DZS Inc (DZSI) 2008 Q2 法說會逐字稿

Good day, and welcome to the second quarter 2008 2008 Zhone Technologies, Inc., conference call. I am Erica, and I will be your coordinator for today. At this time all participants are on a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) as a reminder this conference is being recorded for replay purposes. I would now like to introduce Susie Choy, Director of Investor Relations. Please proceed.

Thank you, operator. Hello, and welcome to the second quarter 2008 Zhone Technologies, Inc., conference call. I am Susie Choy, Zhone's Director of Investor Relations. The purpose of this call is to discuss Zhone's second quarter 2008 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 website at www.zhone.com. I am 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 key financial results and business developments of the second quarter. Following Mory's comments, Kirk will discuss Zhone's detailed results for the second quarter and provide guidance for the next quarter.

After our prepared remarks we'll 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 trends in our 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 discuss our plans, objectives and strategies for future operations. We would like to caution you that actual results could differ materially from those contemplated by the forward-looking statements. We refer to you the risk factors contained in our SEC filings available at www.sec.gov, including our annual report on form 10K for the year ended December 31, 2007, and our quarterly report on form 10Q for the quarter ended March 31, 2008.

We would like to caution you not to place undue reliance on forward-looking statements which speak only as of the date on which they're 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 and pro forma operating expenses, nonGAAP measures which we believe are appropriate to enhance an overall understanding of past financial performance and prospects for the future. These adjustment 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 nonGAAP 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 comparison to say 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 as 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. Mory?

Thank you, Susie. Good afternoon, and thank you for joining us today for our second quarter 2008 earnings call. Let me briefly discuss the financial results before providing an update on the business. After two consecutive quarters of exceeding our revenue guidance, this quarter proved to be challenging. Revenue was $40.1 million, equal to our recently updated guidance of approximately $40 million, but below our earlier financial guidance of between $44 million and $45 million. As announced, our largest customer in Latin America requested aggressive price reduction for a multi-million dollars expansion that we had to refuse because it would have been unprofitable at those prices. This loss was not to any larger or Asia manufacturing but to a European company looking for a new customer. The pricing offered by them was for an inferior product with many service affecting limitations that wasn't competitive to Zhone's product.

New customer wins, additional products with our existing customers and new product offerings give us the confidence to recover from this loss and get back to our anticipated growth. This loss resulted in the majority of the revenue shortfall in our international market. Domestically we met our revenue targets and are encouraged that moderate growth may once again be possible. With the revenue shortfall gross margins pro forma EBITDA and cash flow were also negatively impacted on the short-term basis. Going forward, we will focus on deals that meet our gross margin goals and profitability objectives. We have restructured our manufacturing operations and have reduced operating expenses to achieve pro forma EBITDA profitability in Q4 '08. These actions will have a one-time negative effect on our operating expenses during Q3 '08, but we will have a positive effect going forward. Kirk will give you more details on our financial performance and guidance later.

Before turning to the business side, let me say a few things about the status of our NASDAQ listing. As announced in our recent press release we received a letter from NASDAQ stock market on June 11, 2008. In their letter the NASDAQ notified us that for 30 consecutive days the best price for our stock had closed below the $1 minimum per share price required for continued inclusion on the NASDAQ global market. The NASDAQ has given us until December 8th to regain compliance, [apply for] relisting or apply to transfer the Company's NASDAQ capital markets subject to those requirements. Since receiving the letter we have been actively consulting with our advisors and Board to fully evaluate all of the alternatives. We expect to make a formal announcement prior to the deadline when our evaluation process is complete. So with that brief financial update let me talk about our business and the positive signs that give us confidence that we can overcome the short-term financial challenges.

Turning to a view of the market, we see continued progress on the fundamentals that withstand our confidence about the business. From continuing strong market share position to customer wins and enthusiastic response to any new product innovations. Our market share position remains strong. In the multi-service access platform segment, or MSAP, segment that is core of our business [informatic] research reports in the latest available market share statistics. [That poor] shipment the remain an essentially even heat for leadership between Zhone, Alcatel, Lucent, [AllWave], Nokia, Siemens, [AZT], each was roughly set to 10% market share in the category. Customers with forward-looking multi-service and network conversions initiatives continue to respond very well to the value of our product portfolio. The nature of the customer wins we have announced over the past quarter proves the point.

