DZS Inc (DZSI) 2009 Q2 法說會逐字稿

Good day, and welcome to the Second Quarter 2009 Zhone Technologies, Inc. Conference Call. I'm Anita and I'll be your coordinator for today. (Operator Instructions.) I would now like to turn the call over to Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

Thank you, Operator. Hello and welcome to the Second Quarter 2009 Zhone Technologies, Inc. Conference Call. I'm Kirk Misaka, Zhone's Chief Financial Officer. The purpose of this call is to discuss Zhone's Second Quarter 2009 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. Mory will begin by discussing the key financial results and business developments of the second quarter. Following Mory's comments, I'll discuss Zhone's detailed financial results for the second quarter and provide guidance for 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, 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 express our plans, objectives, and strategies for future operations.

We'd 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, 2008 and our quarterly report on Form 10-Q for the quarter ended March 31, 2009. 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 and pro forma operating expenses, non-GAAP measures that we believe are 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 the 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 comparison to competitors' 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.

Thank you, Kirk. Good afternoon and thank you for joining us today for our Second Quarter 2009 Earnings Call. A strong sequential revenue growth, improved gross margins, and continued expense control contributed to better than expected earnings for the quarter. As we discussed on our last conference call, we were beginning to see signs of an improving environment and a strong interest in our new technologies. Those signs proved to be accurate as we beat our previous guidance for revenue, gross margins, operating expense, and pro forma EBITDA. Most important, revenue grew by 26% from $24.1 million in the first quarter to $30.3 million in the second quarter, which far exceeded our previous guidance of revenue between $27 and $28 million. This revenue growth was driven by broad based deployment of our new products in the U.S. and abroad. I will give you more detail on the new products and market later on.

For now, let me just say that we are very encouraged by the immediate acceptance of our new products and hope to build on this momentum to achieve our primary goal of reaching quarterly EBITDA profitability by year-end. Kirk will give you more details on our financial performance and guidance later on. Also, before turning to the business side, I want to update you on the status of our NASDAQ listing. As we have discussed in the past and as I have continued to [extend] the temporary suspension of the $1 minimum per share bid price required for continued inclusion on the NASDAQ global market. Recently, they extended the suspension of the requirement until July 31, 2009 and notified us that this will likely be the final extension. As such, we will have until September 25, 2009 to regain compliance with the minimum bid price requirement. As you know, we have received shareholder approval to do a reversal stock split of between [one for five] and [one for 10] in order to regain compliance with the $1 minimum per share bid price. If we decide to proceed with the process to complete the reverse split we will make a [further] announcement well in advance of taking any action. In the meantime, we will continue to evaluate our alternatives to maintain our NASDAQ listing.

Now, let me talk about our products and customers. This quarter we announced a very important new product for Zhone, the MXK, intelligent terabit access concentrator. The MXK combines a clean-sheet hardware design for unrivaled bandwidth in GPON and Active Ethernet applications with our well-proven SLMS access operating system for service intelligence. We have been trialing the MSK as the foundation of our customers upgrade to (inaudible) access networks for several months. As we announced at the product launch in June, several of these customers have moved into implementation or are now providing commercial service on the MXK, including Edge Telecom in the U.K., LOS Bynett in Norway, four (inaudible) in U.S., Copaco in Paraguay, Telefonica del Sur in Chile, and a large project in the Middle East.

The industry has responded well to the announcement with positive coverage from all the leading broadband industry press and (inaudible) the product. Most important, the MXK is carrying us into a quickly growing number of customer operation opportunities as momentum in the broader but cheaper market continues to build.

In support of our GPON initiatives and the interest of one of our largest customers, earlier this year we joined FSAN, the food service access network organization. FSAN is an operator-led group that has sponsored a (inaudible) interoperability testing for GPON solution. We (inaudible) to their most recent [interoperability] (inaudible) last month. We performed well in tests with several other vendors. Equipment improved the value of FSAN's work on the (inaudible) standards.

Finally, in the U.S. market, we were proud to announce last month that both the MXK and the SkyZhone, our award-winning metro WiFi product, were accepted by the USDA's Rural Utility Services organization for use in RUS funded projects. This highlights the value these platforms can provide in the U.S. broadband stimulus programs. At the beginning of July, the administration kicked off the application process for the first round of stimulus grants expected to total nearly $4 billion. We are working with a number of our customers on their proposals and the government's (inaudible) suggests that funds should start flowing by the end of this year. We are pleased to see this process moving forward and we anticipate having many opportunities to help the winners build out their network [with] new networks. As you can see, many exciting things are happening in our business that should translate into a stronger financial performance.

