Ladies and gentlemen, thank you for standing by. Welcome to the Sonus Networks Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, October 29, 2013. I would now like to turn the conference over to the VP, Investor Relations, Ms. Patti Leahy. Please go ahead, ma'am.

Thank you, and good afternoon . Welcome to Sonus Networks Third Quarter 2013 Operating Results Conference Call. As a reminder, today's press release and supplementary financial and operational data have been posted to our IR website at sonus.net. A recording of this call and a copy of our prepared remarks will be available there later this afternoon, as well. Speakers today are Ray Dolan, President and Chief Executive Officer; and Moe Castonguay, Senior Vice President and Chief Financial Officer. Please note for purposes of Safe Harbor provisions that during this call, we will make projections and 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 these projections or forward-looking statements and are subject to various risks and uncertainties, including, without limitation, economic conditions, market acceptance of our products or services, the timing of revenue recognition, difficulties leveraging market opportunities and the impact of restructuring activities. 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, unless required by law. 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, as well as in the Investor Relations section of our website. With that, it's now my pleasure to introduce the President and Chief Executive Officer of Sonus, Ray Dolan.

Thank you, Patti, and good afternoon, everyone. We have a lot to cover today, so let me start by giving you my bottom line right upfront. Sonus is winning. We have succeeded in turning a once tired legacy business into an energized growth business that is rapidly becoming a leader in its class. Progress is not always linear, but we are making great progress. As you can see in today's press release, we've provided slightly updated guidance for the year. On the top line, we have reduced the total media gateway estimate, and we've increased our total SBC revenue estimate for net top line reduction of approximately $3 million to $4 million for the full year. Let me provide some color on these variances from our prior outlook. We assume approximately $68 million to $69 million for legacy product revenue for full year 2013, which is an increase from our prior guidance and reflects a slightly slower rate of decline on the product side. Legacy services revenue is now assumed at approximately $80 million for the year, which is below our prior forecast, but in line with our 2012 results. The net change from our prior outlook is a decline of total legacy revenue of approximately $5 million to $6 million for the year. Turning now to SBC. As we said last quarter, we were experiencing a greater mix of service as a percentage of total SBC. We now expect SBC product revenue to be slightly lower than our prior outlook, but we expect SBC total revenue to be slightly higher as a result of higher services revenue. Consistent with what I told you last quarter, there are number of large new projects that have big service components attached to them with initially smaller product revenue. This trend, coupled with…

Thank you, Ray, and good afternoon, everyone. Total revenue for the third quarter was $68.1 million compared to $57 million in the third quarter of 2012. Total SBC revenue, including products and services, was $29.3 million in the third quarter and $25.4 million in the third quarter of 2012. Our top 5 revenue customers represented 36% of revenue this quarter, down from 41% in the third quarter of last year. AT&T was the only 10% customer in the quarter. We reported revenue from 560 customers in the third quarter. This compares to 403 customers in the third quarter of 2012. Looking at revenue geographically, domestic revenue accounted for 66% compared to 76% in Q3 of '12. Before I go into further details on our financials, I'd like to point out that the following are non-GAAP numbers that exclude stock-based compensation, acquisition costs, restructuring charges, impairment charges, incremental depreciation due to acquisition accounting and write-off and amortization of intangible assets. Total gross margin for the third quarter was 63.4% compared to 58.1% in Q3 of 2012. Our third quarter performance reflects lower product gross margin, offset by higher service gross margin. Product gross margin for the third quarter was 63.6%, compared to 66.3% in Q3 of last year. Product gross margin may fluctuate quarter-to-quarter based upon software content and product mix. Service gross margin for the third quarter was 63% compared to 46.4% in Q3 of last year. Total operating expenses for the third quarter were $39.5 million compared to $38.6 million in Q3 of last year. Net income for the quarter was $2.8 million compared to a net loss of $6.3 million in Q3 of 2012. We ended the quarter with total cash and investments of $267.5 million, which reflects the use of $37.3 million to repurchase shares of Sonus…

Thanks, Moe. In keeping with my usual framework, I'd now like to review our progress with the 4 key performance metrics that we identified to you at the start of the year. Let's start with SBC growth. Year-to-date, SBC product revenue is up 39% and SBC total revenue is up 44%. Both are comfortably ahead of industry growth projections. The next key operational metric I'll discuss is new customer growth. We secured 171 new customers in Q3, 77% of which are new SBC customers. As I mentioned, we recently won 3 Tier 1 accounts, in addition to many other key SBC wins. We feel great about our progress here and our pipeline is very encouraging. Our third key metric for 2013 is the percent of product revenue we generate from the channel and the enterprise, important areas of new growth for Sonus this year. The channel contributed 27% of total product revenue in Q3. Year-to-date, it has contributed nearly $25 million to our total product revenue and is on track for the year. I'm particularly pleased with our enterprise results this quarter. In Q3, enterprise contributed nearly $12 million or 28% of our total product revenue. Year-to-date, enterprise has contributed almost $38 million or 31% of total product revenue. This strong performance is already within the range of full year expectations we established at the start of the year of $35 million to $40 million. While we did score a large government contract in Q1 that got us off to a quick start, the vast majority of our success since then has been driven by an increasing number of enterprises, making the move to UC, cloud services and SIP trunking, and we expect these trends to continue. Given our success with new enterprise customer growth and the strength of our…

[Operator Instructions] The first question comes from the line of James Kisner with Jefferies.

I guess my first question is to clarify on these large -- these Tier 1 wins. I heard you say international account with a strategic partner. I just want to clarify that you are talking about probably another OEM there. And could you clarify, again, I think you said you won one with a direct sales force and then also an MSO. That second one, could you please clarify again what that was? How do you described it? And just finally, is there any kind of perspective on when you recognize revenue from these wins and sort of the magnitude of these wins? Are they tens of millions of dollars next year? Any kind of perspective at all would be helpful?

Thanks, James. I appreciate the question. I'll do my best. First, yes you got it right, one international win to a partner, I wouldn't go so far as to label it OEM specifically because I don't want to get into the structure of the deal. But it was through our partnership program as recently announced, and I'm very excited about that. You can consider that to be profound. I'll size this as best I can going forward in this discussion here, okay? Second, you're right, another international that we won direct, and then the third that we won direct, which was a domestic MSO. The MSO has already scored revenue. The other 2 are likely to score in Q4, but if not, early next year. All of them will have ongoing revenue. These are roadmap wins. These are profound. Okay? And I couldn't be more excited about it, and I'm thrilled that, that became the first question because that's exactly why I put it into the script. I think for people to understand the progress we're making, there needs to be an indication of whether we're making progress, just simply milking gateway customers into SBCs or whether in fact we're participating in the architectural transition that the industry is going through. And I'm convinced that it's the latter. When I get up in the morning as the CEO and, James, I may over answer your question here but thanks, I'm not going to size 2014 but I'd be disappointed if all 3 of these didn't end up over time substantially larger than $10 million. When I get up in the morning, I put on my Sonus CEO hat. I draw off from 30-plus years of experience in the communications sector. And as you probably remember, my last experience was as…

Yes, that was a great answer. Just the one follow-up I would have is I'm pretty sure I know about one of these wins that was redisplacement of Acme -- displacement of Acme, but just could you confirm that these were kind of already, is not greenfield, they were incumbents that you're kind of displacing or taking share from in these accounts?

Yes, that's true. We've taken share in all 3 cases, and that's probably the case. I mean, when you're late to the market by 2 years, the odds are somebody has gotten their first. But the good news is a company that named themselves Acme Packet, because they thought the job was moving packets and nothing else mattered, okay, I think the new ownership is waking up to the fact it's a little more complicated than that. Policy matters, QOS matters, Scale matters. Okay? So we're game on in the next second generation of 2.0 of this industry architecture, and we're not just stealing shares at the second source. We're stealing mind share, and we're owning some of the new architecture as these companies think through their cloud strategies.

The next question comes from the line of Subu Subrahmanyan with The Juda Group.

Ray, I was wondering if you can talk about either some of these bigger-picture issues you had mentioned that the carriers are thinking through in terms of the SBC selection. You mentioned you kind of moved to the 2.0 in the industry. Just wondering kind of what is the timing of some of these decisions? Is it impacting the fourth quarter or is this going to be a 2014 kind of a decision process? How do you see that impacting the trajectory of growth in the industry and for Sonus. And then, on the gateway side, just kind of curious the service business has been a pretty steady business. And do you expect it to be steady for the legacy side, wondering if you see that being unchanged?

