The Black Box

[wahz]

Part 2 * We're Still In The Very Early Stages Of IMS Deployment, And LU's Contract Win
Will Likely Do More Good Than Harm To Sonus' Business. In the data
networking world, we recently witnessed a large incumbent vendor, Cisco
Systems, announced its intended foray into an emerging market (layer 4-7
switching), poised for significant growth acceleration. Leading this market
is F5 Networks, a much smaller, more nimble equipment vendor with superior
technology. While the announcement of Cisco's entrance into the layer 4-7
market initially hurt F5's valuation, F5 actually saw its business accelerate
as Cisco's announcement thrusted the layer 4-7 space into the limelight and
into the forefront of customer thinking. We believe investors should draw a
number of parrallels between that scenario and what has just taken place
between Lucent and Sonus. We view Lucent as being similar to Cisco, as the
large incumbent entering an emerging market, while we view Sonus as being
similar to F5, in that it is leading the market, due largely to its superior
technology. VoIP/IMS, relatively speaking, is a small, high growth market
poised for a dramatic expansion, in our view. We believe Lucent's announced IMS contract wins have created the catalyst needed to accelerate this market
and bring IMS to the forefront of customer thinking. Sonus confirmed this
viewpoint by citing a noticeable heightening of the intensity of its
discussions with IMS customers and we think potetnially an accelerating
commitment to the deployment of this technology. This comparison between F5
and Sonus has one key difference however. While F5, benefitting from the
heightened attention now paid to layer 4-7 switching, went on to outperform
street expectations for the quarters subsequent to the Cisco announcement,
the same cannot be said of Sonus, with any degree of certainty, due to its
revenue recognition policy and the nature and timing of deployments in the
telecom equipment world. We think the results at Sonus will reaccelerate and
these shares should rebound. We believe IMS drives to standards based on SIP
and Diameter protocals and less to the older ATM based protocols used in the
Legacy Class 5 implementations. From the get go, these have been the heart
of the Sonus design. We think Lucent has managed to get on this
architecture, but we think a number of the other incumbants are further
behind on this transition.