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

Dmitry Netis - William Blair Jess Lubert - Wells Fargo Ted Moreau - Barrington Research Timur Ivannikov - Jefferies Paul Silverstein - Cowen & Company Subu Subrahmanyan - The Juda Group Nate Cunningham - Guggenheim Securities Mike Latimore - Northland Capital Steven Collins - Provo Partners.

Ladies and gentlemen, thank you for standing by. Welcome to the Sonus Networks' First Quarter 2015 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, April 22, 2015.

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

Thank you and good morning. Welcome to Sonus Networks' first quarter 2015 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 website after the call.

During our prepared remarks, we will be referring to a presentation with supporting information, so please take a moment to locate this on our IR website. 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 those 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-K 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.

And 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. With that, it's now my pleasure to introduce the President and Chief Executive Officer of Sonus, Ray Dolan..

Thank you, Patti, and welcome to everyone on today's call. On March 24, we issued a press release stating that our Q1 results would miss our prior outlook and that our full-year 2015 results would also be below prior guidance.

As CEO of Sonus, I can tell you that this is absolutely not where we want to be and I am disappointed with our first quarter results as well as the revision to our full-year outlook. I and the entire management team understand the importance of doing what we say we will do. I would have preferred to have hosted a call sooner than today.

However, before I spoke with you, I wanted to feel confident that we understood the underlying causes and the likely implications on our full-year outlook. We've worked tirelessly since the March 24 announcement to understand what happened and what we can do to avoid it happening again.

In addition to a deep inspection along with our leadership team of our internal forecast and internal processes, I and other members of the team have personally spoken with or met with many of our largest customers. We do this routinely, but we stepped up our efforts to reaffirm or adjust our working assumptions.

In these most recent conversations, we've discussed their plans and how we are aligned with them both technically and commercially. These customer conversations have given me confidence in Sonus, our technology, and our path forward. Turning to Slide 4, I'd like to highlight three key points right up front.

First, based on the significant work we've done since March 24, we believe that our Q1 shortfall and our revised outlook for the year primarily reflects the late timings of orders, lower spend, and longer RFP decision cycles as our customers take time to determine their future network architectures.

We do not believe it reflects material competitive losses. My customer conversations as well as our ongoing RFP activity confirm that Sonus' technology is aligned with the technology strategies of our customers. Second, despite the near term pressure on our results, we remain well-positioned, both technically and commercially as opportunities develop.

To expand on this point, it's important to acknowledge that our industry is in the early stages of a major architectural shift to virtualization. Fundamental changes like this often take time to accelerate and when they do they are not linear. To ensure Sonus' best position despite this volatility, we are driving operating efficiency.

And as we do this, we are also continuing to innovate in areas that we are confident will matter to our customers. We are staying close to our customers so that we understand their needs and are ready to act when they are. We were the first to virtualize all of our growth products so we are prepared when that shift occurs.

We continue to believe that the shift to a software-centric cloud-based architecture is all but certain to happen and we position ourselves to help lead the industry forward when that happens.

The third key takeaway is that we are controlling what we can in this macro environment, which is now clearly impacting other suppliers in our industry as well. Controlling what we can, means also controlling our cost structure.

As announced today, we expect to reduce our cost structure by approximately $20 million on an annualized basis as compared to full-year 2014, with $15 million expected to be realized in 2015, the majority is being in place by the end of Q2. Let me be clear. These are targeted cuts not wholesale changes to our investment priorities.

We intend to preserve the strategic progress we've made over the past several years. We remain fully committed to investing in the critical technologies, which represent some of the most vibrant growth opportunities in our industry and which are value creating opportunities for our customers and our shareholders.

With that, I'd now like to get into the details of what happened in Q1 and our revised outlook for the year. Let's start with what drove the Q1 shortfall. When we provided our guidance for Q1 on the February earnings call, we cautioned that our quarter was backend loaded. Unfortunately, the vast majority of those late quarter deals didn't occur.

To give you the details, approximately half of the $24 million shortfall were distributed to four of our largest customers delaying purchase decisions, with two of these cases both delaying and reducing their spend to a fraction of what we had forecast. The other half of the shortfall resulted from a large number of mid-size deals pushing out.

Approximately $1 million or less than 5% of the shortfall can be attributed to competitive losses and this level would not be unusual against the quarterly run rate of this magnitude. Beyond the roughly $1 million in Q1, we believe that we have not had any significant competitive losses at our major customers.

Let's turn now to understanding the full-year outlook. We revised our annul expectations downward by approximately 25% or approximately $80 million. Slide 5 summarizes the primary components of that change. Roughly half can be attributed to four large North American tier-1 service providers.

Specifically, with respect to AT&T, which has been our largest customer historically, we are no longer expecting them to be flat year-over-year. We now expect that it will be down approximately $30 million from last year, which means we expect them to contribute roughly $25 million for the full-year of 2015.

