DZS Inc (DZSI) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2005 Zhone Technologies, Inc. earnings conference call. My name is Megan [ph] and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today’s conference, Ms. Tiffany Brown. Please proceed ma’am.

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 2005 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 website at www.zhone.com.

I am 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 key highlights for the first quarter, and then Kirk will discuss financial results for the first quarter and provide guidance for the next. We will conclude with questions and answers.

As you know, during the course of this discussion today Zhone will make forward-looking statements, including those relating to Zhone’s future financial performance, such as profitability, revenues, gross margins, operating expenses, earnings and EBITDA, top-line growth, the attraction of additional customers, the recognition of Etisalat revenues, revenues attributed to our SLMS products, Optical Transport products, and our Legacy end services, the anticipated growth and trends in our business product lines and key markets, our products becoming the products of choice, as well as statements that express Zhone’s expectations, beliefs, plans, and forecasts.

We would like to caution you that such statements reflect only the current expectations and the actual results could differ materially from those projected in forward-looking statements. We refer you to the risk factor and cautionary language contained in our Annual Reports filed with the SEC from time to time, including but not limited to those risks and uncertainties listed in the section titled, “Management Discussion and Analysis of Financial Conditions and Results of Operations” and our Annual Report on Form 10-K for the year ending December 31, 2004. Such reports contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

During the course of this call, Zhone will also make reference to proforma EBITDA and additional non-GAAP measures Zhone believes is appropriate to enhance an overall understanding of past financial performance and projections for the future. These adjustments to our GAAP results are made with the intent of providing greater transparency to supplemental information used by management in its financials and operational decision making. These non-GAAP results are among the primary indicators that management uses as the basis for making operating decisions because they provide meaningful supplemental information regarding our operational performance, including our ability to provide cash flows to invest in research and development, fund acquisitions, and capital expenditures.

In addition, these non-GAAP financial measures facilitate management’s internal comparisons to the Company’s historical operating results and comparisons to competitors’ operating results. The presentation of this additional information is not meant to be considered isolation or in substitute for the net loss prepared in accordance with GAAP. We have provided GAAP reconciliation information with the press release, which as previously mentioned has been posted on our website at www.zhone.com.

I would now like to introduce Mory Ejabat, Zhone’s Chairman and Chief Executive Officer.

Thank you Tiffany. Good afternoon and thank you for joining us today for our financial results of the Q1 2005. We finished the Q1 on our plan as we projected during our last quarterly announcement. Revenues were $27.6 million, and in line with our guidance. Kirk will give you more information about our financials.

Q1 was a strong quarter for our SLMS and Optical products, while the Legacy product was weak as we anticipated. During the quarter, we announced new products for each of the product lines. For the SLMS line, we announced progress trend which is targeted for FTTP application using MALC as the platform. Also we announced our VoiceFLEX Gateway allowing customers to use MALC product as a single network element for voice, video and data regardless of having TDM or high-cap [ph] network infrastructure. Now our customers can market on TDM networks to IP networks port-by-port or customer-by-customer. In addition, we have done intra-capability [ph] testing to sell our soft-switch vendors such as Meadow Switch [ph], Broad Soft and Sorrento.

Our Optical Transport products we announced 10-port fiber channel module for cost effective deployment of sound or video-on-demand applications. GigaMux 50 was also announced during the quarter for entry-level, cost-effective point-to-point CWDM applications.

Q1 was a significant quarter for us with respect to product shipment and cost of acquisition. During the quarter, we shipped 108,000 broadband ports in our MALC products, which is an increase of 500% over first quarter ’04 and 100% over the previous quarter.

Domestically, we announced consolidated the largest ILAC in Illinois and Texas as major IPT customers, Adjuvant [ph] IDS and SpringNet. During the quarter, we added 8 new customers and we have [inaudible] underway for FTTP, Voice-over IP and IPT solutions to sell our customers. Our Voice-over IP product has become the product of choice for carriers converting for UniP [ph] to UniL [ph]. We are continuing our testing with Covad, and we believe during this quarter we hear a formal decision from Covad. The IPT products with unique functionality allows carriers to offer up to [inaudible] channels or [inaudible] to their customers without any performance segregation for voice-print data.

