DZS Inc (DZSI) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Third Quarter 2005 Zhone Technologies Inc Conference Call. My name is Carlo 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 the conference. If at any time during the call you require audio assistance, please press "*" "0" and a conference coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. Now I would like to turn the presentation over to your host, Mr. Kirk Misaka, Zhone's Chief Financial Officer, please proceed sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. The purpose of this call is to discuss Zhone's third quarter 2005 financial results and accomplishments as reported in our earnings release, which was distributed over business wire at the close of market today, and has been posted on our website at www.zhone.com We will also provide an update on Zhone’s recent acquisition of Paradyne, as well as information on the recent divestitures of some of our Legacy businesses.

I am here today with Mory Ejabat, Zhone's Chairman and Chief Executive Officer. Mory will begin by discussing the key highlights of the third quarter. Then, I will discuss Zhone's financial results for the third quarter and provide guidance for the next quarter. We will conclude with questions and answers.

As you know, during the course of this discussion today, we will make forward-looking statements, including those relating to our future financial performance, such as profitability, positive cash flow, revenue, margin, operating expenses, earning, EBITDA, cash balances and debt obligations. Finance objectives and strategies for future operations such as manufacturing efficiencies, product enhancements, customer focus and geographic focus, strong demand and growth in our SLMS Optical Transport Solutions. Revenues attributable to our SLMS products, optical transport products and legacy in service, the anticipated growth and trends in our business, product lines or key markets, the amounts and timing of synergies that may be achieved in connection with acquisition and integration of Paradyne. Zhone’s market position for the remainder of 2005 and beyond and statements that express our expectations, estimates, beliefs, plans and forecasts.

We would like to caution you that actual results could differ materially from those expressed in or contemplated by the forward-looking statements. We refer you to the risk factors in our SEC filings available at www.sec.gov, including without limitations our annual report on Form 10-K for the year ended December 31st, 2004 and our quarterly reports on Form 10-Q for the quarters ended March 31st, 2005 and June 30, 2005. We would caution you not to place undue reliance on any forward-looking statements which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements for any reason.

During the course of this call we will also make reference to pro forma EBITDA and additional non-GAAP measure we believe as appropriate to enhance and for our understanding of past financial performance and prospects for the future. These adjustments to our GAAP results are made with the intent of providing greater transparency, supplemental information used by management and its financial and operational decision making. These non-GAAP results are among the primary indicators that management uses as a 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 and fund acquisitions in capital expenditures.

In addition to non-GAAP financial measures facilitate management’s comparison to the company’s historical operating results in comparison to competitors’ operating results. The presentations of this additional information is not meant to be considered in isolation or as a substitute for measures of financial performance compared in the quarters GAAP. We have provided GAAP reconciliation information within the press release, which has previously mentioned has been posted on our website at www.zhone.com.

With those comments in mind I would now like to introduce Mory Ejabat, Zhone's Chairman and Chief Executive Officer.

Thank you, Kirk. Good afternoon and thank you for joining us today for our third quarter earnings call. This was unexceptional quarter for Zhone with excellent growth in our flagship product lines and a rapid execution of acquisition of Paradyne in addition to divestiture of two product lines. We again achieved profitability on an EBITDA basis in the third quarter, [inaudible] we have set out to achieve for the entire year. Kirk will provide more details on our financials later.

During the third quarter of 2005 Zhone won a significant new business for its SLMS access products and optical transport for products, including 19 new customers. We are pleased to include among these new accounts, some previous legacy customers that have began to deploy our SLMS and optical products. In addition to the strong U.S. sales, business from new first time customers continue to be realized in all of Zhone's international sales regions.

Newly announced VoIP customer include Newroads, and IPTV customer include [Travelier Telephone] and Prairie Stream in the U.S. and Alcom, [inaudible] and Voljatel internationally. Other customers include, Globility of new voice and data throughout Canada, Inter-Touch providing communications and applications to the business traveler in over 65,000 hotel rooms, conference and meeting facilities, airline lounges and serviced apartments in 34 countries across Asia Pacific, China, the Middle East, Africa and Europe. Also we have new deployments in Finland, Sweden, Venezuela, Chile and Korea.

