DZS Inc (DZSI) 2010 Q4 法說會逐字稿

Good day and welcome to the fourth quarter 2010 Zhone Technologies, Incorporated conference call. I'm Chanel 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 Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

Thank you, operator. Hello and welcome to the fourth 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 fourth 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 fourth quarter. Following Mory's comments, I will discuss Zhone's detailed financial results for the fourth 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 web cast 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, 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 reports on form 10-Q for the quarter ended March 31, 2010, June 30, 3010 and September 30, 2010. We would 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 EBIDTA and adjusted 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, the supplemental information used by management and 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 comparisons to competitor's operating results.

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 EBIDTA 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 like now 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 fourth quarter 2010 earnings call. We continue to see a strong growth attributable to our MXK multi-service solution surpassing a new Company first, 1000 MXKs shipped in 2010. Additionally, the fourth quarter marked our third consecutive quarter receiving top industry rankings by the leading research analysts, IDC, Infonetics, Dittberner, Broadband Trends and Ovum. We also continue industry leading GPON growth globally in the key European, Middle Eastern and Latin American markets.

Among other highlights for the fourth quarter we launched several new products expanding the already impressive MXK product portfolio. First, as a current trend to the fiber to the node, fiber to the home, and fiber to the building market segments we introduced two new high-density VDSL2 cards for the MXK, which is the first in a series of powerful launches that we will continue next month further expanding our FTTx solution.

We also announced the first of an entire new zNID 9108 multiple dueling, unit optical network terminal or MDU ONT. Available in both auto-gigabit, active ethernet and gigabit passive optical networking for GPON conversions. The latest addition to the zNID portfolio delivers best in class support for even the most demanding FTTx applications. Lastly, we announced a formidable addition to our management and provisional capability for MXK by adding Zhone easy touch provisioning, simplifying initial and ongoing configuration and management of the end-to-end Zhone solutions.

Other noteworthy news and company affairs. Zhone was awarded entry into the famous Gartner Magic Quadrant Report. We are extremely proud to announce that we were recognized and awarded with a visionary ranking, which is an outstanding accomplishment for Zhone Technologies, earning this new classification and ranking. Now let me provide a few customer highlights.

For the relegating of multi-service attribute of MXK, I wanted to profile several already different customers, all deploying MXK in unique, yet powerful deployment scenarios. All extending fiber triple and quadruple services to both residential and business end users.

First, at the TelcoTV show in Las Vegas we announced that Greenlight Communication had selected the industry-leading MXK MSAN system as a core enabler of its new gigabyte passive optical network or GPON network in the city of Dunnellon, Florida. Specifically, Zhone's GPON solution will enable the delivery of cost effective, best in class triple play services to Greenlight customers across the municipality including residents, businesses, and facilities like fire departments, city buildings and police headquarters. This really exciting project demonstrates that the opportunity that exists to apply our FTTx solution to numerous (inaudible) centric broadband projects in addition to operator DBAN fiber upgrade.

Then in December, we announced our first Russian deployment of the MXK telecom TZ which was previously leveraging a broadband PON solution to deliver voice, video, and data services to it's customers in the city. It's currently migrating to MXK alone, with GPON solutions such as Zhone's zNID ONT within the Moscow service footprint. What is important to note is the Russian operator primary serves enterprise customers and has been experiencing an increased demand for faster speed among its most bandwidth intensive business services which is what signal the need for more bandwidth and ultimately our MXK functionality.

We further demonstrated the global elements of our MXK. I want to note the wins we had in Asia-Pacific and Nordics. In October 2010, Viewqwest began integrating Zhone's MXK, and zNID warranties into their new GPON network in Singapore in what has amounted to Zhone's largest GPON deployment in the country to date. In the coming month, our solutions will provide advanced connectivity to Viewqwest's customers including the small and medium-sized enterprises throughout Singapore.

