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

Jess Lubert - Wells Fargo James Kisner - Jefferies Ted Moreau - Barrington Research Matt Robinson - Wunderlich Securities Subu Subrahmanyan - The Juda Group Ryan Hutchinson - Guggenheim Securities Dmitry Netis - William Blair.

Welcome to the Sonus Networks' Second 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, July 29, 2015.

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

Thank you and good morning. Welcome to Sonus Networks' second quarter 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.

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-Q filed with the SEC and in today's earnings release, both of which are available on our website. While we may elect to update or revise forward-looking statements at some point, we specifically disclaim any obligation to do so.

During our call, we will be referring to certain GAAP and non-GAAP financial measures. A reconciliation of the non-GAAP to comparable GAAP financial measures is included in our press release issued today. So 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. I am pleased to report second quarter results, which are in line or better than our guidance in all key areas of operating performance, representing a strong step in the right direction towards resuming growth and profitability at Sonus.

Let's move right to slide 4 for the highlights of the quarter. First, we are diversifying our customer base with new Tier-1 wins, expanding our presence globally and winning key RFPs based in important growth markets. I am very pleased to report that we won two new Tier-1s, one in Asia-Pac and one in Central America.

The win in APAC is in support from a SIP trunking service for one of the largest communications service providers in the region, supporting over half a billion mobile subscribers in Asia and Africa. And the win in CALA is one of Latin America's largest mobile operators.

Both wins are for our SBC products, which are determined based on large part on our architectural vision, the strength of our product and the strength of our team in each of those regions. During the quarter, we had an additional win with another top wireless operator in CALA.

Coupled with the Tier-1 win in that region I mentioned just a moment ago, Sonus is now embedded in three of the largest and fastest growing wireless markets in CALA. Finally, we recently won a multi-million dollar proposal with one of Europe's leading communications in IT service providers for our SBC 7000.

This provider will utilize our SBC as part of their unified communication solution for their end customer. We anticipate that this Tier-1 engagement will likely grow each year for many years to come, as the overall SIP trunking market continues to develop.

So while we continue to foresee strong business in North America, we are encouraged by the opportunities we see, as SIP becomes more widely adopted globally. The investments we have made over many years, position us well, as new cloud based architectures are deployed going forward.

Another key highlight in the quarter was our continued improvement in gross margins. On a normalized basis, which Mark will discuss in more detail, non-GAAP gross margins were almost 400 basis points higher versus Q2 2014. Finally and importantly, our cost reduction program is right on track with our expectations.

We have established a solid baseline for improved profitability in the second half of the year, and we ended Q2 with cash and investments of nearly $114 million, which was comfortably above the $100 million guide for last quarter.

Turning to slide 5, as the industry transitions to NFV or NFVN or Network Function Virutalization and Software Defined Networking, we have continued our multi-year strategy to focus and invest to enable real time communications in the cloud.

Sonus now delivers a completely virtualized product portfolio to service providers, enterprises and Webscale players, looking to virtualize their communications networks.

The benefits of network virtualization are mainly in two key areas, the first is a much lower cost to deploy and configure networks; and the second is a much faster cycle time to introduce new servers.

Of course, wile the comments to these new network architectures is very compelling, calling the precise timing of the overall transition remains difficult. We are ready to lead this transition as it occurs across all market opportunities.

Meanwhile, we also remain focused on adjusting the near term opportunities and applications, which drive our growth today. Let's revisit what some of those are; interconnect remains the bread and butter of SBC revenue for Sonus.

Demand for network-to-network IP interconnection continues to grow due to increased session densities across voice and data networks. This is a global trend, as SIP has increasingly become a global protocol. SIP trunking continues to have a lot of runway for growth.

[indiscernible] are one-third penetrated and markets such as Europe and APAC are beginning to accelerate, as those markets deregulate and become more open to competition. As I noted before, our new Tier-1 win in APAC was in support of SIP trunking services.

Unified Communications and Collaboration or UCC remains a thriving market due to the benefits of improving productivity and reducing operational cost. Microsoft, a strategic partner of Sonus has emerged as a market leader among others.

As enterprises move to Skype for business as one example, our SBC handles interworking between different VOIP protocols or different vendor standards. UCaaS or UC-as-a-Service is a growing model for how UC is being deployed. Microsoft Office 365 is just one example.

