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…

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…

[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…

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…

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…

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.…

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.

Hi, thanks for squeezing me. Three questions: 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…

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.