Susan Villare - Chief Financial Officer (Interim) Ray Dolan - President, Chief Executive Officer & Director.

Mark Kelleher - D. A. Davidson & Co. Ryan Hutchinson - Guggenheim Securities LLC Jess Lubert - Wells Fargo Securities LLC Greg Mesniaeff - Drexel Hamilton LLC Paul Silverstein - Cowen and Company Vijay Devar - Northland Securities, Inc. Steve Cohen - Procol Partners.

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2016 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct the question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded Wednesday, October 26, 2016.

And I would now like to turn the call over to Susan Villare, Interim CFO. Please proceed..

Thank you, and good morning. Welcome to Sonus Networks' third quarter 2016 financial results conference call. 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 shortly after this call.

During our prepared remarks, we will be referring to a presentation with supporting information. Please take a moment to locate these documents on our IR website. As shown on Slide 2, please note that during this call, we will be making forward-looking statements regarding such items as future market opportunities and the company's financial outlook.

Actual events or financial results may differ materially from these forward-looking statements and are subject to various risks and uncertainties including without limitation, economic conditions, market acceptance of our product and services, the timing of customer purchasing decisions, and revenue recognition, difficulties leveraging market opportunities and integrating acquired businesses and impact of cost containment efforts.

A discussion of these and other factors that may affect our 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. Before I hand over the call to Ray, I'd like to provide color on our investor outreach for the fourth quarter of 2016.

We will be in Boston for meeting with investors tomorrow October 27. We will also be spending the Wells Fargo Securities TMT Conference in New York City on November 10 with our formal presentation at 10.30 AM. Lastly on November 17 and 18, we will be holding meetings in Chicago and Milwaukee hosted by D A Davidson.

We encourage current and potential future investors to reach out the IR contact if you would like to schedule a one on one meeting if any of these locations and dates is convenient. Please see our IR website for contact information. With that, let me turn it over to the President and Chief Executive Officer of Sonus, Ray Dolan..

Thank you, Susan. And good morning to everyone on today's call. Let me explain our framework for today as we have quite a bit of data to share with you. First, we will start off with a review of Q3 for Sonus standalone which was very strong despite a challenging environment.

We will also include the small period that we consolidated Taqua after closing in deal on September 26. Second, we will discuss our outlook for Q4 both for Sonus on standalone basis and for Taqua.

Also given that our Q4 revenue outlook for both Sonus as well as Taqua are now somewhat lower than our prior views, I'll share our perspective on what is driving those differences based on the challenging environment that I just mentioned. We plan to share our 2017 outlook on our February call when we announced our Q4 results.

While we see another year ahead of us at low single digit revenue growth, we currently expect the 2017 full year combination of revenue gross margin and OpEx to lead to another profitable for Sonus on a non-GAAP basis.

With solid cash flow from operations as we continue our focus on supporting our customer through their transition in Cloud based architectures. Susan will provide all the details and precise numbers in our prepared remarks using the same basic framework we've done in the past.

Also I want to clarify that we plan to provide financial results for both Sonus and Taqua separately as well as consolidated in Q4, 2016. In 2017, we will only provide consolidated results consisted with prior transactions. This level of details included in this morning's press release.

And since it is a great deal of information, I want to be clear upfront regarding how I see our business doing strategically so you can determine the proper context of our results, as well as our outlook from your own point of view. Okay, let's turn to Slide 4 and get started with the review of our Q3 financial results.

As you can see we had very solid operating and financial performance this past quarter. The combination of revenue margin and continued expense discipline led to outstanding EPS performance. I couldn't be more pleased with the work of the entire Sonus team that delivered these strong results and their continued commitment to our customers.

For Taqua, the Q3 impact was immaterial to our consolidated financial results. Susan will handle details behind the one penny dilution to our Q3 consolidated results as it rounded up to a penny versus down to breakeven as we had expected. Turning to Slide 5, you can see we had a nice balance of enterprise and service provider product revenue.

Enterprise accounted for 21% of product revenue in Q3. Our channel grew as well over the course of 2016 and contributed 32% of product revenue in Q3. Our geographic mix was consistent with prior quarters at 70% domestic and 30% international. Revenue concentration from our top five customers is 41% down slightly from prior periods.

AT&T was the only 10% customer for the quarter. They were in fact 12% of total revenue or $7.8 million in Q3. I am also pleased that we continue to see expansion orders from several Tier 1.

While a level would not trigger a 10% disclosure, these deals were strategic and included both growth and legacy expansion as we focused on meeting their needs to transform their network. Now let's turn to Slide 6 and talk about our outlook for Q4, starting with Sonus on a standalone basis.

Our prior Q4 applied guidance for Sonus only was $74 million to $78 million and our current revenue outlook is now in the range of $65 million to $67 million excluding Taqua. This lower revenue guidance reflects the challenges we are facing calling a timing of certain deals.

In some cases, we've customer consolidation causing a potential pause in spending. In other cases we are now swapping competitors' equipment and the operating environments can lead to delays for cut over that extend beyond our standing project timeline.

In those cases where we see potential delays beyond under control we've adjusted our guidance accordingly. While we've lowered our revenue guidance for Q4, we continue to see solid traction in both service provider and enterprise customers.

We are not aware of any major competitive loss other than one in Japan which was against a very strong Japanese based incumbent for NNI. NNI or Network to Network Interconnect is the common Asia Pac term of IP peering.

