DZS Inc (DZSI) 2004 Q1 法說會逐字稿

Good day and welcome to the first quarter 2004 Zhone Technologies Incorporated earnings conference call. My name is Brian and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would like to now turn the presentation over to your host for today's call, Ms. Mary Anne Lachey. Please proceed.

Thank you, operator. Good afternoon, everyone and thank you for joining us today. The purpose of this call is to discuss Zhone's first quarter 2004 financial results and accomplishments as reported in our earnings release, which was distributed over business wire at the close of market today.

In addition, Zhone announced today a definitive agreement to acquire Sorrento networks, a supplier of intelligent up come networking solutions for carriers, cable companies and enterprises worldwide.

I'm here today with Morteza Ejabat, Zhone's Chairman and Chief Executive Officer and Kirk Misaka, Zhone's Chief Financial Officer. We are also joined by the executive team of Sorrento networks, Phil Arneson, Sorrento Chairman and Chief Executive Officer and Joe Armstrong, the Chief Financial Officer. Morey and Phil will first take a few minutes to review details regarding today's announcement of the definitive merger agreement between the two companies.

Morey and Kirk will then discuss Zhone's business highlights and financial results for Q1 2004. Following discussion of the quarterly results, the management teams of both companies will be available to answer questions.

Zhone issued a press release today announcing the acquisition agreement and simultaneously issued a release outlining Zhone's financial results for the quarter ended March 31, 2004.

Both releases were released over business wire today and at the close of mart and are posted on the Web site at www.zhone.com. Sorrento issued a press release outlining financial results for 2004 fiscal year and for the fourth quarter ended January 31st, 2004. Which has been posted on senior reason toe owe web site at www.sorrentonet.com.

A replay will be available by dialing 888-286-8010 for US callers and 617-801-6888 for international callers and entering path code 634-83073 in addition an audio web cast of this call can be found at the Investor Relations section on the web site of both companies.

Before Morey begins, I need to advise you that during the course of this call, the gentlemen may make forward-looking statements within the meaning of 27A, of the securities act of 1933, and section 21E, of the securities exchange act of 1934.

The forward-looking statements we will make include statements regarding the projected financial impact of the proposed merger with Sorrento.

These forward-looking statements are based on current expectations, forecasts and assumptions that involved risks and uncertainties.

Actual results could differ materially from those projected in or contemplated by the forward-looking statements.

Factors that could cause actual results to differ include the possibility that the acquisition may not close on the terms described or at all, the possibility that the intended benefit of the acquisition may not be fully realized, the failure of the combined company to retain key employees, this failure of the combined company to manage the costs of integrating the businesses and assets of Sorrento. and Zhone, general economic conditions the pace of spending and timing of economic recovery in the telecommunications industry and in particular the optical networks industry, the combined companies inability to sufficiently anticipate market needs and develop products and product enhancements that achieve market acceptance, and the higher than anticipated expenses the combined company may incur in future quarters. In addition, refer to the risk factors contained in the SEC filings at www.sec.gov.

For other important factors that could cause actual results to differ materially most contained in the forward-looking statements.

Additional factors in connection with the proposed merger will be discussed in Zhone's registration statement on S4, which Zhone plans to file with the SEC. During the course of the call, Zhone will make reference to non-GAAP financial measures.

These non- GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies.

Non-GAAP financial measures should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

The company's management refers to non-GAAP financial measures because they provide meaningful supplemental information regarding the company's operational performance. As such, these non-GAAP financial measures are used by management in its financial and operational decision-making. I will now introduce Morteza Ejabat, Zhone's Chairman and Chief Executive Officer.

Thank you, Mary Anne. Welcome everyone and thank you for joining us today. We are very excited to announce our definitive agreement to acquire Sorrento networks.

As we last reported, our strong financial reports for the first quarter ended March 31, 2004. This acquisition is major milestone for both Zhone and Sorrento Over the past few years we have seen increasing comprehensive of business needs ease of our customers. The combination will allow two businesses capitalize on this convergence bringing together complimentary products as well as complimentary customer bases and revenue streams.

The combination provides a comprehensive solution for access and transport, requirements for both telecommunication and cable operators worldwide. This transaction expands Zhone's already a strong customer base with addition of some of the world's largest cable operators and carriers. In short and allows Zhone to market its voice over IP and access solution into cable.