International business is strong and gaining more momentum. We continue to see orders from Etisalat and new customers in Egypt, Czech Republic and South Korea for both SLMS and Optical product line. Our products are being tested in several countries such as Canada, Costa Rica, Venezuela, and Mexico. In Q1 we executed our plan to focus our product for new growing applications with our existing and new customers. We have stated in our plan to penetrate more IOCs, CLECs, Cable MSOs, and more international customers. We are certain that our plan to pay off during 2005 which would be the first year for profitability and we believe we will see sequential growth in both product lines SLMS and Optical Transport.

Now I’d like to turn the meeting to Kirk to take you through our financial performance and projections. Kirk.

Thank you Mory. As we discussed last quarter, 2005 marks an important transition year for the Company. Over the past 5 years, we have invested extensively to develop one of the most robust technology platforms in the industry, and we believe 2005 will mark the turning point where we can really begin to capitalize on that investment driven by top-line growth, improving gross margin, and leveraging operating costs. For the full year of 2005, we expect to be positive proforma EBITDA.

Today Zhone announced financial results for the first quarter of 2005. Our revenue for the quarter was $27.6 million as compared to $21 million for the same quarter of last year for an increase of 31%. Of that increase, 27% relates to the Optical Transport revenue acquired from Sorrento, and 4% is growth from existing Zhone products. Despite what is normally a seasonally weak quarter, revenues declined only 2% from $28.1 million of revenues in the fourth quarter of 2004 and within the range of guidance that we provided during our fourth quarter conference call of flat to slightly down, largely attributable to our Legacy products. As we discussed on that call, different Zhone products are beginning to meet the performance criteria set forth in our contract with Etisalat, our PTT customer in the United Arab Emirates. Accordingly, $1.6 million of revenue was recognized in the first quarter related to the acceptance of our MALC product.

Etisalat continues to deploy our product and we shipped an additional 2.5 million of MALC product in the first quarter. Based on the acceptance criteria in the contract, we anticipate recognizing that revenue in the second quarter once the acceptance period has lapsed.

As for other large customers during the quarter, we had one 10% customer and our top 5 customers represented approximately 40% of our quarterly revenues. The remaining revenues were attributable to over 200 customers, while sales to international customers represented 24% of the total.

Revenues by product line for the first quarter of 2005 were as follows; $9.1 million for SLMS products; $12.7 million for Legacy products and service; and $5.7 million for Optical Transport products. The first quarter of 2004, product line revenues were; $7.4 million for SLMS products; $13.7 million for Legacy products and service. As compared to the prior year, quarterly SLMS revenues increased by 24% while revenues for Legacy products and service declined by 7% reflecting the general trend that we anticipate for the remainder of the year, namely strong double-digit percentage growth in SLMS revenues and a modest single-digit percentage decline in Legacy and service revenues.

The continued strong revenue growth for our SLMS product comes from the additional Etisalat revenues previously mentioned and 8 new SLMS customers added during the quarter. As for our revenue guidance for the second quarter of 2005, we anticipate that total revenues will range from $29 million to $30 million representing a 5% to 9% increase over the first quarter.

Now turning to our margins, gross margins were 43.4% for the first quarter of 2005, which was within the 42% to 45% range of guidance that we provided during our last conference call. Margins improved slightly from the 43% for the first quarter of 2004. We anticipate gross margins for the second quarter of 2005 to continue to range between 42% and 44%.

As for operating expenses, total operating expenses were $16.5 million in the first quarter of 2005, which is within the range of guidance that we previously provided. Going forward, we anticipate total operating expenses for the second quarter to range between $15.5 million and $16.5 million as we continue to emphasize cost containment. Our expense guidance includes approximately $2.8 million of expenses for depreciation, amortization of intangibles, and stock- based compensation.