We continue to see NNI opportunity in Japan as a solid chance for us in 2017 especially with customers where we have strong established relationships and embedded networks. We also have not forecast any fourth quarter budget flush. Our outlook reflects management's view of our fourth quarter results knowing what we know today.

As you can see on Slide 6, we lowered our outlook on revenue while we continue to focus on margin expansion and expense controls and should still allow us to forecast the solid Q4 non-GAAP EPS performance in a range of $0.09 to $0.12 per share.

That Q4 non-GAAP EPS range would lead to a full year non-GAAP EPS of $0.33 to $0.36 per share coming off our strong quarterly performance in Q3 of $0.13. That fiscal year range would imply non-GAAP operating income of 7% to 8% of revenue in 2016, significant progress on our journey towards our goal of driving double digit operating income.

I am very pleased with the team's progress to date in 2016. We delivered solid earnings while continuing to invest in technology to lead our industry's transition to the emerging software based cloud architecture. I'll talk more about our strategic customer engagement shortly.

Turning to Slide 9 and 10, we provided our consolidated quarterly results year-to-date for 2016 and 2015. So you can see the progress we made this past year on those lines. If you turn to Slide 11 and 12, we've also included our actual consolidated quarterly results for 2014 to 2016. So you can see our quarterly year-over-year progress.

In summary, while we remain short of our desire for material top line growth, I believe we've made solid progress in all other areas which now is driving significant non-GAAP profitability and cash flow from operation.

Combined with our solid balance sheet, our anticipated cash flow can support additional share repurchases or future opportunities for industry consolidation or some combination of both. Now I'll shift to the engagements with our largest customers as well some new customer opportunity.

We've been working with multiple service providers and large enterprise RFPs as I mentioned last quarter. These RFPs have been driven by the upcoming change in architecture or in some cases also by significant performance issues by established vendors. Our sustained focus on innovation is paying off.

As I mentioned in our July call, I continue to meet frequently with customers and consistently get feedback that our product and software quality is strong, that our roadmap is more competitive than ever and fully aligned with our customers' growth strategies. We are now making significant progress in the VoLTE market.

And we are underway with the significant North American Tier 1 project to swap their incumbent VoLTE provider with Sonus' SBC in portion of their network. This marks our second VoLTE Tier 1 win in North America. And I look forward to sharing more results in VoLTE space in future.

Now that we've completed Taqua acquisition, the strategic feedback from several customers has been quite positive. In fact, we'll soon begin the first cloud five transformation projects for Tier 1 service provider in North America using the Taqua assets.

This is a small project to start and subject to the successful outcome, this could lead to further revenue growth in 2017. It's early days in that project and therefore too soon to commit to the timing and size of that incremental revenue until we get further along. We'll know more in approximately three to six months.

That said, I find it very encouraging that customers already see the strategic rationale the Taqua deal. Our technical integration and our cost synergies are ahead of our initial plan as well. I'll now turn the call over to Susan so she can provide more detail around our financial performance.

Susan?.

Thanks Ray. As a reminder, gross margin, operating expense, operating income, net income and loss per share are all be discussed on a non-GAAP basis and have been reconciled for you at the end of today's press release and presentation. So now let's move back to slide 4 for a closer look at our third quarter of 2016 non-GAAP financial results.

The numbers I am about to discuss are all related to the consolidated figures which include Taqua unless I note otherwise. Total revenue was $65 million, which was in line with our guidance. Third quarter product revenue was $38.6 million as compared to $42.2 million in the third quarter of 2015.

Total service revenue was up at $26.4 million in the third quarter of 2016 versus $25.6 million in the comparable prior-year period. Our top five customers represented 41% of total revenues for the third quarter of 2016, this compares to 50% in a third quarter of 2015.

Third quarter 2016 non-GAAP gross margin was 69.9%, which is relatively consistent with the 70% we reported in the third quarter of last year. Non-GAAP operating expenses were $39 million as compared to our guidance of $38.5 million to $39.5 million.

Non-GAAP operating expenses decreased by $2.4 million in our third quarter versus a year-ago due to 2015 cost reduction efforts. Our third quarter of 2016 represents Sonus' fifth consecutive quarter of non-GAAP profitability. Non-GAAP diluted earnings per share for Q3 of 2016 was $0.12 compared to $0.11 in our third quarter last year.

Our solid performance was attributable to strong gross margins coupled with our continued cost containment effort. I now want to provide some color as it relates to the Taqua acquisition and its impact on our Q3 consolidated financial results.

First, we paid approximately $20 million in cash for Taqua on acquisition closing date which was September 26. Additionally, we recorded $10 million of contingent consideration which is our estimate of the earn out based on current expectations regarding revenue threshold being achieved as measured annually through 2020.

We plan to finalize the purchase accounting for this acquisition in our fourth quarter. Acquisition related fees of $1 million were recorded in the third quarter. The deal closed the last week of our third quarter and accordingly their revenue contribution was modest at $0.1 million.

The GAAP and non-GAAP impact of the Taqua acquisition on our third quarter consolidated financial results was a loss per share of one penny. Now looking at balance sheet is still remain strong.

Cash and investments were $121 million at the end of our third quarter of 2016 as compared to $142.7 million we reported at the end of our second quarter of 2016.