Enterprises want to deploy hosted cloud-based solutions in order to control costs, manage complexity and improve productivity. Service producers look to UCaaS as a way of providing their own over the top service.

Our SBCs are purpose built to help both enterprises and service providers experience the benefit of SIP, as they securely deliver new cloud-ready features and capabilities for the customers they serve. VoLTE of course is another incremental driver of growth.

SBCs are an integral component of those carrier network transformations to replace existing voice networks. Voice-over-WiFi is of increasing interest to carriers, especially those, which have spectrum constraints or no license spectrum at all.

We feel that WiFi is leveraging the same standards in technology that have been put in place to support licensed VoLTE services. More and more operators are now looking to deploy Voice-over-WiFi service in conjunction with, or prior to the deployment of VoLTE services.

Sonus is actively working with several technology partners to go after this market opportunity. WebRTC is beginning to show up more often in our customer engagements. WebRTC should drive successions to both access and interconnect.

It allows service providers to extend services to non-traditional devices such as TVs and tablets, and bring video and voice started on those endpoints, into their networks. WebRTC also drives the use for SBCs for security as well as interworking. So while its early days, we are very bullish about our market opportunity with WebRTC.

So with that context of what's driving our near term opportunity, I'd like to hand it over to Mark to discuss our results and our outlook in more detail.

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 7 for a closer look at the quarter.

This slide summarizes our reported results for the second quarter of 2015; total revenue of $54.7 million was at the high end of our guidance of $53 million to $55 million, and $20.6 million or about 53% was attributed to our growth business compared to 51% in the second quarter of 2014.

Total product revenue was $27 million and total services revenue was $27.7 million. Gross margin was 65.9%, which was above our guidance of 64% to 65%; included in our cost of revenue, was an additional charge for excess and obsolete inventory of approximately $1.6 million.

Excluding this charge, gross margins would have been 69% or nearly 400 basis points higher, versus the second quarter of 2014, as Ray mentioned. The outperformance was largely due to favorable product mix.

Operating expenses were $40.9 million as compared to our guidance of $42 million to $43 million and its worth noting that, during the quarter, we identified an inaccuracy related to the historical foreign exchange translation of depreciation expense on certain foreign fixed assets.

This resulted in a historical understatement of expense in prior fiscal years, totaling $1.4 million on a cumulative basis. We booked a charge in the second quarter, it was a onetime event. So on a going forward basis, we expect depreciation to return to historical levels of approximately $2.5 million per quarter.

Net loss per share was $0.10 compared to our guidance for net loss per share between $0.14 and $0.18. Excluding the two non-cash expense items I just reviewed, totaling approximately $3 million, net loss per share would have been $0.04.

Cash and investments totaled $113.5 million at the end of the quarter, compared to our outlook of at least $100 million for the second quarter. And briefly, regarding 10% customers, AT&T was our only 10% customer in the quarter at 18.9% of revenue, which primarily reflects more spend on network capacity expansions than we originally projected.

Let's turn to slide 8 for our guidance; Q3 revenue is expected to be approximately $65 million. Gross margin is expected to be in a range of 67.5% to 68.5%. OpEx is expected to be $40 million to $41 million, and earnings per share is expected to be between $0.05 and $0.08, based upon 50.5 million diluted shares outstanding.

Cash and investments are expected to be around the same level or slightly better than this quarter. Now turning to full year outlook; we continue to expect full year revenue to be in the range of $245 million to $250 million.

Based on our conversations with our customers and when analyzing their outlook for CapEx, we believe that second half spend should improve commensurate with our outlook. With Q4 again being the seasonally strongest quarter of the year. We continue to expect improvement in gross margins over time.

This gross margin expansion is primarily a function of higher utilization, as well as software content, as the industry moves toward greater software centricity.

Net loss per share is expected to be between a loss of $0.10 and breakeven, based on approximately 50 million diluted shares outstanding; and the midpoint of this guidance reflects an improvement of $0.075 versus the midpoint of our prior outlook, which called for a loss of between $0.10 and $0.15.

Finally, turning to slide 9, I'd like to provide an update on our cost reduction program.

As we said last quarter, our objective with this program is to reduce our breakeven point to annualized revenue levels, in line with our revised 2015 revenue outlook, and without compromising, our continued investment in key products and strategic technology initiatives. And the program is tracking in line with those objectives and expectations.

We continue to expect to achieve approximately $20 million of annualized savings as compared to full year 2014, substantially all of the planned headcount reductions were also completed during the second quarter.