A handful of other large North American service provider represents the balance of the tier-1 difference. We are seeing purchase decisions either push out, reduce in size, or both.

The reasons include delays in the major technology transition to SDN and NFP and the switch to software to model, delayed RFP decisions many of which are related to that transition and impact of industry consolidation in both the telco and cable industry.

In some cases customers have experienced their own shortfall to an end market demand relative to their plans and projections. As a result, they are now likely to delay their plans for additional capacity until later this year or even next year.

The other half of the $80 million is roughly evenly split between federal, enterprise, signaling, and professional services. Let's discuss each of these in turn. Our revised forecast anticipates that federal will not contribute meaningfully until at least the second half of 2015.

We are well qualified and we are participating in interesting opportunities across numerous government agencies, including some software only proposal. Still we now believe it is prudent to take more cautious approach until we see more evidence that federal spending is picked up in our category.

In enterprise, we continue to make solid progress with Fortune 100 global account. Our SBC 1K and 2K and our Sonus partner Assure channel remain important aspects of our enterprise go-to-market particularly in a link which is now called Skype for Business environment.

Additionally our full SBC portfolio, along with our recently acquired SDN capability is gaining traction. We continue to make progress with service providers as a channel for these opportunities, including the business services division of AT&T, Verizon, and others where our RPC 5K and the SBC 7K are very competitive.

Other service providers are engaging as well domestically as well as globally. These are the relationships which have historically helped to plan large blue-chip UC accounts. So we remain optimistic that this is an effective go-to-market approach that will continue to be approved over time as the chip company and UC markets continue to develop.

Still the sales cycles remain long and until end user demand accelerates, we've revaluated and reduced our expectation for enterprise accordingly. Turning to signaling. We remain engaged in a number of signaling RFPs for which we feel we are well qualified to win as either a second source or to displace the incumbent provider.

These are often highly competitive RFPs and require multiple rounds of testing given the future complexity in both signaling deployment. We are continuing to harden both the SS7 and the Diameter products that were part of the PT acquisition in an effort to capture these signaling opportunities.

We will keep you informed that these play out later this year but for now we have also reduced our forecasted signaling contribution. And finally, we expect less professional services revenue, which is largely just a mathematical function of our lower product revenue outlook.

For all these reasons we're revising our full-year outlook and we're adjusting our cost structure accordingly. We estimate up to 20% of our revised forecast is related to enterprise and federal with the balance in service provider. This is roughly consistent with our revenue spilt today.

We're also estimating that roughly three quarters is related to growth-related revenue with the balance in legacy, which is roughly consistent with the way our product revenues have been trending in 2014.

Before handing over to Mark, I want to speak to our strategy as summarized on Slide 6, as I remain just as confident in our strategy today as I have ever been. Despite the significant challenges calling the timing of the industry transition to a cloud-based architecture driven by the transition SDN, I believe this transition is inevitable.

Every discussion I've had and continue to have with customers and partners confirm this to be the case. The fact is the application layer will control communications networks going forward. Communications enabling the SaaS layer with critical software component that can then interact with the network to configure it in real time is the primary focus.

We have often called that "over the top" as an alternative service delivery model to today's service providers. Going forward, it becomes the primary model. It changes everything, its destructive, it leads to a radically lower cost structure, and it empowers businesses to establish their own service delivery model.

In this short-term this transition is uneven. Longer-term we'll see that work flows drive communications networks and work flows are in the application there, the customer is the app. As the CEO of Sonus, I'm comfortable that our technology assets are an essential part of the bigger picture as our industry makes this transition.

No one knows precisely how this will happen and when, but I do believe the following. Our policies, signaling, session, and SDN controller assets, taken together form a large part of the architecture that will drive our industry forward in the decades ahead.

These are the key areas of our investments and they remain the areas that are resonating with our customers. To ensure that we continue to invest properly in the critical areas and remain financially and operationally strong during this transition, we've taken the steps to reduce our cost structure quickly. We will remain focused on this transition.

All of our stakeholders including our customers and our partners deserve and will continue to get our best efforts and I'm proud that we and this team have a journey ahead. With that, I'd like to hand it over to Mark, to discuss our results and outlook in more detail as our cost structure reduction plan.

Mark?.

Thanks, Ray. As a reminder, gross margin, operating expense, operating income, net income, and loss per share are all discussed on a non-GAAP basis, and have been reconciled for you at the end of today's press release and presentation. So let's move straight to Slide 8 for a closer look at the quarter. This slide summarizes our reported results for Q1.

Total revenue was $50.1 million with $29 million or about 58% attributed to our growth business. Total product revenue was $24.9 million and total maintenance and services was $25.2 million. Gross margin was 61.5% which was negatively impacted by a charge for excess and obsolete inventory of approximately $2.7 million.

Excluding this charge, gross margins would have been almost 67%. Operating expenses were $43.5 million which resulted in a net loss of $13.1 million or $0.27 per share based on 49.4 basic shares. Cash and investments totaled approximately $113 million at the end of the quarter.

