DZS Inc (DZSI) 2011 Q1 法說會逐字稿

Good day and welcome to the first-quarter 2011 Zhone Technologies Incorporated conference call. (Operator Instructions)

I would now like to introduce Kirk Misaka, Zhone's Chief Financial Officer.

Thank you, operator.

Hello and welcome to the first-quarter 2011 Zhone Technologies Inc. conference call. I'm Kirk Misaka, Zhone's Chief Financial Officer. The purpose of this call is to discuss Zhone's first-quarter 2011 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 first quarter.

Following Mory's comments, I will discuss Zhone's detailed financial results for the first quarter of 2011 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. 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 will 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 or 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 31, 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 EBITDA 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 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 comparison 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 first-quarter 2011 earnings call. Let me provide a few updates regarding the recent quarter. Despite a multitude of substantial performance attributes in Q1 2011, we experienced material shortages and significant operational disruption due to the storm and tornadoes very close to our manufacturing plant, which resulted in an extended power outage impacting our manufacturing output on the critical last day of the quarter.

Due to these factors, revenue for the quarter was $29.6 million and below our expectation, but led to substantial growth in our backlog by approximately $2 million, positioning us for the stronger Q2. Kirk will give you more detail on our financial results later.

Now, let me provide a few details about this past quarter. Subscriber system capacity for the MXK has now officially surpassed 10 million subscribers. Furthermore, the number of MXK platforms deployment has more than quadrupled since March 2010, 1 year ago, expanding from approximately 320 system deployments in 24 countries to more than 1,350 deployments in over 40 countries today.

In addition, we are proud of our industry-leading engineering efforts in continuing to expand and grow our already robust product family. Specifically, we enhanced our fiber and fiber portfolios, introduced Zhone Fiber Cell and Zhone Fiber Home brands and corresponding solutions for FTTC, FTTB, FTTP and FTTN, and a new mobile backhaul solution. The combined solutions include 9 new product launches comprised of 4 new 1U SLMS space products, UCP, RNTs, media sell-through and operating costs, all providing enhanced functionality to an already robust MXK solution.

In terms of the industry recognition and analyst ranking, we continue to deliver solid performance with respect to GPON deployment on global basis. Number 1 in CALA, Infonetics, Dittburner, IDC. Number 3 in MEL per Infonetics, Dittburner, IDC. Top five GPON [lander] globally per Dittburner. Additionally, we announced a multitude of solid new customer wins during the quarter -- Hardy Telecom, recipient of $34 million broadband stimulus award; Rochester Telephone Company; FTTX deployment in Indiana that farther expands Zhone's US and a specifically [needless] broadband footprint; Coaxis Global.net Telecom; triple play services delivered via ADSL2+ and (inaudible); Florida based Myakka Communications -- advanced fiber access offered to subscribers in rural areas of Sarasota and Manatee counties for the first time, we are $7.8 million broadband stimulus project.

Guyana-based Guyana Telephone and Telegraph Company; nationwide deployment of MXK in the Latin America country. Ficos Broadband AS gained further FTTX traction in the Nordics with this fiber project. All of these customers are part of rapidly growing global customer base for Zhone as Zhone expands both in Greenfield and Brownfield opportunities for fiber overlay or enhanced copper deployments.

This quarter completed the product transition for our customer base from the older map product line and to MXK product line. We also started shipping and recognizing revenue to customers who have received broadband stimulus award, resulting in increase in the domestic revenue. During the quarter, we also strengthened our Board of Directors with the announcement of Mr. Lawrence Briscoe joining the Board.

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 first quarter of 2011. First-quarter revenue of $29.6 million declined from fourth-quarter revenue of $31 million due to a variety of factors.

As Mory mentioned, these factors included certain material shortages and the power outage due to the storm and tornadoes close to our manufacturing plant on the last day of the quarter. As a result, backlog grew by over $2 million, and we should see strong sequential revenue growth in the upper single-digit percentage range for the second quarter of 2011. We also still expect revenue for 2011 as whole to grow over that of 2010.

We continue to serve over 750 active customers worldwide with 55% of revenue for the first quarter of being attributable to international customers. We had one 10% customer and experienced slightly more customer concentration this quarter with the top 5 customers representing approximately 44% of revenue for the first quarter of 2011, as compared to 42% of revenue for the fourth quarter of 2010.

