DZS Inc (DZSI) 2007 Q2 法說會逐字稿

Good day, and welcome to the second quarter 2007 Zhone Technologies conference call. My name is Rob, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. And we will be facilitating a question-and-answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to introduce Susie Choy, Director of Investor Relations. Please proceed.

Thank you, operator. Hello and welcome to the second quarter 2007 Zhone Technologies, Inc., conference call. I'm Susie Choy, Zhone's Director of Investor Relations. The purpose of this call is to discuss Zhone's second quarter 2007 financial results as reported in our earnings release which was distributed over business wire at the close of market today and has been posted on our web site at www.zhone.com. I'm here today with Mory Ejabat, Zhone's Chairman and Chief Executive Officer, as well as Kirk Misaka, Zhone's Chief Financial Officer. Mory will begin by discussing the results of the second quarter and providing some insights into the future for the company. Following Mory's comments, Kirk will discuss Zhone's financial results for the second quarter and provide guidance for the next quarter. After our prepared remarks, we will conclude with questions and answers. As a reminder, this conference is being recorded for replay purposes and will be available for approximately one week. The dial-in instructions for the replay are available on our press release issued today. An audio webcast replay will also be available online at www.zhone.com following the call.

As you know, during the course of the discussion today, we will make forward-looking statements including those relating to projections of profitability, earnings, revenue, margins, operating expenses or other financial items, the anticipated growth and transfer of business, product lines or key markets, new product introductions and the migration of customers to newer technologies, Zhone's market position and focus and statements that express our plans, objectives and strategies for future operations including restructuring initiatives. We would like to caution you that actual results could differ materially from those contemplated by the forward-looking statements. We refer you to the risk factors contained in our SEC filings available at www.sec.gov including our annual report on form 10-K for the year ended December 31, 2006 and our quarterly report on form 10-Q for the quarter ended March 31, 2007. We would like to caution you not to place undue reliance on any forward-looking statements which speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statements.

During the course of this call, we will also make reference to pro forma EBITDA, a non-GAAP measure we believe is appropriate to enhance an overall 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 to supplemental information used by management in 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 and they facilitate management's internal comparisons to the company's historical operating results and comparisons to competitor's operating results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for measures of financial performance prepared in accordance with GAAP. We have provided GAAP reconciliation information for pro forma EBITDA within the press release which is previously mentioned has been posted on our web site at www.zhone.com.

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

Thank you, Susie. Good afternoon and thank you for joining us today for our second quarter 2007 earnings call. Overall, the financial results for the second quarter of 2007 are generally within our expectations. Despite the continuation of customer consolidation and a pause among others, customers are evaluating the (inaudible) versus fiber-based network and considering the economics of offering services or (inaudible) or offering these services over [FTTX] or combination of both. Revenues came in at $44.1 million which was within our anticipated range of $44 million to $45 million. Revenue growth over the prior quarter was driven by increased international sales and by our SLMS revenue, which grew by 5% over prior quarter. Our international customers now compromise half of our total revenues. We added 12 new customers of which three were (inaudible). One customer accounted for 10% of total revenue. Margin declined during the second quarter to 34% primarily as a result of pricing pressure from our largest international customers. But our operating expenses improved over the first quarter. Pro forma EBITDA loss of $2.9 million which was within our anticipated range of $2 million to $3 million. Kirk will provide more details on our financial results later.

Q2 2007 was an exciting and busy quarter for us as we continue on the strategy to become a major global supplier of access products. With a large investment in R&D in the past quarters, we announced two major products. The launch of our standards-based GPON products including Optical Line Terminal, or OLT product, based on the SLMS architecture and MALC platform, (inaudible) the introduction of our zNID ONT, or Optical Network Terminal Fiber to the Home Gateway, an ONT that is designed to leverage home network (inaudible) to deliver FTTH bandwidth inside residence or phone line or coax without requiring any new interior wiring, a feature that offers significant installation cost saving to all [purchasers]. A complete line of GPON products has been well received by our customers as is evident by the deployment by three new customers and many evaluations underway. At this point, we believe the MALC product is the only platform in the market that allows service providers to migrate to next-generation networks and offer both residential and business services on a single device. With the MALC, our customers can offer services such as parts, (inaudible) GPON, active internet and EFM on a single platform. Many customers use MALC as a (inaudible) single product offering but they select MALC for its flexibility, manageability, reliability and potential of offering new services either on copper or fiber in the future on the same platform. This protects their investment.

