DZS Inc (DZSI) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2010 Zhone Technologies Incorporated conference call. I'm Jennifer and I will be your coordinator for today. (Operator instructions) I'd now like to introduce Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

Thank you operator. Hello and welcome to the second quarter 2010 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 2010 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'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 of the second quarter. Following Mory's comments, I will discuss Zhone's detailed financial results for the second 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. An audio webcast replay will also be available online at www.zhone.com following the call.

During the course of the conference call, we will make forward-looking statements which reflect management's judgment based on factors currently known. However, these statements involve risks and uncertainties, including those related to projections of financial performance, the anticipated growth and trends in our business, the development of new technologies and market acceptance of new products, and statements that express our plans, objectives and strategies for future operations.

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 31st, 2009 and our quarterly report on Form 10-Q for the quarter ended March 31, 2010. We'd like to caution you that actual results could differ materially from those contemplated by the forward-looking statements and you should not place undue reliance on any forward-looking statements. We also 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 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 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 2010 earnings call. We are proud to announce achieving our revenue and margin guidance for Q2 2010, based on the continued growth of our new MXK and the launch of the new zNID ONT. Second quarter revenue was up 10% as compared to the second quarter of 2009 and up 7% as compared to the first quarter of 2010. We continue to remain confident about the remainder of 2010 based on the strong interest in our new products and our end-to-end multiservice solutions being deployed by service providers in North America and continued strength in the Middle East channel and the new growth in the Nordic regions.

The primary reasons for our continued confidence are as follows. First, service provider demand for our new multiservice solutions remains strong with continued demand anticipated for the foreseeable future. New industry analysts' enthusiasm for the new MXK OLT and newly announced zNID 4200 wire speed ONT products. Recent recognition by some of the leading industry analyst firms like Infonetics, Broadband Trends, (Inaudible) Burner, Current Analysis, IDC and others. Recognized for exceeding over 4500% year-over-year growth for GPON, outpacing every other vendor in the industry. Zhone's new flagship MXK product continues to earn strong market recognition and acceptance, surpassing over 500 MSK systems deployed, supporting a total system capacity of over 5 million subscribers.

Additionally, we continue to see a strong response to our solutions globally, with continued strength in the Middle East and new growth in the Nordics. While we remain confident that U.S. broadband stimulus awards will provide additional domestic growth for the broadband network build-out, we do not foresee award and deployment until Q4 2010 and beyond. That said, many of our customers have been awarded second round (inaudible).

Finally, we launched the exciting, all-new ONT zNID 4200 family of products in Q2 2010. The new line consists of [18] exciting new ONT products, featuring Zhone Easy Touch provisioning, non-blocking wire speed throughput and multiple form factors, making the combination of the MXK and the zNID ONT one of the easiest solutions to deploy, while delivering the highest performance and highest density solutions (inaudible) today.

Now let me provide you with a few highlights from the past quarter. We are in the final stages of launching the new Zhone brand image and tag line. Bandwidth changes everything. This powerful new tagline helps to communicate our new goals, objectives and vision to build the network of the future today. Our new brand is rich and vibrant, effecting our ambitions to build the fastest, highest quality, all-IP networks for our customers while also retaining our Zhone heritage; current (inaudible) technology leadership and innovation and multiservice solutions.

As expected, the new MXK and zNID continue to be selected and deployed by new customers around the globe, solidifying our leadership position in the delivering of all IP multiservice end-to-end solutions. A few examples include incumbent of (inaudible) B.A.S.E. Technologies and Telecom Bonaire, selected Zhone's MXK and zNID platform to deliver fiber to the home or FTT Edge services to greenfield locations throughout the Highland territories. Telefonia Bonairiano N.V. or Telbo cited platform performance, capacity and flexibility to add future services in the winning selection criteria. The Telbo win further expands Zhone's strong presence in the Caribbean.

B.H. Telecom selected Zhone's flagship MSK multiservice access platform to deliver GPON and mobile backhaul services to its customers in Sarajevo. B.H. Telecom is the largest telecom operator in Bosnia Herzegovina and we will be the first in the region to deliver high performance GPON, providing 1 gigabyte per second service to enterprise customers and 100 megawatt service for residential (inaudible). For residential customers this amounts to more than a 25-times increase in broadband speeds and sets the stage for sophisticated IPTV services and a small home network using Zhone zNID ONTs.

