DZS Inc (DZSI) 2003 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Tellium and Zhone, definitive merger conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Jennifer Collins, Director of Investor Relations, for opening remarks and introductions.

Good afternoon everyone, and welcome to today's conference call Earlier today Tellium and Zhone issued an announcement they had entered into a definitive merger agreement to merge the two companies. I'm here with Harry Carr, Chairman and Chief Executive Officer, and Michael Losch, CFO, Secretary and Treasurer. And we are also joined by the executive team of Zone technologies, Mory Ejabat, Chief Executive Officer of Zhone, Kirk Misaka, Chief Financial Officer of Zhone.

Harry will take a few minutes to review some details regarding this morning's announcements, concerning the definitive merger agreement signed by the two companies. The management team of both companies will be available to answer questions.

We hope you've seen the three releases regarding Tellium and Zhone that were issued this morning. Tellium's release outlines the results for 2003. The press release includes certain non-gap information which we may refer to in this call. The release was distributed over business wire and for your convenience has been posed to Tellium's web site at Tellium.com. Zhone Technologies issued a release outlined in their financial results for the quarter ended June 30th, 2003. This release has been posed on Zhone technologies web site at www.Zhone.com our definitive agreement has been posted on both websites. A replay of this conference call will be available on Tellium's web site beginning tomorrow and will be available over the phone by dialing 888-203-1112, the pass code is 742940.

Before we begin I'd like to remind you that statements made during the course of this call that are not purely historical are forward-looking statements. These include statements regarding the company's or management's intentions, estimates, projections, assumptions, beliefs, expectations and strategies for the future. Because such statements deal with future events they're subject to certain risks and uncertainties and actual results might differ materially from those projected in the forward-looking statements.

Important factors that could cause actual results to differ materially from those in the forward-looking statements, are discussed in Tellium's annual reports on Form 10-K filed on March 31st, 2003, and its quarterly report on form 10-Q, filed on May 13th, 2003.

In addition, information regarding factors that may affect Zhone, generally are discussed in Zhone form filed on 13th amended. These documents can be accessed through the SEC’s web site at SEC.GOV. Additional factors will be on Tellium's registration statement, of form F 4 (ph), which Tellium plans to file with the SEC.

Our financial results for the quarter are detailed in our press release. As a quick overview for the three months ended June 30th, 2003, Tellium recorded $10.1 million in revenue and gross margins as a percentage of revenue on a GAAP basis were 39 % and 47% on a pro forma basis.

Our net loss for the quarter ended June 30th, 2003 on a GAAP basis was $12.1 million, and a net loss of $7.4 million on a pro forma basis. Tellium ended the quarter with a cash position of $149.8 million.

Now I'd like to introduce Harry Carr, Tellium's Chairman and Chief Executive Officer.

On behalf of the entire Tellium team, including our board of directors I'd like to welcome you and thank you for joining us today. I am pleased to inform you that this morning Tellium and Zhone Technologies announced that we have entered into a definitive agreement to merge the two companies.

Under the terms of the agreement, the current security holders of Zhone will own approximately 60 % of the combined companies' outstanding shares on a fully converted basis, and 40% will be held by Tellium security holders. After completion of the merger, the combined company will be named Zhone Technologies. And we anticipate that the combined company will be a publicly traded entity, under the symbol ZHNE, traded on the Nasdaq.

The transaction is subject to the approval of each company's shareholders, regulatory review, as well as other customary closing conditions. The transaction is expected to close in the fall of 2003. The combined board will be increased to 9 positions, 7 of which will be designated by Zhone, and two of which will be did designated by Tellium.

Mory Ejabat, currently Chief Executive Officer of Zhone, will become Chairman and Chief Executive Officer of the combined company. We are very excited about this combination, and believe it is the right next step for Tellium.

Before I turn the call over to Mory, I'd like to make a few remarks. Two years ago, Tellium hosted its first earnings call as a public company. We became a public company in a very difficult market in May of 2001.

Our IPO was a culmination of many years of hard work. Since the founding of Tellium in 1997, the company has made its mark as a leader in delivering switching solutions for the core optical network.

We pioneered the optical switching market with our first generation optical switch the Aurora 32, which WUNT into service in the early part of 1999 and is still on demand. We started shipping our second generation switch, the Aurora optical switch, in August of 2000. Our AOS was the first optical switch capable of switching at both 2.5, and 10 gig bit optical wavelength speeds, and remains the only one capable of true shared mesh switching at sonet-like speeds.

In October of 2001, our optical switches were part of networking history, as Dynegy Global Communications publicly announced the worlds largest optically switched mesh networks, with Tellium switches as their solutions in the core. Our market leadership and record of accomplishment has been recognized by some of the world's largest service providers.

Tellium has also lived through dramatic changes in the industry. We began to see increased deterioration in the carrier marketplace in the second quarter of 2002, both in the U.S. and in offshore markets, as carriers dramatically changed and reduced our investments in the core of their networks. We responded swiftly to these changes in the industry. We dramatically reduced our operating expenses and our cash spending.

In 2002, and into 2003, we fundamentally resized and reshaped our business, and aggressively reduced our cost structure. Today we continue to have a strong balance sheet, with approximately $150 million in cash, and remain virtually debt free.

In addition, despite the downturns in the industry, we have positioned the company for continued success through our ongoing R&D investment.

I joined Tellium in early 2000, with a commitment to build a great company and create long-term shareholder value. During the past three and a half years, we have done our best to make this happen. Now it's time for the next chapter in building long-term shareholder value. And I believe the actions we have taken at Tellium to protect the company's viability, combined with this proposed merger with Zhone will live up to that commitment.

We believe the combination of Tellium's and Zhone's technology strength, broad customer base and talent pool will create a powerful competitor for today's global telecommunications industry. In addition, I believe that Mory Ejabat, Chairman and Chief Executive Officer of Zhone, is a visionary, has pioneered the development of next generation communications equipment over the course of his career, and I believe that he is did definitely the right person to lead our combined company.

Along with the entire Tellium team, I look forward to working with Mory and his team over the next few months to ensure a seamless and successful transition for our customers, our employees and our shareholders.

I want to thank the entire Tellium team and our board of directors for making this combination a reality. I've been in this business for over 25 years, and have many great experiences and have worked with some great people--none greater than the folks at Tellium. They've never wavered in their dedication and commitment to being the best, despite the relentless challenges put before them in the past couple of years. I'm confident that the combination of the Tellium and Zhone teams will make for a very formidable competitor in the marketplace.

At this point I'd like turn the call over to Mory to give you insight into Zhone Technologies and the future of the company.

Thank you. Today ,marks a milestone for both Zhone and Tellium, and the telecommunications industry. Over the past couple of years, we have seen the business needs of our customers start to converge--the combination of our two businesses. We provide a (inaudible) solution for local and long distance requirements.

We believe that the combined company would benefit from a strong balance sheet, (inaudible) strength, broad customer base, and a robust portfolio of market leading network products and technologies. The combined company will provide our customers an advanced scaleable access and transport solution to bridge their network from existing cover base loops to fiber optics.

For those of you who may not be familiar with Zhone Technologies, Jeanette Symons and I founded the company in 1999. Jeanette had been CTO and I have been CEO of advanced communications where we led the company from, start-up roots to a multi billion dollar company that was acquired by Lucent Technologies in June of 1999.

Two months later we started Zhone. At the time, we attracted a $500 million funding commitment from our initial investors. Including KKR, TPG. NEA, (inaudible). Our financial strength enabled our team to quickly achieve market acceptance through both internal development and acquisition. Our product portfolio integration and management to the local loop over both copper and fiber (inaudible) subscribers.

This makes it possible for our carrier and service providers to offer a full suite of managed services while reducing operating costs and simplifying provisioning. Our products allow carriers to provide higher speed necessary to deliver voice, data and video and broadcast television services. With the additional Tellium's existing core solutions, as well as the new products now being developed, we will offer our customers a true end to end solution. Zhone financial performance has been admirable throughout an extremely difficult market. By now, hopefully, you have seen our announcement released earlier today, resulting the financial results ended for 2003. Net sales for the quarter grew by 20% subsequently as we finished the quarter with $20.5 million in revenue.