We also launched a FiberSLAM product line. Combining optical technology within our SLMS architecture allowed us to provide the industry's first hybrid access system to integrate Coarse/Dense Wave Division Multiplexing Gigabit-Ethernet Time Division Multiplexing into a single carrier grade 1RU environmentally hardened platform. Uniquely suited for carrier Remote Terminal and cell tower installations, FiberSLAM enables service providers to offer legacy, business services or mobile backhaul or traditional interfaces while migrating to gigabyte internet. FiberSLAM has already been deployed and continues to be evaluated by several customers. The FiberSLAM product was also awarded the innovative product of the year by [Frost and Sullivan], an independent research firm. During the rest of the year, we will continue to introduce new and innovative products to assist our customers with enhancing their offering and taking advantage of their existing networks.

From an internal perspective, we have realigned our executive roster to drive companywide initiatives in advance technology, customer service and support and global marketing. As a technology and customer service-driven access company, the newer executive roster reflects these core values and is ready to execute the next phase of the company's growth. The management team has an understanding combination of technology and cost functional business expertise coupled with the strong individual track record in growing global operations.

In summary, we are very encouraged by the increased demand for our SLMS product including the newly announced GPON and FiberSLAM products as evidenced by the number of (inaudible) and RFPs received. Even though we are excited about the large amount of activity surrounding our SLMS products, the continued customer consolidation and (inaudible) evaluating new products and technology, in addition to the holiday season in International markets, cause us to remain cautious about third quarter. In this quarter, we will focus on expanding our customer base, increasing market share, reducing product cost and optimizing our organizational infrastructure.

Now, I would like to turn the call to Kirk to take you through our financial performance and guidance. Kirk?

Thanks, Mory. Today, Zhone announced financial results for the second quarter of 2007. In our press release, the traditional comparison of financial results for the second quarters of 2007 and 2006 is presented alongside a comparison to the first quarter of 2007. As we have done on previous earnings calls, we'll spend most of our discussion today focusing on the sequential comparison.

Let's start with an overview of revenue. Our revenue for the second quarter of 2007 was $44.1 million which was within our guidance range of $44 million to $45 million and up 2% sequentially. Our single line multiservice product line increased 5% from $30.2 million in the first quarter of 2007 to $31.7 million in the second quarter of 2007. Also, as Mory mentioned, we added 12 new customers this quarter validating the continued interest in our products. By contrast, Legacy service and other revenue declined by 4%, decreasing from $12.9 million in the first quarter of 2007 to $12.4 million in this quarter. As we said in the past, we expect our overall Legacy business to decline by 5% to 10% year-over-year. That overall decline, as evidenced by the current quarter, will likely be somewhat uneven going forward as that part of our business becomes smaller and therefore more concentrated.

Overall, we had one customer comprising 11% of our total revenues during the quarter. Our top five customers represented approximately 27% of our quarterly revenue, which is consistent with, but slightly higher than the 25% for the first quarter of 2007. As previously mentioned, we continue to enjoy a diversified customer base with approximately 600 active customers. International revenue was approximately 50% of total revenue in the second quarter of 2007, as compared to 47% of total revenue for the first quarter of 2007. This increase was primarily driven by our focus on emerging global markets and our largest international customers increasing their spending during the quarter. For the second quarter of 2007, our SLMS revenue represented 72% of our business, which is up from 70% in the first quarter of 2007. At the same time, our Legacy and Service revenue decreased to 28% of our business from 30% in the prior quarter. Going forward, we expect our SLMS business to continue this trend as Legacy customers migrate to next-generation solutions. In light of our lack of visibility into international markets and underlying seasonality of these markets, we are conservative estimating our total revenues to be flat to slightly down to between $42 million and $44 million for the third quarter of 2007.