Sequential cash decline was primarily due to the acquisition of Taqua for $20 million as I previously noted, coupled with $2.2 million of stock we repurchased under our stock buyback program. At the end of our third quarter of 2016, we have approximately $7.8 million that remains available under our previously approved stock buyback program.

Days sales outstanding were 61 days in the third quarter as compare to 68 days in the third quarter of 2015. The last item I'd like to cover as it relates to our Q3 financial results is the restructuring initiative that we announced on our second quarter earnings call.

At that time, we told you we expected to generate between $6 million to $8 million of savings on an annualized basis. And that we would incur between $3 million to $4 million of restructuring expense.

We also noted that we plan to utilize these savings to shift headcount towards new strategic initiative for such items as new product, as well as the expansion of our go-to-market footprint. In Q3 of 2016, we recorded restructuring expense of $1.2 million which resulted in annualized savings of approximately $4 million.

The company has reinvested $2.6 million of these saving to date. We believe the program will be substantially complete by the end of our second quarter of 2017. Let's now turn to Slide 6 and 8 and review our guidance for Q4 as well as our full year. As Ray previously mentioned we will provide forward looking guidance for Sonus which exclude Taqua.

Taqua on standalone basis and then finally consolidated. Starting with our fourth quarter 2016 guidance, we expect revenues to be between $65 million and $67 million for Sonus, $1.8 million for Taqua and $66.8 million to $68.8 million consolidated.

Non-GAAP gross margin is projected to be in the range of 69.5% to 70% for Sonus and 68% to 68.5% consolidated. Non-GAAP operating expenses are expected to be between $39.5 million to $40.5 million for Sonus and $43 million to $44 million consolidated.

Q4 2016 fully diluted non-GAAP earnings per share are expected to be between $0.09 and $0.12 for Sonus, and a non-GAAP loss of $0.05 for Taqua, and lastly $0.04 to $0.07 consolidated. This assumes $50 million of diluted shares outstanding. Ray provided the factors contributing to our revised outlook for Sonus excluding Taqua.

At this point, I'd like to provide some color surrounding why we are lowering the Taqua Q4 2016 revenue forecast now. First, after we further analyzed their wireless business we concluded that their maintenance does not have the SLE and thus we will be taking deals ratably over the maintenance period.

Our preliminary outlook had a larger portion being recorded upfront. Second, their classified outlook for their fixed product had larger upfront purchases assumed for certain customer project. It now appears that we will be taking these over time versus upfront.

Third and finally, purchase accounting, downward adjustment to deferred revenue was greater than we had originally anticipated. We project the deferred revenue haircut will be substantially complete by the end of Q2 of 2017 at which point their maintenance revenue levels will return to normalize historical level.

Despite the short-term reduction in their revenue due to the factors previously noted, we still believe the acquisition was strategic and their pipeline remains strong. Now let's turn to our full-year 2016 outlook.

We expect full-year revenue to be in the range of $252 million to $254 million for Sonus, $2 million for Taqua and $252 million to $254 million consolidated. Non-GAAP gross margins as projected to be in the range of 69% to 69.5% for Sonus, as well as 69% to 69.5% consolidated.

Non-GAAP operating expenses are expected to be between $154 million to $155 million for Sonus, and $157.5 million to $158.5 million consolidated. Full year 2016 fully diluted non-GAAP earnings per share are expected to be between $0.33 and $0.36 for Sonus and non-GAAP loss of $0.06 for Taqua and lastly $0.27 to $0.30 consolidated.

This assumes again $50 million of diluted shares outstanding. That concludes our formal remark. I'd like now to turn the call over to the operator for questions. Operator, we are ready for our first question..

[Operator Instructions] And our first question is from the line of Mark Kelleher from D. A. Davidson. Please proceed..

Great. Thanks for taking the question. Could you just go over the Taqua revision one more time? I know, Susan, you mentioned three of the issues that were involved there. I'm just wondering when those issues were discovered and maybe why those weren't incorporated in the original guidance..

Yes. Mark, this is Ray. I'll take it just shot at that if you don't mind. That happened between our guide and probably over the last three weeks as we get closer to their revenue issues, takes over their G&A functions. The purchase accounting issue is just far more significant impact than we thought.

The VISO issue is just things going ratable in the wireless side. They just had worked under private accounting issues and took interpretation that we are just taking slightly more conservative view on. So that's when that happened. It wouldn't have been included in our prior guidance as we didn't expect getting the prior guidance. .

Did the -- there's a $10 million earn out, right, through 2020? For revenue --.

That's the valuation of the total cap earn out, yes. .

And that didn't change at all.

Right?.

No. The earn out is driven after revenue levels up through 2020 is calculated annually. We carried, as Susan said we carrying it on our book at $10 million. It has the potential to be higher which should be all in our Q but we think relative to what our revenue expectations are that the proper accounting level for it.

And we'll adjust that going forward if we see a change. .

Our next question is from the line of Ryan Hutchinson from Guggenheim. Please proceed..

Hey, good morning. So couple things, Ray -- just given the outlook, as you're looking forward with the pipeline and everything, have you reconsidered maybe some additional cost-savings activities as we look forward or maybe some strategic alternatives? That would be my first question. And then the second question is just on the competitive dynamics.

You referenced a tier 1 win displacing an incumbent, which I think we all know who that is. So I'd just like to get some more color on, one, the timing of that opportunity, potential size and what were the drivers in terms of the displacement..

