DZS Inc (DZSI) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2004 Zhone Technologies earnings conference call. My name is Candace, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Ms. Tiffany Brown. 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 fourth-quarter 2004 financial results and accomplishments as reported in our earnings release, which was distributed over Business Wire at close of market today and has been posted on our Web side at www.zhone.com.

I'm here today with Mory Ejabat, Zhone's Chairman and Chief Executive Officer, and Kirk Misaka, Zhone's Chief Financial Officer. Mory will begin by discussing the key highlights for the fourth quarter. Then Kirk will discuss Zhone's financial results for the fourth quarter and give some guidance for the next quarter. We will conclude with questions and answers.

As you know, during the course of this discussion today Zhone will be making forward-looking statements, including those relating to the attraction of additional customers, Zhone's market share gains, SLMS and other Zhone products as a platform of choice, growth in SLMS and Optical Transport product lines, the improved business climate, Zhone's future financial performance, as well as statements and express Zhone's expectations, beliefs, plans and forecasts.

I would like to caution you that such statements reflect only our current expectations and that actual results could differ materially from those projected in forward-looking statements. We refer you to the risk factors and cautionary language contained in our report filed with the SEC from time to time including, but not limited to, those risks and uncertainties listed in the section entitled, "Management discussion and analysis of financial condition and results of operations," in our annual report on Form 10-K filed for the year ending December 30, 2003, our quarterly reports on Form 10-Q for quarters ended March 31st, 2004, June 30th, 2004, and September 30th, 2004. Such reports contain and identify important factors that could cause actual evidence and results to differ materially from those contained in our projections or forward-looking statements. We undertake no obligation to update such projections or forward-looking statements in the future.

During the course of this 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 would now like to introduce Mory Ejabat, Zhone's Chairman and Chief Executive Officer.

Thank you, Tiffany. Welcome, everyone, and thank you for joining us today. I would like to start by giving you some of the highlights of the quarter -- the past quarter of course. Our revenue growth was about $28.1 million. We had a revenue of $28.1 million. Also, we increased our gross margins, our pro forma EBITDA positive, and our SLMS growth -- it is one of the highlights of our quarter -- was about 75 percent quarter-over-quarter, followed by Optical Transport growth of about 11 percent quarter-over-quarter.

In the meantime, we reduced our debt by about $7 million. Kirk will give you more detail on our financial performance.

Now our business focus during the quarter was to be attracting more customers, gaining more market share and developing new products for high-growth markets that we are in. The markets that were targeted is broadband, either on the FTTP or DSL, IPTV or Triple Play, voiceover-IP and packet migration from TDM and Optical Transport.

Now going back to our SLMS product, we are becoming the provider of choice for that type of platform to offer FTTP, ADSL2+, triple-play VoIP and Legacy voice and data migration. Our DSL shipment grew to over 300 percent year-over-year. We have over 1 million service provider interfaces shipped and actively selling to four of the top U.S. (inaudible).

We have added eight new SLMS customers during the quarter. We also introduced a couple of new products into this our VoiceFLEX Voice Gateway module format, and also we have introduced our FiberSLAM for complete fiber OLT access platform.

In the Optical Transport area, we are the choice by major cable operators to offer DSLAMs and other services to their small and medium-size business customers and also provide media-on-demand services to their residential customers. In the last quarter, we added five new Optical Transport customers during the quarter, and we are actively selling to two of the three top U.S. operators.

We have also announced our customer wins during the quarter, the Goda (ph) certification and acceptance by Etisalat, the PTT UAE that we have been talking about. We also got selected for providing IP video or IPTV to consolidated (inaudible), as well as being accepted by Lattrell Telephone Company. And also we are in the trial with Coax for their voiceover-IP or line power voice services.

In summary our business is improving among our ROCs and our cable operators and international carriers. We have seen very great acceptance to our product. We released evidence recently by wins in both the optical and access product.