In addition, two Norwegian utilities announced that they have been using MXK as the core enabler of their fiber upgrades projects. Specifically, Tussah IKT AS has leveraged the MXK to bolster it's voice, radio and high speed data offering in Sunnmore region since 2009 and has since recognized the benefit of advanced connectivity, improved network quality and service consistency. And LOS is starting to deploy MXK in the Kristiansand region to start its fiber build out and triple play service enhancements. With the goal of achieving subscriber service speed up, up to one gigabyte per second with consistent network reliability and service quality.

Lastly, from a customer perspective, we expect to see continued broadband stimulus contracts from both new prospects and existing customers throughout the remainder of Q1 2011 and beyond. As you can see by the wide area of deployments across multiple networks and countries, each highlighted, they're each multi-service attributes of MXK and the Zhone end-to-end solution. Based on the diversity of deployments from such a wide area of service providers throughout the world, we continue to have tremendous confidence in MXK for 2011 and beyond.

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

Thanks, Mory. Today, Zhone announced financial results for the fourth quarter of 2010. Fourth quarter revenue of $31 million was in line with our preliminary estimate announced on January 7, and which declined from third quarter revenue of $33.7 million due to a variety of factors. These factors included material shortages and long lead-times on some of our modems and delays in processing letters of credit for several orders.

By resolving these issues we expect the first quarter, which is normally a seasonally weak quarter, to be stronger than normal. Therefore, we expect revenue for the first quarter of 2011 to be flat instead of slightly down as compared to the fourth quarter of 2010. Despite the sequence of decline in fourth quarter revenue, revenue for the year as a whole increased by 2% from $126.5 million in 2009 to $129 million in 2010. We expect continued revenue growth in 2011.

We continue to serve over 750 active customers worldwide with 61% of revenue year-to-date being attributable to international customers. We also had two 10% customers, but experienced slightly less customer concentration overall this quarter for the top five customers representing approximately 42% of revenue for the fourth quarter as compared to 45% of revenue for the third quarter. Gross margins were stronger than expected at 39.6% for the fourth quarter of 2010 as compared to our previously provided guidance of between 34% and 36%. With the more normalized mix of OLT and ONT revenue next quarter, we expect margins for the first quarter of 2011 to return to between 34% and 36%.

Operating expenses of $13.5 million for the fourth quarter was at the low end of our guidance range of $13.5 million to $14.5 million. We expect operating expenses for the first quarter of 2011 to drop slightly to between $13 million and $14 million, mostly due to the additional occupancy cost savings associated with the sale and lease-back of our Oakland campus that we discussed last quarter.

Operating expenses for the fourth quarter included depreciation of approximately $300,000 and stock-based compensation of approximately $200,000. Going forward we expect approximately the same amount of depreciation and stock-based compensation.

Finally, our adjusted EBIDTA loss for the fourth quarter of 2010 was approximately $700,000 due to the lower revenue level partially offset by higher than expected gross margins. With continued sequential quarterly revenue growth during 2011 we expect to return to profitability on an adjusted EBIDTA basis in the second half of 2011. The revenue growth will also allow us to exit 2011 with more cash than we started the year with. And while we're on that topic, cash and short-term investments at December 31, 2010 were $21.2 million, which decreased slightly from $21.5 million at September 30, 2010 mainly due to the adjusted EBIDTA loss.

As for other balance sheet changes, other working capital changes largely netted out with a decrease in accounts receivable being offset by an increase in inventories. With the decrease in accounts receivable, the number of days sales outstanding on accounts receivable for the fourth quarter decreased to 86 days as compared to 91 days for the third quarter. As mentioned on our last few earnings calls, we anticipate DSOs will continue to be affected by the shipment and payment cycle with our largest customer.

Our total debt obligations remained at $10 million as of December 31 and September 30, 2010. And is associated with our working capital facility with Silicon Valley Bank. As we've discussed before we renew this facility annually and we anticipate being able to renew it again as we have done for many years. That renewal would occur in the first quarter of 2011.