When you compare this to our cash and investments at the end of the year we were down approximately $35 million, $16 million of this was non-operational cash consumed for the Treq acquisition at $10 million, and share repurchases of $6 million, approximately $19 million was used for our operations.

Let's turn now to our outlook for Q2 and full-year on Slide 9, starting with the second quarter. Q2 revenue is expected to be in the range of $53 million to $55 million. This outlook reflects our expectations for continued near-term revenue headwinds for the same reasons Ray just outlined a moment ago.

Gross margin is expected to be in the range of 64% to 65%, OpEx expected to be $42 million to $43 million, and loss per share is expected to be $0.14 to $0.18 based on 49.5 basic shares. Cash and investments are expected to be in excess of $100 million at the end of the second quarter that includes restructuring costs related to severance payments.

Now turning to our full-year outlook. Full-year revenue is expected to be in the range of $245 million to $250 million.

We no longer guide specifically to growth revenue but given our revised outlook I would like to provide some color on the trends we expect to see in our legacy business which is primarily media gateway and associated maintenance revenue.

As previously reported in 2014, our legacy revenue including product, maintenance, and services, declined by 10% to $133 million. This aspect of our business tends to be very project-driven because it is tied to replacement cycles and upgrades which are unique to each carrier.

Consistent with Ray's description of large North American service provider spending trends, we do not know with certainty that this revenue will come back later this year or even next year. So we are not currently forecasting that it will.

Therefore, in 2015, we are projecting a decline in our legacy business closer to 30% in order to account for this uncertainty. This would imply legacy revenue in the $90 million to $95 million range with the balance of our 2015 revenue outlook comprised to growth-related revenue. We continue to expect improvement in gross margins over time.

This gross margin expansion is primarily a function of higher utilization in software content as the industry inevitably moves toward greater software centricity. Net loss per share is expected to be between $0.10 and $0.15 based on 49.5 million basic shares outstanding.

Now, I would like to provide the details of our cost reduction program summarized on Slide 10. First of all our objective with this initiative was to reduce our breakeven point to annualized revenue levels in line with our revised 2015 revenue outlook, without compromising our continued investment in key products and strategic technology initiatives.

As I just discussed, we are forecasting a loss for the full-year 2015 since the majority of the impact of the restructuring is expected to be realized in the second half. In order to accomplish this objective we would reduce our headcount by approximately 150 positions or 12.5% resulting in a total headcount of roughly 1,050 employees.

Headcount reductions, together with reductions in other discretionary spending are expected to generate annualized savings of $20 million versus 2014 levels with $15 million being realized in 2015. The cost reduction program will cost roughly $5 million with $4.5 million of that being paid in Q2.

And finally, we believe our cash balances will be reduced by a few million in Q2 primarily due to the cost of the restructuring program.

However, as I mentioned, cash and investments should remain above $100 million at the end of Q2 and throughout the remainder of 2015, and once the restructuring is complete we do expect to return to cash flow positive in the second half of 2015. So with that, I would like to turn it back over to Ray for some closing remarks.

Ray?.

Thank you, Mark. In summary while we are disappointed with Q1 and the need to revise our annual outlook, we continue to be confident in the business and our market opportunity.

This confidence is based on conversations that I and other members of the management team had personally had with our largest customers which underscore the inevitable technology shift in this industry. Sonus has the technology and the relationships to capitalize on this shift. It isn't happening at the pace we expected, but it will happen.

As we move forward, I can assure you that all of us at Sonus are focused on doing what we say we'll do for our customers, as well as our shareholders. And with that, we now like to open the call for your questions.

Operator?.

Thank you. [Operator Instructions]. And our first question comes from the line of Dmitry Netis with William Blair. Please proceed with your question..

Hi, Dmitry.

Are you there?.

And Mr. Netis your line is open..

Hello.

Can you hear me?.

Yes, Dmitry, I can hear you..

Apologies for that. Good morning gentlemen..

No problem..

Couple of questions.

I guess as we try to reconcile what had really happened here this is a bit of a loaded question, but you kind of hit the double landing here you got the growth products declining next year and obviously you've taken 30% decline in legacy, which I sort of understand but the fact that the growth products are going down and I guess what Ray had explained as far as the timing and the spending of your carrier deployment.

May be you can provide a little bit of color of why you believe this is not a competitive loss opportunity with your customers and why wouldn't the growth products be going up here.

So just -- I guess what I'm looking for is more color on the competitive environment and your growth product situation?.

Sure, Dmitry thanks for the question. So with regard to our analysis of the competition expected loss that's really based on discussions with our customers it's not on market based analysis.

And I'm comfortable after those discussions that we remain engaged in all those RFPs that we have been engaged in and that we remain engaged in run rate business for those existing customers.

So what I think it is is there probably a cause as there are often in markets as they develop in the early stages here towards a more over the top application based market and frankly that cause was not forecasted it is now in our forecast based on those changed circumstances and that's how I would analyze..