In respect to our IPTV and Triple Play, we have four new customers deployed or trying this product. In addition, we have four new customers that are trying our voiceover-IP product as well. We anticipate continued growth in SLMS and Optical Transport products in this quarter.

With that, I would like to turn the call to Kirk Misaka who will provide you with more detail on our fourth-quarter financial results.

For the first time in Company history, we reported positive pro forma earnings before interest, taxes, depreciation, amortization and stock-based compensation. These results were driven by topline growth, improving gross margins and further cost containment during the quarter that marks an important turning point for the Company.

Over the past five years, we have invested extensively to develop one of the most robust technology platforms in the industry, and we believe the fourth quarter of 2004 will mark the turning point where we can really begin to capitalize on that investment.

Before getting to the details, I should emphasize that I will refer to both GAAP and non-GAAP pro forma financial information when discussing our fourth-quarter 2004 financial results, as well as our financial guidance for the first quarter of 2005. We have provided GAAP reconciliation information within the press release showing that the pro forma results exclude interest, taxes, depreciation, amortization and impairment of intangibles and stock-based compensation, as well as certain other non-recurring items. Management uses pro forma EBITDA to evaluate core operating earnings to make comparisons with prior periods and to forecast future performance. Pro forma information is often requested by our investors and industry analysts for similar purposes.

Today Zhone announced financial results for the fourth quarter of 2004. Our revenue for the quarter was 28.1 million as compared to 23.3 million for the same quarter of last year and 27 million for the third quarter of this year. The revenue was within the guidance range that we provided during our third-quarter conference call.

As we discussed in that call, different Zhone products are beginning to meet the performance criteria stipulated in our contract with Etisalat, our PTT customer in the United Arab Emirates. Accordingly, 1.4 million of incremental revenue was recognized in the fourth quarter because we received an acceptance certificate from them for our MALC product. We anticipate similar revenue in the first quarter of 2005 related to this contract as they continue to deploy our equipment.

As for other large customers during the quarter, we had one 10 percent customer, and our top five customers represented approximately 44 percent of our quarterly revenues. The remaining revenues were attributable to over 200 customers.

Revenues by product lines for the fourth quarter of 2004 were as follows. 9.8 million for SLMS product, 13.6 million for Legacy products and service, and 4.7 million for Optical Transport products. For the year ended December 31st, 2004, productline revenues were 29.4 million for SLMS products, 58.9 million for Legacy products and service, and 8.9 million for Optical Transport products. As compared to the prior year, SLMS revenues for the year increased by 40 percent, while revenues for Legacy products and service declined by 5 percent for the year.

During our last earnings call, we anticipated double-digit percentage growth from the third quarter to the fourth quarter for both SLMS and Optical Transport product lines. Actual quarter-over-quarter percentage growth were 75 percent for SLMS and 11 percent for Optical Transport.

The continued strong revenue growth for our SLMS product comes from the additional Etisalat revenues previously mentioned and eight new SLMS customers added during the quarter.

Now turning to our margins. Gross margins were 43.8 percent for the fourth quarter of 2004, which was was within 42 to 45 percent range of guidance that we provided during our last conference call. Margins improved from 42.1 percent for the third quarter of 2004 as we made further cost reductions in the manufacturing, particularly with regard to the Sorrento productline. We anticipate gross margins for the first quarter of 2005 to continue to range between 43 and 45 percent.

As for operating expenses, total operating expenses were 15.8 million in the fourth quarter of 2004, which is slightly better than the 16 to 17 million range of guidance that we previously provided. Going forward we anticipate total operating expenses for the first quarter of 2005 to range between 15.5 and 16.5 million as we continue to emphasize cost containment. Our expense guidance includes approximately 2.8 million of amortization of intangibles on stock-based compensation.

On a GAAP basis, our net loss for the fourth quarter was 3.8 million compared to 6.4 million for the same quarter of last year. As I mentioned before, for the first time in Company history, our pro forma earnings before interest, taxes, depreciation and amortization was positive. Pro forma EBITDA was a positive 481,000 for Q4 of 2004 compared to a pro forma EBITDA loss of 4.2 million for Q3 of 2004 and 6.2 million loss for Q4 of 2003.

