want to be clear that we believe we are doing this from a position of strength.

In fact, we had the approval to do a reverse split about four years ago, but we concluded that was not the right time, when we still had so much of our operational turnaround in front of us.

Over the past six to 12 months, we have heard many current and potential investors tell us that Sonus is a much different and much better company today, but it still has too many shares outstanding, and that we should correct it. So we are also listening to this feedback.

While it wouldn't change anything fundamental with the business, there are a number of benefits to doing a reverse stock split, one of which is that we can shine a brighter light on our earnings performance. Slide 15 shows a good illustration to this.

This data shows that while we met our guidance this quarter when rounded to the nearest penny and using our current share count, a smaller and arguable more appropriate share count would have uncovered a significant EPS outperformance, depending on the split ratio.

As Mark said earlier, Sonus has now delivered six consecutive quarters of positive non-GAAP earnings, and met or beat our guidance in every one of those quarters. Our valuation is increasingly underpinned by the fundamentals of our operational performance. Yet, this progress is arguably overshadowed by the high number of shares we have outstanding.

So among other potential benefits of reduced training volatility and lower transaction costs, doing a reverse split would better portray our earnings performance. We encourage you to read the definitive proxy filed with the SEC on October 15 for more details in advance of our special shareholder meeting on December 2nd.

So let's tie all this together back to our performance on slide 16. The transformation that's taken place at Sonus is clear. Our revenue is growing, and our margins are expanding. We are generating positive earnings. In fact, we raised our earnings guidance earlier this year based on that strong performance.

Turning to slide 17, these trends all point to strong operating leverage, which I believe is one of the most exciting aspects of our investment thesis. Our strong execution allows us to confirm the 10-10 financial framework for 2015 that we first laid out for you at our Investor Day in March.

And turning to the final slide, slide 18, we will be attending a couple of investor conferences in New York and getting on the road in other parts of the country this quarter. We hope to see as many of you as possible during this next outreach period. And with that, we now like to open the call up for questions.

Operator?.

Thank you very much. (Operator Instructions). And our first question comes from the line of Subu Subrahmanyan with The Juda Group. Go ahead..

Thank you. Two questions. First on the guidance for the next quarter. Mark, as you mentioned that there are some variables in terms of year-end CapEx budget flush.

Can you talk about which product segments that specifically impacts? Is it fairly broad-based, does it impact the growth products more versus kind of legacy? And thinking about your guidance for next year, the 10% revenue growth, can you talk about -- I know you're not breaking it out too much, but is the trajectory similar where the legacy products are declining somewhere north of 20% and growth products are offsetting that?.

Sure. With regards to the guidance, I did mention in the remarks, but you know in the chart, you can see that we also have a pretty wide range for the growth products. So its maybe a little bit less wide than the total.

So specifically to your question I think where mainly, as we look and contemplate like what we think of the budget flush in the fourth quarter is, we are thinking it has more to do, or probably the majority of it has to do with growth products versus legacy.

And then with regard to the question about next year and revenue growth, I think largely we believe that the trends that we have been seeing in growth versus legacy are pretty much still intact, and by that I mean, we had talked about the market growing probably in the 20s for SBC and certainly diameter combined with that, and that the legacy product revenue, we continue to think that that is also -- declines pretty rapidly, probably in line with what we have seen this year, which is in the 20s, but that the maintenance declines at a slower rate probably, high single digits maybe 10%.

So we have been talking about those sort of percentages consistently, with regard to the various components of revenue and the assumptions pretty much stay the same for what we are thinking about next year..

And just a quick follow-up on gross margin, strong gross margin number this quarter, you are guiding it down a little bit for next quarter? Is it just mix, could you just talk about trends for gross margin going into next year? What are the --.

It's exactly that.

Its mix and you know as you have seen this year, in fact on the chart that we have got in the presentation, quarter-to-quarter gross margins can jump around a little bit, but the trend is pretty steady and we think based on guidance we are looking at, as much as a 300 basis point improvement year-over-year, which would follow a 300 basis improvement in 2013 versus 2012.