Now, let's turn to gross margins. Gross margins were 34% for the second quarter of 2007, which was slightly below the 35% to 37% guidance we previously provided and the 36% in the prior quarter. The decline in margin was largely attributable to pricing pressures from our largest international customers. We expect to restructure some of our manufacturing processes to align them with our current sales volume levels and expect our margins for the third quarter of 2007 to be between 33% and 35%. As for operating expenses, total operating expenses for the second quarter of 2007 were $19.4 million, which was better than our $20 million to $21 million guidance. For the first quarter of 2007, total operating expenses were $20.1 million. Operating expenses included depreciation of approximately $500,000 and stock base compensation of $700,000. Going forward, we anticipate total operating expenses for the third quarter of 2007 to continue at a reduced level between $19 million and $20 million including $1.1 million of expenses for depreciation and stock-based compensation. Finally, pro forma EBITDA for the second quarter was a loss of $2.9 million and within the anticipated range of a loss between $2 million and $3 million. Our estimated pro forma EBITDA for the third quarter of 2007 is the loss of between $3 million and $4 million.

Turning to the balance sheet, our cash and short term investments at June 30, 2007 were $57.2 million, which is down from $60.3 million at March 31, 2007. Cash balances declined during the quarter primarily as a result of the pro forma EBITDA loss of $2.9 million. Our total debt obligation declined slightly to $41.4 million at June 30, 2007 compared to $41.5 million at March 31, 2007, as a result of normal debt amortization. On a combined basis, our net cash balance or cash net of debt obligations, decrease by approximately $3 million during the quarter. We continue to focus efforts on minimizing our net cash [burn]. As for other balance sheet changes, inventory levels decreased while accounts receivable levels remain relatively flat from the prior quarter. The number of day sales outstanding on accounts receivable decreased to 71 days for Q2 of 2007 as compared to 72 days for Q1 of 2007. Finally, the average basic and diluted EPS shares were $149.5 million for the second quarter changing only slightly from the $149.3 million in the first quarter due to stock option exercises by management and employees.

Before I turn the call back to Mory, let me summarize the financial results for the second quarter and recap our guidance for next quarter. Revenue for the second quarter of 2007 was $44.1 million within our previous guidance of $44 million to $45 million. Gross margins were 34%, which was below our guidance of 35% to 37%. Operating expenses were $19.4 million, which was better than our anticipated range of $20 million to $21 million. Our pro forma EBITDA loss of $2.9 million was within our anticipated range of a $2 million to $3 million EBITDA loss. Our guidance for the third quarter of 2007 anticipates slight to slightly declining revenues to between $42 million and $44 million. Gross margins should be between 33% and 35% and operating expenses should remain between $19 million and $20 million, including $1.1 million of expenses for depreciation and stock-based compensation. Overall, we anticipate a pro forma EBITDA loss for the third quarter of 2007 of between $3 million and $4 million. With that overview, I'll turn the call back to Mory.

Thank you, Kirk. Although we are concerned about the lack of visibility and expected seasonality with our international customers in the short term, over the long-term, we are excited about the prospect for the future of the company. We are encouraged by the continued customer (inaudible) and level of customer interest in our next generation products for both (inaudible) and fiber (inaudible) services. Specifically, we're excited about the launch of our FiberSLAM and GPON product solutions which have already attracted a strong interest. As always, we appreciate your continued support. Thank you for joining us today. Now I would like to open the call to all questions. Operator, please begin the Q&A portion of the call.

Thank you, sir. (OPERATOR INSTRUCTIONS) Sir, please give me a moment while I gather up your first question. Sir, I have your first question coming to you from Anton from Think Equity.