Now turning to the balance sheet. Our cash and short-term investments at December 31st were $65.2 million. Cash and short-term investments declined slightly from 68.6 million in the previous quarter. This 3.4 million decline was more than offset by the approximately $7 million reduction in our debt obligation.

During the fourth quarter, we sold the Sorrento campus comprised of two buildings for net proceeds of approximately $7 million. We used these proceeds to pay the related mortgage debt of $4 million and used the residual proceeds to pay $3 million to the Sorrento convertible debt holders. As a result, cash net of our debt obligation actually increased by over $3 million during the quarter.

The number of days sales outstanding on Accounts Receivable increased to 62 days from Q4 of 2004 compared to 43 days for Q4 2003. This increase is largely attributable to the higher average DSOs related to the newly acquired Sorrento business. DSOs for the fourth quarter actually decreased from 65 days for the third quarter of 2004.

Inventory was 37.4 million at the end of Q4 2004 as compared to 24.3 million at the end of Q4 2003. The increase in inventory levels from last year relates to the inventory attributable to the Sorrento products and the new product introductions we mentioned during our last conference call. Inventory levels only increased 200,000 from the third quarter to the fourth quarter.

Our long-term debt balance increased to 39.9 million at December 31st, 2004 from 32 million at December 31st, 2003 due to Sorrento's convertible debt of 8.9 million. But, as I mentioned, overall debt obligation decreased from the third to fourth quarter of 2004 as a result of the sale of the Sorrento campus, the proceeds of which were used to pay Sorrento-related debt.

Finally, basic and diluted EPS shares were 94 million for the fourth quarter, which remained basically flat from the third quarter.

Before I turn the call back to Mory, let me recap our guidance for next quarter. For the first quarter of 2005, we expect revenues to remain flat or to decline slightly from the fourth quarter of 2004 due to the normal seasonality associated with our Legacy business. Gross margins are expected to range between 43 and 45 percent and operating expenses between 15.5 million and 16.5 million, including 2.8 million of expenses for depreciation, amortization of intangibles of stock-based compensation. We expect the revenues attributable to our SLMS and Optical Transport products to continue growing for 2005 and our Legacy and service revenues to decline modestly.

With continued emphasis on topline growth and cost containment measures, we expect pro forma EBITDA to remain breakeven or become slightly negative if revenues decline slightly during the first quarter of 2005. But in any event, we expect positive pro forma EBITDA for the full year.

With that overview, I will turn the call back to Mory.

Thank you, Kirk. We demonstrated this quarter that we were on plan to achieve profitability. We believe 2005 represents an excellent opportunity for us to further capitalize on our investment, and we remain focused on being one of the top equipment providers delivering (inaudible) and networks to carriers and cable operators worldwide.

Thank you for joining us today. I would now like to open the call, to open our questions.

(OPERATOR INSTRUCTIONS). Joanna Makris, Adams, Harkness.

I was wondering if you can talk about how much you had shipped cumulatively to Etisalat at this point?

We shipped cumulatively almost $4 million, and we recognize 1.4 of that and the remaining remains in our books.

Okay. And then can you discuss actually the number of current video trials that are ongoing? And also can you provide a little bit more detail with respect to your deployment at Covad in terms of how large the deployment is now and how it could ramp over time?

Okay. With respect to the media trials, as you know based on our press release, consolidated has started deployment of the IP video in their territories. At the present time, we have four active trials going on, and we anticipate to close several of them this quarter. VOD video, video on DSL.

With respect to Covad, I cannot speak much about their business and our business relationship, because, first of all, we are in a trial with them, as well as Nochis (ph). But we see ourselves to be a frontrunner in the trial, and we believe that we can provide the type of equipment that they need. And also we believe we're going to be into a measured trial with them this quarter.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Hasan Imam, Thomas Weisel.