And then to that effect have you noticed any or have your discussions with customers exposed any pricing changes with your competitors you see them getting more price aggressive in the market or has that not been a factor?.

I don't think pricing --.

I know if you could comment would be great..

Yes, sure. Thanks for the question. So pricing has not at this point been a huge factor. I do expect pricing to evolve quite a bit as we move into a software model. So as we get more visibility into that we'll certainly share that with you and others on calls going forward like this.

But as we move to software, people will have the agility to do much more, page you go type of models and may or may not move into subscription models. But fundamentally, I don't believe that the data for Q1 or historically for Q4 -- for 2014 will show that the industry is competing on price at this stage..

Okay. And I couldn't help but noticed Ray but another company I cover BroadSoft, they're seeing a bunch of TDM IP transformation deals. And as we know those come with some plumbing attached to it, right.

You have the application, you have the plumbing underneath and a bunch of that plumbing is supplied by guys like you and Attunity Oracle and may be Jane Banton and some of the other competitors we see out there. So I wanted to sort of -- I believe I posed that question to you earlier.

But I also wanted to get may be an additional color on why you may not be participating or if you are and we would love to know, if you are participating in this TDM IP transformation deals that are going on right now on the market?.

Sure, Dmitry. So sure, we are definitely participating in TDM IP network transformation deals. I'm not going to comment on the specific partner or a specific deal.

Our outlook today is, you and everyone else on this call, our view is to what that looks like in our results and other companies that may have a different visibility into different deals or different portions of deals that will be taken down at different times. I trust that their outlook will reflect that.

But we are certainly participating in the broader TDM to IP transformation. The company you mentioned is more on the class five edge side and it's tough which side we're more in the core at this stage. And so that's why there may be some of those difference..

All right. And then the last question and I'll seed the floor is related to AT&T. I think you had $55 million last year with them, you're guiding down about $30 million this year.

I'm just curious, how much have -- I don't believe you had any expectations for AT&T in Q1 and if there were, can you let us know that you had expected them to contribute in Q1.

But I remember this AT&T was a backend loaded type of discussion related to domain 2.0 and you had that $10 million deal that had slipped couple quarters ago that you are eyeing for the second half of this year.

So I guess the question is, what was your expectation for AT&T this year relative to what you see -- what you had guided just now that is being -- which is being down $30 million? And then what you had expected from them in Q1?.

Yes, on the AT&T the portion of our Q1 outlook was relatively modest as you said. That represented a substantial shift from where they were in Q1 in 2014, which was -- if you look back historically, a large part of our revenue achievement in Q1. I think your question is what is our AT&T outlook? And you gave the data yourself in the question.

Our outlook is really for $25 million revenue relative to our prior outlook at about $55 million level. So we're down about $30 million. That reflects a pretty significant pause in their product spending and the continuation of their maintenance and related spend on the gateway side. So that's our view of AT&T going forward.

And I think it's probably consistent with their desire to run their networks harder and to drive the CapEx utilization as hard as they can as they've stated in public setting..

All right. Thank you. I'll jump off. Thank you so much. Bye, bye..

Our next question comes from the line of Jess Lubert with Wells Fargo. Please proceed with your question..

I also have a couple -- two for Ray, one for Mark. Ray, first the full-year outlook seems to imply a fairly decent recovery in the back half of the year. Can you help us understand your visibility to this improvement perhaps of the $80 million? It flipped out of your 2014 forecast.

How much you believe you are likely to recapture overtime versus how much you think may have been lost?.

Sure, Jess. But first if I'm understanding the question, how much visibility do we have into the second half recovery, which is implied in our annual guide to go back closer to what you might call the normal run rate of our business.

And then I guess the second half of your question is how much our total year might be lost as opposed to say pushed into 2016.

So first on the visibility, we've done a lot of work not only in our interactions with customers but in our internal modeling, making sure that we fully understand the operational requirements in order to score the revenue in the pipeline that we have right now. And so I feel pretty good about our second half.

Although, having said that, I am also quite aware of the magnitude of our revised outlook. So I would offer you the following. We'll continue to track that and we'll continue to drive that in close interaction with our customers and we'll report out on our second quarter call what the back half of the year looks like.

But I feel very comfortable that we've done as much work as we possibly could do and that the pause in the first half is in fact company's consolidating the current networks rationalizing their transition at the end and at the end planning for their network expansion activity later this year.

Many customers have reported some externally, some just with us, what looks like a first half reduction in CapEx with the back half recovery and our outlook is consistent with that, okay.

Second, with regard to how much of our annual outlook shift has been lost versus pushed I think it's too soon to say but I believe that the majority of it will continue to run into 2016.

What we'll be looking for is book-to-bill ratios and bookings that will give us confidence in our revenue outlook and so far I see a pretty good pipeline to our bookings that would support the fact that these are delays and not losses.