Okay. Thanks Hutch. Well, we make additional cost, yes, that's actually the reason we announced the restructuring program we said we are constantly looking at our cost structure. Going back a few years our OpEx run rate will probably in the range of $20 million is higher on an annual basis than they are right now.

So I think we've taken a good bit of cost. We'll continue to look at that. And we'll balance the cost versus investment equation. But I think our current restructuring program is probably the best plan for you to look through on that as we take about 6 to 8 odd and reinvest probably 75% and more which is why we said we will invest.

We are investing in that in some very interesting growth engines which I think are having a material impact on our ability to win business in the current environment. Second, whether they will explore strategic alternative.

I am not going to speak to anything there but I do believe that we got a great balance sheet, great cash flow and we are a great partner., is that what drove Taqua to us, customer interest and big opportunity in Class 5 is a lot more strategic implications of C5 transformation in the context even MIS play.

And our access SPC or proxy CSCF was highly complimentary with their IMS like core that they built and partnered with Erickson on. So I consider Taqua to be part of strategic alternative and they are more beyond that potentially and we'll just address them as they come up.

That's call as far as our goal with regard to strategic alternative in case still if anything else behind your question.

Regarding Tier 1, yes, the timing of that is we've already started as to its size it will at least double digit million over a period year potentially in 2017 -2018, as to when it scores on revenue recognition it is a little bit hard to call. So we will give more color on that next year as we guide to the year.

But what I am very encourage in that case and in other cases of big deals that we are working on as that there is multiple applications that we can go after. This is double digit millions for years in the future if we can continue to stay close to this big Tier 1.

Now as I say that they are all exploring incredibly creative strategies on where they want to manage or own their day centers, where they are going with regard to content of the stock, you see them buying things as to how much CapEx they still have for their networks.

And I just think it is appropriate for us to stay conservative for what I call balanced because I frankly think there is some risk to our prior guide and that's why we took it down. But I am no less bullish with regard to our strategic options which is I am not going to reduce OpEx just to start the company into an EPS footprint.

This EPS footprint I believe is about the right place for us to be this year at our journey to double digit operating income.

We'll generate somewhere in the mid-30, I can't remember this, you can correct me -- don't even correct me on the exact numbers, it is what it is, it is in the record, it is our guide, we'll be there, we'll deliver what we said we are going to deliver.

But we are also delivering tremendous strategic value to our customers as we help them work to their strategic transition, and they trust us for that. I hoped that helpful, Hutch, if not happy to take your follow up question..

That's great. One more, if I could just squeeze it in.

I know it's still early, but given the AT&T, Time Warner potential merger here, have you had discussions with them? And potential for spending pause or freeze or anything like that that you see on the horizon?.

So, a to be clear I have not had any discussions with AT&T about their Time Warner I believe they are too busy to take my call. But I will give you my personal color on it. I think it's going to stress their CapEx spend across the board.

I would expect that to be -- the conclusion by the end industry analysts, the research analysts on this call and other calls, I think it is the obvious strategy for them to pursue to protect their dividend, to finance that transaction and to explore strategy so that they don't become a dumb pipe.

Now that said, they are running their network hot, we are there to help them and we are involved in multiple long-term D2 projects which we are working very, very hard on. And we don't get out ahead of our headlights there. But I believe we are very strategic and we will increasingly strategic.

But short term, I think the entire industry is looking at, a; consolidation strategies, b; diversification from dumb pipe strategies, you see it certainly in AT&T. You see it in Horizon with regard to their acquisition. You are starting to see it globally. You see Softbank acquiring ARM and other aspect of food chain.

So we wanted to do is just stay realistic in our guide, stay strategic in our focus to the big spending service providers, continue to diversify into the enterprise, continue to move to software, continue to drive margins and where we can reduce our OpEx so we can deliver financing leverage.

But I love the hand we have, it's just the very difficult environment with all the strategic and so my goal is that to just be transparent with you. I hope that's helpful, Hutch. .

Our next question is from the line of Jess Lubert from Wells Fargo Securities. Please proceed..

Hi, guys. A couple questions on the output -- first, I was hoping you'd provide some additional detail regarding the breadth of the weakness driving the revised forecast and to what extent we should be thinking about the low seasonal trends over the next few quarters.

And then, Ray, perhaps longer-term I was hoping you can give us a sense to what degree you believe your end markets is growing.

What gives you confidence you can deliver low single-digit growth moving forward, given it looks like global carrier spending trends are likely to be down moving forward?.

Great. Thanks Jess. So Jess the question on the outlook in the breadth of the weakness, I think it is more of a timing issue than a weakness issue first of all. And so we are trying to call our outlook properly in Q4 I think we have.

With regard to end market growth, I do believe that there is some level of consolidation and likely if you will some lumpiness over the next year. It is hard to tell whether that's going to occur Q4, Q1. So we just -- we are just trying to prepare for that. But I do believe we are gaining shares as well.

So when I look at low single digit growth, I look at Sonus consolidated with Taqua, I'll give more color on our February call and the consolidation of those two revenue stream so probably drive off of our 2016 results low to mid single digit growth rate, okay.

And I think that with proper expense discipline and margin creates cash flow on earnings and we'll guide to that next year when we have our February call. With regard to seasonality, it is too soon for us to call to Q1 but I do think it would be proper for us to tell you that we expect next year to be as seasonal as prior year.

So we've always had a low Q1 relative to the rest of the year. I don't see that changing next year but we haven't done enough analysis to give you any specific facts on that, okay. .

So Ray is the assumption that the market you compete in is flat next year? And then maybe just for Susan, gross margin has been above 69% now for four out of the last five quarters. Would love to get a sense of what's likely to drive the sequential downtick in Q4, given it does sound like software is increasing as a percentage of mix..

Jess, this is Ray. That's just a mix we have -- Jess, we look at our deal flow, and we have some that carry a little more third party content than others. Some that has a little bit less software density than others.

And in part the mix of deal flow that move from Q3 to Q4 and something that move from Q4 to Q3, we popped a higher margin in Q3 than expected because one of our lower margin deals just deferred into Q4. So that's really all it is.

I think I would consider that flux and to the extent that we can beat that guided range by anywhere from 20 to 50 basis points. I think that's somewhere around I am thinking we will end up. And I think that what that does is it gives us another 100 to 150 basis points of progress year-over-year.

And then we have a February call we'll try to give an indication whether or not we can make that progress again next year. Okay, I hope that's help. .

Our next question is from the line of Greg Mesniaeff from Drexel Hamilton. Please proceed..

Yes. Thank you. Ray I was wondering if you can give us a little more color on the potential for customer synergies with Taqua. In other words, what do they bring to the table as far as their customer base and where are there opportunities to cross sell your existing products with theirs? Thanks..

Sure, Greg. Thanks for that question. So actually it's quite exciting.

It is not yet in our guide, I just want you to know well, had some hockey stick in 2017 for any of these material opportunities but I'll try to go through them in order and I'll start with the more mundane and classified transformation some of these offices are many decade old, you would be surprised what you see when you walk into I mean they come with a very solid classified soft switch opportunity which is very nicely tied to IMS core strategy which lacked in SBC.

And it lacked a policy engine. So we are already seeing interest in pull through that's actually what drove the transaction. We saw a lot of interest in pull through for our SBC and for our policy engine in a number of their existing customers.

Now mind you they had success in Tier 2, Tier 3, so lot of these names may not be name you recognized or name should bright on, but they are material drivers to their revenue stream and they will probably be sustainable through this transaction.

What we can do is upgrade that to a Tier 1 presence because we have the credit, we have the embedded nature of our class 4, now right now the opportunity in North America with Tier 1 is Taqua only strategy. It doesn't connect to our deeply embedded class 4 asset in that carrier.

But we are actually exploring ways to do that in the second rev which would develop into a pretty pervasive IMS play. These companies have already taken down one slug of IMS generally speaking from the big guys like Erickson, Huawei, Alcatel Lucent and Nokia.

And they have incredibly small traffic on it because they are very heavy duty, they are not move -- they are not transitionable to an NFE strategy, most of them are stuck in hardware architecture. And so they are kind of looking at alternatives with having already spent some money on IMS, they are reluctant to do it again.

But they are looking at a way to help us get them into future architecture. So that's one, I call it classified transformation that could evolve into a much more advance strategy. Two is a mobility play.

They have already got multi tens of millions of dollars of established software based client asset on femotcells for the couple of carriers around the world. Some of which are Tier 1s in North America. That has stalled in recent years and we think we can resurrect some of that depending on how we can tie that to a more broad strategy.

So as maintenance coupon to it, it is got small amount of attached to it from the standpoint of their existing project but we could certainly turn that into a viable revenue stream with some very nice current customers.

They also have Voice-over-WiFi client which together with VoLTE client we could pull through to our policy engine SBC and create a fix model conversion which I've always believe is where the industry is going.

It is probably then anticipated for 30 years but I do believe now that LTE is pervasive voice over the data channel, voice over Wi-Fi and Voice over 3G are going to become client options and people are going to start to explore that strategy.

That's going to be attractive to anybody without spectrum which includes Tier 2s, Tier 3s and the cable industry. In fact, I think it's going to be attractive even to the folks with spectrum as the data offload and a voice offload strategy. So those are a couple of -- Greg I hoped that's enough.

We've got some additional home run strategies I just wanted to take you at this time because we need to explore them. But I am very pleased that we've done this acquisition. I think we can block and catalogue their current revenue stream.

I think we can drive additional synergies beyond what we anticipated especially given this fourth quarter miss, we are going to go back and look at additional strategies to address this before, what we are planning to do on January 1. And we will keep you posted on that on our next call.

Do you have any additional questions, Greg?.

Yes. Thanks for that color, Ray. Just a quick follow-on. Did you break out your percentage of revenues from enterprise? And if you did not, if you can just give us some color on that? And also if you are looking at all to move a little bit downstream as far as smaller enterprise customers? Thanks..

Yes. We did Greg. In my prepared remarks we showed into slide it is 21% of product revenue went to the enterprise.

Okay and whether not we will go down market, I'd say we are already down market, already in our price strategy is both we do direct sale to the large enterprise and handed after the channel whether that channel is a service provider or VAR and we've always had a vibrant channel in the Lynx now Skype for business market as well as in the bar channel where our 1K and 2K sales what I would call down market where the session density is might be 50 to 1,000 session.