Yes, Subu, thanks. So 2 questions, one is the timing on SBC architecture changes, right? And the other is a little bit of commentary on the legacy business. I'll try to do the first one first, okay? And it's a great question because I think about it all the time. Timing is the challenge, right? It masks the transition we're going through. And the visual image that I have or the metaphor that I use is when somebody tries to turn 90 degrees -- we've all driven cars before. What you do is you slow down in a turn and you accelerate out of the turn. Even the most nimble NASCAR driver slow down in the turn, okay, and accelerate on the straightaway. This industry is going through a turn and is causing some timing issues and is impacting the results of everybody.

[indiscernible] right?

So obviously, it's going to impact us now. You've asked when do we think we'll come out of that. I don't know that we'll come of the impact of those timing changes for quite some time. But the good news is, the first 3 commits that we got on the Tier 1 level are revenue-ing already. Whether they'll revenue as quickly as we want, hard to say. We'll guide to next year when we get there. But some of the players are acting like NASCAR drivers and they're pivoting around a big oval and they're keeping their speed up, and others almost stopping and pausing and choking and reorienting. And we put their results in and guide at our own peril, right? And so that's one of the most difficult challenges I face is trying to figure out when all those are happening. But as I meet with these people personally and through Todd and other members of the leadership team, I'm convinced that the architectural shift is happening. So I hope that's answered your question. Some of it's now, a lot of it next year. And then some of the Tier 2, Tier 3s will lag because that's what they do. They say they'll lead, but they really want to see the Tier 1s move so that they can follow those technical trends in an industry that's probably going to do more consolidation. But instead of it being domestic, it'll probably be global. So some folks are holding their CapEx, some folks that are struggling entire business models are dressing up their OpEx and CapEx because they know they're going to get consolidated. And they end up surprising us because we have a lot of folks in our old legacy business that are frankly going through consolidation and they're…

Yes. One thing if I can just follow up, Ray, on the architectural updates that carriers are going through, do you think to some degree next year, it changes the trajectory of the market or do you think through this, there are enough opportunities and balance that and you're moving some of them, today, that you mentioned that we can still -- the market still see healthy growth.

I think it'll see healthy growth. And I think people are forecasting, say, like high 20s this year, maybe as much as 30. Some people are forecasting, I do know if they forecast next year, but I'd be surprised if they take those down. Some people are because they think VoLTE is being pulled in. I think that's a lot of noise, to be honest with you, but you could call that defensive on our part because we don't have a VoLTE story that we're talking about yet. So net-net, I think we'll be fine. The things that will drive it up or down are the end markets. It's always that way. The UC end market appears to be on fire. We are lined up behind 2 of the 3 leaders. So those leaders are Cisco, Microsoft and BroadSoft. We partnered with Lync. We partnered with BroadSoft. We're not partnered yet at this point with Cisco for obvious reasons. So as that end market eclipses a billion dollars, gets more and more strategic and drives enterprise growth, which we're hearing some great anecdotal evidence that it's accelerating right now. That could be a catalyst for further SBC growth. Because it's just going to pull through sessions, especially as they deploy voice and video, okay? If they don't do that and there's a hiccup in that market, it'll impede the growth of the session side of the enterprise. They're not going to get out ahead of that market, okay? So we're going to follow those trends, okay?

Your next question is from the line of Catharine Trebnick with Northland Securities.

So my question is on, Ray, a little bit on the competitive landscape on the enterprise side just to get some more color. Could you describe when you run into may be an AudioCodes or one of these lower end and how well you're doing. I know it's good that your product portfolio goes from the small-medium business all the way to large carrier. But can you just describe the dynamics more on the SMB side of the business and how that's helping you grow your revenue?

Sure, thanks, Catharine. It's a great question because AudioCodes is in fact a very effective competitor on the low end. I haven't seen their results for Q3, but we'll let them play out their hand. We do play the breadth and depth card, the financial strength card. Those do show up in research as important decision-making criteria, and they're important to Microsoft as a partner, as well as BroadSoft. But they've been niched into that low end nicely, and we've got some work to do. We're doing it and I think we're getting more and more effective as we go forward, and I expect we'll be even more effective in 2014. Is there -- I hope I've answered your question. Do you need any more there?

No. The other question -- I'll come back to the other one. I jumped on the call late. So I'll circle back.

The next question is from the line of Ryan Hutchinson with Lazard Capital Markets.

