DZS Inc (DZSI) 2010 Q3 法說會逐字稿

Good day and welcome to the third-quarter 2010 Zhone Technologies, Incorporated conference call. I'm Melanie and I'll be your coordinator for today. At this time, all participants are in 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 Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

Thank you, Operator. Hello, and welcome to the third-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 third-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 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. 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 will 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, 2009, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and June 30, 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 adjusted EBITDA and adjusted 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 a basis of 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 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 adjusted 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 2010 earnings call. We are pleased that we exceeded our profit guidance and generated positive cash flow from operations for the third quarter of 2010 based on the double-digit growth in our Latin America, European, and Middle Eastern regions, and continued revenue growth attributable to our MXK OLT and zNID ONT.

We continue to remain confident about generating positive adjusted EBITDA and the cash flow for the fourth quarter of 2010 as well. The fourth quarter should bring even stronger revenue growth as we work to address the material shortages and long lead-times from suppliers that limited our third-quarter revenue growth.

The other important financial accomplishment for the third quarter was the sale and leaseback of our Oakland campus. The transaction allowed us to substantially strengthen our balance sheet and reduce our capacity costs going forward. Kirk will give you more details about this transaction in a minute.

In the meantime, let me spend a few minutes talking about the improving state of our business.

First, growing service provider demand for our GPON solutions while MXK has become the product to beat. Second, new customer growth -- fitting over 20 new MXK customers in [Q3] 2010 alone. Third, growing interest in our solution from broadband, a stimulus recipient in the US, who are beginning to receive funding and are choosing the MXK for deployment.

Fourth, MXK recognition by leading research analyst firms like Infomatics, Broadband Trends, and DeepBurner; recognized as a clear leader in GPON globally; recognized as the leader in GPON in Latin America; recognized as the number two in GPON in Europe and Middle East. Moreover, we are well on our way to achieve three consecutive quarters as the clear leader in GPON rating among industry giants, Huawei and Apoto.

And finally, with over 700 MXK systems deployed globally, supporting a total system capacity of over 7 million subscribers. We expect GPON expansion at both the central office and customer premise locations in the future.

Now let me provide a few highlights on the past quarter.

As anticipated, the combined strength of the powerful MXK and zNID solutions continue to gain market share and recognition. As mentioned previously, MXK quickly recognized as a market leader in GPON and selected as the product of choice by more than 20 service providers globally in Q3 2010. Additionally, in Q3, we announced several of many new North American broadband stimulus winners including Yadkin Valley Telephone Membership Corporation.

Yadkin will use Zhone's MXK intelligent Gigabit Passive Optical Network, or GPON solutions, as well as its zNID ONT to extend higher speed fiber optic connectivity to home, businesses and schools in rural North Carolina.

We also announced broadband stimulus award winner Shawnee Telephone Company, who selected our multi-service AccessNode for support to the Southern Illinois Sustainable Growth Broadband Transformation Project. Shawnee was awarded $8.5 million in federal and state funds to connect households, businesses, and public schools, libraries, law enforcement offices, and medical facilities, in one of the nation's most remote and underserved regions. Shawnee, one of the largest and most remote contiguous service carriers in Southern Illinois.

We continued to recognize worldwide market gain for GPON solutions in the third quarter of 2010. The impact of Zhone's GPON market growth and overall industry leadership is substantiated by Zhone's recent ranking status with leading market analyst firms Broadband Trends, Infomatics Research, and DeepBurner Associates. As of Q3 2010, Zhone recognized as number three vendor worldwide for GPON revenue for [ruling] four quarters -- 3Q 2009 to 2Q 2010, source Broadband Trends; number one vendor in [Tallery Gen] for GPON ports for 2Q 2010, source, DeepBurner Associates; number two vendor in EMEA region for GPON ports for 2Q 2010, source, Infonetics Research.

We announced our new brand, its strategy and website as part of our nonstop global awareness campaign. The Company's rebranded strategy centers on two core elements -- building a network of the future today; building the fastest, highest quality all-IP multiservice networks in the world. The positioning concepts drive our new corporate tagline -- Bandwidth Changes Everything.

As mentioned previously, we remain confident about the fourth quarter and highly optimistic about 2011, as we see considerable momentum from many new and existing customers, and enthusiasm for the highly successful MXK and our powerful [YSV] ONT solutions.

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's Zhone announced financial results for the third quarter of 2010. Third-quarter revenue of $33.7 million grew slightly by 1% as compared to the second-quarter revenue of $33.3 million. As Mory mentioned, growth was limited due to material shortages and long lead-times from suppliers. By resolving these issues, we expect stronger single-digit percent of sequential revenue growth for the fourth quarter. That growth will be driven by increased stimulus funding for domestic customers and network expansion 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 also continue to have just one 10% customer that experienced slightly more customer concentration this quarter, with the top-five customers representing approximately 45% of revenue for the third quarter as compared to 42% of revenue for the second quarter.

Gross margins of 40.3% for the third quarter of 2010 were better than expected, due to a large percentage of OLT revenue during the quarter. With a more normalized mix of OLT and ONT revenue next quarter, we expect margins for the fourth quarter to return to between 34% and 36%, which would be consistent with second-quarter gross margins of 36.1%.

Operating expenses for the third quarter included the $2 million gain on the sale of our Oakland campus, which I'll discuss in greater detail in a moment. Otherwise, operating expenses of $13.6 million, excluding the gain, was at the low end of our guidance range of $13.5 million to $14.5 million. We expect operating expenses for the fourth quarter to continue to be within this range.

Operating expenses for the third quarter included depreciation of approximately $400,000 and stock-based compensation of approximately $200,000. Going forward, we expect approximately the same amount of depreciation and stock-based compensation.

Finally, and most important, our adjusted EBITDA profit for the third quarter of 2010 was approximately $600,000, which beat our breakeven guidance and improved upon the adjusted EBITDA loss of approximately $800,000 in the second quarter.

For the fourth quarter, we expect to continue to generate positive adjusted EBITDA. If we accomplish this goal, we should exit 2010 with more cash than we started the year with. And while we're on that topic, we substantially strengthened our balance sheet this quarter by generating positive adjusted EBITDA and selling our Oakland campus.

Cash and short-term investments at September 30, 2010 were $21.5 million, which increased from $20.3 million at June 30. Also, nearly all of the proceeds from the sale of the campus were used to pay the outstanding mortgage debt. Accordingly, net cash or cash net of debt obligations, improved by $19.7 million to $11.5 million at September 30 from a negative $8.2 million at June 30.

Now let me say a few things about the sale and leaseback of our campus. As mentioned on our last earnings call, we initiated conversation with our mortgage lender to restructure the mortgage debt that was coming due in April 2011. As part of that process, we began evaluating other alternatives to monetize the value of the excess space associated with our campus.

Ultimately, the buyer and landlord approached us with a superior opportunity to sell the campus and retain the space that we needed to run our business, including space to accommodate growth over the next few years. In the meantime, the sale-leaseback will also reduce our future operating costs by approximately $1.5 million per year. We anticipate completing the transition and consolidation into a single building by the end of the year, at which point we will begin realizing the benefits of the reduced occupancy costs.

As for other balance sheet changes, other working capital changes largely netted out, with an increase in accounts receivable being offset by a decrease in inventory and an increase in accounts payable. With the increase in accounts receivable, the number of days sales outstanding on accounts receivable for the third quarter increased to 91 days as compared to 75 days for the second quarter. As mentioned on our last few earnings calls, we anticipate DSOs to continue to be affected by the shipment and payment cycle with our 10% customer.

Our total debt obligations declined from $28.5 million at June 30 to $10 million at September 30, due to the payment of the campus mortgage debt. The remaining debt is associated with our working capital facility with Silicon Valley Bank. As we've discussed before, we will renew this facility annually, and 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.

Lastly, the weighted average basic and diluted shares outstanding were $30.4 million and $31.9 million, respectively, for the third quarter of 2010. The weighted average basic and diluted shares outstanding for the second quarter of 2010 were $30.3 million as reflected on a [pulse risk reverse] split basis.

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. The positive feedback we have received from customers and industry analysts shows that our MXK solution is gaining momentum in the marketplace as we move into the fourth quarter and 2011. With this momentum, we hope to improve on our revenue growth and EBITDA profitability for the fourth quarter.

Thank you for joining us today. We would now like to open up the call to the questions. Operator, please begin the Q&A portion of the call.

(Operator Instructions). [Martin Laney, Blueing].

Just two brief questions. What were the DSOs again, Kirk?

DSO was 91 for the third quarter and 75 for the second quarter.

And other than Yadkin, do you release the names of the other 19 customers you got in the quarter?

Yes, it was Shawnee Tel.

You mentioned 20 total, though, I thought.

Oh, 20 new customers we got. Those -- we didn't announce those names. The two that we named were the stimulus accounts.

Okay, thank you.

(Operator Instructions). And I'm showing no further questions at this time. I'd like to turn the call over to Mr. Ejabat for closing remarks.

Sure. Once again, thanks for joining us today and for your continued support. We are looking forward to speaking with you on our next earnings conference call. Operator?

Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect.