Please ensure Javascript is enabled for purposes of website accessibility

Can an Acquisition Pull This Struggling Tech Company Out of a Rut?

By Nicholas Rossolillo - Apr 14, 2017 at 8:23AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Acquisitions can open up new opportunities and lines of growth for small companies. For Sonus Networks, a purchase it made last year has not yet had that effect.

Communications technology company Sonus Networks (RBBN -2.74%) acquired a small company called Taqua last year for $20 million in cash. The reason for the deal was twofold: Taqua was complementary to Sonus' existing portfolio and well-aligned with its new growth strategy. Nearly seven months since the merger, here's a look at how things are working out.

What the two companies do

Sonus is a supplier of technology enabling online communications. Devices sold include session border controllers used to control voice and media signals sent and received via the internet. With the advent of the internet and new means of communication in the late 1990s, Sonus was off to the races.

SONS Chart

Data by YCharts.

In the last decade, however, revenue has been stagnant at best and often inconsistent. The reason? Internet-based communications ended up not being the catalyst Sonus investors were expecting. Voice communications largely bypassed internet service providers and went mobile instead, helped in part by the advent of the smartphone.

Sonus is now playing catch-up. Its new strategy is aimed at mobile network communications, and the purchase of Taqua helps accomplish that.

SBC 7000, a black box with a green and chrome front.

Sonus Networks SBC 7000 session border controller. Image source: Sonus Networks.

Taqua was primarily focused on building tech enabling voice over Wi-Fi and voice over 4G LTE (VoLTE). Wi-Fi and 4G networks are mostly used for mobile data connections, but many mobile providers like Verizon are now opening up their newest networks for higher-quality voice calls.

The proposition to mobile providers

Sonus is pitching its new VoLTE service as a way to reduce cost as mobile providers can offload older voice networks. This eliminates the need to operate two networks side by side, one for voice and another for data. It also increases end-user satisfaction with higher reliability and clearer phone calls as networks can be extended using a Wi-Fi or 4G signal.

As a result, Sonus makes the case that its new LTE Calling service can help reduce what the telecom industry calls churn. Churn is a measure of the percentage of subscribers switching to a rival service in a given period of time.

With mobile network growth slowing down, holding on to as many subscribers for as long as possible is the name of the game. Sonus is betting that the new services it picked up with Taqua will open up new lines of revenue and help the company return to growth as mobile providers make a full transfer to 4G and Wi-Fi signals.

An early progress report

Taqua revenue was $25.2 million in 2014 and $28.3 million in 2015. The company made $0.1 million and lost $0.8 million in 2014 and 2015, respectively. It had $16.8 million revenue in the trailing 12 months as of June 30, 2016, with a GAAP operating loss of $10.8 million in that period. While Taqua's profit was lagging, the revenue had the ability to help pull Sonus out of the rut it's been stuck in for some time, as the 2015 number would have added about 11% to Sonus' top line that year.  

SONS Revenue (TTM) Chart

Data by YCharts.

But so far that hasn't happened. In its first quarter with Taqua in the fold, revenue fell year over year by 11%. In part, that's because the acquisition generated only $1.9 million in revenue from the Sept. 26 purchase to the end of the fiscal year three months later. Going forward, management will not break out Taqua results separate from the overall company's. "I would point to Taqua more as a strategic contributor than a financial contributor right now ..." said CEO Raymond Dolan on the Feb. 15 conference call.

Sales from new projects is expected to be choppy as well, lacking the consistency needed to do year-over-year comparisons as Sonus tries to gain new ground in the world of telecom. As a result, the top line was forecast to only grow by low-single digits at best in the year ahead with continued bottom-line losses for full-year 2017.

Sonus' new strategic direction and acquisition to support it sound exciting, but any results have been slow to transpire. Mobile service providers are making the transition from old networks to new ones, and Sonus' CEO said the company recently won deals in Latin America and South Africa as a result of its new services. But with internal expectations still muted, it looks like the Taqua acquisition isn't enough to take Sonus to the next level yet.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ribbon Communications Inc. Stock Quote
Ribbon Communications Inc.
RBBN
$2.84 (-2.74%) $0.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.