Our net restructuring expense in the second quarter was $1.5 million, which reflects $2.9 million approved for the severance related to the implementation of the program, partially offset by a $1.4 million benefit, in connection with the termination of a facilities lease in Fremont, California.

Of the $2.9 million accrual for severance related expenses, we paid out $2.5 million in the second quarter of 2015, and we expect to pay the remaining $400,000 in the third quarter.

You may recall, that we initially expected approximately $500 million in total restructurings expenses pertaining to the cost reduction program, and we have successfully been able to reduce this charge by nearly $2 million, versus those original expectations.

Finally, turning to cash, our plans to return to positive cash generation in the second half are tracking ahead of expectations, instead of consuming cash in Q2, we generated positive cash flow, including investments, primarily due to strong gross margins, as a result of the favorable product mix that I mentioned, as well as very good cash collections.

So with that, I'd like to turn it back over to Ray, for some closing remarks.

Ray?.

Thanks Mark. To summarize, our second quarter results were a solid step towards resuming growth and profitability. We are winning key RFPs and expanding our presence, both domestically and internationally. Our gross margins are tracking ahead of plan, and we have returned the company to positive cash flow, with a strong balance sheet.

I am proud of the team for responding swiftly and getting our cost structure aligned with our current revenue profile. The cost reduction program we announced last quarter is on track, as are all of our technology milestones. This industry is in the early stages of one of the most significant network architectural shifts of this century.

These shifts don't happen in an orderly fashion, and this one is particularly [indiscernible]. Telecom and datacom have collided, and datacom has won. The cloud is a massive IP data network, but it still lags the resiliency required by real time applications like voice and video. Mobility is driving massive benefits to end users.

But when you scratch below the surface of all the hype, mobility networks are simply an IP radio length, connected to a very large and very long wired network, which we now call the cloud. Licensed and unlicensed mobile networks converging. As core networks are flattening and moving to software, the new model is all about applications.

To paraphrase an old political slogan, 'it’s the application, stupid.' Going forward, the network is the application and the application is the network. The mission to migrate real-time capability to the new cloud architecture is a large one, and we believe that Sonus is perfectly positioned for this transition.

We have led the transition to software-based SVCs and we have more than a decade of experience in the design and operation of large scale, real time networks. We have the products, the talent and the financial strength to invest in continued innovation. With that, we'd now like to open the call up to your questions.

Operator?.

Thank you. [Operator Instructions]. Our first question coming from the line of Jess Lubert with Wells Fargo. Please proceed with your question..

Hi guys. Good morning..

Good morning Jess..

Couple of questions; first, I was hoping you could comment on overall visibility levels into projects you are seeing with some of your large Tier-1 customers, particularly in the U.S., and given your second half sales outlook compared with fairly deep sequential improvement, does that embed equal improvement with the U.S.

Tier-1?.

Thanks Jess. Visibility in the Tier-1, I am assuming you are talking about the telco players. We have got decent visibility that's implied in our guidance to the large players. There's always [ph] timing with these folks, because they move projects around.

By taking together between Q3 and Q4, I feel comfortable with their component of our outlook in the second half..

And can you update us on the status of some of the projects that swept out of Q1, and to what extent they are still in play, or likely to close later this year?.

Sure. Most of those projects are still in play, and I expect them to close, either in the back half of this year or in 2016..

And then, it seems like the international business was fairly weak sequentially, and year-over-year.

So I guess I was hoping to parse some of the wins you saw in the region and positive comments regarding international demand versus what we saw from a reported result in the quarter, what's giving you confidence, whether its some of these big deals contributing to revenue in the near term? If you can just put some color around what you're seeing internationally, because it seems like the numbers there were fairly weak in the quarter?.

Yeah. So Jess, we are seeing very good RFP activity. I feel very comfortable with some of our outcomes already, and what will be our likely outcomes over the next 12 months in those RFPs. The SIP trends have continued to move offshore beyond Europe, and now are, I would say fairly deeply embedded in Asia Pac.

We are starting to see some of the large carriers peer [ph] even within Japan for example, and then between large nations. So I would expect those to continue into 2016 and 2017..

And the big Tier-1s you announced internationally, do those contribute to revenue over the next few quarters?.

I would say, willing to [ph] go out full year, they will contribute to revenue..

All right. Thanks guys. I will jump back in the queue..