So we are already there. And we will continue to focus on that. We are doing a lot of work in the Microsoft environment moving our 1K and 2K to be more compliant with their strategic goals in Azure. And we will talk more about that as we do product releases in the fourth quarter. .

Our next question is from the line of Paul Silverstein from Cowen and Company. Please proceed.

Thanks. I just need some clarifications. And if you already gave this, my apologies; we could take it off-line.

First off, Ray, can you give us any insight on the new customers in terms of number and what percent of revenue?.

Susan will give you a new customer number in a second here, Paul, but is over 100 wasn't it?.

New customer is 145 this quarter.

How many of those were service providers, Susan?.

We don't break that out. .

It is small number. A lot of it is channel and enterprise but we have brought on handful of new service providers. .

Can you tell us what they were as a percent of revenue? Because -- [Multiple Speakers].

Hey, we don't break that out. .

Yes. Let me see if we can get our arms around that, Paul. If we can we will disclose that --.

Going forward.

Yes, going forward. We will try to get our arms around that. But it is relatively small percentage of new revenue. .

All right, I appreciate it.

And I forget; do you guys provide book to bill?.

We generally don't but I will tell you, our book-to-bill is above one and over the last six quarters we consistently been on average above one. .

Okay. And on the calendar 2017 lists single-digit revenue guidance.

Was that organic or was that including Taqua?.

Say that question again Paul please..

I thought I heard you say that for calendar 2017, Ray, you are expecting low single-digit revenue growth.

Did I hear that correctly?.

Yes. That would be consolidated. .

Consolidated? So that's with the benefit of Taqua?.

Yes. .

Okay.

And can you -- did you discuss linearity in the quarter?.

I didn't, yes, but I am happy to. Our linearity was pretty good. Our DSOs were 61, 62, so I felt good about linearity. We had actually good linearity throughout the calendar year. And I expect decent linearity this quarter as well, Paul. So I am pleased with that. Happy to discuss that further if you got a follow up question. .

Two other quick ones, if I may, a little bit more extensive. Ray, with respect to your comments on enterprise a moment ago, if I recall, when you acquired NET back when, you had a lot of momentum in the enterprise and it worked out really well for a while. And then I thought there was a reversal or the emphasis on the enterprise peace.

Today I hear you saying -- is it that you are refocusing on enterprise? Is there a change in strategy? Is there something new and different? Or it's just waxing and waning in the business? And then I got one last quick one, if I may..

Absolutely, Paul. So there never has been a change in the enterprise strategy. There is flux in our results. We are very strong in the service provider and so we are not going to abandon that for some home run strategy in the enterprise.

And then I've also said in prior calls I am happy to be state that I believe at the end of the day which may be two three years from now, there is a conversions in the enterprise and the service provider because frankly the service providers are probably going to defer to the big data center players at least in collaboration and public private posted cloud with Amazon and Google and others.

Then they are going to move a lot of their call control to the cloud and what the enterprise did or is going to evolve so I actually believe it will become more of a unified market. And we are pushing very hard on both.

And the products that tend to be focused more service provider centric even though they actually play any enterprise especially the large one like the banks by the 7K and the 5K.

And of course the 9K is still our work horse because it is so deeply embedded that a lot of people are buying the SBC had a 9K just because they are so familiar with the user interface. And the 1K, 2K and our Swe are the principal way software addition I am talking about when I say Swe by the way.

Those are our principal go-to-market strategies at the enterprise but now the enterprise is often the combination of a headquarters which tends to be heavy duty 5K, 7K or call center which tends to be a 5K, 7K and a lot of edge offices which tends to be a 1K, 2K. And what you get there is just valuable branch exchange, it's got TDM, it's great.

And we are evolved in the Lynx environment and Skype business environment. And I am personally along with our leadership team very, very involved in the long-term design structure of the Azure cloud with some folks in Redman and throughout Microsoft because they are evolving very, very quickly.

I think they send turn a pressure from Google and Amazon, it used to be Google and Amazon. I think it is now Amazon and Google.

And we are involved in Amazon and Google with regard to the evolution of their cloud strategies which up to date has been best ever cloud strategy, and they are evolving very quickly to embrace the SOA requirement of the Telco. So I am extremely excited have been for long time about the enterprise.

It's just -- it is a long sale cycle, it does generate lumpy results and from time to time it drops into the teams and then it pops into the 20s.

And if that give an any appearance of the shift in strategy toward them or away from them over the last year and half, it is my bad, I'll just clarified on this call, we remain 100% focused on the enterprise. .

Okay. And my apologies to my peers on the call. But if I may, one last question -- and Ray, I'm going to apologize. I recognize this may be controversial, the way I'm going to frame it.

But given the Treq acquisition, which appeared to have a lot of momentum in next-generation product line at the time, I don't think we've heard anything about it recently. So I'm assuming that -- maybe it's gone better, but I'm assuming it hasn't. Maybe you've just been quiet about it.

But given that Treq doesn't seem to have panned out, in spite of the promise and the momentum they had at the time of the acquisition, and given that Taqua has been around for a long time -- I think that company is now 18 years old and you are the third company to now have acquired it in that time span, are there lessons learned? And why -- I guess I don't understand the optimism.

And are there lessons learned from Treq and other acquisitions that you've done in terms of looking at Taqua going forward?.