I just wanted to revisit the dynamics around the product versus service one last time here so I grasp it. Last quarter, you gave a broader range with SBC guidance and indicated at the time that the transactions could happen in Q3 or Q4. And today, you're talking about, obviously, the services component, which you alluded to in the last call, being a larger percentage, so there's 2 things. I want a clarification. Do any of the new wins, the international wins, are they incorporated at all in the new product guidance that you gave? And can we assume just a meaningful uptick at some point in the first half related to the commentary that you've suggested around the dynamics related to the larger services component? Just trying to get a sense on the timing because it looks like what we've -- in essence, if I got this right, would essentially just pushed out sort of an uptick in product from Q3 or Q4 into Q1 or Q2. That's really what I'm trying to get at.

Thanks, Ryan. Let me take a shot at that. So I don't read it that way, but I'll try to think it through and we're happy to collaborate with you as we go forward, Ryan, in our discussions. But I don't look at it as a product pushout so much. Those trends were in place in Q3, it's early for me to call that trend into Q4. But I indicated on our call last time that I have sense that we're going to have to take our guide down. So nothing has changed from that, and that it would be a mix issue. So I don't think things pushed out as much as the trends continue. That's the first way and I just offered that to you as my point of view, not to criticize yours, I appreciate that. Now as to whether or not they come in the first half or there's some dramatic bump up, I think that's probably premature to predict. I'm not predicting the first half anyway, but I would suggest to you that I'm not just being coy, I don't see that happening as early as first half. Now of the 3 wins we've had, I wanted to be clear, I said it earlier, one has already revenued. In fact, they've revenued twice since the initial bid. So we've had 3 successive drawdowns in the one case. The others are just revenue-ing this quarter and they might fallout, but they're not so material that could place risk on our guide in Q4 from an SBC product point of view. But they should, if they follow that pattern, continue to revenue either every quarter or every other quarter as those start to grow. So I hope that's answering your question. Happy to take a follow-up if it hasn't.

[Operator Instructions] Your next question comes from the line of Steve Cohen [ph] with ProVal Partners [ph].

Ray, you mentioned in the -- your opening remarks that SBC selling cycles were getting a little longer, and you talked about the architectural decision points that a lot of the big carriers are facing now. Specifically on Acme Packet, now that Oracle has owned them for 3 quarters or whatever it's been, how has that changed the competitive landscape? Are they a more aggressive competitor now with Oracle's deep pockets behind them? Is the Oracle linkage back to the database of all the other products becoming a meaningful decision point? Or is there all sorts of changes underway at Acme that's actually making them a weaker competitor?

Well, Steve, thanks for the question. I wouldn't call Acme nor Oracle a weaker competitor. But I would say that it's offered an opportunity for us to accelerate. The team is really motivated and we're delivering. I'll give you one example. There's a lot of chatter that Oracle bought Acme because their SBC product line could be virtualized and placed in software. We've done that. They're still talking about it. So we believe we're accelerating. We believe we're leading. And I'd rather not get too caught up on a call like this or in, frankly, any public environment bad mouthing them. What we -- I do want to say to you, I'm not trying to be overly coy here. Of course, any time an industry leader gets bought, you got turn in a team, you got pricing strategies, you got turn in the channel and all of those opportunities, I think, are beginning to show up as opportunities for Sonus, and we're just going to leverage them as best we can. But our story is our story. We've had this story, literally, since we called -- we got a lot of things right and a lot of things wrong when me met with you in I guess it was June 2011, I was in the saddle about 9 months, we said we hadn't been out there for 6 to 7 years in the public domain, and we went out and said we've got to be transparent with the street. And what we said was there will be a second-generation architecture. It will be linked to scalability, policy, quality of service and transcoding. The world will get more complicated, and when that happens, it will be our opportunity. So I would say, it's in part the ownership change, but far more important is the architectural change. And for them, there's probably, my guess is, a wake-up call to: "Wow", in the midst of 2 changes, it's hard to make them both elegantly. And we're going to try to harvest that as best we can, all right?

At this time, there are no questions. I'll turn it back over to you.

Well, thank you very much, and thanks to all of the folks on this call for following our company through the 3-year journey on my watch. This is the best hand I've ever had to play in my 30 years of commercial experience. The combination of an innovation engine that this team has stepped up to becoming, and it was an innovation engine, make no mistake, at the turn-of-the-century. But that was during the bubble when innovation engines didn't have to get things all the way to the bottom line to create value. The world has changed and this team knows that. And this innovation will drive all the way through the financial leverage and that journey starts now and will continue going forward. So thanks to all of you for being patient, working through all of our discussions of trials, all of the complexity associated with the old Sonus and for working with us into the new generation of Sonus going forward. I really appreciate that, and we look forward to sharing more with you on future calls. Thank you, operator.

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