Thank you..

Thank you. Our next question is coming from the line of James Kisner with Jefferies. Please proceed with your question..

Thank you very much. I just wanted to talk about gross margins. So 69% backing at this charge is historically very strong. I think that's potentially the second highest in company history. First factor Mark mentioned here in terms of driving the strength was improved utilization.

Can you just talk about that some more, that comment just seemed a little surprising, given that your revenue level was not particularly higher?.

Yeah James, it's Ray. Thanks for that question. The gross margin was largely driven by mix. We have been moving our products more towards software. We are seeing some levels of density, and even on the legacy business, we are seeing some expansion opportunities which tend to come at high margin..

Okay. That helps.

So I know you are not breaking this out explicitly any more, can you talk about how SBCs trended quarter-over-quarter, what you're assuming for -- I assume that's what's driving the Q3 ramp sequentially and I was hoping you'd also talk about trends and enterprise versus service providers on the SBC business, both net income Q2, and what you expect in Q3?.

Sure, let me take a shot at that. First of all, in our growth revenue, SBC related -- Q2 wasn't as strong as we like and year-over-year comparisons will show that. But in the back half of the year, and a lot of that growth resumes and it becomes a really nice piece of our outlook in the second half.

With regards to enterprise versus service providers, we still see the majority of the market in the service provider, but there is some very large enterprise data opportunities that are going on in virtually all parts of the world. And we have been working for years now with the Tier-1 service providers as a challenge to them.

Some of them are hard to call into timing, but all of them are, I think very strategic to us.

And there is a lot of confusion out in the marketplace, it makes it challenging to call the timing of these issues, but it actually is giving a lot of energy to CIOs and CTOs around the world, looking at both on-prem and cloud-based architectures and what's happening, in my opinion, is that the cloud based architectures are becoming the thing going forward.

You're seeing that in Skype for Business moving quickly, internet [indiscernible] enable more voice as opposed to just seek licenses, and you're definitely seeing it in some of other [indiscernible]..

Great. Just one final one here; you guys talked in the past about your progress amongst cable operators. I don't know if you could hazard it, a rough estimate of how much cable has been in your business in the past.

But some folks have been talking about M&A related weakness from the cable operators, and you are seeing some pre-announcements and weak guidance driven by weak cable spend. I am just wondering, is that weighing [indiscernible] today, any impact at all that you can see from wins in cable? Thanks..

Sure James. Thanks. So we don't break out cable as a percent. But I will tell you that it has become increasingly strategic to us over the last few years, and I would expect that trend to continue for the next few years.

My own time, I am spending much more time strategically with the cable industry, and a number of CTOs that gather in conferences like CableLabs. And I expect their network spend to be quite bullish going forward.

Maybe that some of the set top box issues that are -- major platforms like XFINITY moved to the cloud, it may or may not put pressure on some of the other things recovering.

But from a standpoint of their cloud architectures, their interconnect, their peering strategies, all of those are very-very favorable towards our SIP strategy and our cloud strategy..

All right. Thanks very much..

Sure. Thank you..

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

Thank you very much. Good morning. Just first of all, congrats on the customer wins that you talked about.

Given the size of the APAC service provider that you won, is there a possibility that eventually they will become the size of maybe an AT&T or is that not really on the cards?.

Yeah, thanks Ted. I probably should wait a year or two before we make that call. AT&T was really the bear customer for our company, when we formed Sonus, 15 years ago. So it’s a little early days to call that [indiscernible]. There are some other customers around the world though.

Beyond just the Tier-1 and APAC, there are some other North American customers that are really becoming very-very strategic to us, and there is a couple of EMEA customers that have the potential to be very-very strategic to us. I would expect us to be a far more diversified company 18 months from now, than we are right now..

All right. That helps.

And those other customers that you're talking about, I mean, those are current wins that you have and you expect that just to ramp eventually, or do you still have to go out and win some of those deals?.

No, these are current customers. But we have had either gateway or SBC procuring wins in projects that were somewhat isolated and we are now far more pervasive in our coverage across the accounts and able to talk about their migration to the cloud; because we have been investing for at least three years moving to software account longer.

And as everyone is waking up to just how fast this transition to cloud is going to happen over the next few years, and just how disruptive it is. We become a much more trusted partner to a much more diverse number of Tier-1s to look at those architecture.