At the same time, combining the two businesses extends Zhone's product offering to include metro optical transport for existing customers.

Sorrento products portfolio has immediate application of both existents Zhone accounts as well as (inaudible) deployment. By delivering converge voiceover IP, broadband access, video services and transport protocols over our customers' existing infrastructure.

We believe that Zhone's customer will greatly benefit from Sorrento's products, which include transport efficiency and expand available bandwidth of five networks. Zhone will be able to provide advances to scalable access on transport solution, which bridges customers' networks from existing copper based loops to fiber opposition. These benefits solidify Zhone's position as the first and leading company solely dedicated to providing the fullest spectrum of next generation solution. By uniquely addressing today's multi servicing requirements.

Zhone demonstrates its continued commitment to quickly respond to customer needs. Before I discuss Zhone's first quarter results, I would like to turn the call over to Phil Arneson, Sorrento's Chief Executive Officer to offer his insight into Sorrento's network and the future of combined company.

I'm sure many of you know Phil and the tremendous job he's done leading Sorrento in a challenging environment for telecommunication industry. Phil and his team have built a solid company and we believe that this transaction will greatly strengthen the ability of both companies to meet their business goals. Phil?

Thank you, Moray. And on behalf of the entire Sorrento team, I'd like to thank all of those dialed in today for joining us. We are very pleased about the combination of Zhone and Sorrento, and we believe this is exactly the right next step for Sorrento.

Since the founding of Sorrento fiber optics in the year 2000, the company has made its mark as the leader in delivering the transport solutions for the metro optical network. Sorrento has over 2500 nodes deployed worldwide, and has over 70 active customers.

Our technologies permit telecommunication service providers to increase fiber capacity and fiber bandwidth utilization, while reducing network costs over scalable and efficient networking platforms. These technologies complement Zhone's product portfolio and are targeted towards a similar and yet complementary customer base. Broadband service providers such as domestic and foreign telephone companies inter exchange carriers and cable MSOs.

So the addition of Sorrento's denies wave multiplexing and course wave division multiplexing products to Zhone's very comprehensive product portfolio creates a whole greater than the sum of its parts. We believe that Zhone has the infrastructure and the assets to extend Sorrento's leadership in the telecommunications industry.

Also, Zhone's solid revenue performance, broad customer base and strong balance sheet are ingredients for continued success. This transaction advances Moray's vision to make Zhone a comprehensive provider of next-generation wire line network solutions.

Along with the entire Sorrento team, I look forward to working with Moray and his team over the next few months to ensure a seamless and successful transition for our customers, our employees and our shareholders. I wish to thank the entire Sorrento team and our board of directors for making this combination a reality.

I've had many great experiences in my career, and have worked with some great people. None greater than the folks here at Sorrento. I'm confident that the combination of the Sorrento and Zhone teams will create a powerful competitor in today's global telecommunications industry. At this point I'd like to turn the call back to Moray.

Thank you, Phil. Today Zhone also announced disclosed financial results for the first quarter. We are pleased to announce that the two more revenue increased 23% to $21 million as compared to the $17.1 million for Q1 2003. This increase in revenue reflects an expanded customer base and a stabilizing demand for our product.

Our financial position remains strong with $90 million in cash and short-term investment. On hand as of March 31, 2004. Kirk Misaka our CFO will en expand on the later in the call, during the first quarter we met significant accomplishments to support our goal of being the number one extension equipment provider.

During the last call we said we would continue to grow to acquisitions develop and diversify our product portfolio and expand our reach into emerging growth markets.

We are pleased to say that we have made contributions in call three areas during the first quarter of 2004. As previously announced, in February Zhone acquired the assets of on networks.

And developed of next generation combat switching system for telecommunication service providers. This acquisition is a strategic move for Zhone to provide customers with the next-generation packet-based switching product to complement Zhone access networks.

In January, Zhone announced availability of its new line power DS adapter 100 LP. This product extends the reach of conventional DSL circuit to more than twice the servicing area of DS labs. There after 100 allow service delivery as far as 38,000 feet from the central office.

In February, Zhone announced a ZI60 200 voice over IP integrated access the voice. This product enhances a Zhone's portfolio of IP products and is based on the software technology of previous acquisition packet.