Our operating logs, excluding noncash charges for the second quarter was $4.7 million versus $6.8 million for the first quarter. Our revenue growth is generated by (inaudible) sales efforts, which focused on large global communication service providers as well as independent telephone carriers. This (inaudible) synergies and sales and marketing effort of Tellium and Zhone. And planned to elaborate our existing sales channels and opportunities to sell Tellium's future optical products.

Currently, Zhone products are deployed on six continent and over 250 carrier customers. The majority of revenues are from North America with installations of eight of the top ten North America carriers. I believe the combination with Tellium will only make this relationship stronger.

Zhone has acquired eight companies over the last 4 years and we intend to continue this strategy as we continue to (inaudible) our market share growth, and add the best available talent to our team--focused on the uniquely on the specific areas of the carrier's network.

We believe that this combination a combined company have a strong currency for additional acquisition. We believe Zhone and Tellium shareholders, as well as our respective customers will share our enthusiasm for this transaction. We are looking forward to working with Tellium's teams, Tellium's customers and Tellium's shareholders. And to the shared success we believe this measure provides all of us going forward.

Let me take a moment to acknowledge Harry Carr. He's an established leader and has led Tellium through, undoubtedly the most difficult telecommunications market era ever. Harry and his team have built a great company in Tellium, and we are certain that this transaction only strengthens the ability of both companies to meet our business goals. Thank you for joining us today. We would like to open the call up to questions. Operator, please.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit 1 on your telephone.

We will take questions in the order that you signal us and we'll take as many questions as time permits. If you're using a speaker phone, you will have to release your key function in order for the signal to reach us.

And our first question comes from Hassan Imam.

This is actually Mike DeMichele for Hassan. Congratulations on the merger.

Just had a couple kind of housekeeping items, to understand the financials are a little bit more and then maybe a more strategic one. So maybe Mory, you could tell us a little bit more about what the breakdown of the revenues we have.

I think it was $20 million or so this quarter, how, what products those are coming from and how you guys expect that to be going forward and what you guys are expecting from the combined companies cash burn. Are there any synergies here that you guys think you can realize or is it just essentially two separate operations?

And then also, I think there's some balance sheet debt with Zhone. Does that get transferred over to Tellium as well? And what does that consist of, is there a particular duration on that or are there any plans for the cash to pay some of that down?

And then if I could, just a strategic question in terms of are there any cross-selling opportunities that you guys have already seen out there are or what's the plan there with Tellium switches being very much in the core?

And I think the Zhone portfolio very much in the access layer, how does the cross-selling opportunities work there? There a product in the middle at the edge to have a complete end to tend or just some color there. Thanks, guys.

Well, I could inform you for a whole day--for all those questions. But anyways, let me ask Kirk Misaka to give you a breakdown in the revenue. And then we can talk about synergies and selling channels and product strategy going forward. Go ahead, Kirk.

The composition of the $20.5 million of revenue that Zhone reported for the second quarter was made up of $7.3 million from our single line multi-service products which are the Zhone newly developed technologies. The DLC (ph) product line represented $4.8 million, or about 23%. And our MUX (ph) product represented $8.4 million, or about 41 %.

The other question was if there are any synergies or any cost synergies in the plan. We may see some synergies in the future. We are looking at that. We are going to work throughout these several months and figure out what the synergies are that we are going to achieve, and the cost reductions -- and I'm sure there will be some -- that we're going to take advantage of.

The other question I believe was about the selling for position. I believe our sales team will meet in the future, and we will try to do cross-selling to our customers--both product lines.

And the last question I believe was based on our balance sheet or debt on the balance sheet, if we are going to take some of this money and pay down our debt. There's no plan to pay down our debt. And our debt is not -- it's not a huge debt at this point.

So we don't think we are going to pay down any of our debt at this point. We don't have any plans for that.

