DZS Inc (DZSI) 2009 Q3 法說會逐字稿

Good day and welcome to the third quarter 2009 Zhone Technologies Inc. conference call. At this time, all participants are on a listen-only mode. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to introduce Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

Thank you, operator. Hello and welcome to the third quarter 2009 Zhone Technologies Inc. conference call. I am Kirk Misaka, Zhone's Chief Financial Officer.

The purpose of this call is to discuss Zhone's third quarter 2009 financial results as recorded in our earnings release which was distributed over the Business Wire at the close of market today and has been posted on our Website at www.Zhone.com.

I'm here today with Mory Ejabat, Zhone's Chairman and Chief Executive Officer. Mory will begin by discussing the key financial results and business developments over the third quarter. Following Mory's comments, I will discuss Zhone's detailed financial results for the third quarter and provide guidance for 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. And the 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 related to suggestions of profitability, earnings, revenue, margins, operating expenses, or other financial items. The anticipated growth and trends in our business, product lines and key markets, new product introductions and the migration of customers to newer technologies, Zhone's market position focus and statements that express 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 you to the risk factors contained in our SEC filings available at www.SEC.gov, including our annual report on Form 10K for this year ended December 31, 2008, and our quarterly reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 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, we believe, are appropriate to enhance an overall understanding of [tax findings] and performance and prospects for the future. These adjustments to our GAAP results are made with the intent to provide a greater transparency to supplemental information used by management in its financial and operational decision-making.

These non-GAAP results are among the primary indicators 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 (technical difficulties) and comparison to competitors operating (technical difficulties).

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 third-quarter 2009 earnings call.

A strong sequential revenue growth for the second straight quarter led to better than expected earnings. As a result, we generated a slightly positive pro forma EBITDA ahead of schedule and are on track to improve pro forma EBITDA profitability in the fourth quarter and potentially achieve GAAP profitability as well.

There is strong interest in our new technologies has driven impressive revenue growth of 26% and 19% in the past two quarters. We have revenue increase from $30.3 million in the second quarter to $36 million in the third quarter, which far exceeded our previous guidance of revenue between $32 million and $33 million.

This revenue growth was driven by broad-based deployment of our new products in the US and abroad. I will give you more details on the new products and markets sales. For now, let me just say that we are very encouraged by the growing interest in our new products and hope to continue to build on this momentum to increase profitability.

Kirk will give you more details from our financial performance and guidance later on. So let me give you a brief update on the status of our (inaudible).

We recently announced that Zhone volunteered (inaudible) and application to transfer from NASDAQ Global Market to NASDAQ Capital Market. That petition was approved and on September 28, 2009, we began trading on the NASDAQ Capital Margin.

From an external perspective, it continued to trade under the suggested [logo], ZHNE, and have the same trading and market access as any other NASDAQ (inaudible) company.

However from an administrative perspective, the transfer provided us with an additional 180 days until March 29, 2010 to comply with that. $1.00 minimum debt was required for continued in closing on NASDAQ Capital Market.

Accordingly we postponed the plans to move forward with their reverses stock's split is approved by our shareholders in October 2008.

Now let me give you an update on our products and customers. This quarter we announced a very large expansion of our portfolio of customer (inaudible) equipment for FTTx application or CNet [warranty] products. We have been receiving a wealth of operator feedback on (inaudible) for FTTx application (inaudible), quickly growing number of (inaudible) costs and deployment all over the world.

Because warranties represent a deep part of the cost of any GPON and active return, it is important that warranties match precisely and operators have specific network (inaudible) partners. Our development and integration efforts on warranties have created the industry's most comprehensive portfolio.

We have now 27 different models covering a wide range of functionalities in both indoor and outdoor applications, from simple low-cost devices of basic residential service to a sophisticated multi-service asset for business application and worldwide [backhaul].

Our customer base at both [MAP] and MXK platforms continue to grow. This past quarter we announced a New Mexico deployment for ADSL (inaudible). Expanding this territory in Louisiana. In NYNEX (inaudible) improved a large net (inaudible) in Italy (inaudible) and a high-profile installation in (inaudible), a large area resort town on the Red Sea created by [property] development on the global telecom operator [Glascomm].

Finally in the US market, we joined the rest of telecom (inaudible) here and are eagerly awaiting the outcomes from the first run of broadband stimulus grant proposals. It has afforded a number of our customers in fighting their proposals and based on their quality expectant have done well in the proposal reviews.