Now, I'll turn the call over 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 2009. In our press release, the traditional comparison of financial results for the second quarters of 2009 and 2008 is represented alongside a comparison to the first quarter of 2009. As we've done in the past, most of our discussion today will focus on the sequential comparison to first quarter results.

As Mory mentioned, revenue for the second quarter of 2009 increased by 26% from $24.1 million in the first quarter to $30.3 million in the second quarter, and exceeded our previous guidance of revenue between $27 and $28 million. Last quarter, we mentioned that we had started to see some signs that revenue levels had hit bottom. Those factors included sales backlog that increased for the first time in several quarters, increased trial activity, more requests for information about our new products and product enhancements, and greater visibility into this quarter's pipeline of orders. Those factors continue to exist, and so even though our third quarter has historically been seasonally weaker, we are forecasting continued revenue growth for the third quarter to between $32 and $33 million.

We continue to serve approximately 700 active customers worldwide with 52% of revenue for the second quarter being attributable to international customers. We experienced slightly more customer concentration this quarter with one 10% customer and our top five customers represented approximately 34% of revenue for the second quarter as compared to 26% for the first quarter. Similar to our revenue growth, gross margins also improved substantially, from 32.4% for the first quarter to 36.4% for the second quarter, and exceeded our previous guidance of between 31 and 33%. The margin improvement resulted from a variety of positive factors, including new product cost improvements, favorable pricing on a few large transactions, inventory earn out proceeds from previously divested products, and manufacturing economies of scale. Going forward, we expect margins for the third quarter to range between 32 and 35%.

Operating expenses for the second quarter also came in better than guidance at $13 million, versus guidance of between $13.5 and $14.5 million. Operating expenses included depreciation of approximately $400,000 and stock-based compensation of approximately $500,000. With additional sales and marketing activity around our new product launches, we anticipate total operating expenses for the third quarter to increase slightly to between $13 and $14 million, including approximately $1 million of expenses for depreciation and stock-based compensation.

Finally and most important, pro forma EBITDA for the second quarter of 2009 was a $900,000 loss and significantly less than our estimate of an EBITDA loss of between $3 and $4 million. With continued revenue growth, but slightly lower margins and slightly higher operating expenses, we expect a pro forma EBITDA loss for the third quarter to range between $1 million and $2 million and hope to return to positive quarterly pro forma EBITDA in the fourth quarter of 2009 assuming revenue continues to grow.

Now, let's take a quick look at the balance sheet. Cash and short-term investments at June 30, 2009 were $26.8 million, which declined from $28.9 million at March 31, 2009, largely due to the EBITDA loss and other working capital changes occurring during the second quarter. Our total debt obligations remained basically the same as last quarter at $28.9 million. As for other balance sheet changes, inventory levels decreased again from $39.8 million as of March 31 to $33.6 million as of June 30. Also, accounts receivable levels increased slightly to $19.1 million at June 30, but with higher revenue in the quarter, the number of days sales outstanding on accounts receivable for the second quarter decreased to 57 days as compared to 70 days for the first quarter. We anticipate DSOs will return to around 70 days for the third quarter.

Finally, the average basic and diluted EPS shares were 150.9 million for the second quarter, increasing only slightly from the 150.7 million in the first quarter. Once again, the slight increase resulted primarily from stock option exercises by management and employees.

With that financial overview, I'll 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. As (inaudible) new major products (inaudible), we hope that the second quarter of 2009 represents an important turning point for the company. Given the initial positive reaction to our new products, we are optimistic that we can return to generating positive, [quality] pro forma EBITDA by the end of 2009. This remains our primary financial goal.

Thank you for joining us today. We will open--we will now open the call to questions. Operator, please begin the Q&A portion of the call.

(Operator Instructions.) Our first question comes from the line of Greg Mesniaeff of Needham and Company. Please proceed.

Yes, thank you. Good evening, guys. Nice job on the revenue line. I was wondering whether the guidance you had given for gross margins for the third quarter, which I believe is up to 35%, is kind of a sustainable number assuming the current revenue run rate and what contributed to the even stronger numbers in the second quarter - the 36.4%. Thanks.

Well, let me say that we hope to be able to sustain a higher gross margin level going forward. We did provide guidance of 32 to 35% to reflect where we anticipate the third quarter to come in at. And Mory will talk a little bit more about the reasons for the margin improvements last quarter.

Okay, Greg. A couple of things on revenue growth. 20% of our revenue was attributed to our new product introduction, the MXK, with the associated CPEs. So that was a good win [beyond our sales]. And that product has really taken off and people are really excited about the capabilities that product has and by far it has exceeded any competition in the industry. So that has been a shining point in our revenue.

And if I could just ask a follow-up question regarding the MXK product - without giving any perhaps concrete backlog numbers, where are you seeing most of the activity--the backlog activity for that product? Is it in the U.S. or what region of the world?

Yes, it's really diversified, Greg. It's--we have good backlog on that domestically as well as internationally. But internationally, it's a stronger--has a stronger backlog than domestically.

Thank you.

Our next question comes from the line of Donna Jaegers of D.A. Davidson. Please proceed.

Hi. I follow a number of your customers in the rural area. And I was just curious, given that the rules have finally been spelled out on the use of the subsidy money for rural broadband are you seeing any sort of pickup in testing or any other indications that would indicate that the rural companies are looking more at your products?

Well, one thing that we have seen is the first RUS has started providing funding for some of the contracts that were signed before the stimulus. For a while they didn't do that. Now they've opened up the gate and they are doing that. The other thing that we are seeing, we have seen lots of proposals ready to go with our customers putting together proposals to put in there for their (inaudible). We have seen lots of activity in that respect. And also, we have seen lots of interest in our new MXK product for testing everywhere (inaudible) other areas in the country.

Can you talk about--I know Consolidated Communications is a large customer of yours. Can you talk about any of the other major [RLUKs] that are testing your equipment?

Well, we kind of like to keep that confidential since I don't want to give the testing of our product to our competitors.

Okay. All right. Can you talk a little bit about how your product stacks up for sort of bandwidth and IPTV versus Adtran's products or any sort of comparable product from AlcaLu?

Well, let me just tell you our product. And I'm not going to talk about the competitors, but I can tell you this - that we are the first product that can provide terabit bandwidth [back line] capacity. We have cards--GPON cards that have four--eight ports on that and each can put out [9,000] [subscribers] on that. With that 9,000 subscribers they can run IPTV, voice-over-IP, traditional voice, and also high speed internet access - [major] high at 50 to 100 meg. So we've got kind of a combination that we put together. I don't see any competitor anywhere close to what we offer.

Great. Thanks, Mory.

Sure.

Our next question comes from the line of [All Baum] of Verizon Network. Please proceed.

[Marty Elbaum]. Hi. Guys, congratulations. You did a great job. That's fabulous. I could see the turn coming. Can you give us--these projections for the next quarter, it seems to me with all the stimulus money that's coming there, do you anticipate us getting a portion of this, and how big can it be and when do you expect this?

Well, we do anticipate to get some of the stimulus money to (inaudible) by our customers getting those money and in turn ordering equipment, those funds are not going to be available until the fourth quarter. And the reason we (inaudible) guidance at this point, as you know, the majority of our business or a good portion of our business is from international customers. And Europe is going to be on vacation throughout this quarter and Middle East is going to be so hot that people don't work and we have some of the holidays as well in Middle East that's going to affect the quarter. But given that, we are still seeing a growth in our products and mainly it's going to come domestically.

I would think that the stimulus package would want American companies to participate in the package. So I think we're in a great position on this I would think.

We sure are. And the majority of our customers are open to buy products from a company that manufacturers in the United States.

That's wonderful. Now, have you gotten any new brokerage people following you? Are you going to have any analysts looking at your company? Because I think we've got a great story here. If you get the story out of this new exciting product and the turn coming and the stimulus package, I don't think you're going to have to worry about doing any--doing a reverse split on this thing, because that--the stock can [go down] easily with any coverage at all.

Well, I cannot comment on your last statement, but I can tell you we have talked to several banks and they know our position and our strength in the market. And Greg Mesniaeff has done a great job following us and we are happy with the colors that he puts out and we get. And hopefully, in the near future we'll have some more analysts to follow us.

That's wonderful. Really. Keep up the great job and it's wonderful the turn that's taking place in the company. And I'm sure in time it will--everything will come together there. And I appreciate what you've done for the company.

Thank you much.

(Operator Instructions.)

Great.

There are currently no additional questions in queue. I would now like to turn the call back over for closing remarks.

Thanks again for joining us today. We appreciate your continued support and look forward to speaking with you on our next conference call when we hope to announce another quarter of strong financial performance. Thank you, Operator.

Thank you for your participation in today's conference. This concludes the presentation.