Stop me if you've heard this story before. A dot-com-era phenom launched its IPO in 2000 and quickly doubled in price. The company developed next-generation equipment that was going to revolutionize the way we communicate. This, of course, justified a multibillion-dollar market capitalization, even with millions in ongoing losses.
Shares in Sonus Networks (NASDAQ:SONS) continued to climb as sales grew rapidly and investors were all abuzz over the "next big thing," a tag line bandied about a little too carelessly (is it ever bandied about any other way?).
The party didn't last long, however, as the post-bubble market hangover set in worse than that tequila experience you will never forget. As customers reined in spending in late 2000-2002, Sonus and competitors, such as Lucent (NYSE:LU) and Nortel (NYSE:NT), saw their sales drop dramatically, and each company's shares lost more than 90% of their value.
But Sonus was really on to something revolutionary -- voice over Internet protocol (VoIP) -- and made the advanced network equipment that many telecoms demanded. After a stroll through the rough neighborhood of penny stocks at less than $2 per share, Sonus soared to more than $10 on revived sales in 2003, when telecom service providers finally loosened purse strings to upgrade aging networks. With the temptation of profits just around the corner, Sonus then pulled the ultimate New Economy cliché -- it failed to report earnings and admitted that a financial audit was in order.
Since that fateful day, Sonus has been through the SEC investigation and earnings restatement mill. Shares gyrated up and down as investors placed bets on whether the company was a complete sham or just "maliciously maligned by the shorts and market makers." After more than a year in SEC purgatory, though, Sonus has finally emerged exonerated from suspicion of accounting improprieties. The infractions were actually minor in nature and related to revenue recognition, far from the outright fraud found in other public entities.
Soon after the SEC green light, Sonus announced solid earnings, with a profit of $9.7 million on sales of $58.1 million for the second quarter ending June 30, 2005. The results beat estimates, and the stock responded, shooting up more than 10% in short order. The bright news obviously pleased some investors, but in my mind one good quarter is not enough to ignore the recent past.
The problem I -- and other Fools -- have with investing in Sonus is not necessarily the past restatement, but the way the management dealt with the issue. Rather than communicate the problems to investors, upper management fired some underlings and just continued to talk up product successes. Executives have now appointed a new financial controller and continue to sell into a hot space, which is promising. But without complete confidence in management, I find it hard to risk capital in Sonus.
Related Foolishness:
- Sonus sure knows how to be a party pooper.
- Bill Mann says something smells fishy at Sonus.
- What's the onus on Sonus?
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Fool contributor Dave Mock had a bad vodka experience once and doesn't even look at orange juice the same way anymore. He owns shares in Lucent.