So I feel really good about that, as I said across North America, where we are pretty deeply embedded, but also in some emerging areas of EMEA that we had missed, as much as a decade ago..

That sounds good. And then, you have been talking a lot about the movement of software and virtualization.

Where do you stand with respect to recognizing virtualized SBC revenue now? I mean, have you been recognizing it yet, like where are we in terms of that revenue recognition?.

Yeah I would say that the software portion of our revenue in total is immaterial at this point in time Ted, and its probably going to stay that way for the balance of this year. But we will start to talk more about that next year, as we see these cloud strategies play out..

Okay. Sounds good.

Final question, you talked about AT&T capacity additions; was anoy of that tied to Voice-over-LTE or is it more traditional stuff?.

Most of that was more traditional stuff. You will see some of the Voice-over-LTE stuff in future periods..

Okay, great. Thank you so much. Good luck..

Thank you. Our next comes from the line of Dmitry Netis with William Blair. Please proceed with your question. Mr. Netis, we cannot hear you at this time, please verify your mute function..

Operator, let's go ahead and jump to the next question. Dmitry can hop back on..

Thank you. Our next question comes from the line of Matt Robinson with Wunderlich. Please proceed with your question..

Thanks for taking the question and congrats on the cash flow and customer wins. I was hoping you could talk a little bit more about how UCaaS is changing the way you address the market. What products you use to target those kind of customers and applications.

Also, it sounds like your number of new customers is down from a year ago as well as your number of total customers, but it seems like your wins are pretty big wins, and I was wondering if you could talk about talk about the tone of the kind of customers you're winning in this quarter versus a year ago, maybe some of the discriminators [ph] that got you the mobile business?.

Sure Matt. So on UCaaS, we basically got to market at the edge with our SBC 1000, SBC 2000, which is you know, an SBC that also has some hybrid TDM content, a lot of the EDGE and the enterprise network still does some TDM work.

And then of course, we have our 5K and 7K and Core, and that's probably where people have done the most work with our software version, as some of the smaller channels are starting to drive the SWE and small density deployments.

We see that happening more and more, I think as the big players, like Office 365 and like Google Hangouts and even Apple and others start to drive enterprise consumer kind of hybrid solutions, you're going to see UCaaS that can take off and move to a cloud based architecture, and I think things are going to move pretty down quickly in the next 24 months.

As regarding new customer wins, we have had a lot of focus for multiple years now on Tier-1s around the world. Some of those were long RFP processes that are starting to come to bear. I am excited with our wins.

We are learning when we don't win, why? And we are doubling down on our effort, and we are starting to get a critical mass across some of the mobility requirements of the VoLTE marketplace. So I would expect to be some more things we are supposed to talk, going into 2016, as we drive that as well.

I think that was at the tail end of the third part of your question..

So when you look at the UCaaS opportunity, especially the interconnect piece, how big is that relative to the EDGE portion?.

Well its hard for me to say, but the interconnect piece in, say a Skype for Business environment, would I think be very wise. It'd be both in the cloud deployment, there'd be a breakout function across a number of [indiscernible] partners and then the DNH [ph] function.

Probably the largest piece of revenue would still be on the EDGE though, until things move to a hosting model, which is probably still a few years out..

Last question.

Nice to see the DSO come in, can we -- is it possible for you to bring it back down to last year's levels, down into the 70s and have another strong operating cash flow report this quarter?.

Yeah, I think its possible. Its going to be mostly dependent upon, the linearity of revenue within the quarter as it always is. So our guidance reflects sort of normal historical linearity, to the extent that some of the revenue comes a little bit quicker than what we have experienced historically, then certainly we should see that.

One of the benefits of that would be lower DSO. So I think it’s a little early to call the ball on that, and again, our guidance is right down the middle. But that would be the main factor that would allow us to do something like that..

Thanks..

Thank you. Our next question comes from the line of Mike Latimore with Northland Capital. Please proceed with your question..

This is Vijay Devar [ph] for Mike Latimore. I got a couple of questions here, one on the services business.

Could you give me some color in terms of what could be the growth opportunity for the services business?.

I don't understand the question.

So this is professional services component of our business, or the entire services and maintenance business?.

The entire services business, yes..

So the entire services business is probably flat to slightly up, presuming that we continue to get professional services attach rates that we have right now to our product outlook. So I'd say, there may be some low single digit growth opportunities there between now and the end of 2016..

Okay.