Lastly the weighted average basic and diluted shares outstanding were $30.5 million for the fourth quarter of 2010. The weighted average basic and diluted shares outstanding for the third quarter of 2010 were $30.4 million and $31.9 million respectively. 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. We remain part of industry momentum and recognition MXK is achieving, surpassing over 1000 chassis deployed across a diverse range of broadband and stimulus contracts, new service providers and markets. And saw tremendous confidence that we have developed the right solution at the right time.

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

(Operator Instructions) Please stand by for your first question. Your first question comes from the line of Jay Kumar of Midsouth Fund.

Did you guys mention that you're going to turn profitable for the second half of the year?

Yes, we did.

Okay. So, revenue and expenses -- revenue is going to go up and expenses are gong to go down or how do you see that going through?

We expect revenues to go up and operating expense to stay flat.

Okay. Do you have any margin of how much it might go up in terms of ballpark margins on the revenue side?

No, we just give quarterly guidance.

Okay. Which sector is the biggest sector that you guys supply your switches to?

By sector, what do you mean? By product? Product, yes. It's our MXK product line.

Is it on the backend of mobile phones or -- so to mobile operators or who is the biggest --

We sell to the land line operators and some of them use it for mobile backhaul as well.

Okay. Thank you, guys.

Your next question comes from the line of Joseph Beaulieu of Morningstar.

Hi, guys. Thanks for taking my call.

Hi.

I was wondering if you've noticed any interesting trends geographically with regard to infrastructure build outs?

We are seeing interest in South America and mainly Brazil, and Argentina as well as Chile. Some in Mexico. The Middle East is growing rapidly, especially in Saudi and the UAE and some of the Gulf countries. We do see some activity in Russia coming on strong, as well as some and Nordic countries.

Is that really -- the Nordic countries, and so nothing else in Western Europe or the UK? Or do you just not have enough exposure to talk about that?

No, we do lots of business in the UK, but it's mainly on the copper -based networks with our EFM product line. One other area that we are getting a lot of traction with the broadband stimulus winners in the US.

So, you're seeing an uptick for broadband stimulus?

Yes.

Great. That's a great data point. Thank you.

The next question comes on the line of [Harry Levin].

Yes. I'd like to know what is the current backlog of orders?

We normally don't mention the backlog in our conference call. Our business is mainly book sheet business.

One of the things that is in your annual reports as relates to product where you actually have deferred revenue. Contractual commitments. So, my next question would be, what do we have that's set out there where revenue is being deferred?

You mean dollar wise? Or -- that has been a constant for all of our quarters in the past. So, we normally don't talk about backlog in that scenario.

Okay. Thank you.

Your next question comes from the line of [Wayne Linneman].

The materials shortage, does that mean that the orders are in but the material or equipment has not been produced yet?

That's correct. We have received the order but we haven't been able to ship the product.

How do you plan to correct that next quarter or this quarter?

Some of our suppliers have committed to provide those material and we believe with the schedules that they've given us, they will be able to solve a majority of that.

That's good news that those orders are in, correct?

Yes, that's good news.

The other question I had asked this third quarter of 2010, I saw last year Calix bought out Occam. If a private equity firm approached you guys, would you look at selling the company?

We would look at any opportunities. It depends on what the dollar amount is and how big the check is.

Okay. Thank you, guys.

Certainly.

(Operator Instructions) Your next question comes on the line of [George Thomassy].

Can you shed any more light on when you may start realize on the P&L some of the stimulus revenues?

We would probably start realizing that this quarter, as the funds are going to be processed and given to the operators.

Okay. And will you be making any more announcements of the stimulus wins?

Yes, we will. We have done several of them so far and we will continue doing so.

Okay. And then what competitive impact do you expect to see if the Calix/Occam merger goes through?

Well, there is a couple of points into that. One is we have one less competitor, which is good. Secondly is, Calix and Occam and have been in the number one and number two position in some accounts, and that would give us the opportunity to be the second one in Occam or the lead one. And also, the uncertainty that has caused this transaction to some of the operators, we have seen more RFPs coming into the market because of that. So, we might take advantage of some of those RFPs and win them.

Okay, thank you.

Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to Mr. Mory Ejabat, Chief Executive Officer of Zhone.

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

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