On a GAAP basis, our net loss for the first quarter of 2005 was $5.1 million compared to $13.4 million for the same quarter of last year. Our proforma EBITDA loss was at $1.7 million for Q1 of 2005 compared to a proforma EBITDA loss of $3.7 million for Q1 of 2004.

Turning to the balance sheet, our cash in short-term investments at March 31, 2005 were $61.1 million declining slightly from the $65.2 million in the previous quarter. Also during the quarter, we finalized an agreement with our contract manufacturer regarding certain inventory purchases that resulted in a reduction of accrued liability of $3.8 million and a corresponding increase in short and long-term debt obligations. Otherwise, debt obligations substantially remain the same as in previous quarter.

The number of days sales outstanding on accounts receivable decreased to 61 days for Q1 of 2005 compared to 62 days for Q4 2004. DSLs improved despite a seasonally weak quarter for a variety of reasons, including better-than-expected sales throughout the quarter, higher-than-normal collections, and an improvement in payment terms.

Inventory was $43.2 million at the end of Q1 2005 as compared to $37.4 million at the end of Q4 2004. The increase in inventory levels from last year relates to the inventory triples of the Etisalat product, and the new product introductions we mentioned during our last conference call.

Finally, basic and diluted EPS shares were at $94.1 million for the first quarter of 2005, which remained basically flat from the fourth quarter shares of $94 million.

Before I turn the call back to Mory, let me recap our guidance for the next quarter. For the second quarter of 2005, we expect revenues to grow sequentially by 5% to 9% to $29 million to $30 million. Gross margins are expected to range between 42% and 44% and operating expenses between $15.5 million and 16.5 million including $2.8 million of expenses for depreciation, amortization of intangibles, and stock-based compensation.

We expect revenues to triple through our SLMS and Optical Transport products to continue growing strongly for 2005 and our Legacy and service revenues to decline modestly. With continued emphasis on top-line growth and cost containment measures, we expect proforma EBITDA to be break-even or slightly negative for the second quarter of 2005. In any event, we expect positive proforma EBITDA for the full year.

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

Thank you Kirk. We demonstrated this quarter that we on plan to achieve profitability. We believe 2005 presents an excellent opportunity for us to capitalize on our investments and we remain focused on being one of the top equipment providers delivering next-generation networks to carriers and cable operators worldwide.

Thank you for joining us today. I would now like to open the call to questions. Operator, please begin the question-and-answer portion of the call.

Thank you sir. (OPERATOR INSTRUCTIONS).

Kenneth Miller, Bonanza Capital.

Hello gentlemen, I had wondered if you guys could give us a quick update on the various customer trials going on, especially Covad.

At Covad, presently we are testing with them and they are testing with us Samsung and Nokia at the present time. The testing has not been concluded for any of us. We understand their deployment or trial has been delayed from early April to end of May to early June, and we’ll see how it goes during the testing. And we feel very optimistic.

Okay, any other major ones you’d like to update us on?

Actually, we have several trials that are going on that we cannot really talk about that at this point.

Okay, thank you.

Alan Adma [ph], Alan Adma Enterprises.

Hello, would you talk a little bit about some of your revenue capacity, where you think you’re going to go. In the conversation after the last quarter, your CFO was talking about $150 million would be a logical or possible goal based on not your Legacy products but your other products. Is that still feasible? Do you think you’ve got products in-house that can do that level, or do you need acquisitions and/or other new products?

The products we have I think we can definitely deliver the type of numbers we have plans for and we would be able to meet our goal. At this point, we don’t believe we need any more acquisitions to get there. IN the meantime, we are obviously looking at new products and we are adding more functionality to our product line. I don’t think we would be adding more resources to add more products into our product portfolio.

So would it then be safe to assume that you would not need to do any other fancy [inaudible] cash to get to your plans? You would not need to either sell stock or raise other money?

Correct, that’s true.

Thank you.

(OPERATOR INSTRUCTIONS).

Anton Wahlman, Needham & Company.

Hey Kirk I have a question for you primarily on the gross margins, kind of current and going forward. If I were to say that gross margins for your 3 segments are sort of 50% for SLMS, 40% for Legacy and service, and 45% for Optical, one of them is likely to be a little high if you look at the mix. Which one of the 3 in particular would you say maybe those types of numbers would be a shade too high?

Actually Anton, the mix of Legacy and service revenues puts the average margin pretty close to the 43% that we reported this quarter. SLMS is similarly in that range, so there isn’t a dramatic difference between the SLMS gross margins and the Legacy and service margin.

So then Optical is the one that’s probably too high at 45% then?

Slightly.

Okay, so that’s where we would need to do some trimming. All right, now one other question probably for you Mory more so than for Kirk, it’s on you view of consolidation in the industry, as you know there are a lot of companies around that are flirting with break-even and that are fundamental and not necessarily unsound, but that just don’t have the sort of the scale this year just being able to clear the public company overhead and R&D and whatever else. I mean, do you think that in the next 12 months that we are going to see more than usual, say more than what we’ve seen the last year or two consolidation in the industry in the vendor community, or do you think that the case will not necessarily accelerate from what we have seen in the last year or two?

Anton, I don’t believe we are going to see any acceleration in the consolidation as we have seen in the past. I think we are going to see the same sort of consolidation. But in the meantime, we are going to see some of the companies that are not performing as well, and they don’t have financial backing to survive. They’ll probably either close shop or do an asset sale. And we are seeing some of that happening at this point, especially some of the fiber optics.

Do you see any of the formerly very large companies, kind of the East Coast and Northern companies for example that used to dominate these businesses so if you look back 5 or 10 or 15 or more years ago, do you see some of them that are sort of being sold to some of the smaller companies or a private equity or something like that? Or do you think it will be more of a consolidation amongst the smaller companies themselves?

Well, there are 2 groups, there are going to groups that are going to be consolidated in a smaller version. In the larger companies, I believe they are going to start trimming product lines again. They have done that in the years 2002 and 2003. They got rid of some of their product lines. I believe they are going to start trimming some of their product lines, either selling it to other people or just discontinue their operation.

Finally, in terms of attacking the largest U.S. [inaudible], would you contemplate any partnership to [ph] for those remaining opportunities or is that really something that you’re not really focused on and you’re really focused on the international opportunities and the other alternative and other geographical carriers?

Well, we are not against partnerships with any larger company who wants to position our products to the larger [inaudible]. We would definitely consider that. But we are not actively pursuing that. We think there are other companies in other countries and also in the U.S. that are easier to adopt new technology and move on. They are companies that can believe in new technology and want to take advantage of the new type of infrastructure that they move faster in those types of environments, which we believe the bigger telephone companies are not suited for.

Okay, thank you very much.

Jay Albany [ph], Calisso [ph] Capital.

Hey guys, great quarter, good guidance. I just had a quick question about the market for IOCs. Has the competitive environment changed at all in the U.S., or do you guys still have a good chance of winning most of those?

Actually Jay, it has become more favorable to us in the I-Lacks [ph] and C-Lacks [ph] environment. Mainly the C-Laks are becoming more and more active, and they have more financial backing. Uni-AP [ph] to Uni-L [ph] is becoming a very good market to us for virtual IP. In additional, all the I-Lacks that we are working with now with the advent of soft switches that are available from different companies are getting more and more inter-connection [ph] than DLCs. And the larger companies, they cannot provide that type of assistance to the I-Lacks so that market becomes more and more feasible for companies like us and others that are like us.

Okay great, thank you very much.

Ladies and gentlemen, that concludes the question-and-answer portion of today’s conference. I would now like to turn the call over for any closing remarks.

Thank you all for participating to this conference call, and we will talk to you next quarter. Thank you very much.

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes this presentation, and you may now disconnect. Good day.