But you've got some maintenance revenue, could you tell me what's the renewal rates?.

Renewal rates..

The renewal rate was very high. We don't break that out, but it was immaterial, lack of renewals..

Okay.

And finally, is there any opportunities like a federal contract or something like that?.

Is the question, are there are any opportunities in the federal vertical?.

Yup..

Yes there is. In fact, we are engaged in a number of opportunities in the federal space. We will see if they come in under this fiscal budget or get pushed to the next one, that was a very hard engagement to call. We have not only been going directly over the last year or more, we have actually built a vibrant channel into the federal space.

We have also [indiscernible] certified our 5K and our 1K, 2K, so we will soon be certifying the rest of our SBC suite. And I think between that and our software capability, federal has an opportunity to contribute nicely to 2016. But its too early to make that call..

Okay. Thanks a lot..

Thank you..

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

Thank you. When you talk about sort of big picture question, if you look at the trajectory you were in 2014 and step down we are seeing for 2015, do you see this primarily as a result of changes ahead of transition to changes ahead of transition to software models.

Do you see this as some specific customer timing? Can you talk a little bit about that and how are you thinking about 2016? Are we working off of sort of that lower point this year, but still in terms of growth opportunities you see similar sort of growth rates for your set of products? I am just trying to understand sort of the dislocation this year, and how do you see that as part of the larger trend?.

Yes Subu I will certainly do my best to answer that question, but there is a lot of risk in trying to call a market that's in this level of flux. I think most of the 2014 to 2015 transition came from traditional telco spend being under pressure and the Webscale spend not yet growing sufficiently to displace that.

So the telco model is under tremendous stress, and so, you know, I know you and many of the others on this call are following very-very closely, all the commentary about the Tier-1s in North America and around the world.

And I would expect those trends downward to continue, because I think that model is going to stand the stress for the next several years. So I would not return that component of spend into any larger component than it is in our 2015 model, as we transition to 2016.

The Webscale players have an opportunity to become a meaningful driver as early as 2016.

We are seeing some traction with a number of folks across that industry, and here is what's happening; they are beginning to realize, despite the relationship [indiscernible] line out there, both on the EDGE and in the core cloud architectures, that in order for voice and video to work, they need to be managed.

And second, in order for it to happen securely, between networks and the cloud is actually a collection of networks, is not one unified network. In order for them to happen securely, you need an SBC, which is essentially a session layer firewall.

So for those reasons, I would expect the Webscale spend as a percentage of our total revenue to start to become more meaningful next year. Now what does all that mean mathematically? I believe this year, we baselined the company in the zip code that we are in right now. We will see how the year ends, way before we [indiscernible] to next year.

But presuming that we stay on our track, which is where we are right now for the second half, I am tracking our book to bill, and we have had a successful first half above one, and I do expect our second half to will be above one, and if that's the case, we will return to growth next year.

Okay? But we will make more comments on that in our next quarter's call, and then we will ultimately guide on the following call. I hope that's helpful to you and everybody on the call, as to how we are thinking about our growth trajectory..

Yeah, absolutely. And from an underlying market trend perspective, in the past, you talked about sort of growth rates for the SBC markets, sort of declines in the legacy.

I think you had a point that, the telco market spending pressure, both because of architectural shifts and I guess because of aggregate dollars, remains under pressure, quite a bit of growth comes from the Webscale.

So do you think of next year as the telco market remaining relatively flat, and growth being layered on by Webscale or if the set of markets you are in, the SBC market especially, still that growth market, that you think about just having had a hiccup this year?.

I think its too soon to tell. Its probably between the two, and we are just going to track our bookings quarter-to-quarter, our traction with Tier-1s and how fast we can broaden beyond say, being a dominant Interconnect player to being a big part of their access network, to being a big part of their emerging cloud architectures and software.

And we will keep you posted as we progress there, Subu. But I wouldn't want to call 2016 at this stage in 2015 year..

Totally understand. Thank you..

Thank you..

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

Good morning guys. So a couple of clarifications questions here. On the Tier-1 component that you talked about in the guide, when you look at that versus years prior, maybe as a percentage basis.

How does it compare to years passed? I am just trying to get a sense of how much your expectations for the second half are tied to the Tier-1s and in the event that some of these things that you have outlined with respect to architectural shifts etcetera, continue to sort of drag on results?.