The ZI60 200 provides all of the advanced function, a carrier needs to deliver quality voice and business class services over IP networks using either Stap (ph) or MGCP signaling. While continuing to enhance our product portfolio during the first quarter, we are announced three major international customer wins in Brazil, Bolivia and Belgium, GVT, Intel and Escol (ph) these increase to our footprint in the emerging growth international market. In addition, we had a three new customers in the U.S

The most recent announcement March 17, was the Belgium largest telecommunication company as (inaudible). It has selected zones platform to deliver integrated voice on higher speed Internet access over single line to the across residential and small and medium sized businesses throughout Belgium. It has about 1.5 million residential and business customers and operates on high-tech fiber network within bill gum.

Other customers in Brazil and Bolivia have selected zones throughout the next generation DSO, going forward, we see a strong demand for products on higher spending far more customers in Q2. We will continue to gain new customers domestically and internationally and we are optimistic about our potential in Q2.

In addition, we believe that the combination with Sorrento will provide more comprehensive solution for Zhone's existing customers and will enhance Zhone's among cable MSOs and major international operators.

Compilation of this transaction Zhone will service both telecom and cable operators providers spanning six continents. I would now like to turn the call to Zhone's CFO Kirk Misaka who will provide you with more details on our first quarter 2004 financial results. Kirk?

Kirk Misaka Thanks, Moray. First I'll discuss the first quarter results and then I'll turn to our financial guidance. As a reminder, throughout my discussion I'll reference both GAAP and non-GAAP pro forma financial information.

We have provided GAAP reconciliation information within the press release. The first quarter pro perform forma results excludes stock-based combination amortization of intangibles and purchased ion process researchers and development.

As Moray mentioned we ended the first quarter 2004 in a very strong financial position, and are pleased to announce our first quarter results. First, let's focus on the income statement. Revenue for the first quarter 2004 was 21.0 million, an increase of 3.9 million, or 23%, from the first quarter 2003, revenue of 17.1 million. This increase was primarily driven by the strong revenue growth in both our SLMS and DSL C platform.

Sales byproduct line for the first quarter 2004 was as follows: 9.6 million for our SLMS products, 6.3 million for DLC products and 5.1 million for MALC products. International sales were approximately 15% of revenue for the first quarter 2004, as compared to 8% of revenue for the first quarter 2003. This percentage increase is largely attributable to of to revenue from Asia that we expect to more closely approximate historical levels going forward.

For the first quarter 2004, our top three customers comprised approximately 30% of Q1 2004 revenue. These customers were Quest, Bell west, and Motorola. The remaining 70% was attributable to approximately 200 IOC, and major carrier customers.

Gross margins were 43% in the first quarter 2004 as compared to 46% in the first quarter 2003, within the range of goings of 43% to 46% that we provided during our last conference call. On a year over year basis, gross margins declined primarily due to a shift in product mix to a higher percentage of DLC, which have higher material costs than other products lines we expect margins to improve throughout the remainder of the year as our higher SMLS product line continues to grow. Total operating expense 21.9 million in Q1 2004 is compared to 10.0 million in Q1 2003.

Q1 '04 operating expenses included a one-time charge of 6.2 million, for purchased in process research and development relating to the Gluon acquisition. 2.1million of amortization of intangibles, and 0.5 million of stock-based compensation expense. Excluding these charges, on a non-GAAP pro forma basis, operating expenses were 13.1 million.

Moderately higher than our previous guidance of 11.5 to 12.5 million, due primarily to charges associated with the settlement of excess facility leases of $900,000. On a GAAP basis, net loss for Q1 2004 was 13.4 million, compared to 13.4 million in Q1 2003. On a non-GAAP pro forma basis, net loss for Q1 2004 was 4.5 million, compared to 14.5 million, for Q1 2003.

Now let's turn to the balance sheet. Our financial condition remains strong, cash and short-term investments at March 31, 2004, were 90 million. Accounts receivable day sales outstanding were 58 days for Q1 2004, compared to 41 days for Q4 2003, reflecting normal seasonality trends.

Inventory was 28.4 million at the ends of Q1 2004 as compared to 24.3 million at the end of Q4 2003. This increase in inventory is primarily a result of planned new product introductions.

Finally, our long-term debt balance declined from 32 million at December 31, 2003, to 31.8 million at March 31, 2004. Basic and diluted EPS shares were 77.3 million for the fourth quarter of 2004, compared to the first quarter of 2003, our shares outstanding increased due to the Tellium merger.