Gross margins at 35.8% for the first quarter were at the upper end of our previously provided guidance range of between 34% and 36%. In our long-term model, we could see some margin expansion associated with the benefits of the extensive hardware reengineering we've undertaken to cost-reduce our products and from additional manufacturing cost leverage at higher future anticipated revenue levels. For now we are continuing to forecast between 34% and 36% gross margins for the second quarter of 2011.

Operating expenses of $13.1 million for the first quarter was at the low end of our guidance range of $13 million to $14 million. We expect operating expenses for the second quarter of 2011 to continue at this reduced level and are dropping our guidance range to between $12.5 million and $13.5 million. Operating expenses for the first quarter included depreciation of approximately $400,000 and stock-based compensation of approximately $300,000. Going forward, we expect approximately the same amount of depreciation and stock-based compensation.

Finally, our adjusted EBITDA loss for the first quarter of 2011 was approximately $1.8 million, due to the lower revenue level partially offset by strong gross margins and tight expense control. With sequential quarterly revenue growth during 2011, we expect to return to profitability on an adjusted EBITDA basis in the second half of 2011. Revenue growth will also allow us to exit 2011 with more cash than we started the year with. And, while we are on that topic, cash and short-term investments at March 31, 2011 were $19.2 million which decreased from $21.2 million at December 31, 2010, mainly due to the adjusted EBITDA loss.

As for other balance sheet changes, other working capital changes largely netted out, with a decrease in inventory being offset by a corresponding decrease in accounts payable and accrued in other liabilities. Although accounts receivable remained basically flat, the number of days sales outstanding on accounts receivable for the first quarter increased to 90 days as compared to 86 days for the fourth quarter. As mentioned on our last few earnings calls, we anticipate DSLs will continue to be affected by the shipment and the payment cycle with our largest customer, but hopefully will be trending downward for the remainder of the year.

Our total debt obligations associated with our working capital facility with Silicon Valley Bank remained at $10 million at March 31, 2011 and December 31, 2010. As previously announced, we renewed this facility in the first quarter as we've done for many years. Lastly, the weighted average basic and diluted shares outstanding were $30.6 million for the first quarter of 2011 and $30.5 million for the fourth quarter of 2010.

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.

We remain optimistic about our industry momentum. New customer wins, market growth and continued recognition MXK continues to achieve. Also surpassing over 1,350 chassis deployed across a diverse range of new and existing customers. Additionally, with the addition of the two new solutions, Zhone Fiber Home and Zhone Fiber Cell, both complementing and fortifying an already powerful MXK solution, Zhone is enabling new revenue opportunities for its customers. The newly launched Zhone Fiber Home and Zhone Fiber Cell product suites enables service providers to offer a more robust solution for their customers while driving additional ROI from their new or existing MXK deployments and fortifying FTTB, FTTN, FTTC and mobile backhaul deployments.

Zhone's continuing investment in the best-in-class engineering and solution design, combined with simulation and technology leadership, have contributed to the recent expansion of its MXK customer base in some of the fastest-growing economies in the world. Thank you for joining us today. We would now like to open the call to questions.

(Operator Instructions) We will pause momentarily to compile a list of questions.

(Operator Instructions) Our first question comes from the line of David Burstein with DSL Prime. Please proceed.

Hi, Mory. You've had some success in the US stimulus. How do you think over the next few years your volume is going to compare in the United States to overseas? Is the stimulus enough to change the trend?

I'm hoping so because margins are better in the United States than it is in the international market, but there are several countries internationally that the economy is very solid and they are growing very rapidly. For example, in Brazil or some of the -- even Middle Eastern countries are putting money into their economy, so I don't see us catching up in a couple of years over there, but our hope is we keep around 55% international.

Thank you.

Operator?

Our next question comes from David Lamond with Artis Capital. Please proceed.

Hey, Mory. I saw that you guys have a substantial increase in order backlog. I was wondering if you can be a little bit more specific in how the book to bill shook out?

Normally, we don't publish that, but I can tell you that book to bill was positive.

Okay. And, while I have you, anything else in the new product pipeline that you are excited about?

Well, we very excited about the fiber cell and -- which is going to be used for fiber backhaul solution. We are in trial in a couple of different places and also we are seeing some momentum in our FiberHome [stuff] for media cell, so even though it is new product we have some momentum in that, but it is a very competitive product.