Thanks, this is Ray. So I would say, its about the same. It might be a little bit less going forward. So its probably the same to a little less concentrated on Tier-1.

The enterprises are starting to track, although it's really hard to call the [indiscernible] now and say that there is just probably even more timing risk on the enterprise in some cases, than there are in Tier-1s.

And then Webscale players have to come in and start to drive length transitioning to Skype and other places like the Google Environment, have the opportunity to displace that as well..

Okay.

Then as part of that I guess, why are you comfortable that the SBC component comes back in the second half?.

Just based on customer engagements, what we see in our first half bookings, what we see in our progress in July, for example, and I have been on the road a lot, talking to all of our customers. And so I feel comfortable with our outlook.

If there is an issue at all regarding the spread between Q3 and Q4, there is always -- there is modest exposure towards slipping between the quarters. But I think from the standpoint and the outlook on the second half in total, I feel very good about our outlook..

Okay. And then finally, can you just talk to the competitive environment that hasn't been bought up, specifically around other vendor's virtual strategies. There is some commentary from some of the competitors that they are farther along than where you are.

And I know that may have been the case, how do you look at that, how do you stack up against some of the other emerging competitors that are focused on this virtual opportunity?.

Thanks for that question. I don't believe it ever was the case. It is not now the case that any of those competitors, if I presume that you're talking about, [indiscernible] old press releases, for open source commitments and things like that. They have never been ahead of us.

They have never been able to scale more than us, and we have won a number of engagements that have gone to that, and not only come back to us, because we can scale. So I feel very comfortable about the resiliency, scalability, reliability of our products, and our transition to software.

Now, we do it off of a common code base, and we can do it a cloud of general purpose compute platforms, and we can do it in almost every virtual environment that exists today, and we will get to all of the virtual environments that exists going forward.

So I have had discussions with CTOs and other senior execs and the MSOs and the Tier-1 telcos, as well as the Fortune 50, and all of them are very-very comfortable with where we are now and where we are going architecturally..

Okay, great. Thanks guys..

Thank you..

Thank you. Our next question comes from the line of Dmitry Netis with William Blair. Please proceed with your question..

Good morning gentlemen..

Good morning..

Okay, great. Just making sure you can hear me. Sorry about the technical difficulty. I would like to ask a couple of quick ones.

First, I think we have beaten this horse to death, but as you look out into the next leg of growth, how many of the wins, for example, with Tier-1s or not can you attribute to this virtual SBC policy sort of product? Is there a number that you can kind of disclose? I know and its very early, but I was just trying to gauge a number of engagements that perhaps you can talk about some of the perhaps and RFPs that are out there that you are competing for?.

Yeah Dmitry, I would say, you cannot engage very many Tier-1 RFPs around the world, unless you have a committed path of virtualization and can demonstrate that. Actually, that might be one of our greatest competitive advantages, is that we have been committed to that for so long, we do it off a common code base, and we scale very-very nicely.

So our 7K architecture, which puts them in a video-ready capability with the 10-Gig interfaces, it’s the highest entity box by far on the marketplace. And the fact is, that code base in fact allows them to go the cloud, is very compelling to the Tier-1s.

Now when you add our policy engine, which was actually the first network element that we virtualized, and when people realized, how important policy is to arbitrating applications that are all trying to control the network, and that's what Tier-1s are realizing, is that the applications controlling the network and they are fighting amongst each other, there needs to be an orchestration layer that arbitrates if you will, the needs of the app.

When the app goes off-hook, in old fashion terminology, somebody needs to manage the party line that's going on right now in the cloud. The policy engine does that. So the combination of our SBC and policy assets in software, is a very powerful part of our architectural story. And that has been part of almost every Tier-1 engagement we have had..

Okay. I was really hoping to see more of a kind of a softer virtualized product, in terms of the number of engagements.

But it sounds like you're not ready to disclose that just yet?.

Was there a question in there Dmitry, because --?.

No. I will move on. And then on AT&T Domain 2.0, is there an update there? I am just curious. Has that RFP been decided -- and I know that might include virtualized SBC and policy. Could you give us an update there? I mean, that's a fairly large project that's potentially late last year and moved into this second half of this year.

Where are we with this one? I know the question has been asked before, but give us an update if the RFP is decided or not, and whether you're still in the mix there?.

We have been engaged with AT&T for a long time, and we remain actively engaged with AT&T. But I am not going to comment on the domain 2.0 program. You can certainly ask AT&T on that.