Our total shares outstanding increased to 78.1 million at March 31st, 2004, as a result of the glue on acquisition. Before I turn the call back to Mory, here's our guidance for next quarter. On the top line, we expect second quarter 2004 revenue to range between 22 and $23 million.

This increase represents a growth rate of approximately 7 to 12% year over year, and a growth rate of approximately 5 to 10% quarter over quarter. We expect gross margins to improve and range from 43 to 46% during the remainder of 2004.

We expect second quarter 2004 operating expenses to range from 4.5 to 15.5 million, including stock-based compensation expense and amortization of intangibles of approximately 2.5 million.

Such amounts exclude any incremental expenses associated with the acquisition of Sorrento, and other -- unanticipated charges.

We currently expect the acquisition of Sorrento to close near the end of the quarter and that it will immediately be accretive, excluding the effects of acquisition-related charges, including amortization of intangibles and purchased and processed research and development. We'll provide additional guidance during our next conference call in July, to announce our second quarter results. With that, overview I'll turn the call back to Mory.

Thank you, Kirk. Zhone is pleased with the financial performance for the first quarter and taking the steps that we believe are necessary to achieve profitability.

Our acquisition much Sorrento demonstrates our commitment to continued growth through acquisition, to develop and diversify our product portfolio and expand our reaching to emerging growth markets We intend continue the strategy by adding the best available strategy to our project portfolio and talent to our management team.

Our focus remains on delivering the next generation networks to telecommunication carriers and cable operators worldwide.

We look forward to working with the Sorrento team to achieve this vision and these goals. We are confident that Sorrento's customers and shareholders will share in the benefit of this merger. And contribute to its success. The combination of Sorrento and Zhone Technologies financial --broad and deep customer base will create a unique and strong and very well positioned company a leading competitor in the rebounding global telecommunication industry. Thank you for joining us, I would like now to open the call to questions.

Operator, will you now begin the questions and answers portion of the call.

Thank you.

[OPERATOR INSTRUCTIONS]

And your first question comes Hasan Imam of Thomson Weisel Partners. Please proceed.

Thank you. I had a couple of questions, the one to do with Sorrento. Could you talk a little bit about what the customer mix is and then in terms of the revenue, what percentage comes from your CWDM, versus DWDM product and the last question regarding Sorrento at one point in time you had a met owe switching platform on the development. Could you update us on the status of that?

Yes, and Joe has that information in front of him, so Joe, would you take that, please.

Sure. The makeup of our revenue in terms of CWDM, and DWDM, as you may possibly know or maybe you don't know, the actually the LUXON product has dual architecture and in the case of that product, a lot of the people that are looking for CWDM, actually ordered the DWDM because it's of minimal costs for them to upgrade to it.

So as a result of that, our CWDM revenue percentage is probably a little less than 10%, most of it is all DWDM. In terms of the switching platform, we do not have that in active mode. At least the large switching of the LUXON product had.

and let me just add to what Joe mentioned. The switching product was a very expensive development over a period of time and as we consolidated our resources here, at S, and chose our priorities in the R&D arena, focusing on those customer applications that would hold and generate revenue for us, we put that switch on hold but we extrapolated many of the technologies from that switch and incorporated them into the transport products that we have been introducing in the past year or two. So, the manifestation of that investment is benefiting the company, and we're using some that was the LUXON, OE switch and that's now available, and I hope that answers your question.

Yes, thank you. And I had a question for Kirk. Your stand-alone Zhone was on track for profitability by third or fourth quarter, revenue and cost cutting. And what does this acquisition do to that trajectory?

We expect the transaction to be immediately accretive, we have not gone through transition and integration plans yet so we don't know yet how much cost synergies and potential revenue cross sales opportunities there are. As we work ourselves through that transcription integration we'll have a better idea and our plans are to release further guidance on the implications to our financial model during our second quarter conference call.

OK, thanks And Mory, one last question. You introduced your new MLC Access Gateway, which offers voice over who are the target customers? Are you actually seeing (inaudible) types interested in offering over DLC, or is it going to be a different group of customers?

It's -- mainly, the IP Access Gateway and the access side is very interested -- interesting for the IXC's and long distance carriers and we are seeing that interest through them and also we are seeing it through some of the OICs that are getting into the long distance.