And while next year, not going to run ahead of myself and be talking about guidance in 2015, I think we are still on the page of what we talked about before, which is we think we continue to make good incremental improvement in gross margins on a going forward basis..

Got it. Thank you very much..

And our next question comes from the line of James Kisner with Jefferies. Please go ahead..

Thanks guys. Congrats on a strong Q3..

Hey James..

Hey there. Congrats on a strong Q3, and thanks for giving us some visibility into Q1.

So just wanted to understand the guidance, I mean, just -- I mean there is a no budget flush, I mean is there really something you're getting, is it some kind of impact you're seeing in your bookings, is this conversation with customers, are you reading the headlines, what's the overall kind of driver here to your conservatism in Q4?.

Yeah. So James, as we tried to say in our prepared comments, it is more macro environment looking at just limited budget flush as potential option, so what we tried to do is just open a range to that, but no I wouldn't call it any weakness from the standpoint of Q3 bookings to the contrary.

What I would say is, we just have to -- we have to be aware of the macroeconomic environment out there in some of the spending trends that we see from some of the largest service providers..

Okay. So one thing, particularly on the test side, we have seen some folks that there has been a little bit of some pausing here and there around just SDN, architectural decisions that certainly at least one major large carrier in North America.

Do you think you're seeing any of that at all, is there any potential impact from that?.

So I have said on prior calls James, here is how I would try to answer that question. I want to put this in context, I don't want to be just a simply yes or no there, although that tends to be the easiest answer to quote.

These transitions to SDN are choppy by their nature; because remember, there was a domain 1.0 before there was a domain 2.0, and who knows, maybe there will be a 3.0.

People try to figure out -- the basic thing that's happening here, is a transition from dedicated networks with dedicated endpoints running dedicated applications, voice, video, data, etcetera, to an application suite driven mostly in the cloud, running across an IP architecture.

So that cloud architecture is working really well in IT, but most of the revenue is still living in those old MPLS architectures and nailed up architectures. The transition of that revenue is what people are kind of -- on again, off again so to speak with, because they can't break that revenue, right; and all that revenue is real time stuff.

The majority of the volume is best efforts, the majority of the revenue is in the real time suite. And that transition across that chasm is what I think you are seeing some false starts on; and I would expect those false starts to continue.

I think they are in the run rate of the industry today, I don't think that suggests or implies any slowdown or any speedup, but when we get across that chasm, I think you will see it will -- fairly large secular growth up as that new cloud architecture takes hold. That's the transformation that Sonus is going through as well.

It’s a very healthy thing for us. When I indicated that we are increasingly strategic to those tier-1s, it's because we are in increasingly senior and strategic discussions with all of those tier-1s around the world, discussing how to move their revenue into that cloud architecture, without breaking it.

It’s the simplest way I could describe it to you..

Okay. And just one last quick -- thank you. And just one quick one; so obviously you have had pretty strong data points in the iPhone 6 launch, it’s the first major phone or at least the very significant phone to support voice-over-LTE.

I mean, is there any visibility for you in the interconnect side? Do you kind of see a pickup there? I mean, could you potentially have some accelerating capacity additions as a result of the iPhone 6.

Just any kind of initial anecdotes or just datapoints on that from where you sit?.

The simplest answer is no James. I don't think that the iPhone 6 by itself drives this. I do think that the transition to a real-time suite, not just voice, but the entire real-time suite, and I think video is going to be the bigger driver, and we have said that for a number of quarters now, if not longer.

It’s the driving up to videos, why, because it unlocks a new revenue source and a new revenue source justifies expansion and capital budgets. To me, just boil this down to really simple metrics. If we can get behind driving revenue for service providers, they can let out additional capital.

Until someone helps them do that, its going to be a measured CapEx environment for all service providers. I don't think iPhone 6 has yet, and I don't expect it will be for another couple of quarters really unleash VoLTE or video. But it certainly sets the table for it..