(inaudible) Communications a competitive carrier covering 16 states in the eastern United States selected the [MALC] as the platform to support voice and EFM services to over 160,000 small, medium enterprises. In Canada, MTS Allstream, a leading in telecom provider and Maskatel, a comparative carrier, both selected the MALC platform to support converge voice and data services that will be delivered throughout the country. On telecoms an innovative alternative carrier in Greece selected the MALC to provide business services using our internet in the first model or EFM solution targeting lease line replacement and improved economies for more than 70,000 small, medium enterprises in the territory. Growing support for multi-service access vision across every region we serve become tangible in the new way in May.

Our annual customer event, Zhone Tech, will offer from a record 30 different countries together for spirited discussion of the road ahead for access. Previews of our next product releases and productive networking with their peers. Our R&D efforts continue to create greater depth in our multi-service offerings. Our latest public launch, the SkyZhone metro Wi-Fi product received rave review from the industry press and product innovation of our judges at NXTcomm, the industry's key annual event, but other than the wireless opportunity as national extension of multi-service wireline asset network, we have created a solution in SkyZhone that will dramatically improve the economics of metro Wi-Fi by delivering much higher capacity and reliability with very low incremental costs. We continue our first deployment with ACD.net, a US CLEC that has implemented this solution in model private public partnership between two cities in [a line]. We also have several deployments in progress with other telcos, attractive opportunity to extend service (inaudible) and capture new revenue sources within their markets. Our R&D team has also been substantial progress on a number of next-generation aggregation platforms that are in early customer deployments now. Customer experiences with these early deployments have been very positive. And we expect to launch this solutions to the broader market over the course of Q3 and into Q4. Now I would like to turn the call to Kirk to provide more details about our financial results for last quarter and to discuss our financial guidance for next quarter. Kirk.

Thanks, Mory. Today Zhone announced financial results for the second quarter of 2008. In our press release additional comparison of financial results for the second quarters of 2008 and 2007 is presented alongside a comparison to the first quarter of 2008. As we have done on previous earnings calls, most of our discussion today will focus on the sequential comparison to the first quarter results. With that in mind, let's start with revenue. As Mory mentioned, revenue for the second quarter of 2008 was $40.1 million, which met our revised guidance but fell short of our original financial guidance of between $44 million and $45 million. Weakness in the Latin America market caused international revenue to decline to 55% of total revenue in the second quarter as compared to 59% of total revenue for the first quarter.

Domestic revenue, however, increased by 3.7% over the prior quarter showing signs of an improving domestic environment and increased interest in our technologies. We continue to serve approximately 700 active customers worldwide, but experienced slightly more customer concentration over the last two quarters as compared to the past. We had one 10% customer representing about 17% of second quarter revenue and our top five customer says represented approximately 37% of revenue for the second quarter as compared to 38% for the first quarter. Second quarter revenue of $40.1 million declined by 6.9% when compared to first quarter revenue of $43 million. Since the third quarter is a seasonally weak quarter, particularly in our international market, we expect revenue to continue to decline and expect it to range between $36 million and $37 million for the third quarter. We expect revenue growth to return in the fourth quarter.

Now let's turn to gross margins. Gross margins fell to 29% for the second quarter of 2008, largely due to the lower revenue level in manufacturing operations that were prepared to produce much higher volume. Going forward we've adjusted our variable manufacturing labor and other costs to the new revenue forecast and therefore expect margins to improve to between 32% and 34% for the third quarter.

As for operating expenses, total pro forma operating expenses for the second quarter of 2008 were $18 million, excluding the impairment of intangible assets of $70.4 million and the increase in our estimate of the lease liability associated with excess space in our Largo facility of $3.3 million. Pro forma operating expenses were within our $17 million to $18 million guidance range. Operating expenses include depreciation of approximately $400,000 and stock-based compensation of approximately $600,000. As Mory mentioned, we have also reduced our operating expenses to reflect a lower revenue level, and we anticipate total pro forma operating expenses for the third quarter of 2008 to drop to between $15 million and $16 million, including approximately $1 million of expenses for depreciation and stock-based compensation, but excluding about $500,000 for severance and other restructuring charges attributable to reducing operating expenses by approximately $2 million per quarter.