OK, and in terms of Sorrento plus Zhone, I mean, are there some new product integrations on the plan in

You know, we are in a planning stage on that. Mainly, first thing we might do is to integrate all the product under the same network management that. Would be probably the first phase of integration.

Thank you very much.

and your next question is from Susan Calaa (ph), of FBR

Good afternoon, I wonder if you could give us an idea what have revenues of SORRENTO you think might be sustainable in the addition of Sorrento to your product portfolio.

Susan, this is Morteza Ejabat. I don't believe - Sorrento's guidance for the quarter, but we will continue that ramp and that growth which they have participated to do.

So all of it will be additive?

Right.

Thank you.

Sure.

and your next question is from Chris Lord of Criterion. Please proceed.

Can you give me an update -- I wasn't listening to this part. You said you did about 6.6 what was that in the prior quarter, Kirk?

Just a minute, let me pull that up

and then, if you had a DLC dismubs product mix that would be great.

the amount in Q4 of 03 was 8,785,000

OK. Did the MALC dropoff surprise you? product normally goes through a seasonal effect, Chris, and there was a major customer who buys that product from us and normally they are very seasonal on that.

Is that Motorola?

Yes

I know you've always said your break-even is 125 million ; is that right?

We said our break-even point would be between 25 and 28, depends in where our gross margin ends up which is between 43 and 46.

OK. So, just eyeballing it, this will clearly get you there, right, because -

We will definitely work toward that.

SORRENTO did 25 million last year, January year end, fiscal '03, and then did they report the January quarter yet or not?

the January quarter they just -- actually, the year-end is in end of January, so -

Have they reported -- I don't see a number. I'm staring at a -- screen and I don't see a number. But even if they -- it looks like they're doing at least 25 million on a run-rate basis.

Yes, Mory, this is Joe Armstrong. We just reported our results today, and we finished up the year 25.5 million, and the quarterly revenues were reported at 6.4 million

OK, so about flat sequentially. So you got an extra 25 million, so Mory you're clearly now above your break-even run rate, and I assume there's going to be a kind of overlap whether it's sales, engineering, G&A, so you know, as a shareholder who wants to you preserve your cash, is it a fair assumption to make that this will get you to profitability?

I would say this would get us to profitability. Obviously, we have to work through cost reduction and maintain the customers and work with them.

Right, but I think that the majority of that would be would be in either engineering or sales -- OK, and the Sorrento executive, what are your gross margins, currently?

the gross margins for this quarter were actually a little low compared to our prior year. Primarily, they were lower because of the acquisition of LUXON, we're integrating that, reducing the facilities, and I think Zhone has a lot to contribute to our lower overhead. But the overall gross margins were actually 9%. We also took a significant amount of inventory write-offs during the period, but our traditional margins have been more in the 38 to 40% for the Sorrento line.

OK, great. So you should still be fine on getting to break-even. And then my last question is it a correct assumption to make that the most the Sorrento people that will be coming over to Zhone will be in the engineering and sales groups; that's correct, that's a fairly good assumption.

and then

And then two last questions. The total -- three more questions. Total shares outstanding now with the acquisition? Is going to be -- you issued 9 million shares to do this ; is that right?

the exchange ratio, Chris, is .9

and there's 10 million shares outstanding?

No, Sorrento has approximately 16.7 million shares outstanding

OK. Does that include debt and all that stuff?

That does not include the fully dilutive value of the warrants and other options that they have outstanding.

How many shares are you going to have to issue?

on a fully diluted basis, approximately 17.5

OK, great. That's fine. And then, the -

I'm sorry, Chris can I make a clarification. 17 and a half times the .9 exchange ratio

OK. And then the trials, any comment on trials that you're currently involved with?

We are in several trials on video over fiber and video over copper, and we are in testing with our voiceover IP gateway.

OK. And finally, any comment on the overall spending environment? We'll probably see comments from tell labs and others this week.

We are seeing positive movement toward spending. We are moving -- seeing our customers moving especially on the environments right now

the last part?

on the triple play areas.

Great. Super. All you have to do is announce two or three of those wins and you're good.

Thank you, gentlemen.

Thank you.

Your next question comes from Simon Leo Pold (ph)of Morgan Keyingan.

Quick follow-up, line-powered additions to your raptor line for DSL access. I wanted to see if you could give us a sense of what's going on in that particular market segment in terms of RFP activity and your sense of what the total addressable market might be there.

