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Sonus earnings, BellSouth deal lift shares

Investors applaud good news from Sonus Networks, but analysts say the communications-equipment company's strong second quarter doesn't indicate a recovery for its competitors.

Analysts and investors applauded a double dose of good news from Sonus Networks Thursday, but said the communications-equipment company's strong second quarter doesn't portend a recovery for its competitors.

Sonus drove home solid second-quarter results Wednesday night with an extra piece of good news: a significant contract with BellSouth, which will use the company's packet voice technology for its network.

Sonus Networks has been a beacon of hope in the muddled communications market; its shares were up $3.58, or 15 percent, to $22.51. They were still far off from a 52-week high of $93.66 though, as Sonus' stock has suffered along with its peers.

The larger equipment suppliers such as Lucent Technologies, Nortel Networks and Cisco Systems, as well as emerging networkers such as Sycamore Networks and Redback Networks have all had rocky paths.

Sonus piled on the good news in its second quarter. Revenue and earnings were ahead of estimates, with earnings of a penny a share on revenue of $52.6 million. First Call had expected the company to break even, and last year's second-quarter results were earnings of 7 cents a share on revenue of $6.5 million

The company also increased its deferred revenue, which was up to $18.9 million from $16.9 million due to more finished goods waiting acceptance by customers. Sonus also announced a strong balance sheet with an increase in cash; the company generated $12 million in cash during the quarter.

Goldman Sachs analyst Mary Henry called the quarter "an excellent one, free of issues" and raised estimates for 2001 revenue. The analyst now expects 2 cents a share on revenue of $210 million for the year, in contrast with previous projections for revenue of $195 million.

WR Hambrecht analyst Tim Savageaux reiterated his "strong buy" rating on the stock Thursday and said Sonus remains his "top pick in the communications infrastructure market."

Aside from the strong quarter, analysts were most encouraged by the BellSouth deal.

"Most impressive in the quarter was the major incumbent win with BellSouth, which we view as a potentially massive opportunity," Savageaux said.

While no specific size for the contract was given, "given BellSouth's considerable size," this could be the company's biggest contract ever, Savageaux noted. The company may even have more positive surprises ahead, the analyst added. He thinks it has won but not announced deals with Broadwing and Level 3 Communications.

Henry noted that the new contract's biggest boon was that it diversified Sonus' customer base. "With the new BellSouth contract, customer concentration risk is reduced, and the growth outlook for 2002 seems more clear," she wrote.

CNET's Telecom Equipment index is up nearly 5 percent after the news. However, the analysts all said the company's strong quarter does not mean the sector is recovering. "These good results do not signal a rebound in the telecom-equipment fundamentals, but rather an exceptional set of drivers for Sonus," Henry said.

Roberston Stephens analyst Paul Johnson reiterated his "buy" rating and a price target of $28 a share on Sonus, but he actually lowered his estimates for 2002. The analyst said it was "in an effort to be responsive to the prolonged difficult carrier spending environment."