But that's a huge opportunity I think, for all vendors in this space, all about the path of virtualization, the cloud architecture, and getting to the right unit cost structure..

Okay. All right.

And then lastly Ray, maybe if you could give us a sense with diameter this quarter, and where maybe heading in terms of visibility of the pipeline for you? I know you had two wins, is there any update to that and how comfortable are you with diameter growth going forward?.

Diameter was not a material contributor to our revenue this quarter, Dmitry. Our signaling revenue was really about our S& [ph] piece.

But it’s the interplay between those two, that I think over time will give us more traction in the broader signaling marketplace, and as we become more wireless oriented through some [indiscernible], I think you will see, as it gets more diameter traction into 2016..

Okay, perfect. And maybe one more if I may; just kind of, as I look into the enterprise side of the business; I know Ray you mentioned, Skype to Business and Microsoft relationship. I don't know if there is any comments you can provide on that front? I know that could be a potentially large opportunity for you.

Have you thought about, in terms of the growth projection there, I know maybe its off a little base today, but is that the business that can grow, 20%, 30% for you going forward? Are you investing in that side of the business? Give us a sense of whether -- as an opportunity may lie for you? Thank you..

Yeah, sure Dmitry. So the enterprise business is larger than just the Skype for Business relationship. I will comment on it separately. We have a huge opportunity in the enterprise, which we deal wit directly until we get the design win, and then largely through the telcos of the channel.

And we have got some great Fortune 50, Fortune 100 enterprise opportunities in our pipeline, and as we score those, where we pull it out on them to the extent we can. So I feel very good about our overall enterprise story. Now more specifically on Skype for Business, we have been invested in linked for many-many years.

That relationship strengthened when we bought NET and the 1K, 2K [ph] which is certified. Now all of our products are linked and now Skype for Business certified. But one of the things we did years ago was decide not to build a phone-in-a-box, because the phone-in-a-box was a end market [indiscernible].

That the entire end market was going to move into the cloud, and then ultimately into a hosting model. So we invested heavily, both technically and commercially in the relationship side at that opportunity, for the day when the world was moving to the cloud.

So I would not want to be a competitor out there, just waking up to the fact that there is a stall and a linked market, because it appears to be moving to the cloud. We are thrilled about that transition, and to the extent that it happens in 2016, it’s a huge opportunity..

All right. Thank you very much..

Thank you..

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

Thank you. This is [indiscernible] for Paul. I just had a quick question on long term deferred revenue. I noticed that it was down slightly sequentially, and I would have expected it to be up, given that you had more traction with Tier-1 service providers and more long term contracts this quarter.

Could you just comment on that briefly?.

Well the long term is down a little bit, but the short term was up. And as I told, deferred revenue was higher and as Ray mentioned, I think somebody asked with regard to when do you expect these Tier-1 engagements to revenue, he said, over the next 12 months or so. So, that's -- you would see it in the short term, not the long term deferred revenue..

Got it. And that's just the short term shift. Okay. Thank you very much..

Thank you. And we have time for one more question, coming from the line of Stephen Collins with ProVal Partners. Please proceed with your question..

Hi. Continuing on the discussion of those Tier-1 wins, I guess, [indiscernible] in deferred revenue. I am trying to get a size, would you expect that they would be material contributors, when you finally get around to scoring that revenue.

Could those names show as 10% customers in the quarter?.

I don't know. Really, it will depend on how they develop, but its unlikely. If they do, we will be pleased to break them out for you..

Okay.

And totally different kind of question, I noticed there was a jump in stock comp this quarter, could you just say what that was about?.

I am going to have to get back to you. I think that there was -- from the grants that were done earlier in the year, I think that's what drove it. But I can look at that and get back to you on that particular question..

I appreciate that Mark..

Thanks Steve..

That's it for me..

Okay. Operator.

I think that's the end of the questions, could you confirm that Cindy?.

Yes, thank you sir..

Okay. Thanks everyone. I know that Mark is going to open soon, and I won't belabor any comments other than the fact that I am very-very proud of the team for its resiliency. It has been demonstrated over many years at Sonus. But yet again, we have dealt with the challenge in the first quarter.

We have achieved our second quarter goals, and we have confirmed our outlook for the second half. We are going to get back to business and run a great company. We will keep you posted as we make progress. Thanks for all of your support along the way. Have a great day..

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