Thanks a lot.

on the line-powered product line, days 1 active carriers, that we are participating on that, and there was -- that a specific product that we introduced is for PTT, internationally, that - we announced that. I cannot give you really the market size on that. But those were two specific areas that we developed this product for.

Thank you.

Next?

Yes and your next question comes from Quint Slattery (ph) of Cemetery Peak Management.

This is a message from Phil. You're going to get a message from Dan, so if you could make sure you call him back, that would be great.

Certainly, we'd be pleased to do that.

Your next question is from Dave King from Roth Capital.

Thank you. Good afternoon.

Question for Joe with today's acquisition announcement, does that change anything as far as your plans about sale of the building as well as LUXON Sorrento. Thank you. We'll certainly be consulting with Zhone on that, but no, we are actively pursuing converting our non-strategic assets to cash and that includes the real estate that Sorrento owns.

and second question is, you and I talked about this potentially significant contract in San Antonio, I gee the next couple of quarters. Can you give us a little bit of update on that? Thank you.

I can comment on that. This is Phil, Dave. There are a number of companies competing for that opportunity. We are one of those companies, and it's in early stages, and so we expect to perform well in those competitions as we usually do.

Thank you.

Your next question is from David Tong of Whittaker Securities. Please proceed.

Good afternoon

Good afternoon, I have --parts to this. Mory, you talked about your revenue from the MSOs in the past. How does this transaction get you deeper into that space, you know, is it different people that you interface with through S, and also, for the S. people, can you break down your revenue between your MSOs and your telecom customers?

Well, Dave, let me answer the fir question. We were selling, or we are selling equipment to cable operators, mainly on their back hauling of their voice traffic on a TDM network. We are not in front of those guys in respect to transport or offering any Internet services to the customer. That's an area that is going to be very interesting for us. In addition, we, right now, the majority of the MSOs are going to small to medium sized businesses as a target, and our product, S. product combination of the two would fit in the network infrastructure very well. And I believe the next question was for Phil or Joe. Joe, why don't you take the question relative to the breakdown on the revenue components.

The breakdown on the revenue in terms of domestic revenue of the combined companies, let me just look at that real quick. We did 63% of our revenue in the quarter domestically, 36%, in terms of Europe, and Asia, which fluctuates a little bit around, we, did 17% in the prior quarter but 1% this quarter. But we do see some good opportunities in terms of the Asian revenue picture.

The breakdown in terms of our product line revenues or division of the 6.4 million for the quarter, we -- just trying to grab that right here. We did 4.2 with the 6400 product, which is the Sorrento product. We --1.3 million with the LUXON product, and that has been a good performing product and the' first quarter we had that product we did 2.5 million. There's quite a bit of activity associated with that product for future prospects, and we think that that product is doing really well. We also have a small product line that did well during the quarter, which is the merit product line which did close to a million dollars and that compares to 400,000 in our prior quarter.

OK. Thank you. Mory, I've a follow-up with you. You talked about the fiber to the premises project with verse --that you were fairly close with them and eventually the business went to one of your competitors. There's been some news reports about some issues in the testing. Does that get you back into the ball game, are there any update on that or color you can provide?

You know, we don't have any update, and we haven't got any indication from verse on that we're interested in discussing that project with that

Although, in your discussions about fiber with other customers.

Yes, we do have some that are testing on product line

All right, thank you.

and your next question is from Glen Schneider of FG Capital Management. Please proceed.

in the release, you guys say that the deal will be immediately accretive. I just want to make sure, does that assume the same level of revenues that the 25 million that st just put up, the 6.4 million run rate, and Joe, maybe you can talk about the kind of growth opportunities you guys were seeing obviously before this deal, what kind of growth you guys were anticipating over the next few quarters?

Sure, Glen. We actually didn't give guidance. As you know, our business a lot of times is geared toward large orders, and there's a lot of that activity that we're working on

Maybe just qualitatively which direction and comment on some of the opportunities.

Sure. Well, we think that the opportunities going into 2005 are significant. We're well represented by two large infrastructure, I guess providers of broadband. One being Time Warner telecom, which has been a great customer of ours and has some significant opportunities.

Also, we're represented with our product line by Comcast commercial services, which use a lot of the infrastructure of Comcast. And again, they're representing the product. In addition to that, our traditional strength of the business has really been to the cable MSOs, the multiple service providers.