Hey, Paul, it is a great question. And I am glad you asked it. So please comfortable because I don't think you need to apologize at all for the question. It is something that I think about all the time. We talked about as a leadership team. A, one, I want just point out a few things. We did upfront cash payment and earn out in both of those transactions.

I am convinced that both of those transactions made sense at the time and still make a sense. Okay now the question is did they generate the revenue hockey stick that was associated with the earn out. In the first case it clearly hasn't and we disclosed what we thought would be a fair market value for the earn out. It hasn't happened.

I'll be glad to explain for you in a second while I give some color. We structured top at the same way with the modest upfront payment which allowed them to resolve the credit facility they had. We took the company on clean, we cleaned up a lot of their cable issues and what have you -- and we got really good technology.

Let me go back to track and then I'll come back to top, okay. But I just want to layout the structure of our thinking so you can understand why we think it was a smart thing to do. Based on an upfront payment at Treq, we got some great ST win assets and we got a layer 2 switch and a number of other assets in a team.

So layer 2 switches market is a commodity market. And trying to layer our technology on top of third party layer 2 switches became a bigger challenge for us than frankly we were up to. Based on our footprint in the enterprise. But it is still a great technology play for us.

It blends with our signaling policy SBCS to create a new software tech in a cloud. So I am glad we did that but it is -- the reasons we don't talk about it, it is not material to our results from a revenue point of view, yes. Okay, but that's how we look at it so I just offer that to you the same way you offer the question.

And hopefully that respond to. The lesson learned is, should you do pay for that hockey stick or she put that burden back on the company that you acquired, deliver what they say they are going to do at the time of the transaction. We've done the same thing with Taqua.

We set revenue goal that they thought they could hit, I believe we can properly discount those which is why we are carrying that earn out of $10 million as an MPV fair market value after the analysis is done. They have an opportunity to earn out more than that. Our current outlook doesn't drive that at all. It doesn't drive it in 2017.

It probably wouldn't drive in 2018 although we haven't really guided anything there or worked that model. But what it does give us is incredibly strong classified asset which I do believe is a vibrant market for network transformation. We had validated that before the transaction. I personally validated that with few Tier 1 since.

It gives us an opportunity to hunt in that market. Tied to our cloud 4 which nobody else can do, tie to IMS light which few people can do and see if we can generate some revenue of that.

In which case this will be a very high margin business but for the professional services side of the business which could or could not create a margin drag at the onset.

It also gives us a good voice over WiFi VoLTE synergy play which comes as a coupon, it gives us a massive footprint in Sprint at the femto level that we can monetize with additional end to end and given their -- our Softbank present in Japan and our relationships there at network level, it allows us to think globally about Softbank where we haven't been able to do that before.

So Paul I am optimistic on it. But at the same time I want to tell you that my optimism is tampered by the fact that we are only going to guide a conservative outlook for Taqua and the burden is on them and their earn out to deliver that. And if they deliver their earn out and get it, it will be accretive to Sonus, right.

So that's how we are structuring those and if it looks like a tired asset, it has been around for 20 years in changed hand, it is. There are others out there like that. And the question is what do you when customers ask you to please help them through their transactions. And so that's how we are thinking about that.

I hope that gives you a transparent view. And now what we need to do is go out and deliver that in 2017. Okay --.

Our next question is from the line of Mike Latimore from Northland Capital. Please proceed..

Hi. This is [Vijay Devar] for Mike Latimore. Thanks for taking my question.

During your commentary around the timing -- can you quantify revenue impact?.

Could you say that again, Vijay? The timing of what?.

The sudden days that impacted -- figure the lower revenue growth.

Did you guys quantify the revenue impact?.

Is it for Taqua acquisition you are asking?.

Yes. .

Vijay, I am sorry I don't understand your question.

The certainty of - are you talking about the Sonus only guide from -- that was in the mid -70s to 65 to 67 is that your question?.

Yes. For the fourth quarter what guidance yes. .

Okay. So I think I understand your question Vijay that it is what was that drove the magnitude of that. As I said in my prepared remarks, we have a number of customers that are going through either consolidation or M&A.

That I personally believe could cause some push in their current projects and so we've try to reset those around that current push and I actually believe that's going to happen. So that's why we shifted our guidance. It is not just a hitch.

And with regard to other projects that personally either literally the exact sponsor out or directly involved with other executive on the other side, I just believe anywhere between the acceptance or the VISO issues or the third party risk associated with other folks that are evolved in the plan, it is just profit to repay some of the revenue recognition around those big project but I am at the same time very excited about what this exposes us to with regard to Tier 1 VoLTE both for interconnect and a follow on acts as opportunities and then ultimately end to end opportunities on this big company.

This is a different place for us to be hunting in Tier 1 in North America almost across the board. And so that's what's driving that delta $9 million or somewhere in the $9 million at mid point, okay..

Okay.

So does it mean for the first quarter next year we see a slightly different from the regular seasonality?.

No. What I said I think in response to question by just -- we do continue to expect seasonality in 2017. I would expect our first quarter to be our weakest quarter which has been for the majority of my watch over last six years.

But when we look at the year in the aggregate with regard to our current 2016 revenue what are likely to be a one do not repeat and what's likely come in that new. We consider that to be basically a flush and as a result we consider Sonus and Taqua to add modest single digit growth to our total top line.

But the Q1 seasonality issue is not going to be offset by dramatic push out of Q4 which is going to spike Q1. I would not suggest that you model it that way. .

