Part 3 From A Technology Standpoint, Sonus' Original VoIP Offering Was Best Positioned
For The Evolution To IMS, Enabling Sonus To Gain A Jump Start On Most Others.
To be clear, IMS (IP Multimedia Subsystems), in terms of being incremental to
the VoIP movement, is nothing more than a set of standardized functions and
interfaces. It is simply a widely agreed upon network architecture approach,
which was first advocated and promoted by the service providers. The equipment
providers have rapidly adopted IMS as the standard, rendering the network
architectural wars over. IMS mandates that SIP (Session Initiation Protocol)
be used as the signaling protocol to set up and tear down sessions within the
network. Sonus' original VoIP offering leveraged SIP from the very beginning,
a claim none of its competitors can make. We note however that Lucent's
acquisition of Telica also positioned its VoIP portfolio favorably, as it
pertains to adapting it to the IMS architecture, as it also leveraged SIP as
its signaling protocol. Lucent's acquisition of Telica however only provided
Lucent with a few components of the IMS portfolio whereas Sonus can provide a
complete solution today.
GSX4000 Signifies Sonus' Entry Into A Sizeable Market With Real Barriers To
Entry.
Sonus has already made significant progress with its GSX4000 with orders
already on the table. The sales cycle of the GSX4000 is considerably shorter
than that of equipment sold in the TDM world, or even that of the GSX9000.
This is particularly true for existing Sonus customers with GSX9000s already
deployed, looking to fill in the 'gaps' of their VoIP networks. We think the
GSX4000 expands Sonus' addressable market by 50%. With this product,
domestically, Sonus is entering a market in which competition is essentially
limited to one other vendor, AudioCodes. Based on Sonus' reputation in the
high density media gateway market, and AudioCodes' own endorsement of the
product's capabilities at our technology conference in September, stated that
the GSX4000 should prove to be a very competitive product, we think Sonus'
product here will be successful. Additionally, in our meetings with
management, Sonus echoed AudioCodes' sentiment that the low density media
gateway is a very different product, technologically, than the high density
media gateway. Sonus added that it took the company about a year's worth of
R&D to develop this product, despite the fact that Sonus' VoIP skills are
considerable, and it already had a head start in that it was working off the
GSX9000's base. We think it would take considerably longer for an equipment
vendor with lesser IP skills, to bring such a product to market. As a result,
we think the barriers to entry in the low density media gateway market are
considerable, while the benefits to it are likely not enough of a lure for a
large equipment vender with an annual revenue base in the billions. Smaller
companies such as Sonus however, could stand to benefit in this arena.
While Management May Have Spoken Too Soon, Disappointment In Sonus' Access
U.S. Deal Wins Can Be Largely Attributed To Several External Factors And Future
Momentum Will Likely Be Better. At the beginning of 2005, Sonus management
stated it believed the company would begin to generate more revenue from VoIP
access business, on a run rate basis, at some point in 2005. In the United
States, this did not meaningfully materialize, but we believe this is more a
function of a slower developing market than anything else. We continue to note
that Sonus has deployed more access VoIP implementations than any other vendor,
but these deployments are primarily in the Asia Pac/Japan geographies. The
U.S. performance reflects a number of factors outside Sonus' control that
played into the disappointing 2005 access market. Consolidation Shrunk The Competitive Landscape, Dulling The Competitive
Impetus For Service Providers To Offer Residential VoIP Quickly. With
the repealing of the UNE-P rules, VoIP and potential VoIP service
providers such as AT&T and MCI found themselves without a workable
business model, ultimately leading to them being acquired by larger
carriers. In particular, AT&T's VoIP offering, CallVantage, was stalled
for the majority of 2005, until its acquisition by SBC was completed.
Prior to the merger announcement, we expected AT&T to be a 10% customer
of Sonus in 2005. We also expected rollouts like AT&T's to provide the
necessary competitive impetus to force the larger local exchange
carriers and cable companies to aggressively market and deploy VoIP,
funneling more business in Sonus' direction. The market now appears to
be developing at a more measured pace, boding well for 2006 and beyond,
however rendering 2005 a lost year for Sonus in class 5.
* Slow Adoption Of Broadband, Domestically---Need To Deploy The Footprint
Before The Applications Are Needed. The rollout of FTTX fiber
deployments and the conversion of the North American service provider
infrastructures to an all IP network topology is underway. But the
first phase is primarily focused on rolling out the connectivity/the
broadband pipes. Due to the cost and complexity of class 5 VoIP
deployment, it is now clear that VoIP will be delivered to the customer
over a broadband connection. This pegs the speed of VoIP deployment to
the pace of broadband deployment, which has been slower than hoped for
by many in the industry. Once broadband penetration achieves critical
mass, we think VoIP deployments will follow suit and Sonus will be one
of the main benefactors. We point to Sonus' success in Asia Pacific as
an indicator of what should take place in North America. Broadband
penetration rates are significantly higher in Asia Pacific than they are
domestically, and Sonus has won more than its fair share of business
there as a result.
* Sonus Has Demonstrated Its Ability To Deploy Working Access VoIP/IMS
Deployments In Japan Where Its The Market Leader. While the U.S.
market has had imbalances and infrastructure deployment issues, Sonus
has had considerable success in Japan at Fusion, Yahoo Broadband, KDI
and NTT deploying access footprint and IMS like application delivery.
Sonus has more successful access deployments than any other vendor. We
think the success in the international markets and the shift to a
technology footprint that's highly compatible with the SIP/Diameter
based portfolio of products offered by Sonus bodes well for the comapny
in being a key supplier into the U.S. Service providers over time. We
strongly doubt that the U.S. service providers will choose a single
vendor approuch. We note that in the closed architecture world of
traditional Class 5 gear there are no single sourced service providers.
Its easier to be multi vendor in an open systems environment so its
highly likely there will be multiple equipment vendors at every service
provider over time. Sonus appears well positioned to be among the top 3
in this arena and is currently the leader in terms of existing
deployments.
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