All right. Thank you very much..

Sure. Thank you..

And our next question comes from the line of Ted Moreau with Barrington Research..

Hey Ted..

[Indiscernible] quarter guys. Just kind of curious.

You talked about a little bit of some backlog helping to drive Q3, so just wondering how you're thinking about backlog going into Q4 and how much could come out of backlog?.

So over the last couple of years, I mean -- and we have talked about this before; I mean, the business has changed, where its not as much of a backlog business as it used to be, and its more of a turns business -- I wouldn't call it a turns business, but its --with those two bookings, we have moved towards being more of a turns business.

So I guess in Q4, I mean, I expect kind of the same that we have seen over the past couple of quarters this year, with regards to how much of the revenue was going to be generated out of backlog, and how much is going to be booked, shipped and revenued in the quarter.

I am not -- so I am going on and on here sorry, but I am not seeing any different trend or any big movement or changes with regard to those sorts of metrics..

Okay. Sounds good.

And then during the prepared remarks, you guys were talking about the various partners; could you rate those as far as what you believe maybe the most contributors to revenue growth over the 2015? And then I noticed, Juniper wasn't listed on that slide, and I thought I saw a press release about your interaction with Juniper, excuse me, very recently, so could you provide an update on Juniper?.

Sure Ted, this is Ray.

Those three partners that we dealt with there, Genesys, Microsoft, Lync and BroadSoft, BroadCloud, those are all, if you will, application suites and what I was trying to describe there is the opportunity for us strategically to embrace those strategies as they all drive, if you will, the transformation of the edge of the network and the access part of the network, call centers, as well as the enterprise, and to a certain extent, the small-medium business in the hosted environment for service providers.

Juniper would be more of a core infrastructure player down the stack in layer three, and we maintain a vibrant technology partnership with Juniper, but it wasn't as much a go-to-market strategy, that's why we just didn't bring them up in this call.

But it remains a good strategy, a solid strategy, and in fact, its consistent with all the higher layer strategies in all of those cases, because Juniper serves all of those environments as well.

And I wouldn't necessarily stack rank them, I do think the call center environment in general is an important category for us to penetrate, and penetrating one of the industry leaders is an important data point for us. We have moved beyond that.

In fact, last quarter, we mentioned that we had penetrated -- we had scored a call center environment off shore, and that was not Genesys. So I just used it as a large name, so that you could understand the significance of our adoption into that space; because SIP trunking and call center development are running in parallel on a global basis.

The move into BroadWorks and BroadCloud is a big deal for us on the service provider side, and the interoperability between the BroadCloud environment and the Microsoft Lync environment is another very important thing for us to help both of those environments work in the multi-vendor marketplace that we have today.

So I hope that's enough color and background on that Ted, do you have any follow-up that you wanted to explore?.

No. Thanks for the clarity on that. Appreciate it. Thank you..

Sure. Thank you..

Our next question comes from the line of Paul Silverstein with Cowen. Go ahead..

Thanks. Ray, I apologize if you all gave this during the call.

But can you give us the number of tier-1 service providers for SBC? I -- just from the commentary, it sounds like you now have BICS and there is Asian-Pacific tier-1, does that mean you now have two tier-1s out of the gate for diameter, or is it more than that? Then I have got a couple of follow-ups..

I think its safe to say that with those two, I don't want to go beyond that just now Paul, and then with regard to -- we quoted the entire -- if you will, and it was 22 of the top 50..

Yeah. 22 of the top 50 for growth.

Does that mean you have got two for Diameter than you have just 20 or 22 of the top 50 for SBC by definition?.

Yes..

Okay. I just wanted to make sure I'm having that. All right.

In terms of your revenue, [indiscernible] the customer number, can you give us this -- again I apologize if you gave it during the call, but can you give us the split between enterprise and service provider on the SBC piece?.

Sure. If we look at the product revenue, enterprise as a percentage of total product revenue is 24%, and if you only looked at it on the growth related products side, its like 27%..