We understand that (technical difficulties) are nearing their decision to finalize soon and we look forward to seeing this important program turned into real broadband deployment activity early next year.

As you can see, many exciting things are happening in our business that should translate into a stronger financial performance in the future. Now I will turn the call over to Kirk to invite more details about our financial results for last quarter and to discuss our financial guidance for next quarter. Kirk.

Thanks, Mory. Today's Zhone announcement [enters] results for the third quarter of 2009. In our press release, the traditional comparison of financial results for the third quarter of 2009 and 2008 is presented alongside a comparison to second quarter of 2009.

As we have done in the past, most of our discussion today will focus on the sequence of comparisons to second quarter results.

As Mory mentioned, revenue for the third quarter of 2009 increased by 19% from $30.3 million in the second quarter to $36 million in the third quarter, which exceeded our previous guidance of revenue between $32 million and $33 million. Looking forward, we see continued revenue growth in the fourth quarter but at a moderating [rhythm]. Any economic recovery is expected to be slow. The broadband stimulus fund isn't expected to happen until the first quarter of 2010 at the earliest, and many carriers are expected to continue to be cautious about moving forward with major capital expenditure plans at this time.

Nevertheless, we are forecasting continued revenue growth of 3 to 6% for the fourth quarter, resulting in revenue between $37 million and $38 million.

We continue to serve approximately 700 active customers worldwide with 62% of revenue for the third quarter being attributable to international customers. We experienced more customer concentration this quarter with one 10% customer and the top five customers representing approximately 42% of revenue for the third quarter, as compared to 34% for the second quarter.

As expected, gross margin dropped from 36.4% for the second quarter to 33.5% from the third quarter which was within our previous guidance range of between 32 and 35%.

As mentioned on our last conference call, the second-quarter margin [with] expected inventory earnout proceeds from previously divested product lines that didn't exist in the third quarter. Going forward, we expect margins for the fourth quarter to improve between 33 and 36% with opportunities for slight margin expansion in the areas of improved new product costs and manufacturing (inaudible) scale.

Operating expense for the third quarter came in at $13 million versus guidance of between $13 million and $14 million. Operating expenses included depreciation of approximately $400,000 and stock-based compensation of approximately $500,000.

The traditional sales and marketing activity around our new product launch, we still anticipate total operating expenses for the fourth quarter to remain between $13 million and $14 million including approximately $1 million of expenses for depreciation and stock-based compensation.

Finally and most important, pro forma EBITDA for the third quarter 2009 was a $79,000 profit, and better than expected loss of between $1 million and $2 million. With continued revenue growth and slightly better margins offset by slightly higher operating expenses, we expect the pro forma EBITDA profit for the fourth quarter to improve to approximately $1 million which would also lead to breakeven GAAP earnings.

Our primary financial objective continues to be generating GAAP profitability. And we are looking forward to achieving that objective in the fourth quarter.

Now let's take a quick look at the balance sheet. Cash and short-term investments at September 30, 2009 were $22 million, which declined from $26.8 million at June 30, 2009, largely due to the working capital changes occurring during the third quarter. Our total debt obligations remain basically the same as last quarter at $28.8 million.

As for other balance sheet changes, inventory levels decreased again from $33.6 million as of June 30 to $30.5 million at September 30. However, accounts receivable levels increased nearly $13 million to $32 million at September 30 and the number of days sales outstanding on accounts receivable for the third quarter increased to 80 days as compared to 57 days for the second quarter.

The increase in accounts receivable and DSOs is largely attributable to the growth in business with our 10% customer. We anticipate DSO will return to around 70 days for the fourth quarter.

Finally the average basic and diluted EPS shares were 151.1 million for the third quarter, increasing only slightly from the 150.9 million in the second quarter. Once again the slight increase resulted from stock option exercises by management and employees.

With that financial let's 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. We are excited by stronger than expected revenue growth associated with the beginning of a new (technical difficulties) product for the Company. The initial positive reaction to our new products is very encouraging and we hope to build on that momentum going forward.

In the third quarter, we achieved our primary financial [product], generating positive culturally pro forma EBITDA ahead of our schedule and now focus on improving the process of credit in the fourth quarter.

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

(Operator Instructions). Greg Mesniaeff from Needham & Co.

Hello. This is [Con Irvine], calling in for Greg. Congratulations on the quarter.

I just wanted to ask, first off, about the timing of the broadband stimulus funds. It seems like funding has been pushed out a little bit into next year and I guess I'm just trying to get a sense of when you think that might really start to benefit your business next year?

We have been able to benefit with [a start] in January and we are going to continue to see that through Q1 and Q2.

Okay. That's Q1 into Q2. Great. And then my next question is in regards to your gross margin. I know you said that in Q3 it was down lower as a result of our inventory earn out.

Was that the majority of the decline in? Are you guys still seeing favorable pricing? And just a little more color there would be great.

The decline was based on that inventory earn out, but we don't see any more price erosion anyplace in respect to our business. Actually when it comes to pricing, I believe we are a leader in the pricing at this point, including domestically and internationally.

And did you still see cost reductions, product cost reductions in the quarter?

We are continually looking at cost reduction now, of course, we are going to see some more.

Great. And my last question for you is with your, in regards to your sort of your long-term operating targets. Again you did a great job in the quarter. I was wondering how you expect that to trend into Q4 and if you have any insight yet into next year and basically how you see your sales and marketing activity tied to your new product cycle? Thanks.

Our plan is to continue improving our profitability to -- during every quarter. We haven't set a major target about what we are going to see, but if I look at the industry as a whole, a majority of them are said to have about 10% of 12 -- profitable to margin.

So our goal is to continuously improve our profitability.

And did you provide a dollar amount for OpEx in Q4? I might have missed that.

The OpEx amount is $13 million to $14 million..

It was 13 to 14. Okay, great. Thank you very much.

(Operator Instructions). [Tay] Kumar of [Midstyles Investor Fund].

Got a question about your R&D spending. Are you going to be spending $5 million for the next couple of quarters? Are you going to reduce that or what's the plan on that?

No. We are spending about the same amount you mentioned in R&D and we are -- it is about $5.3 million and we are going to continue shipping that, increase it a bit during the quarters.

Another question is are you guys think you are doing a reverse stocks play or anything in the near future?

Well, we announced an approval of our shareholders stocks for a [spot], as the stock is (inaudible) 5 for 1 or 10 for 1, but we are still looking at that. We haven't made a decision on when we are going to do that, if we're going to do that.

Okay. Thank you.

Chad Smith of Smith Capital.

Great job on the quarter. Couple of questions and to whatever extent you can provide some color, that would be great. If you can't that's fine. Can you give me a breakdown of growth by geographic region? I mean, obviously I know you already gave the breakdown of the percentage of revenues that are coming from international, but just based on your various regions, can you give me a feel for where you are seeing the most growth?

I can tell you that we had growth, both domestically and internationally. And also within the international, we saw majority of the growth to be in (inaudible).

I'm sorry, what was the last thing you said?

Middle East.

So broadly speaking, the majority of your international growth, not majority of revenues, but majority of growth is coming from more emerging markets. Would that be correct?

Correct.

Are you seeing any signs of pickup and developed international markets?

Yes, we do. We do as we said, outside the United States. We see some of that is improving.

Great. And what about some -- any -- can you give us a breakdown of percentage of revenues that are still coming from, I guess what I would describe as legacy products? But what you guys would describe or put into that category?

Actually we stopped at doing any legacy business. I don't know if how long ago you have been following us, but we sold all of our legacy business. It was in 2008, I believe. And what you're seeing is all about our -- what we call (inaudible) space product line.

Yes, I knew that, I didn't know what if there was any residual but it's all coming from [SOS&S]?

And if there is some it's very negligible.

Okay. And Kirk, I'm sorry, I missed when you indicated -- on the balance sheet you gave a comparison on the cash line. I apologize if I -- What was the -- I mean you've got $22 million in cash now, what was the last quarter? I just don't have it in front of me.

It was $26.8 million at the end of June.

So even with EBITDA positive, can you get a feel for what point we are going to reach that kind of cash neutral? Maybe even transitioning into cash flow positive mark?

Well, there is a substantial buildup in the accounts receivable this quarter. So, that relates to this 10% customer that we have that we are expecting payments from the next quarter.

So with that was a $12 million -- a little over $12 million increase in accounts receivable alone. And as I said largely from that customer, that we would expect to be collecting next quarter.

All right. Fantastic. That does it for now. Thanks so much.

There are no further questions in the queue. I would now like to turn the call over to Mr. Mory Ejabat. Please proceed.

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 a strong financial performance. Thank you. Operator?

That concludes today's conference. Thank you for your participation.