Okay. If I may squeeze in one more.

On the revenue recognition side even more only the revenue impact -- will that impact even the cash generation which was expected earlier?.

No. We will get the cash outcome, we just can't get - square the revenue upfront. It will be ratable. .

Okay. So the cash remain same I mean in terms of the cash generation remains the same. .

Yes. That's correct. .

Our final question is from the line of Steve Cohen from Procol Partners. Please proceed..

first, the $7 million spike in accounts receivable in the third quarter, if you could give us some color on that? Second question is the fourth-quarter revenue guide downward.

Is that a faster falloff of the legacy business, slower growth of the growth products for that? And then more strategically, Ray, what needs to happen to get out of $65 million, plus or minus, per-quarter revenue? Is that a broadening of the product line, enhancing of the distribution capabilities? What's it going to take for Sonus to break out of that plateau?.

Yes, Steve, I'll ask Susan to just deal with the AR issue and I'll come back to you on the mix of our guide down and the $65 million range bound question, yes, go ahead Susan. .

Okay, yes. So as we said our DSOs are up 61 days which is consistent with last year, it was actually up last year 68, so we had unseasonably low AR I believe in the first half. So typically we are run at 42 to 46 marks. So we expect that to continue next quarter, fits in more DSOs so that we have no bad debt and no issues with collection. .

Yes. So, Steve, and thanks Susan for clarifying that. I do believe we'd probably regress back to more normal, I call DSOs like substantially higher and this is a business under stress. But right now we are in good shape.

With regard to the Q4 guide, it probably is a little bit more growth related because it is a timing issue and those are big deals related to a couple of those customers that are gone through those changes as I described in my prepared remarks.

So to the extent that it led to a smaller piece of growth revenue in Q4 but deferred into 2017 that's probably the more likely case. I don't believe that's unhealthy but at the same time, to the extent folks want to opine on that and their research they are welcome to do so. With regard to the $65 million range bound question.

Yes, you are right the math looks like we are going $65 million to $65 million, we had prior Q4 is substantially higher, it is $65 million to $67 million, we'll see where we actually end up. When we will require, it will definitely require us to continue our drive to new customers. And we are doing that.

Most of which are small to medium size enterprise and then small handful are service providers. But we've always had a strong service provider business. It requires us to continue to move beyond the internet -- sorry the interconnect app in this big service providers and move out to access, and we are doing that.

It requires us to leverage Taqua which I think we will do next year. And I am going to get personally involved; I have been personally involved in a number of Tier 1 discussions around that which is what drove the transaction in the first place. And I remain involved. And then we really need to broaden our reach into the cloud players.

I think in order for us to be really strategically successful, we got to be even more strategic to Microsoft which we are but I think by that I mean at the end of a SIP trunk, it is us and audio codes. We share that market; it is like part's part. Most of the end market considers is undifferentiated, I'll just be clear about that.

So you go out and try that sell it is basically just either pricing or an after sale support. And we are strong in Europe, they are strong in some part of Asia Pac, we are both strong in North America. So what we need to do is exchange that game.

We need to become very strategic to the go-to-market strategy of Azure and we are working very hard on that. We need to continue to expand in the cable and the service space. And we are but they are going under a lot of pressure to consolidating. They are reorganizing literally as we speak.

And so I just wanted to be clear when we guide to the market, we are going to guide what we think we can control. We are going to guide the ranges of outcome, to questions on people's call before meantime we will continue to drive synergies both Taqua as well as in our own organization.

We will probably put three quarters of that back into the growth initiative and about a quarter of it's to the bottom line through our restructuring program. And we will hit our EPS. So, Steve, what I come back to your question to just offer a closing remark that's triggered by your question if you don't mind. It's what I put in my prepared remarks.

We are still missing growth. We are missing material growth. I consider the company flat because even if we did 1% it is flat, okay. So I am not going to argue with the market place its perception, it is honest, it is flat. We are continuing to retool from legacy to growth. Growth is just enough to absorb the downturn in legacy.

We think that will continue for another year roughly. Taqua will bolt on some inorganic revenue; I am not going to hide that in some mix consolidated results. And what we need to do is just continue to be faithful to our customers as they make this turn.

And when they do, we are going to be there with product that gets them into market within affordable simple solution and go to the cloud. And that's a part that I am excited about.

And meanwhile, we've now taken a company that was largely in the high 50s even though with spike at 62 and then reported 50 number, we have now reliably marched through the 60s and we should end this year touching 70% maybe even for the full year we will say right.

And then we will guide to next year and those 12 points have now gotten to the bottom line and leads to the point where we are at 7% to 8%. And what we will try to do is expand that EPS and become an EPS growth story next year without a lot of top line growth. And then the world can judge with that's worth.

Solid balance sheet, solid cash flow, solid EPS growing at a reasonable rate and the world can put a multiple on that and we will just get back to work, right. .

So, Steve thanks for questions. I hope I have answered it. And thanks to everybody on this call for their continued interest in Sonus regardless of how you see us, what you see is I believe a really solid team of 1,100 people working very hard for a number of service providers that are trying to figure out where they are going to go from here.

And we are going to get back to work now. Look forward to meeting many of you in the marketplace on either non deal roadshows or frankly in just one-on-one coverage discussion, okay. Have a great day guys. .

Thank you. .

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