Finally, pro forma EBITDA for the second quarter of 2008 was a $5.2 million loss and larger than our anticipated estimate of EBITDA loss of approximately $2 million. We expect to substantially reduce the pro forma EBITDA loss for the third quarter to between $2 million and $3 million with the goal of returning to break even quarterly pro forma EBITDA in the fourth quarter. As for the balance sheet, cash and short-term investments at June 30, 2008, were $50.1 million, which declined from $57.3 million at March 31, 2008, mostly attributable to the EBITDA loss and other working capital changes occurring during the second quarter. Our total debt obligations declined slightly to $34.2 million at June 30, 2008, as compared to $34.3 million at March 31, 2008. On a combined basis our net cash balance or cash net of debt obligations decreased from $23 million to $15.8 million at the end of the second quarter. Again, as a result of the EBITDA loss and other working capital changes occurring in the second quarter.

As for other balance sheet changes, inventory levels stayed basically the same at $37.2 million as of June 30, 2008, while accounts receivable decreased by $1.9 million to $30.2 million at June 30, 2008, but the number of day sales outstanding on accounts receivable for the second quarter coming in at 68 days as compared to 67 days for the first quarter. Finally, the average basic and diluted EPS shares were 150.3 million for the second quarter, increasing only slightly from 150.1 million in this first quarter. The slight increase resulted primarily from stock option exercises by management and employees. With that financial overview, I will turn the call back to Mory for a few final comments before we open the call up to questions and answers. Mory.

Thank you, Kirk. The second quarter proved to be challenging, but our business shows positive signs that indicates that we can overcome the short-term financial challenges. We remain focused on quickly making the necessary adjustment to our business so that we can get back to break even pro forma EBITDA by the fourth quarter. We expect future results to confirm that the service providers around the world are adapting our market leading access technologies at increasing rate. As a global company focused on pure play access technologies, we are positioned to benefit from the expansion of access networks and emerging markets around the world. Thank you for joining us today. We will now open the call to questions. Operator, please begin the Q&A portion of the call. Thank you.

(OPERATOR INSTRUCTIONS) All questions must be submitted at this time in order to be registered. Questions will be taken in the order received. (OPERATOR INSTRUCTIONS) And our first question is from the line of Eric Kainer with ThinkPanmure. Please proceed.

Thank you very much. I wonder if you could talk to us a little bit about how much of your business came from existing contracts and how much came from new contracts, and maybe how did that compare to the past?

Well, Eric, let me comment on that. In comparison to the past as you remember we had some legacy businesses in Q2 of last year. If we take the divesture of the Q2 last year, a year-over-year our business grew about 4%, even though we had a shortfall this quarter, so that means we attracted new customers and new product sales to these new customers to achieve that 4% year-over-year achievement. We normally don't keep track of how much of our business comes from new businesses, but in the past quarter we have several new customers as we announced and several of them that we haven't announced. So I would say good portion of our business came from our existing customer, but there was some from the new customers.

Okay. So far as the new bids that you are part of, are you seeing an increase in the number of competitors in those new bids?

Actually, no. We're seeing decrease in amount of customers in the new bids. As you know, one of our largest competitors dropped the [GPON] business that was well publicized, and also the people are looking for more and more multi-access concentration, or MSAP type product, and not as many people in the industry that can provide all that functionality.

Okay. One last question is about the SkyZhone product. I wonder if you can tell us about the kind of interest that you're seeing there and how quickly that product may ramp?

Actually all I can tell you we were at NXTcomm trade show, and majority of the show was centered around this product. We have seen lots of people looking at the SkyZhone, very interested. We have several trials going on right now. Majority of the interest comes from telcos that have relationship with municipalities as well as international carriers, and we believe that the product is going to start ramping up, more likely in Q4 and Q1 of this year.

Okay. Great. Good luck.

Thank you.

Our next question comes from the line of Greg Mesniaeff with Needham & Company. Please proceed.

Yes. I have a question for Kirk. If you can just tell us where the concentration of the goodwill impairment was focused on? Was it the [paradigm] part of the business?

Greg, the impairment eliminated all of our goodwill that still remained on the books.

Okay. Okay. So it is everything at this point?

Yes, that's correct. There is no remaining goodwill to be impaired.

Got you.

We had previously impaired about $165 million of goodwill, and [premises and paradigm] were the majority of that amount.

Got you. Thank you.

Okay. This is all the time we have for questions. I would now like to turn the call back over to Mory for closing remarks.

Thank you again for joining us today. We appreciate your continued support and looking forward to speaking with you on our next conference call, when we hope to announce improved financial performance. Operator?

That concludes the presentation. Everyone have a great day.