My portfolio is smarting today.
Voice and video networking expert Sonus Networks (Nasdaq: SONS) was supposed to break even in the first quarter, but it shocked the Street -- and us shareholders -- with a non-GAAP loss of $0.04 per share.
Revenue rose a modest 7.9% year-over-year to $67.3 million, beating analyst targets with impunity, but the bottom-line miss resonated more strongly with investors today. To the doomsday strains of Bach's Toccata and Fugue organ masterpiece, they streamed for the exits. Shares fell as much as 17.7% overnight and after a brief rebound this morning continued their descent.
The earnings miss and revenue jump both came from a telecom deal that was signed three years ago. Bahamas Telecom finally got around to installing a large amount of networking equipment after signing a contract with Sonus back in 2008, moving a big chunk of deferred revenue into the sales column. Unfortunately, the deal included an unusually large amount of Calix (NYSE: CALX) hardware, which lowered gross margins from last quarter's 64.4% to a terrifying 40.3%.
Management assures us that this was a one-time event that won't happen again. The Calix component was announced in 2008 along with the whole Bahamas Telecom deal, but I don't think the margin impact of it was made obvious.
Going forward, management sees gross margins not only recovering to pre-Bahamas levels but also climbing beyond that: Full-year gross margins are projected at 65.5%, give or take 2.5%. That's a more than respectable margin target in Sonus' circle of voice and data infrastructure peers, where Calix goes to about 43%, Westell Technologies (Nasdaq: WSTL) stops at 34%, and ADTRAN (Nasdaq: ADTN) has to settle for 59%.
There's still room for improvement and margin leverage, as shown by the 80% gross takes at F5 Networks (Nasdaq: FFIV) and Acme Packet (Nasdaq: APKT). Economies of scale make a difference when you're wrangling hardware, and I see plenty of runway ahead of Sonus as its voice-over-IP technologies work their way into more and larger telecom deployments. The company is hiring more engineers and sales staff, which I take as a sign of good health.
All things considered, I'm sticking by my Sonus investment because nothing in this report contradicted my original investment thesis: I still see a low-risk entryway into the VoIP market and expect tremendous returns over the next five years or so. Feel free to treat today's free-fall as a buy-in opportunity. At the very least, you should add Sonus to your Foolish watchlist and follow this exciting growth story as it plays out.