But we'll continue to track that then we'll report that as transparently as we can quarter-to-quarter going forward..

And then I didn't see the --.

Was there another question for me, Jess?.

Yes, I didn't see the carrier enterprise split but the prepared comments suggested you did see some weakness in the enterprise business as well. I was hoping you can may be help us understand what you're hearing from your enterprise customers. It sounds like enterprise is spending more broadly is actually pretty decent here.

So just would love to understand what drove the miss on the enterprise side?.

Yes, so I'll ask Mark to just give you the numbers here in a second because I think he has them but I'll speak to the qualitative aspects of our enterprise push.

While our enterprise numbers are down and part of our revised outlook for 2015 down as I broke out in my prepared comments, I'm actually quite pleased by the strategic interactions we're having with the Fortune 100, both in the link environment and more broadly in NaaS IQ which actually they are interrelated because as people look to deploy voice in real time communication in a linked type of business environment more and more often new network architectures are required in order for them to really turn voice on.

So good strategic interaction but again driving longer sales cycles and a result being some delay in some of those purchase orders.

Mark, can you fill in with the details around Q1?.

Yes, sure just enterprise as a percentage of total product revenue was 15% and that was consistent with the fourth quarter. So the enterprise was down but as a percentage of total product revenue it was -- it remained the same.

And then with regard to just enterprise as a percentage of the growth related product revenue which is where most of the enterprise is, it was 22%which was actually up a little bit percentagewise from the fourth quarter pretty much the same as what it was a year ago in the first quarter.

Just note that in the year ago quarter, you did have a pretty good size federal order in there so you strip that out, enterprise was not counting any federal business as a percentage revenue was up as well..

And then just last one from me clarification on the restructuring, is Q1 the point of comparison for the savings, and are we looking at $20 million and expected run rate savings versus your previous plan or should we be looking at total OpEx run rate to be $15 million lower from this point in time by the end of the year and then $20 million lower at some point in 2016.

Any help there, please..

Yes, so there the -- yes, the reference point we were using was 2014 costs because you've got that actual so that's what we're using and actually the first quarter not completely and consistent with that run rate.

I mean there were some reductions because obviously there is, for example less of accrual for incentive comp and things like that but it was -- it's really against the 2014 levels..

Thanks guys..

And I think also just FYI that if you look at the $20 million annualized about $15 million of it is employee-related cost, about $5 million of it or so is the discretionary cost that I mentioned..

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

I just was wondering since a significant amount of the full-year takedown in revenues occurring on the legacy side of the business.

If we think about your restructuring actions, is there an equal proportion of the restructuring targeting legacy or how do we think about the legacy versus growth restructuring actions?.

Yes, this is Ray. Thanks for the question. We don't break that out but rest assured as I said in my prepared comments our primary focus as we look to spend going forward was to preserve our investment in future growth products.

So it would imply that we targeted where we could, still protecting our customers and their networks on the legacy side targeted more efficiencies there..

Okay. Thanks for that. And then one of the reasons cited for the takedown in numbers is industry consolidation.

If any of these major deals gets rejected, do you view that any more or less favorably and how it might impact your business, does it, I mean if a deal gets rejected does it accelerate may be the deployment timeline as opposed to if the consolidation does proceed then the integration takes time to play out and it delays, continues to impact the delays?.

Yes, it's a great question, Ted. But unfortunate it's kind of expected I think. Here is how we try to resolve all of this industry plugs as we've established our outlook.

We've stayed close to our customers as I said and we try to really expect that these delays will create flux and we're just linking ourselves to the underlying operations of each of the businesses that we're attached to and not trying to call the timing of mergers either pro or con.

So I feel good about our outlook, I believe we've properly hedged the risks associated with delays and upsides, and I believe we now have an outlook that we can achieve, and its independent of those timings at least to the best of our ability to do so.

And we will continue to stay close to our customers going forward so that should that change will revise our outlook accordingly..

Okay. And then you also cited some signaling delays as well.

How much of this traditional signaling versus say next generation Diameters at all, more on the diameter side and then can you talk about the competitive dynamics and specifically in the Diameter business?.

Sure, Ted. So first of all our signaling revenue remains, majority of which is the SS7 side of the Diameter market evolves. So the majority of the delays that were in that SS7 side. But they're correlated because these companies are running kind of combined networks and they were looking at us both for the SS7 side as well as the Diameter side.

I expect the SS7 to be a vibrant market and the SBCs are going to be around for quite some period of time. Now with regard to the competition on the Diameter side, we're in-play for a number of Diameter related RFPs.

As we talked about RFP activity in my prepared remarks, we've seen a number of global tier-1s in North America, in Europe, in Central and Latin America, bidding out their SBC business as well as their signaling business driving towards this new network architecture and Diameter definitely a part of that.

We'll comment on the Diameter outcomes as they come along but I feel like we've done a good job hardening, virtualizing our Diameter platform, now it's just a question of whether we can get embedded in these networks as they continue to go..