And we're working with new customers on that front, we just introduced a product 10 MALC video on demand that has a lot of good opportunity, we feel in our install business in the MSO environment, and overall we see a lot of the cable operators going to our technology.

So, going into 2005, we are optimistic that there's a lot of business to be done there. So our general feeling is very positive.

OK. And Mory, just in the release it says will be immediately recreative. I want to understand what you're assuming in terms of revenue and if that assumes the same kind of revenue and run rate and cost takeout.

We're assuming the current level and when Joe talks about 2005, he's talking about fiscal year 2005. Am I correct, Joe?

Yes, you are correct.

OK

and Joe, what was the motivation for you guys, given that your balance sheet, if you liquidate some of those assets and some of the inventory, and improving environment with some of these new product opportunities, what was the motivation to join?

Well, from our standpoint, and I'll certainly let Mory speak to this, but from our standpoint the -- the real business out there is done with large, large carriers, which there's great opportunities as they start to upgrade their networks to our technology, and the strength of the company has a lot to do with their selection process.

So, while we have made great progress in cleaning up a lot of the issues of our company getting rid of debt, and other things, and increasing our balance sheet, the fact of the matter is that the at the end of the quarter, we were a company sitting with $18 million of cash, small amount of liability to some degree, but when you're doing business with the large MSOs and stuff, the strength of the company means a lot to them, and we think that the product offering of Zhone, along with our product; just a great fit for future opportunities for us.

Great, thank you very much.

[OPERATOR-INSTRUCTIONS]

You have a follow-up question by Chris Lord of Criterion. Please proceed sir.

Sorrento, 18 million in cash on the balance sheet, is that correct?

That was as of the January 31st, correct.

and sir, the billings buildings that people are referring to that you own, can you give me an approximation of what those might be worth

Sure, they range as the real estate market

How many are there, where are they and what's your best guess?

Well, we own two facilities, located in San Diego, primarily, in the telecom valley, I guess you might call it here. One building is approximately 55,000 square feet, the other 135,000 square feet. he mortgages that we own on the buildings is slightly under 3.3 million, and the market values range anywhere from 8 to $10 million in terms of market value.

on

on a combined basis?

Correct

and are you actively trying to sell those currently?

Yes, we are

and how long have you been trying to sell them, and do you have any takers yet?

Morteza Ejabat We have had offers, actually we've got a few that are on the table right now, and the level of activity in the market down has actually picked up significantly. They've been on the market for about two to three months, maybe.

(inaudible) come, sell them to --come. So the net cash is 23 million, is that correct, let's say you can sell them for the low end of the range there. Net cash is about 23 million ; is that right?

Morteza Ejabat Yes, assuming conversion of the buildings to cash, and that would be the net cash proceeds out of the building, anywhere from 5 to 7 million

Great, OK, thank you for your time.

and you have another follow-up question from Susan Calla of FBR

Doing a quick back of the envelope on the combination of the two companies, I'm coming up with a kind of a range for revenues in '04 somewhere around 150, and then assuming that you can take some of the costs out of the combined companies and then EPS about twice where you thought it was going to be. About 5 cents. Is that kind of within the range of what you're seeing for 2005 calendar?

Susan, we really haven't put the numbers together on that. We would be more than happy to discuss that with you at a later time.

Do you expect to get synergies from the acquisition on the cost side over the -- within 2004?

Yes, we do.

OK, thank you.

Sure.

and your final question comes from Hasan Imam. Please proceed

I had a follow-up question. Would the closing or the selling of the facilities, I mean, does that indicate that there's going to be significant relocation of the S. employees, or significant head count reduction? Can you comment on that? Thank you.

There will be some synergies, Hasan. We haven't discussed about locations or where the employees might be located. We will do that the same way we have dealt with all other acquisitions, so it's going to take some time for us to formulate all of that.

OK, thanks.

I would just add one point to that. The action that is we took to convert our building to cash was really driven by strengthening our balance sheet. On the analysis that we looked at, it made more sense for us to rent facilities than it did particularly to own them. So our action was really driven to --that asset that was on the balance sheet.

OK, thanks.

Mr. Ejabat, at this time there are no more questions from the audio bridge and I will turn the call back over to yourself.

Thank you everyone for joining us today.

We appreciate your support and look forward to speaking with you on the next earning call.

Thank you operator.