When is the debt due?

If you look at the Form 10 filed for Zhone you'll see we have approximately $35 million that's owed to Fremont Investment and Loans, and has a working capital facility with Silicon Valley Bank. And the terms of those debt agreements are disclosed in the Form 10.

Thanks, guys.

We'll now go to Steve Levy.

It’s Marcus Scuperschman for Steve Levy. I want to know some more about the sequential sales growth you experienced. Was it a function of the increased customer orders or was that any layering of any new products? Or is there anything you could help us understand more about how you generate the growth there? That would be great.

It was two. One was actually the -- some of our customers released their budget at the end of the Q1 (inaudible) in Q2. That was one of the (inaudible), the increase in releasing their budget. As you know, carriers do budget planning--most of them release their budget at the end of the Q1 for deployment in Q2. And also we are announced a new product called a raptor, and that increased revenue in that quarter.

Great. Thank you.

We'll now go to Mark Franklin.

Is there any place I can see a balance sheet for Zhone? I'm looking at the SEC web site right now, and you've got a few filings, but I'm not sure where I can find it.

The 8-K filing that should have been filed around 1:00 Pacific standard time today includes the press release for our earnings. It also includes the balance sheet for the quarter ended June 30, 2003.

Actually, if you look at our press release, that was announced this morning, there's a balance sheet attached to that.

Okay. How do I access that on the web? Can you just give me a clue? Is it on your own web site?

Yes, yes. This is on our own web site. Zhone.com.

We'll now go to Rick Zamdazian (ph). My question was already answered. Terrific deal. Thanks.

We'll now go to Andy Shaptik.

Hi. Good morning. Could you comment on what the cash burn rate has been at Zhone? I do remember when you acquired Premises. I don't know how much that has really contributed to your results. But I also can't really tell here what the cash burn rate has been, looks like you were running pretty much out of cash here at the time you're announcing this deal. Cash burn was -- you have those numbers for Q1, Q2, Kirk?

For Q2 it was approximately $4 million to $5 million. The reason why you may not see the cash liquidity is because we're borrowing off of our working capital facility with Silicon Valley Bank.

How large is that facility.

That facility is up to $25 million.

How much of it is outstanding now?

Approximately $10 million.

And that's in addition to the outstanding debt that's on the balance sheet?

Correct.

Yes, Premises, what has happened to that product line?

That product line, we narrowed that product line. If you recall, it used to be called Imax (ph) and there's different products we narrowed those products down to one product. And we are still calling it Imax, we got rid of the majority of the old products, and we're shipping that product as part of the March (ph) product line. And the largest customer on that is Motorola.

Okay. Thank you.

Moving on, we have Nikos Theodosopoulos.

Yeah, I had a question on, and this may be in the filings, so if they are, excuse me, but can you give us a sense of, the last six months for Zhone, what the revenue composition is by customer type, RBOC, CLEC, you mentioned Motorola? Could you give us a sense how your customers are split up by customer type?

We can give you top ten customer we do sell to about 250 customers worldwide. In the last two quarters the top customers were Motorola, Quest, Verizon, Bell Canada, and (inaudible) and IOC and a company called HCL, who is an integrator for Verizon and also TELUS (ph)And CCR (ph).. Those are the customers with more than 1% percent.

Thank you very much.

Rich Church has our next question.

Bill Gilday for Rich. Along those lines, were there any actual 10% customers in this second quarter? And maybe you can comment, is the raptor and the DLC revenue, the $4.8 million?

No, we have two 10% customers. One was Motorola and another one is Quest.

That was for the second quarter or for the first half?

For the second quarter. And the raptor is a next generation DS LAN that we have announced. Not all of that was, is $4.7 million. Some of that is our next generation DLCs, or packet DLC that we call Mount. Our raptor is a version of the Mount (ph) Product line (ph).

The DLC at $4.8 million for the quarter, how is that traditionally?

The traditional DLC, the traditional DLC was $4.8 million. Our S (ph) MS product line was about $7.3 million, which includes our Mount and raptor and other products.