Okay.

And then some of these Diameter opportunities, I mean do you see those decisions happening later this year or is that more further out?.

I do see the decisions happening later this year although that could change because customers could change their RFP cycles again on it. But right now our outlook has those decisions occurring largely this year. The revenues associated with them could happen this year but they're more likely to start modestly this year and dwell into 2016 revenues..

Okay, fair enough. Sounds good. Thank you so much..

[Operator Instructions]. And our next question comes from the line of James Kisner with Jefferies. Please proceed with your question..

Yes, hi, this is actually Timur Ivannikov for James Kisner. And we had a question; I guess the broader market question and may be a specific product question. So given the transition to the Unified Communications and Voice over LTE, I guess we are just trying to understand how can the carriers delay spending.

Is there -- have they bought enough capacity already if there is some kind of market saturation.

So we are trying to understand what's specifically could explain this delay?.

Sure. Just the question is what could explain the delay and you're looking into the UC and Multi markets I will be happy to comment on them but I don't know that that would be fair to characterize that our delay would be principally associated with those end markets.

A lot of it the push out is either in legacy side gateway piece or on the SBC piece more broadly. But with regard to UC and Multi, I don't see the UC end markets really slowing down at all from the standpoint of a class five. The Multi market has had a lot of flux in it.

I'll look for others to comment that more broadly over the next couple of weeks we can see where that comes out but I think it's safe to say that the complexity of the shift to both remains a problem for the industry more broadly and it's both in the local deployments and also in the international roaming opportunity.

And those complexities will get worked out over time probably through the balance of this year and then you will see additional expansion in the multimarket and the wireless UC market more broadly..

All right.

And so and also a question about your acquisition, could you explain a little bit the $10 million?.

The question is on the acquisition of Treq you want us to explain the strategy behind it or what the $10 million..

Yes, sure..

Okay..

Just the strategy would be fine, yes..

So yes we went into this many time in the last couple I'm happy to repeat this year we acquired a company called Treq Labs and they came with an SDN controller and an agile software platform that interoperated with our network asset or session and signaling and policy assets, and basically allows to drive dynamic win optimization in the enterprise through the service provider.

That is in fact what looks like the emerging model for people to move the enterprise to real time communications and cloud-based architectures. So we've continued to integrate Treq Labs.

We've continued to fund what was developed and when we acquired in and we're seeing some good traction in our discussions but the revenue aspects of that are mostly expected later this year or into 2016..

Our next question comes from the line of Paul Silverstein with Cowen &Company. Please proceed with your question..

Ray, I've other places to ask some very discrete questions as opposed to speculative questions, but I'm going to ask more than two? Again I'm going to try to keep them very discrete.

First off, I trust given the numbers with the widely relationship you are not expecting much of anything from this year?.

We may see some widely but it won't be -- I don't think it will be material and I don't think it will be a 10% type of relationship, Paul, if you want to use that as a threshold..

Okay.

And can you just you said on the call but can you remind me how much is -- of the revenue is lost revenue as opposed to delayed?.

At this point in time I don't see any of it being lost revenue. But it is too soon to call because I think to the extent moves into 2016 we haven't commented on that guide at this point in time..

My apologies I thought you had cited some dollar amount that you probably lost, my apologies..

Okay. So yes you're right, Paul let me just interrupt you before you go on to next question.

We did say that in our miss in Q1 we could attribute from our forecast that it was about $1 million in aggregate small deal loss but none of them from our large customers that would imply a material competitive loss from one of our top customers that's what we said..

Got it.

And I understand the Diameter of activities were robust in terms of the opportunities out there but can you remind I know you were reluctant to give a lot of disclosure, but can you remind me -- remind us what you said historically, about the number of Diameter wins you have to-date in terms of your set up, in the prospects of you winning this deals?.

Yes, I think we disclosed probably small handful of Diameters wins in the past one of which was in the funnel when we acquire PT and the balance of which would have earned with -- on the Sonus..

All right it's just one or two more I promise. On U.S.

Federal I know you've reduced your expectations but what's the base what was it in 1Q and what was in calendar '14 was it I assume it was relatively small?.

I didn't understand that question about the rate --.

U.S.

Federal government in terms of revenue contribution?.

Okay. That the Federal government deal in Q1 2014 was probably about 7% of the growth related revenue, Paul. So I want to say it was close to $3 million, $2.5 million, $3 million..

And Mark, that was specific to Q1 so there wasn't any U.S.

Fed revenue in the rest of the year?.

That was very small..

Okay..

That was the -- we had a big deal in Q1 '13, and then we had a big deal in Q1 '14, and then the rest of the year was really very modest and then in Q1 '15 it was really next to nothing..

I appreciate that.

My last question, Ray, in terms of visibility in your processes, I understand you feel confident now in the outlook but what most changed, what did you do to last two to four weeks versus whatever processes you had in place previously that gives you the incremental confidence?.