This is Iam Kaan (ph) for Hasan Imam. I've got a couple of off questions on Etisalat. First is, what do you think is the opportunity there longer term beyond the initial 4 million? And then also as we think about modeling the SLMS segment, should we be backing out kind of the 1.4 from this quarter when we think of kind of a normalized base, that growth is going to occur off of -- how should we think of growth sequentially going forward in SLMS? Thanks a lot.

All right. Etisalat business, we anticipate getting more orders from them this quarter, and I believe in the long-term it is going to be around $10 to $15 or even $20 million at comp for us.

In respect to the SLMS business, we had $9.8 million of venue last quarter, and if you stay with our guidance to be flat, I believe we're going to be around $9.8 million or possibly better this quarter.

Thank you.

(OPERATOR INSTRUCTIONS). Anton Wahlman, Zhone Technologies (sic).

The fiber to the home product that you announced some time ago, what is the stage there that you are in with customers in terms of trialing that product?

On that product one large IOC has begun trialing that product, and we're in the negotiations for trial with a couple of other ones.

Okay and in terms of a VDSL product, are you trialing such a product today with that customer, or have you started any commercial shipments of any of VDSL products at this point?

At this point, we're not offering -- we do offer DSL in our product line, but we're not in any trials with respect to VDSL. A majority of our customers are either focused on ADSL2+ or FTTP.

Okay and your side of the house gateway, the network interface device that includes some of the digital video termination technology so as to reduce or eliminate the need for a set-top box in the home, where do you stand with that in terms of any customer trial or activity further along than that?

Actually we have several customers that are trialing either on a dot product with the FTTP platforms or with ADSL2+ at this moment.

So with ADSL or with fiber you said?

No, one we have ADSL2+, which is copper using that, and the other one is with the FTTP, which is (inaudible) on the fiber. So we have two versions of that, and for both versions, we have customers trialing them.

Okay. So the latter one there, the FTTH and ID, that overlaps -- that is an overlap of what you said earlier about the one large IOC that has begun trials of your ECH (ph) product?

Yes, that IOC is using our FiberSLAM in conjunction with our DRGs, which is the outside of the house box.

Are you continuing at this point in time to sell products -- I know you had a couple of cable customers, most notably Cox and Cablevision. Do they remain meaningful customers at this point in time?

Yes, definitely Cox, Comcast and Cablevision are -- especially Cox and Comcast are one of our top customers.

Cox and Cablevision remain, and then you also have Comcast you said?

No, we have Cox and Comcast, two major ones, as well as Cablevision. Cablevision revenue is not as high as Cox and Comcast.

Okay. All right. Thank you.

(OPERATOR INSTRUCTIONS). Alan Parpua (ph), Advantech.

The question I have for you is with respect to the new relationship you have with Covad, at least what you announced. How does that affect foreseeably the relation of the Bell carriers?

Well, you know, definitely with the IOCs, the type of customers we have they do not have any issues with that. You know, really we're not selling to the large RBOCs at this point our new platform. So our business relations with Covad has not evolved to the point that we would provide them the Next Generation platform for them to offer voice, video and data.

Okay. Now to follow up to that question, with respect to the Next Generation DSLAMs that you have, why is it you are not focused with the RBOCs? I see that Alcatel has been doing some work with them.

Alcatel has been working with them for many years, and telephone companies, the RBOCs, at this point have decided not to select any new platform. Actually they have not done it for the last 12 or 15 years for that type of product because of their operation expense.

I see. So do you see like future deployments, mostly greenfield types of deployments for you?

No, it's not going to be all greenfield. It's going to be lots of IOCs as well that they do have existing platforms.

Okay. So most of your customers will be IOCs, maybe some CLECs and also cable companies?

IOCs, CLECs, cable companies and international carriers.

I see. Okay. Thank you.

This concludes the question and answer portion of today's call. I will turn it back to Mr. Ejabat for closing remarks. Sir?

Well, thank you all very much far participating, and we are looking forward to talking to you next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.