Right. Last thing in the DLC again, what percent of that is North America roughly?

The DLC, the majority is North America. Probably -- I don't have the percentage, but it could be up a 100%.

Mostly IOCs?

No, some of it goes to carriers also.

Carriers, meaning RBOCs?

Yeah, such as Quest Verizon and SBC.

Thanks very much.

Just a reminder, if you wish to ask a question, please press star 1 on your telephone. We go next to Joe Noel. Joe Noel at Pacific Growth. Mory, what can you tell us about the plan going forward? I know you don't want to give concrete numbers, but could you speak to, give us some color on the growth you're expecting for the rest of the year. And the second question is it sounds like almost all of this business is domestic. Is that correct? \

Well, all of our business is not domestic. We are about 85% domestic, 15% international. And those numbers I may have to reach out again but I don't have them in front of me. In respect to the business going forward, you know all I can tell you, Joe, is that we are going to see a sequential growth in the Zhone traditional business next quarter. And our goal is the two companies work together very hard to probably be profitable in the first half of 2004.

Great. Thanks.

We now have a follow-up question from Andy Shaptik.

I'm trying to understand the capitalization of the company when this deal is completed. How many shares approximately would be outstanding?

Michael, do you want to answer that question? Well, this is Harry Carr if you count shares, options and warrants, which is the fully converted method, all in will be roughly about 330 million shares, give or take a couple million. And it will all be, the final exchange ratio will be set at closing.

Of course. But it will be kind of in that vicinity?

Yes, sir.

And then the Tellium shareholders will own effectively 40% of the company?

That's correct.

Thank you.

You're welcome.

As a final reminder, if you do have a question, please press star 1. And we have a follow-up from Hassan Imam.

Harry, really quick on the core Tellium business: The first half of the year I think was driven by the Cable and Wireless deployment, $10 million in each of the quarters. Wondering what the visibility is going into the second half of the year.

You know, are we expecting a drop-off here or do we basically go back to maintenance levels with existing customers are any deployments still going on? If you could give us some color into that. That would be great, thanks.

I promised wouldn't make too many comments on commitments he would have to live up to T basically we've gone into the third quarter we haven't specifically given guidance at this point.

What I can tell you is there's still some Cable and Wireless revenue to come in the third quarter and some additional opportunities we're in the process of trying to close. I might also add I don't know if it was you or somebody asked a question before, from a product perspective what are the cross-selling opportunities.

One of the things in my quote in the press release today you saw is we've got some products under development that, as we've talked on other calls, we haven't publicly announced yet deliberately. Obviously, Mory and his team have had the benefit of getting a close look at those. And that's one of the reasons why this deal makes strategic sense, not just financial sense, because it does provide you with a company with access measured with core solutions.

So I think when we do the cross-selling, hopefully we can continue a positive trend in the revenue. But we're going to be working together as appropriate in the interim period and ultimately after the deal closes.

Okay. Thanks.

And a follow-up from Nikos Theodosopoulos.

I just wanted to know the head count of each company at the end of the June quarter, if you have that available.

Nikos, Tellium had 177 people. And Zhone has 240.

And are all the -- what's the geographic, are all the Zhone people located on the west coast? I'm not up to speed on the locations of the company. No, majority of the people are in Oakland (ph). we do have interim (ph) offices in (inaudible) Georgia, in Boston and in Ottawa, Canada and also in Oregon.

All right. Thank you. You're welcome.

And at this time there are no further questions. I'll turn it back over to you for any closing remarks.

Mory would you like to close out the call? I believe this is going to be a great combination, and it took lots of work between myself and you, Harry. And we believe the combination is going to be a great winner in the industry. Harry?

Thanks, Mory and I’ll just echo those, and thank for his partnership in this. I believe he'll deliver shareholder value for the people. You'll see a list of frequently asked questions being filed in the next day or so. So they'll be available. They answer a lot of questions that we may not have covered today. Thank you, Amy, that's the end of the call.

That does conclude today's conference. Thank you for your participation.