Okay, thanks.

Our next question comes from [Ala Kamoona]. Please proceed.

Hi, guys.

How many broadband stimulus projects are you still pursuing in terms of still being in trials?

Actually, unfortunately, I don't have the numbers in front of me, but there are many RFPs for the stimulus accounts that have been started coming through or being published. We are working with many of the tier three to tier five customers who have received this stimulus, but we recently saw that after the budget approval in the US start coming in and making more productive and people are planning to use the money to start building.

Okay. Now, you have this new counter added to Zhone website. That appears to give this MXK subscriber capacity shipped number.

Correct.

The question I have is how one can make use of that information. In other words, how that number relates to revenue or something more meaningful and measurable?

If it was really -- we are not using that for financial conditioning. We are using that for our customers to know where we have expanded capacities on a daily basis. Now, some of that capacity might be used in the shelf, but some of it may not be but the chassis has the capacity to do that. Realistically, it is not for financial analysts; it is more for of a marketing campaign.

Okay. At least in an effort to make use of that information, is it possible for you to share that on an average or typical basis when you send out or ship a MXK chassis, how many cards go with that?

Normally, it has anywhere between 14 and 17 slots, our product, maybe eight. But normally the majority of them go out with probably three to eight line cords.

And at one time in one of the conferences you guys had mentioned that you are below 100% in your factory utilization, and I think there is a potential for you to have more than one shift. What is the current utilization rate and what is your expectation for the future quarters?

Unfortunately, our business -- all the orders come in at the end of the quarter. And we get a (inaudible) at the end of the quarter. At beginning of the quarter, we are not really in a double shift, but we need that capacity at the end of the quarter. Unfortunately, we just don't have any. That taught us a lesson; we can have three shifts, but if act of God happens, we cannot do anything about it.

In any case, we are using that capacity for when the volume goes up and down, but at the end of the day I can say that we are about 50% to 60% of the capacity.

Another question is on your website, you have in this last couple of months added several new open positions. The question I have, are these positions open because you have lost people or this is based on your anticipated future need?

Every quarter, we would look at our people and look at the performance, and sometimes we have to shift people from one function to another function so to take advantage of the attrition in that respect. Right now we have several openings mainly is based on some [future equipment] that we are seeing from some of the customers. But as a whole, we are not going to increase our operating expense.

Okay. And regarding your guidance, it happened for last several quarters that you ended up missing the guidance, and I would assume that having a credibility is important in the marketplace. Are you trying to address by adjusting or doing something to your accounting processes to fix that issue so we can be more confident that the guidance that is provided would be -- the company would be able to meet it?

Yes, we are looking at all of our backlog, all of our orders and we are adjusting for that every week, and we know where we are going to go. In the beginning of the quarter, we get a forecast from our sales people and we adjust that and that's the number we give you -- the guidance we would give you. Sometimes, due to international issues, some orders don't come. Or sometimes we have missed because we don't finance our customers. They don't send a letter of credit on time and things like that will happen. That's the fluctuation you see in the international business.

Okay. Your results seem to suggest that and you guys claim probably fairly that MXK system is probably one of the best XS product out there. The question comes to mind is your generation of revenue and the lack of profitability doesn't seem to reconcile with that. Can you shed some light that what is the reason for that?

As you will see, we have shipped more than anybody a GPON-based product line in the last year. We are the number one in several areas or we are in the top three or top four in every region. Now, given that, the nature of our business internationally is very cost competitive, and we have gone through several cost reductions, but we have to turn around and provide that cost reduction to our customers because of some of our competitive issues that comes from China and other places.

Okay. I guess the last question, Zhone has been good to its customer, providing a great product and has been good to the Company employees. I'm an investor and I want to know when investor will begin to see benefits of their investment?

We definitely want to be in your good side as well, not only the customer and employees; we want to make sure the investors get a return on their investment as well. As Kirk mentioned, we are targeting to be profitable in the second half of this year and be able to return some -- if we get some appreciation on the stock and you guys can take advantage of that.

Okay, thank you and good luck.

Thank you.

(Operator Instructions) At this time, there are no more questions. I would like to hand it off to Mr. Mory Ejabat, CEO. Please proceed.

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. Thank you.

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