Hi, Mory and Kirk. Maybe I missed this, but (inaudible) you introduced the standards-based GPON product recently, but do you have a sense of--I mean, in terms of where you stand today with customer trials and so forth, when do you see volume installations by any of your customers for the standards-based GPON product?

Ok, Anton. For the standard-based GPON we already announced three customers when we announced the product. There were three customers that use this product, and they have developed--deployed it in their network. Those customers have been trialing this product for at least four months before they start deploying it, and they have live customers running traffic on that including IPTV, voice over IP and high-speed data. So, they are deploying that. But typically, we are seeing for any new customer, for deployment of the GPON, it would take probably anywhere between six to seven months to deploy a network. We do have lots--many customers on trial on the GPON, especially since ours is the first one out the gate with a standards-based GPON, and they're working on that.

So, when you say that you're first out of the gate with standards-based GPON--I mean who do you--who do you view that would be sort of next after you with a product like that? I mean, I'm just scanning my memory. And generally, it seems like there have been a lot of announcements out there, companies saying that they have the GPON available. But maybe you can--

I won't talk names but I will tell you that there's some customers--I mean, competitors that they say they have GPON but they do have GPON at 1.2 gig not a standards-based 2.4 gig. And there are some that they have--they will come--they say they will come out with a standards-based GPON in the next quarter or so. There's lots of competitors that they talk about coming out or they are in trial, but nobody has officially deployed this type of technology yet as far as we know.

Ok. Well, that's very helpful. So, on this platform then, maybe you can--so this is--this GPON, are you also seeking at some point to deploy [GEPON] on the same platform with a different LAN card or is that not going to be a market that you will seek to be addressing?

We are not going to address that market at this point. Because of the pricing of the standard-based GPON, especially on the (inaudible), we see it's going to come down to the point that there's no differences. There's no measured difference in the cost structure for the GPON versus EGPON--EPON.

Ok. Okay, well that's very interesting. Well, thank you very much.

Sure.

Thank you. We're going to go to Greg Mesniaeff from Needham and Company.

Yes, thanks. Just two quick questions. The pricing pressure that you've alluded to in international markets, do you see that more as a function of just general, long-term pricing declines in the equipment categories that you're focusing on? Or is this something more related to some large M&A activity on the part of large competitors?

Well, it wasn't based on any competitive pressure at this point. It was because of the--we have the larger cus--international customers that we negotiated pricing and they hit their point that we have to come out with a more price reduction for them when that happened. It wasn't to a point that we were getting under pressure with some customers or competitors. It was based on the negotiated pricing that we negotiated several years ago.

Now these customers, as they negotiate pricing with you, are you seeing visibility decreasing, getting better or not changing?

We are seeing pricing pressures getting better. Because we understand at this point that Chinese manufacturers are not as aggressive as they were in the past year or so. They are getting to the point that they have to provide quality product with the right pricing. And we are seeing that is not happening as much as it was happening in the past.

Thank you. And then as far as the 11% customer, any--can you tell us who that is?

That was an international customer that we had and we announced a long time ago.

Ok. Thank you.

Thank you, sir. (OPERATOR INSTRUCTIONS) I have your next question coming to you from Gaurav Kapoor from Thomas Wiesel Partners.

Calling on behalf of Hasan Imam. Sir, just first question, can you give us some sense of what portion of the revenue was (inaudible) business? I mean, what was booked and shipped to you during the quarter? And is that how we should be thinking about going forward?

The quarter was very typical of prior quarters. We had roughly $9 million coming in--$8 million to $9 million coming into the quarter so the rest was really book shipped during the quarter.

Okay. And has there been any meaningful shift in terms of your competitive space?

Domestically, no. It hasn't. Internationally, as I mentioned, we see of less Chinese manufacturer being active in our market. Or in the price-wise and technology-wise, they're falling behind.

Ok, thanks.

Thank you. And sir, I have no further questions for you at this time.

Ok. Thank you again for joining us today. We appreciate your support and look forward to speaking with you on our next conference call. Operator.

Thank you, sir. Thank you, again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines now at any time.