Integrated telecom service provider in the UAE has opted for Zhone's multiservice access node to deliver a broad suite of sophisticated IP access services to its increasing fixed access customers to selected zones end-to-end solution to provide voice internet in the first mile or EFM, ADSL 2-plus and ISDN BRI over IP to its residential and business customers as part of its IP network initiatives. As mentioned previously, Zhone received a strong industry analyst endorsement from some of the leading industry analysts ranking us amongst the largest equipment vendors in the industry. Results show Zhone's GPON port shipment year-over-year growth at 4580% from Q1 2009 to Q1 2010; thereby outpacing the industry average.

The company saw rapid adoption of its MXK and zNID FTTx system in EMEA and CALA. Since announcing the MXK, Zhone has continued to increase traction in key growth markets including the Americas and the Middle East, said Jeff Heynen, Directing Analyst, Broadband and Video for Infonetics Research. Subscriber density, expanded throughput performance of the MXK, and a broad range of zNID ONTs have helped Zhone expand its FTTX market presence worldwide. Beside the inherent product trends of the MXK and zNID line, Zhone benefits greatly from its ability to address global markets.

We remain highly optimistic about 2010 and we see considerable momentum from our customers and enthusiasm for the MXK and our powerful ONT solutions. With the addition of the new zNID ONTs alongside the MXK, our portfolio becomes a powerful competitor enabling Zhone to deliver the network of the future today.

Furthermore, we continue to strengthen the company from multiple perspectives; one, with the launch of our new wire speed ONT solutions we rely less on the third-party offshore manufacturing and increase our U.S. based manufacturing capabilities. Two, we continue to improve our overall business and financial performance, increasing both our cash position and gross margins.

Now I will turn the call over to Kirk to provide more details about our financial results for the last quarter and to discuss our financial guidance for the next quarter. Kirk?

Thanks, Mory. Today Zhone announced financial results for the second quarter of 2010. As Mory mentioned, the second quarter revenue of $33.3 million grew by 10% year-over-year as compared to the second quarter of 2009 and increased by 7% sequentially as compared to the first quarter of 2010, due to increased demand for our MXK product family.

Looking forward to the third quarter, we expect another quarter of single digit percentage sequential revenue growth as domestic customers get more stimulus funding and network expansion continues in emerging international markets. We continue to serve over 750 active customers worldwide with 62% of revenue year-to-date being attributable to international customers. We experienced slightly less customer concentration this quarter with the top five customers representing approximately 42% of revenue for the second quarter as compared to 50% of revenue for the first quarter. We continue to have just one 10% customer.

As expected, gross margins of 36.1% for the second quarter of 2010 remained approximately the same on a sequential and year-over-year basis. We also expect gross margins to remain close to 36% for the third quarter. Pro forma operating expenses for the second quarter came in at the low end of our expectations at $12.9 million as a result of continued expense control. We expect pro forma operating expenses to increase only minimally for the third quarter, attributable to the anticipated revenue growth.

Pro forma operating expenses for the second quarter exclude depreciation of approximately $400,000 and stock-based compensation of approximately $300,000. Going forward, we expect operating expenses to exclude approximately the same amount of depreciation and stock-based compensation.

Finally and most important, our pro forma EBITDA loss for the second quarter of 2010 was approximately $800,000, which met our goal of reducing the pro forma EBITDA loss from the $1 million loss in the first quarter. We expect to achieve breakeven pro forma EBITDA for the third quarter of 2010, keeping us on track of achieving our primary financial goal of having positive pro forma EBITDA for the year as a whole.

Now let's take a look at the balance sheet. Cash and short-term investments at June 30, 2010 were $20.3 million, which declined only slightly from the $20.9 million at March 31st, largely as a result of the pro forma EBITDA loss for the quarter. Other working capital changes in the balance sheet netted out, with the large decrease in accounts receivable being offset by a similar decrease in accounts payable. With the large decrease in accounts receivable, the number of days sales outstanding on accounts receivable for the second quarter decreased to 75 days as compared to 109 days for the first quarter.

As mentioned on our last few earnings calls, we expected DSOs would decline as the payment cycle with our 10% customer caught up with and eventually exceeded additional revenue shipments. With this decline in DSOs operating cash flow will begin to turn from negative to positive along with pro forma EBITDA. For the remainder of the year we anticipate roughly net neutral cash flow from operations, which will help stabilize our liquidity resources.

As for other balance sheet changes, our total debt obligations remain basically the same as last quarter at $28.5 million. Total debt obligations are now classified as current since our campus loan is due in April 2011 and our working capital facility renews annually in March. We are currently working on a restructuring our campus loan and are targeting completion of that restructuring by the end of the third quarter but no later than the end of the year. In any case we'll make an announcement when the restructuring is completed. As for our working capital facility, we anticipate being able to renew it again as we've done for many years. That renewal would occur in the first quarter of 2011.

Finally, the weighted average basic and diluted shares outstanding were 30.3 million for the second quarter of 2010. The weighted average basic shares outstanding for the first quarter of 2010 were also 30.3 million, as reflected on a post-reverse-split basis.

With that financial overview, I'll turn the call back to Mory for a few final comments before we open up the call to questions and answers. Mory?

Thank you, Kirk. We are pleased with the 10% year-over-year and 7% sequential quarterly revenue growth which builds on the momentum from the first quarter. Market interests in our new products and improving overall environment makes us optimistic that we can continue growing quarterly revenue for the remainder of the year which will lead to achieving our primary financial goal of generating positive (inaudible) from our EBITDA. This year we will sustain our investment in research and development, focused to ensure we widen our window of opportunity in high growth markets including multiservice, FTTx and mobile backhaul solutions. We intend to leverage our market leadership in Middle East and replicate the success in surrounding greenfield agents.

As an organization, we will continue to maintain close attention to operational expenses and exercise discipline to maintain maximum efficiencies across the board. We have taken a proactive role in helping our U.S. customers navigate broadband stimulus funding and we will continue to provide support throughout all phases of the deployment. We plan to strengthen our relationships with our partners and channels, working to help our current and future customers deliver profitable services. We have renewed commitment to building the fastest and highest quality all IP multiservice solutions for our customers. Thank you for joining us today. We would now like to open the call to questions. Operator, please begin the Q&A portion of the call.

(Operator instructions) Our first question is from Greg Mesniaeff with Needham & Company.

First for you Kirk; looking at the OpEx results for the quarter, it seems G&A was down after an unusually high Q1. Could you kind of refresh my memory on what that was all about?

Greg, we had the acceleration of some of the stock option vesting recorded in G&A in the first quarter; that's about $800,000 of stock-based compensation that no longer is in the second quarter.

So for modeling purposes, the current G&A number is a more normalized kind of a benchmark number?

Yes, going forward that should be pretty close.

Okay. For you Mory; I was hoping you can give us a little more of a product roadmap on the zNID ONT product and where you see that product being deployed in terms of current market geographies?

The zNID product right now actually has been deployed around the globe wherever we do sell our product, but the majority of its sales have been in Middle East, South America and United States and the majority of our new IOC customers are using our new zNID. The roadmap on that right now is the residential and multi-dwelling units that are being deployed and we're going to follow that up by mobile backhauling product line.

Your next question is from Edward Zabitsky with ACI Research.

Just wanted to ask you about the MXK. You had mentioned of course that is continues to grow, so could you define what percentage of overall revenue it was this quarter just so we understand where we are on this process?

We haven't published that information at this point, what percentage it is, but if you look at the whole FTTx or FTTh area, the majority of the sales come from ONTs; they are the CPs or (inaudible) that go with this product line, but our MXK enables the sales of the ONTs. We do have right now over 500 units deployed of the MXK.

Okay. Typically in the markets, I've heard a number around $100 per line quoted; is that about right for you? Are you above market, below market?

Yes, $100 per line, it depends what you are describing. If you are talking about GPON product line, it's way too low at $100. We haven't even seen that from very very I guess Chinese manufacturers. You can talk about between $150 to $250 per line, depending on the features and functions.

Is that both sides?

It's both sides.

I was talking about per side. Okay, so that's in the ballpark?

$100 per OLT side, it could be correct.

Okay. You mentioned a new customer in your press release; can you tell us a little more?

We talked about several new customers in the call; there were four or five of them that we discussed. We do have lots of new customers, but we do not talk about them until we do a press release. The two major customers that we had in this call that we mentioned, one of them is BHT Telecom which is Bosnia Telecom, which is the incumbent in Bosnia, that's a large telephone incumbent and we have got the first order from them which was minimal, but we anticipate a larger order from them.

The second large one is Du, which is the largest wireless and wireline telecom provider in UAE after Etisalet, so with Etisalet and Du being our customers, we have a total coverage of a majority of Gulf regions and UAE.

Okay. The quote from the press release was new growth in the Nordic regions.

Oh, Nordic regions, yes. We are in about 20-somewhat customers in Nordic region that they have started deploying our product in a trial and first (inaudible) application right now.

Okay. Just going back to the UAE, there's been some press about their broadband plans. Are we talking about an Emirates wide deployment? How big are these planned deployments?

If you look at the total Emirates, which includes eight Emirates, they decided that they are going to go fiber to all the Emirates, to every home and every building and from every building to every condominium or any complex, so they are in initial deployment on that.

And over how many years do they--?

Their plan is to - I would guess that, but their plan is to do it in a couple of years.

Oh wow, so you expect this to be a continued driver for you?

Oh definitely.

Your next question is from Wayne [Legman].

I have two questions for you. Number one, can you give me your thoughts on why the stock price is trading so low for a company which is projected to be profitable by the end of the year?

Wayne, we typically don't comment with regard to the market activity around our shares. Certainly we're disappointed that we don't have similar valuations as our competition, given our performance.

Okay. The second question; if a private entity wished to purchase the company would you consider a buyout?

Well, you know, we always look at - we always consider any buyout. It depends how big your check is.

Your next question is a follow-up from Greg Mesniaeff.

What was the DSO for the second quarter versus the first quarter?

Second quarter was 75; first quarter was 109.

Any color or commentary about that?

As we talked about on the last few earnings calls, our 10% customer had a payment cycle that was just beginning and we received a very large payment this quarter which exceeded the revenue shipment and therefore, had a significant reduction in accounts receivable related to that 10% customer.

In addition to that Greg, there was a performance criteria that we had to meet and get acceptance and we did that and passed that.

Your next question is from George Topsy.

Can you shed any light on whether the stimulus revenue is starting to hit your P&L yet and also what you see in the next couple of quarters regarding the stimulus revenue, because you mentioned it?

Sure. The stimulus revenue hasn't hit our numbers yet, but we have several customers, probably more than what you would anticipate, that have awarded stimulus money and right now they are in the last contract negotiations with us for getting the money awarded to them or released. They have been awarded but the money has not been released to them and we anticipate seeing some of that release after September, then at that point they would place orders with us.

Okay. How long do you expect that to continue for? Is that going to continue for a quarter or two or for a year?

I think it's going to continue on until the end of 2011.

And then I noticed that one of your Directors that was just recently appointed resigned from one of your founds--.

That was unfortunate misinterpretation of the regulatory requirement. Us and Mahvash Yazdi interpreted the regulations, the period of time that we had to wait for approval was wrong for our interpretation. The regulation is from a different industry, she had to wait 60 days for regulatory approval but we thought it's immediate and that caused some issues. We have to wait 60 days.

(Operator instructions) Your next question is from Edward Zabitsky.

I wanted to go back to the MXK. Obviously over time you've gone back to targeting larger, really the tier-1 carriers across the world. Has it entailed a change in your sales force toward people that are more familiar with some of these larger accounts?

Yes. Actually a majority of our sales force are trained for that type of account and the area that we are changing a bit is in our service area to make it more conducive to the type of a requirement that larger customers have.

So since the big merger a few years ago you've been able to retain some of these people who had the big carrier experience?

Oh definitely.

Okay. Lots of luck.

There are no further questions. I'll turn the call back over to Mory Ejabat.

Once again, thank you for joining us today and for your continued support. We are looking forward to speaking with you on our next earnings conference call, when we hope to report another quarter of improving financial results.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.