Yes, a lot of it is just the customer interaction, Paul. And as I said in my prepared comments, it's not that we didn't do that before but the lot of circumstances had changed for our customers and we've been able to confirm where they are in these changed circumstances, and we've revised our outlook accordingly.

We had some backend loaded fields that didn't come in and we've just gone out and confirmed, are they gone, are they coming later, and what programs are they tied to and what end market demands look like. And so therefore I feel comfortable that we've got as much visibility as we can. Now we can't control those end markets.

We can't control our customers' drawdown. So in order for them to hit their revenue goals, they have to have some level of market development. We see people are going to stop communicating and the fundamental technology drivers remain in place towards Unified Communications and the SBC is role in UC is evolving in a very favorable way.

And they're trying to stop what's favorable to us. So what we did was confirm that we're being viewed properly as a strategic partner and I can confirm that. We've reviewed their underlying programs that are driving their demand and their visibility, and we believe we've properly hedged the risk associated with further delays.

And I say that with the caveat that we only know what we know and we'll continue to drive visibility going forward. I hope that's clear..

I'll take the rest offline. Thank you..

Okay. Thank you, Paul..

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

Two questions. I guess the first one on similar tone as the first one -- earlier ones, all right. It seems like many things happen at the same time, which is sort of unusual -- usually get one or two carriers to change, but across carrier, enterprise, federal, multiple things happened and obviously some acting guidance as well.

So just trying to understand, what is the kind of level of conservatism thrown in your way -- and kind of how you think about all these things happening sort of in parallel, which is somewhat unusual?.

Okay. So to answer your question, with regard to many things happen at the same time, we try to breakdown the Q1 mess versus the full-year outlook.

And so I wanted to just make sure I'm responding to your question in the Q1 unless we've described where we are on primarily the legacy, the enterprise, and the service provider, growth type of the business.

But when you bring in the federal piece and others, here is what we did, we looked at our Q1 outcome relative to our prior guide and spoke with all of our customers that we could and as that would include federal and others and well federal wasn't a big piece of our Q1 outlook it was a bigger part of our year than I think it's still justified given these circumstances.

So we've revised downward, your question is how much conservatism is in there.

We think its properly balanced, we think we struck the right balance giving customers time to work through the technology issues of this shift, it's an architectural shift for sure, time to work through in industry consolidation phases, whatever is right for their business with the politics of it and then the neutrality aspects that are going on in the broader environment and just make sure that what we could control was in our guide as long as we stay close to our customers and continue to develop competitive products.

So if you want to look that conservative you're free to do so but I consider to be kind of down the middle guide and to the extent that we have upside we'd be very happy with that outcome..

All right.

And I totally appreciate the detail of kind of we're through the mess and, Mike, many things happening at the same time was always referring to that which is there were it wasn't one carrier, it wasn't even four carriers, it wasn't just service provider, it was literally every across segments of business which is unusual for all of this to happen in the same time.

I'm just wondering if you think there are individual reasons for each but then kind of you put it all together it's a fairly broad number seeing those wondering if you think that's being influenced by something.

And then my other question was just if you look at kind of what the numbers imply exiting the year depending on how you kind of project out the next couple of quarters, you should be back on a kind of flat year-over-year double-digit operating margin sort of assumptions in order to make the kind of a full year kind of number, is that the right way to think about it and I know it's too early to tell but are you, do you think that the first half -- just going to -- it will be kind of an anomaly and we're back on at least an improvement trajectory out of that 2015?.

So in a word, yes. That is how I would look at it. Now we're not guiding to the specific financial outcomes in Q3 and Q4, but the implications of our guidance are consistent with what you just said.

We assume that the revenue will continue based on the visibility that we see in not only our backlog but out bookings coming out of Q1, and what we see in Q2, and that presuming that the industry stays on its current trajectory, we've got really good shot at returning to that trajectory where one, the revenues look more consistent with last year and two, our margins look more consistent with continued margin expansion as we drive the software as Mark said.

And then the operating income outcome of that would be consistent with what you said..

And how do you factor the deflationary potential aspects of the shift to software as you kind of throw the things into the mix of 2015 is a transformation year, but beyond 2015 do you worry that that's going to be a headwind on revenue it may not be on margins but on revenue?.

Well it could be, we haven't really looked into 2016 sufficient enough to discuss it guide for it for sure, but -- may be that some of those headwinds are actually in our 2015 number. So we'll just see how 2015 plays out and then we’ll come back to and look at next year..

All right. Thank you for taking the questions..

Our next question comes from the line of Ryan Hutchinson with Guggenheim Securities. Please proceed with your question..

Hi, this is Nate Cunningham, on for Ryan.

Two questions, first in the event that growth revenue doesn't rebound in the back half, what further actions would you take and would you have to look at financing alternatives? And then on SDN and NFP, can you tell us what exactly your carrier customers are telling you and explain your role in more detail for when that transition takes place? Thank you?.