DSL port shipment for the combined product portfolio increased to over 250,000 during the quarter, keeping Zhone as the number one market share leader for the Broadband Loop Carrier market according to industry analyst firm, Broadband Trends. BLCs are the fastest growing segment of DSLAM market and are defined as access platforms that support voice, data, video services with IP uplinks.

Zhone also announced during the quarter that we were named by analyst firm, Infomatics, as the market leader in the fast growing Internet access market. We are very pleased with our leadership position in the fast growing space, and [our net] for the standard products continue to break new ground in growth applications, including business Internet services and cellular backhaul.

With the Paradyne acquisition we now have over 640 customers worldwide. As our business continues to grow, our reliance on any given customer has declined and for the first time in the company history we did not have any 10% customers. This week at the USTA show in Las Vegas, we announced our new MALC 100 product with support for 48 ports of ADSL2+ lifeline cards and integrated splitters. MLAC 100 allow service providers to deliver voice, data and video services off from a compact 1U Broadband Loop Carrier. With ample bandwidth to deliver high definition and multi-standard definition video streams, high-speed data and voice services to each service provider.

Copper or fiber dual Gig-E uplink for wide cost effective and bandwidth efficient traffic management with quality of service assurance and network resiliency. Optional watertight OSP enclosure allows for pole, pedestal or underground deployment and the small footprint allows carriers to deploy closer to their service provider for advanced triple play services even in more serving areas.

Now met me give you an update about their recently completed acquisition of Paradyne. We completed a transaction on an extremely accelerated timeline. It left on eight weeks passing from the time the deal was announced to closure. This acquisition has gone very smoothly and demonstrates the efficiency and effectiveness with which we were able to execute this type of synergistic transactions.

Our business integration is going very smooth and will be mostly complete by the end of Q4. We have reduced the Paradyne manufacturing [embargo] by 50%. This facility will be focused on producing low volume, high mix products, as well as final assembly and takes of all Zhone and Paradyne products, while we will continue outsourcing our high volume products. Also during the quarter we announced a divesture of some of our legacy product portfolio. These includes Arca-DACS and Sechtor product lines, which were sold to Verilink Corporation, and the Eluminant product lines which were sold to Communications Test and Design Incorporated.

By divesting these legacy businesses Zhone is demonstrating an increased focus and commitment to our [fleshy] products. We also believe that the recent [inaudible] demonstrated for our fleshy BLC Ethernet and optical products can continue to perform us in the areas of growth we are targeting for the company.

During Q4 we will continue enhancing our products with additional functionality and higher bandwidth interfaces allowing our customers to offer VoIP and IPTV, broadband, triple play, Ethernet and Gigabit Ethernet services in addition to sound applications. Domestically we will continue to focus on IOC, [CLAC] and MSOs. In this market we have been successful against traditional vendors, as well as taking market share from new vendors and start offs.

Internationally we will continue our focus on closed areas such as Middle East, South Asia, Eastern Europe and Caribbean. While we focus on alternative carriers in Western Europe, Canada, South America our success rate has been increasing against Chinese and European manufacturers due to the full feature and cost effective product offering. Financially, we will continue in operating cost improvement, profitability and generating positive cash flow during the quarter. Now I would like to turn the call to Kirk to take you through our financial performance and guidance.

Thanks Mory. Today Zhone announced financial results for the third quarter of 2005. Before discussing these results let me explain how these results reflect by the Paradyne acquisition and the divestitures of certain of our non strategic legacy businesses. First, the Paradyne acquisition closed on September 1st and therefore the third quarter results reflect one month of activity related to Paradyne's operations as well as various acquisition related charges. As I discuss the results of the quarter, I will focus on the core Zhone business in comparison to our previously provided guidance. In addition, I will provide some of the detail related to the one month of Paradyne activity as well as anticipated changes to Paradyne's revenues, margins and operating costs going forward, so that you can better understand our future operating model and our financial guidance for the fourth quarter.