So there is 27% of growth of products?.

Yes..

Great. And then, finally on the 73% coming out of the service provider, can you give us a split or at least a rough split between how much of that now is tier-1 versus non-tier-1s of that service provider please? I apologize, I have one last question after that..

I would approximate it to -- at least three quarters tier-1 I would say..

It needs to be and definitely is pretty high Paul, because I mean you had a couple of 10% customers this quarter who were very large, and so those two in and of itselves are going to be a significant percentage of that..

Right, and you said that each of AT&T and Century were 17, so those were 34, and then the balance of your tier-1s was somewhere in the 40-ish, 45%?.

Yeah..

All right. One final question from me.

As you look forward, in terms of driving your SBC revenue, thereby driving your total revenue, those 20, 22 tier-1s that you are now in with SBC, how many of those have you becoming there be strategic, or one or two or three strategic suppliers, as opposed to the old days, when I think it was more one-off projects? Is now most of those 20, 22 where you are either be sole or one or two or three? Can you give us some sense of how many of those?.

Yeah, if you open it up to one or two or three Paul, I'd say it’s the majority, for the vast majority of them. We have gotten very strategic with the majority of those tier-1s. The virtualization, roadmap and our achievements to-date on virtualization has been a big part of that.

The fact that in many cases, we grew out of the gateway business into an SBC architecture and protected them, on their old TDM sides. Definitely has helped us. So a lot of them got comfortable with us on the 9K and have evolved into 5K, 7K customers. So that's -- I would say we are in a really good position with them, and its helping us.

The fact that we grew out of a peering application, and now we are starting to proliferate into access also helps, because you peer with somebody else and a lot of times, one peering side brings us another peering side, as that market evolves. So all of those, I would say, were in that bucket..

And I trust, by definition that's reflected in these tier-1 for 20, 22s in SBC, they are coming back to you again and again and again? Or otherwise, you wouldn't be one of the strategics?.

Yeah. Some of them we have just early penetrated them, so I don't have to overstate my again and again and again, or be misunderstood. But yes, I think we are very strategic with these tier-1s around the world..

All right, again I am going to apologize to others on the call, one last question.

If I took those 20 to 22 tier-1s, how many of those -- to your last statement, how many of those have been secured in the last handful of quarters?.

We said we had seven in the last five quarters. I don't have the number off the top of my head beyond those last five quarters, but that seven to 22 Paul, I hope that's enough to give you a sense of trajectory..

That's fine.

So you have gone roughly in the last year from seven to 22? Is that what you're saying?.

15 to 22..

15 to 22, excuse me. All right. I will pass it on, I appreciate it. Thanks guys..

Thank you..

Our next question comes from the line of Steve Cowen with (41:31) Partners. Please go ahead..

Hi.

Couple of questions; first, what was the headcount as of quarter end?.

It was around 1,200..

1,200? Okay, great. Ray, more strategically, you made tremendous progress in building the indirect channel and in my numbers it is up -- revenue is up, product revenue, more than 50% year-on-year. By contrast, the direct revenues have been roughly flat year-on-year for the nine months of the year.

Can you talk a little bit about what's going on, on the direct sales, which I guess implies sales into service providers and when we might anticipate some acceleration in that business?.

Sure Steve. Probably the flat side of that business is most likely SBC growth and a little decline on the gateway side. So that side is actually drawn down, because it was exclusively -- the gateway side was exclusively service provider.

So when you look at the mathematics of our top line, our service provider sector is far more influenced by the legacy businesses trajectory than the enterprise, which is frankly a pure play, because there was virtually no gateway business on the enterprise side, okay.

So I would assume, as that map changes, it will see some aggregate growth, because its seeing some growth on the growth side now.

Makes sense?.

Sorry..

Okay, yeah go ahead please..

To follow-up on that, if then -- if you looked at the carrier business, exclusively the growth products, what kind of year-on-year, revenue growth would I expect to see?.

I don't have that number handy Steve, we may be able to come back to you on that. I don't know -- I haven't broken that out per se..