Sure, Nate. So first of all should the back half not play out that way, we will probably make some further adjustments, some of which will just come out of the COGS associated with the revenue that wouldn't happen if it didn't happen. But under all circumstances I don't believe we need to look at any financing alternatives just be clear about that.

And then the second question is would we comment on what customers are saying about SDN NFP. Our customers are quite pleased with the progress we’ve made moving our policy signaling and session assets to software and we are engaged with some of the largest search providers both the ones we currently serve as well as the number of new ones.

To look at major deployments and those would include trials in laboratories and as part of an RFP response. And what we're doing is completely consistent with where that SDN and NFP transition is going..

And our next question comes from the line of Mike Latimore with Northland Capital. Please proceed with your question..

Hey, I think what, just on the services revenue, what percent of your services in the quarter was maintenance?.

It would have been roughly $20 million of the $25 million little bit higher than that but roughly that, and which is consistent with what we would have seen in prior quarters in 2014 as well. So really nothing in this there..

Okay.

So that should that mean this line should be relatively stable going forward?.

I would expect that to be true..

And then you mentioned it kind of legacy $90 million and $95 million for the year roughly what percent of that would be kind of product versus service?.

There is going to be some decline attributed to the legacy services effectively offset by growth. So I think on the maintenance side as I just mentioned I think that’s going to remain relatively stable.

In total, there could be some change in the mix between growth and legacy, and then I think there is the bulk of it or big chuck of it going to related to the product side..

And then on the enterprise side of things, did you see any -- was it possible there any delays just on the kind of pre-naming re-launching of link in Skype for business or are there other effects there related to the Enterprise of this?.

Yes, Mike, this is Ray. I don’t think the renaming really had to anything to do with it. But the broader strategy launch is actually material and I wouldn’t attribute delays to link. I think that would be inappropriate.

But even if you look at the restrategization, if you will, the link for business push and the desire by Microsoft and the entire ecosystem we are really focused on deploying voice and other real time collaboration, it’s a pretty big industry-wide deal and its major competitive battle between them and some of the other UC suites that are out there.

And so it’s very much a part of our enterprise push.

Whether or not it’s literally cause the delay I think that’s too speculative, but I do believe that we are in the hunt for all those deals and ultimately it will push through and drive the architectural shift that we’re talking about here and we’ll and we will be very favorable to our business when we do..

Okay thanks..

Thank you..

Our next question comes from the line of Steven Collins with Provo [ph] Partners. Please proceed with your question..

Hi, thanks for taking the call.

Going back to the precipitousness of the guidance reduction and matching that against how broad-based the takedown was trying to understand what happened in the month between the time that you set the original outlook in March 24, is it changes in the net neutrality discussions and that caused CapEx changes among your large carriers.

Do you think these were issues that were external to Sonus or they're internal to Sonus forecasting issues that got ameliorated when you did revise the outlook? Just trying to understand how things have gone so far negative, so broadly, so quickly?.

With regard to the 30 day between guiding that the recap that we will -- it really links to the fact that a) the forecast was backend loaded as disclosed. And then two, circumstances in the market changed for a lot of these customers. We try to highlight which segment but you're commenting broad based it is broadly out there.

I'm reluctant to call it net neutrality, I think that will be a little bit too simplistic.

But the significance of the architectural shift, the backend of lot of these companies are under their own stresses with regard to forecasting their end market demand, their own capital budgets, their own capital allocations, and the industry consolidation, all of those things interplay in there.

And I understand the magnitude of miss, we are all accountable to it, but I don't have a better way to explain it than what I did in my prepared comments..

I guess, as a follow up to that then, Ray. What I'm trying to understand is the forecasting process and, therefore, the confidence that you have in that process going forward.

What you're describing seems to be that these were industry wide changes that, for whatever reason, didn't get picked up sooner in the forecasting process as opposed to sudden changes in the environment?.

Yes, so, Steve, what we did was we described the process that led to this outlook. And we have always had collaboration with our customers but we really focused harder in the midst of this miss to, one, understand what happened in Q1 and, two, understand its implications on our outlook.

And so I spent a significantly more time with our customers as have to other members of the leadership team, so that we really understand their end markets. So that's how I would explain that miss. So thanks for that question. I just want to close this as I know a number of folks are moving on to other things, including the market opening shortly.

And just we emphasize that a) we expect accountability for this miss and we're on it. We have revised our outlook consistent not only with the Q1 miss, but our view of the industry going forward and that we remain very comfortable that we are a strategic partner to this industry, including all of our customers as they make this difficult transaction.

Ultimately, the reward will be a more fully communications to architecture that is served as going forward for decades to come. I'm proud to lead Sonus going forward in that transition and I appreciate all of your support out there not only on this call but going forward. Thanks a lot..

And Mr. Dolan, there are no further questions at this time. I would now turn the call back to you. Please continue with your presentation or closing remarks..

So operator, we just did that. We'll go ahead and tear the call down now. Everyone have a great day..

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