With regard to the divestitures of certain of our non strategic legacy businesses both of those divestitures closed on September 30. Accordingly, the third quarter results reflect a full quarter of activity related to those legacy operations which was anticipated when we originally provided guidance for the third quarter. With these divestitures however, we expect our revenue will decline slightly and I will discuss that impact in the context of our fourth quarter revenue guidance. We anticipate that these divestitures will have very little effect on the margins and operating cost structure of our business going forward.

With that background, let’s start with the review of revenue. Our revenue for the third quarter was 48.6 million, of which 31.5 million was attributable to Zhone’s core business and 9.1 million was attributable to the one month Paradyne activity. As 31.5 million of Zhone revenue was in the middle of our previously provided guidance range of 31 million to 32.5 million and represents a 3.5% quarter-over-quarter increase as compared to the second quarter of this year and a 16.7% year-over-year increase as compared to the third quarter of last year. The 9.1 million of Paradyne revenue is generally reflective of the anticipated level for one month of activity based on historical results.

Through the acquisition however, Paradyne did not provide any financial guidance to which we would compare these results. Revenue by product category for the third quarter was as follows, cash elements revenue was 18.1 million of which 11.3 million came from Zhone’s SLMS product and 6.8 million came from Paradyne broadband product. Legacy and service revenue was 17.3 million of which 15 million came from Zhone legacy products and services and 2.3 million came from Paradyne narrow band products and services.

Finally, optical transport revenue was 5.2 million, entirely related to the Zhone product portfolio. Revenue breakdown by product category shows that Zhone SLMS revenue grew a strong 15% quarter-over-quarter from 9.9 million in Q2 of 2005 for 11.3 million in Q3 of 2005. On a year-over-year basis, the Zhone SLMS revenue growth was even more impressive, more than doubling from 5.6 million in Q3 of 2004, to this 11.3 million in Q3 of 2005. These results reflect strong demand for our single line multi service solutions coming from both existing and new customers.

Both the legacy and service revenue and optical transport revenue were affected by uneven customer quarterly buying patterns more than anything else. We continue to expect the yearly revenue trend in our legacy and service business to be flat to slightly declining. In contrast, we anticipate moderate growth in our optical transport business.

As Mory mentioned, we didn’t have any 10% customers during the quarter for the first time in our history. This trend reflects an increasingly diversified customer base and a reduced dependence on certain key customers. Also, our top five customers represented approximately 29% of our quarterly revenue, declining from 41% in the second quarter.

The other 71% of quarterly revenue was attributable to over 400 customers. International revenue was approximately 35% of total revenue in the third quarter of 2005 as compared to 31% in the second quarter of 2005. The increases in our business [inaudible] as well as continued success in other international raises grow this increase.

As for our revenue guidance for the fourth quarter of 2005, we anticipate the total revenue will range from 54 million to 56 million, reflecting continued strong growth in SLMS and optical transport revenue base, being off set by a slight decline in legacy revenue attributable to the two legacy businesses that we divested. Those two businesses were generating approximately 3 million to 4 million of quarterly revenue.

Now turning to margins, gross margins were 41.3% for that third quarter of 2005, which was within the 41% to 43% range of guidance that we provided during our last earnings conference call. So our margins were generally within the range of guidance, they will affected by the Paradyne acquisition in several ways.

First, the Paradyne products generate slightly lower margins than other Zhone products. The lower margins are a result of both product mix, and an underutilized manufacturing facility. To address the underutilization issue, we are moving some of the Zhone product manufacturing, currently being performed by outside contract manufacturers, to the Paradyne manufacturing facility. This move will increase utilization at the Paradyne facility and reduce the manufacturing over head burden rate.

At the same time, we are substantially reducing the footprint of the Paradyne facility to eliminate any remaining excess capacity. For these reasons, we anticipate gross margins for the fourth quarter of 2005 to range between 39% and 41%. As we further evaluate and improve the manufacturing model, we anticipate that some margin improvement can be made. That benefit however will likely take several quarters to achieve as we integrate the Zhone production and move to a manufacturing model where we are doing primarily just final assembly and test aspects of production.

As for operating expenses, total operating expenses were 27.3 million in the third quarter of 2005, including 15.9 million related to the historical Zhone operations, excluding Paradyne and then the acquisition related expense. The 15.9 million for the Zhone only expenses was in the middle of the 15.5 million to 16.5 million guidance range we previously provided, as we continued our cost containment [emphasis].

Going forward, we anticipate total operating expenses for the fourth quarter of 2005 to range between 26 million and 28 million, which reflect the effects of implemented cost savings associated with Paradyne acquisition. In that regard, we are on track to achieve the previously announced cost synergies associated with Paradyne acquisition of 15 million to 20 million over the next 12 months. Expense guidance includes approximately 5.3 million as expenses for depreciation, amortization of intangibles, some stock-based compensation.

Finally, pro forma EBITDA for the third quarter was slightly positive and based on the other financial guidance just provided for the fourth quarter, we anticipate generating between 1 million and 2 million of pro forma EBITDA next quarter. As we move into 2006, our quarterly EBITDA is expected to grow as we complete the Paradyne cost reductions, including the aforementioned manufacturing changes.

Turning to the balance sheet, our cash and short-term investments as of September 30, 2005, were 80.9 million, increasing from the 52.6 million in the previous quarter with the addition of the cash balances from Paradyne as cash used in Q3 operations and acquisition related cost. Under our combined operating model, we expect cash balances to increase slightly during the fourth quarter.

Our total debt obligations remain substantially the same as in the previous quarter and were 56 million at September 30, 2005. As previously announced, we are still evaluating whether to pay down some or all of the debt to reduce the net interest cost of the combined company. As for balance sheet metrics, the number of days sales outstanding on accounts receivable were 51 days for Q3, 2005, compared to 55 days for Q2, 2005. DSOs improved on more linear sales and collections throughout the quarter, despite the integration and transition related to Paradyne.

Finally, the average, basic and diluted EPS shares were 112.1 million at the third quarter, which increased from the average second quarter shares of 94.4 million, almost solely due to the shares issued to acquire Paradyne. As of September 30, 2005, we had approximately 147.2 million shares outstanding.

Before I turn the call back to Mory, let me summarize the financial results for the third quarter and recap our guidance for the next quarter. Top line growth for the third quarter was within our guidance that reflected particularly strong SLMS growth of 15% quarter-over-quarter from Q2 2005 to Q3 2005, and a 102% year-over-year growth from Q3 2004 to Q3 2005 for Zhone's core businesses. Margins, operating expenses and EBITDA for Zhone's core business hover within our prior guidance and led to strong financial performance for the third quarter, including slightly positive EBITDA.

As for the fourth quarter, we expect revenues to grow sequentially and as a result of the Paradyne acquisition to be between 54 million and 56 million. Gross margins are expected to range between 39% and 41% until Paradyne's manufacturing efficiencies are fully realized, and operating expenses should range between 26 million and 28 million, including 5.3 million of expenses for depreciation, amortization of intangibles and stock-based compensation. These results should drive between 1 million and 2 million of pro forma EBITDA for the quarter.

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

Thank you, Kirk. We demonstrated in the third quarter that we are on plan to achieve profitability in 2005. We believe the remainder of 2005 present an excellent opportunity for us to further capitalize on our investment and we remain focused on being one of the top equipment providers delivering next-generation networks to carriers and cable operators worldwide.

In summary, we are very pleased with this quarter's performance, especially in the continued adoption of our SLMS and Optimal Products. Increased customer acquisition and solid execution by our team fully indicates that Zhone is well positioned for the reminder of 2005 and beyond. We plan to maintain our leadership position in the fastest growing areas of the telecommunication industry. Thank you for joining us today. I would now like to open the call up to questions. Operator, please begin the Q&A portion of the call.

Thank you, sir. Ladies and gentlemen, at this time if you wish to ask a question, you may do so by pressing "*" "1" on your touchtone telephone. If that question has been answered, or you wish to remove yourself from the queue, you may then press "*" "2". Again, now is your opportunity to ask a question by pressing "*" "1". One moment please. And our first question is from the line of Joanna Makris with Adams Harkness.

Hi, good afternoon.

Hi, Joanna.

Hi, I am wondering if you can talk, I am sorry if you may have mentioned this perhaps earlier, but if you could talk about what is the percent of utilization right now of the Paradyne manufacturing facility.

I am sorry, could you put down Joanna again.

I am sorry, the percentage utilization of the Paradyne manufacturing facility, what is that currently?

It was about-- when we acquired Paradyne, it was about 50%, now we believe we are about 60%-65%.

And then what do you think a reasonable goal could be as you begin a lot of this transitioning process, I mean, what do you think that could look like perhaps two to three quarters out.

Most likely, we are going to continue our outsourcing process and we are going to combine the Zhone and Paradyne finalize [somebody] on test and new product introduction into that facility. So, we can really use that as a smaller manufacturing site for finalize somebody on test and outsource majority of our product supplies overseas or domestically.

Okay and then I am wondering if you can talk a little bit about the potential from may be cross selling many of the Zhone SLMS products into the Paradyne customer base, I mean to what extend you think that’s possible and which product areas do you think could be most likely to sold into that customer base

I actually -- we have seen that already happening, we are selling to existing Paradyne customers, we have introduced our [MUX] product into those customers and majority of them are very interested, we have won couple of deals already for the [inaudible] and we believe there are probably about 50% to 55% of Paradyne customers who would move into our [MUX] product line.

Okay, could you also finally just comment a little bit on [Atisila] maybe in terms of what does it kind of looks like, currently with you and what kind of expansion plans they are talking about with you?

[Atisila’s] expansion is for this year almost complete, there are about 2,00,000 lines, we believe they are going to continue that the deployment and we believe there going to also about a million lines in the next few quarters

Thank you

And sir, our next question is from the line of Anton Wahlman, with Needham.

Hey Mory and Kirk, can you hear me.

Yes

Kirk, could you break down the 5.3 million for next quarter depreciation, amortization of stock based comp, roughly how you think that will break down.

About 4.5 is amortization related about 400,000 is depreciation related and the reminder is stock comp.

400,000 stock comp.

That much.

Okay, the optical business transport was down quite a bit here on a percentage basis, anything in particular going wrong there which we ought to be aware?

Well, optical business grew year-over-year, but in the quarter over quarter was gone, and typically for that business, Q3 is a big quarter mainly due to the European deployment that we have on that quarter.

What percentage of that optical transport business should we attribute to traditional cable TV operators as opposed to telcos do you think?

I would say about, let's say about 60% are MSOs and the rest are [inaudible] and telecom providers or integrators.

I see. Now, with the combined new size of the company, and you'll be obviously well over say $200 million annual revenues, sort of, let's call it $250 million worth of revenue going forward here, obviously company is so much larger than it was and do you think that you would consider starting to address the very largest customers out there or are you still going to focus on sort of the IOCs and the smaller carriers in North America.

Well, we are always in discussion with the largest carriers. But right now our focus is on IOCs and [CLACs]. I think in the next few quarters we will be pushing to penetrate the larger accounts, tier one accounts, hopefully we do some of our new products.

I see, alright, thanks. Did you give a headcount?

No, we didn’t, our headcount at this point is -- go ahead, Kirk.

Well it -- just excluding the manufacturing employees, we have about 340 non-manufacturing employees at September 30.

And that -- you are permanently done with what you got to do there or is that like a -- was that very much a moving target at the end of the quarter?

In that 340 there are some that are in a transition, and we believe they are going to be -- I know there are 40 to 50 people that are going to be gone by the end of the year.

Okay, alright. Well, that seems fair. Thank you very much.

Sure.

And sir, your next question is from the line of Hasan Imam with Thomas Weisel Partners.

Yeah, thanks. I have just a couple of questions. Mory, could you comment on the large Middle Eastern customers, besides [Atisila] that you have been working with? Any new developments in those accounts, and could we expect some revenues from them in '06?

We had another larger telecom provider in Middle East. We are not allowed to say who that is. But we had that the last quarter and we anticipate getting a larger deal we have done next quarter and we may have a -- we would announce that, and actually we did that with another equipment provider as a partner for that account.

And could these deployments be roughly the size of [Atisila]?

Yes, it's potentially in that size.

Okay. great. And then one other question on the headcount front, at Paradyne the reduction, is that primarily on the G&A side, and with the remaining engineers that you have on the Paradyne side, what will they be focusing on going forward?

The reduction trend from G&A and engineering as well.

Okay

And we are using our new product and engineers and some of their engineers to deal with new products that we are not ready to announce.

And last question, Mory, I am in terms of your product development, are we going to see essentially more features in the existing product lines or could we see you branching out in some new areas in over the next 12 to 18 months timeframe.

I believe in the next six months you are going to see our products coming out from us.

Okay. Great, thank you.

Sure.

And again, ladies and gentlemen, as a reminder please press "*" "1" for any questions at this time, "*" "1" please. And sir, our next question is from the line of Bob Poole with BCM.

Hi guys. You are going to exit this year, wherein you will have operating expenses before depreciation, stock -- amortization, etcetera, of roughly 22 million for the fourth quarter this year. With the cost saving efforts that you will be putting in place over the next few months, where would you expect to -- what kind of operating expense run rate would you expect to have exiting 2006?

[Our time] is to be somewhere between $19 million and $20 million in operating expense.

Right, okay. Well, that makes sense. Thank you and good luck with that.

Thank you

And sir, our next question is from the line of Peter Lu (phonetic) with Lu (phonetic) Capital Management.

Hi. I invested in your stock before the Paradyne acquisition, and there was a huge move on the upside. Then the acquisition got completed. I thought that you -- well, I can think your stole Paradyne. You got in very, very good value, and then you outlined all the benefits. What troubles me is that the Street is voting with their feet, and I would like to ask you, where the disconnect might be between the Street's understanding and your communication to the Street on all the benefits of the Paradyne acquisition.

Well, all I can tell you is we communicate what we know on what -- what we are doing in our business, and we leave the interpretation between the Street and investors. Our goal is to set a goal and hit those numbers and hit those goals on that sort of projects and that’s what we do.

Okay. The growth rate is somewhat confused, because the one month contribution from Paradyne, and there is no basis for comparing Paradyne's growth. But there is a basis of comparing your growth and your growth relative to the market. Maybe you can discuss a little bit about where you think you are in relationship to the market that you serve.

Right.

I know you hit a homerun with the MPLS product, but the legacy product is a drag. So where do you think you are in terms of taking market share or holding share with the traditional product in conjunction with MPLS.

Actually we don’t have any MPLS product. Our product is called SLMS.

Excuse me.

Yeah it’s all right. We are not in the ATM business. So we are [inaudible] Now as you have heard our SLMS business grew 102% year-over-year and 15% quarter over quarter and in the telecomm industry is very tough to find that type of a growth rate on any product line or any companies that are doing that well. We anticipate to grow hugely in this area or last year we grew that business 40% year over year. And we are in the good rate of expansion this year.

What percentage of your total revenues do you expect the SLMS product to be by year end and 2006? Give me a [inaudible] range.

Yeah, what I can tell you is we are kind of-- we are including migrating Paradyne products also into SLMS product line. And our belief is and in 2006 potentially we will be about 70% SLMS and 30% optical product. That is just to get I haven’t done any thinking about that.

Okay. Do you have a broad view of how this move upward as long term interest rates would affect the capital expenditures of your customers? Or it is the cost performance of your product, is it so persuasive that it can over come moves in interest rates?

Okay Peter I am going to answer this last question, the companies that we target are IOCs and a international market, there the companies are cash rich and normally they don’t depend on financing for some of our products. And our belief financing doesn’t -- it doesn’t come into the equation for the type of products we provide to our customers. Actually, some of our customers are getting subsidized from the government, so they don’t need to worry about their interest rates.

Okay. Thank you.

And Sir, our next question is from the line of Dawn Brown (phonetic), Private Investor.

Hi Kirk.

Hello Dawn.

I spoke with you just recently, I have some other questions, I have come up and if I can ask them, that would be great. Do you plan to grow mostly in the next say 4 -5 years through acquisition, or do you look at your growth primarily to be organic?

I'm going to answer this question, Dawn I am Kirk, our plan is to definitely grow the business organically, and I am going to know why we come across acquisitions that are very synergistic with what we do, and we will take the advantage of that. But most likely, our plan is to really go organically unless we have – we see a good acquisition coming through.

Okay. The telecommunication industry which is where your operations are at the present time seems to be in shambles and it has been for quite a long time, how do you actually look at the future of the industry and what shape do you think it's going to be going forward. Is it going to be more mergers of the big companies buying the big companies, or how do you look at that?

No, I believe there is a consolidation that has to happen and I'm among the service provider and equipment provider, that’s going to happen in the long on and as the number of customers reduces, the number of suppliers have to reduce. So that is going to happen, but the industry has been in trouble for long time, but we believe with the new initiatives that the service providers are taking on Voice over IP, IP TV and broadband the growth is going to come back to this industry.

Okay, Kirk, I asked you this the other day and you were unable to give me an answer, perhaps you can today, post the merger what is the book value of the company?

Post merger the book value, well, in our press release we have the balance sheet, so you can look at it and the book value at September 30 was 398 million.

We are trading below our book value.

Okay and that book value is post merger?

Yes.

Yes it is.

Alright, and my other question, I have read a lot about the speculative growth of Voice over IP, it seems like this is really the trend of the telecommunication market over the next 5 years or so, is this the way you read it and is your SLMS product-- what does it have to do with the voice over internet protocol?

Well, yes that voice over internet is an area that is going to grow in addition to IP TV and broadband and other services that have [inaudible] do using our product line. But our product at this point allows carriers to offer Voice-over-IP using their traditional telephone network.

Okay. That’s all the question that I have, thank you very much.

You are welcome.

And sir, our next question is from the line of Todd Koffman with Raymond James.

Yes. Can you share with us what the full quarter of Paradyne revenues were for the September quarter?

Actually we don’t have that information handy right now. I really don’t know what they will be in the first month of the quarter.

Okay, unrelated question. When you first announced the combination, it sounded as though there was going to be some consideration to not following the Paradyne manufacturing approach and doing -- relying more on outsourced manufacturing. And today it's sounding like you are going to try to fill the factory, am I reading that correctly?

Not totally. In traditionally Zhone has been doing final assembly and [test], and we have also seen other stuff that we are doing. And we are following that scenario with Paradyne and Largo facility. No, it's going to take some time to wind on some of the operations that they do over there and move some of our product over there for final assembly and [test], and outsourcing some of the products that we are doing. So this step by step approach we cannot turn out overnight and if we do that we are going to have massive problem with our cost management. So we are going to follow that format.

Thank you, very helpful, good luck.

Sure.

And sir, we have a follow up question from the line of Anton Wahlman.

Hey two things, first quickly Kirk, the 3.1 million of acquisition related charges, that all comes out of your G&A line, right?

Yes, it does.

Okay, Mory, just one question on, sort of the strategic nature of the customers, overall, in terms of your total revenue, I believe it's a very small percentage that comes from MSOs, even though it's a large percentage of optical obviously, are you, I mean would you be adverse to wanting and at some point if you came across an attractive acquisition in the area of serving MSOs or would you be adverse to doing something like that or is that something that’s totally fit for a discussion.

Anton we have great relationship with the MSO customers that we are working with and if an acquisition comes around that is not dilutive and has a good product and we can take advantage of their product and our relationship with MSOs, we’ll definitely look at that.

Sounds good Mory, thank you very much.

Good.

And again, ladies and gentlemen, as a final reminder, please press "*" "1" at this time for any questions, "*" "1" please. Yes sir, we have follow up question from the line Peter Lu (phonetic).

Some time ago, the venture capital investors bought a lot of stock; I have not seen any insider buying by the operating management. I think your resources are very substantial. So, if you do buy some stock it would send a very nice [signal] to the street, are you inclined to do that?

No, I personally am not inclined to do that, I already have purchased lot’s of the stock in the company from my own money and cash and also our investors, they were lot and they couldn’t borrow any of stock, now the [long hop] is going to come out in the next few days and we don’t know if that plan seems better or not.

Okay, thank you.

You are welcome.

And sir, we have no further questions, back over to the group for any further remarks.

Well thank you all very much for participating in our conference call and we will talk to in the next quarter, thank you.

Thank you.

Ladies and gentlemen, we thank you for your participation in today’s conference. This does conclude your presentation and you may now disconnect.