Without getting too quantitative, would you expect to see growth in that area, consistent with how the market is growing 30 kind of percent?.

Yeah. Its in parallel, because as we said, the gateway business trajectory on the product side is exclusively on the service provider side. So as it runs off, its going to expose what's already a growth business on the service provider side.

So we can do the math for you, but I think you can probably do it as well, because all you have to do is burden the service provider side with the entire downward trajectory of the gateway business, and let that start to decline. But our service provider business is growing in line with the market, if not slightly above, as is our enterprise side..

Through both counts?.

Through both the enterprise, yes. The enterprise for the channel and the service provider into the core networks. Yes..

Great. Thanks for the explanation..

Sure. I'd also highlight, as we did on the call Steve, just for the purposes of everyone else that may or may not have made their early part of the call; the service providers as a channel is a very healthy strategy that's playing out for us right now. We exposed one piece of data, which was AT&T.

Business services as a channel was a third of their total business, which is why they popped to a 10% customer, but one of the reasons why they popped to a 10% customer again this year -- this quarter. We had another western European channel, which is a service provider, drive a large multinational win in the Lync environment for us.

So as the service providers explore SIP trunking and get into that as a hosted or a non-prem solution in either Lync or other environments like BroadCloud, that's a very healthy growth strategy for us as well..

And we do have one final question, it comes from the line of Mike Latimore with Northland Capital Markets. Please go ahead..

Yes. Thanks a lot.

I am curious on the enterprise side, has your outlook for that segment changed at all, better or worse, same as before?.

Yeah, this is Ray, hi Mike. I would say same as before. I think the enterprise side is continuing to grow nicely. The good news is, its starting to globalize, driven by multinationals. We commented at the front end of my comments, that the U.S.

is now approximately 20% SIP trunking, and that we are seeing good growth, certainly mid-single digit penetrations in Asia-Pac and European region.

So we see some progress in [indiscernible] though its early, and if all of those trends continue, it could be in fact the beginning of a hockey stick so to speak in SIP trunking, and if that's the case, the enterprise growth should take up quite nicely in 2015 and 2016.

So the trends are in place, they may in fact be accelerating, that's how I would summarize where the enterprise is..

And when you talk about enterprise gaining, I think you said 24% of product revenue, that does not include the sell-through in some of these telcos, right, where the telco is actually selling it to the enterprise excluded from that, is that right?.

That's correct. We score that into the service provider side..

All right okay.

Did you know roughly how much that would be in terms of additional enterprise revenue?.

I would say, we carved out roughly three -- it might be another $5 million max of total revenue that you could score, both -- and kind of a hybrid service provider enterprise side, but we scored on the enterprise side..

Fair. Okay. Thank you..

I should say on the service provider side. Sorry for the confusion. Thanks Mike..

And gentlemen, we do have a question that was just queued up by Dmitry Netis with William Blair. Please go ahead, sir..

Hi Dmitry..

Thanks for squeezing me in. I have a couple ones, I will go quickly through them, gentlemen. One is, I might have missed it, but can you tell us what the SBC 7K revenue was this quarter, as well as the Diameter revenue this quarter, and then what are you baking in towards the fourth quarter for those two product lines..

So Dmitry, we had talked about the 7K specifically last quarter, because it was the -- right out of the gate. But I mean, historically, we haven't gone into product line details.

So I am not going to give you a specific number, but what I will tell you, the 7K continued to perform really well, and certainly, as we look at Q4, and we are looking at the funnel, and even as we look out into Q1 and we are looking at the funnel, we have got a very strong -- it looks like very strong demand for the new products.

So we are very happy with how that's progressing.

And then with regard to Diameter; again, I don't want to talk specifically to product lines there, but we currently -- we had said, basically back when we purchased PT, we thought Diameter would be pretty modest this year, as we did the product development that we wanted to do, that's in the original guidance, I think it was around $3 million, and that's where we remain, with regards to guidance per diameter for the year..

Okay. All right.

Thanks, and then as I look into -- kind of the comment you made on the enterprise side, which is 24% of your product revenue; can you segment that further for us and maybe tell us what the Lync related revenue out of that segment would have been?.

So I don't have the specific number for you, but its very high. The majority of it would be driven by Lync deployments..

Majority of that 24%? Okay. And then, a question on AT&T, how much -- I know it was a 10% customer this quarter, what are you projecting for AT&T in the fourth quarter? I mean, given that its such a big customer of yours. If you can provide some commentary on that, that would be very helpful.

And then with the kind of the fiscal 2015 or calendar 2015 rather, what are you thinking there on AT&T? Are they kind of soft in the first half, pick up in the second half or vice versa? I mean, give us some commentary of how AT&T supposedly will project out next year? And then I don't want to sort of put the words in your mouth, but the $10 million product push-out you had last quarter, can you give us sort of your expectations.

That's still on track, as you push it out further, or that's still sort of what you have been expecting? Thank you..

Okay. I am glad I was writing all of those down. So let me take them one at a time.

So with regard to AT&T and fourth quarter, I mean -- actually on the last call, what we had said was, frankly we didn't expect AT&T, or at least I didn't expect AT&T was even going to be a 10% customer in the second half of the year, so I was a little surprised in Q3, when they popped up as they did, and as Ray mentioned, a fair amount of that had to do with the strength of the sell-through to enterprise.

So kind of back to where it was in Q4, I am not expecting a tremendous amount from them, but we will have to see with regard to any kind of reselling business, what that does. With regard to 2015, I think you're just asking me to get way ahead of myself with regard to that.

So I am going to defer that, and we will come back in February and when we really talk about annual guidance at that time, and talk about the trends that are impacting that, I guess, we will have more to say on that.

So I don't -- again, all we really wanted to say was, with regard to Q1, when we look at the consensus out there, we are reasonably comfortable with what we see, and as Ray said, we remain committed to our 10 in 10 model..

With regard to the order that we had talked about a quarter or two ago that pushed out, I still think that's a 2015 event.

Don't specifically -- have a specific quarter with regards to -- I think that's going to be, nor did we ever really say what quarter we thought it was going to be, and I think people perhaps put some words in our mouth, but I don't believe that we ever -- we are [indiscernible] on that.

We still think that that will happen in 2015, but not exactly sure in which quarter..

I believe Ray it was going to be first half. I mean, if I recall, that was sort of -- just for the call last quarter.

So is that still sort of tracking within your expectations?.

Yeah, we still have a great relation with AT&T Dmitry, and we will follow their spending pattern. So we feel really good about the strategic projects that we are working on with them..

Okay, last question if I may. On the network equipment manufacture partnership front. If you could comment Ray, what are you seeing sort of out of potential times with the Ericssons, Nokias, Alcatels of the world, that they are going to those major sort of architectural deals.

Are you working closely with them, are you trying to sort of collaborate on projects. I mean, give us the state of the market there or the industry there? Thank you..

Sure. So with regards to all of those partners, our principal goal is to follow the direction of what our core customers want, principally the tier-1s. Many of those players supply into those tier-1s with both old and new architectures, and we have been partners with many of them in the past, and we will continue to partners with them in the future.

But I don't have anything specific on this call to refer to Dmitry, and we will just continue to work on it.

Okay?.

Very good. Thank you..

And there are no further questions at this time. I turn the call over back to you sir..

Thank you very much. I will be brief in my closing remarks. I know a lot of you need to move on to the market open, which is imminent. Thank you very much on behalf of all my colleagues at Sonus for your support out in the marketplace, getting our word out. I am really pleased with our progress.

I look forward to sharing the results of our fourth quarter with you. When we close that, I appreciate your participation today. We have done our best to give you a transparent into what we see out there and to be as conservative as we think its appropriate to be, with regard to our outlook going forward. So thanks a lot.

We look forward to meeting many of you out in the marketplace over the weeks ahead. Have a great day..

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone..