DZS Inc (DZSI) 2011 Q2 法說會逐字稿

Good day, and welcome to the second quarter 2011 Zhone Technologies Inc. conference call. I'm Stacy, and I will 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 second quarter 2011 Zhone Technologies Inc. conference call. I am Kirk Misaka, Zhone's Chief Financial Officer.

The purpose of this call is to discuss Zhone's second 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'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 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. 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 31, 2010, and our quarterly report on Form 10-Q for the quarter ended March 31, 2011.

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 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 second quarter 2011 earnings call.

The second quarter revenue increased by 6% to $31.3 million versus $29.6 million for the previous quarter. The increase was driven primarily by increased International customer acquisition and significant MXK competitive advantages over our competition.

Domestic growth remained on target largely driven by MXK expansion by new and existing customer base, and increased stimulus activity in the region. However, some of our domestic customers experienced fiber shortages, which resulted in lower than expected results in North America. Nonetheless, as expected, the MXK continued to grow, as new organic customer growth sustained industry leadership and a strong customer acceptance. Kirk will give you more detail on our financial results later.

I'm also proud to announce that Zhone Technologies has been once again recognized by the industry-leading technology analysts, including Infonetics Research, Dittberner Associates, Ovum Research and IDC acknowledging Zhone's growing momentum in the GPON and Ethernet FTTH markets in Q1 2011.

[Our last] report reflected the following results for Zhone. Top three leadership for GPON in Caribbean and Latin America. Top three leadership for GPON in Europe, Middle East and Africa. Top four market position for GPON in North America. Top five market position for GPON globally.

Zhone was also recognized as the number two market leader in North America for Ethernet FTTx. This is a significant milestone for Zhone as we establish ourselves in leadership positions in both GPON and Ethernet FTTx technologies around the globe.

Furthermore, Zhone established early market leadership in the fast paced VDSL2 market segment. For instance, in Latin America Zhone was rated as the number three player for DSL connectivity in Q1 2011, per Infonetics Research and Dittberner Associates.

During the quarter we announced several new customers. We also have won many stimulus projects and continue to compete for other projects. The size of these projects can vary widely, depending on which type of network the telco decides to deploy; GPON versus active Ethernet. We have received orders from several of these projects in the second quarter. Now I would like to share a few of them with you.

At Doylestown Telephone the MXK was selected to support FTTx triple-play and ADSL deployment, providing thousands of their subscribers access to new triple-play services in Ohio.

At Alhambra-Grantfork Telephone the MXK platform was selected for FTTH and Multi-Service deployment. Illinois residents gain access to higher speed, higher quality voice and data services with an all-new fiber network.

In the Midwest Pulaski-White Rural Telephone Cooperative expanded their broadband services. The Indiana operator leveraged new fiber network using the MXK platform to deliver higher speed Internet, voice and video offerings.

At Hickory Telephone Company Zhone helped -- we did deployment of an all new copper and fiber based RF triple-play deployment in Western Pennsylvania. Subscribers will benefit from ten times greater bandwidth increase after the integration of the MXK platform.

Regarding new products and solutions, Zhone R&D and engineering worked diligently to develop and launch several new products targeting the mobile backhaul market segment. Specifically, we expanded the MXK portfolio with a new uplink card for mobile backhaul. Our new mobile backhaul solution, Zhone FiberCell, allows a multiple step transition from copper to fiber.

In conjunction with the uplink card, we also developed a comprehensive new line of zNID warranties for deployment at the mobile tower locations. Now our customers have the ability to use the MXK for multi-service copper and FTTx convergence while also accommodating complex mobile backhaul over copper or fiber using the same solution.

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 next quarter. Kirk?

Thanks, Mory. Today Zhone announced financial results for the second quarter of 2011. Second quarter revenue of $31.3 million increased 6% from first quarter revenue of $29.6 million, driven by strong demand for our products, especially in our International markets, which represents 59% of revenue for the second quarter versus 55% of revenue for the first quarter.

For next quarter that strength in global markets, such as the Middle East and Europe, is likely to create some seasonal weakness due to the holidays, as it has in other years. Also, continued fiber shortages could push out some of our customer deployments domestically.

As a result we are forecasting that third quarter revenue may be flat to slightly up, as compared to this quarter, before stronger growth returns in the fourth quarter.

We continue to serve over 750 active customers and experienced less customer concentration this quarter, with the top five customers representing approximately 37% of revenue for the second quarter of 2011, as compared to 44% of revenue for the first quarter of 2011. As usual we continue to have just one 10% customer.

Gross margin is at 35.4% for the second quarter. We're at the upper end of our previously provided guidance range of between 34% and 36%, and approximately the same as the first quarter gross margins of 35.8%.

In our long-term model we continue to see some margin expansion associated with the benefits of the extensive hardware reengineering that we have undertaken to cost reduce our products, and from additional manufacturing cost leverage at higher future anticipated revenue levels. For now, however, we are continuing to forecast between 34% and 36% gross margins for the third quarter of 2011.

Operating expenses of $12.9 million for the second quarter was in the middle of our lowered guidance range of between $12.5 million and $13.5 million, and consistent with a $13.1 million for the first quarter. We expect operating expenses for the third quarter of 2011 to continue at this reduced level. Operating expenses for the second 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 second quarter of 2011 improved, as it was approximately $1.1 million as compared to $1.8 million for the first quarter due to growth in revenue and stable gross margins and operating expenses. Despite the adjusted EBITDA loss, cash and short-term investments at June 30, 2011, improved slightly to $19.3 million from $19.2 million at March 31, 2011, due to improved working capital balance changes during the quarter.

Most notably, accounts receivable declined by $2.6 million to $26.8 million at June 30 from $29.4 million at March 31, improving the number of days sales outstanding on accounts receivable for the second quarter to 77 days, as compared to 90 days for the first quarter. DSOs continue to be affected by the shipment and payment cycle with our largest customer, which improved during the quarter.

Our total debt obligations associated with our working capital facility with Silicon Valley Bank remained at $10 million at June 30, 2011, and March 31, 2011. As previously announced, we renewed this facility annually in the first quarter as we have done for many years.

Lastly, the weighted average basic and diluted shares outstanding remained at 30.6 million for the second quarter of 2011.

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. Reflecting on Q2, we had a good quarter, achieving 6% growth and increased revenue globally. Once again, we were recognized as a leader in both GPON and Ethernet FTTx solutions in the leading emerging markets globally. We experienced organic growth internationally, domestically, and from new stimulus wins. We launched a compelling line of new mobile backhaul products that leverages our industry-leading MXK as the [cornerstone] of the solution.

As subscriber demand for bandwidth continues to rapidly increase, Zhone has timed the market with 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.

Thank you. (Operator Instructions). And your first question comes from the line of George Thomassy with Scott-Macon. Please proceed.

Yes. Can you give us any flavor on what impact what's happening in Egypt in the Mideast is having, if any, on your Mideast business, and in particular Etisalat?

Definitely we have some drawbacks from Egypt, but it's coming back again in the last couple of weeks. But in the other areas in that region that we are actively are involved we haven't seen any pressure of any kind with respect to our customers and their orders.

Okay. Thank you. And then --

Go ahead.

You mentioned new products in particularly backhaul. I was under the impression that had been introduced last quarter.

Yes, a portion of that was introduced last quarter, and a portion of that introduced this quarter. And we are -- you've got to have both ends of the product to offer the mobile backhaul, and we are just getting into some trials with that.

Right. But I thought there was some trials for what was introduced last quarter that were -- either had started or were about to start?

Correct. We had some trials on that as well. Normally these trials take about six to nine months to complete.

Is that potentially a big area?

Mobile backhaul is a growing market. I don't have the numbers of how big the market is, but it's growing, and the conversion of TDM to fiber is becoming -- or to IP -- becoming more and more prevalent right now.

And can you give us any -- shed any light on what revenue you lost this quarter due to the shortage of fiber which you referred to? I know some of your competitors have referred to that as well.

We don't disclose those numbers at this point, because I don't think my customers would be very happy with that.

Okay. In a report that Jefferies recently released they estimated that Calix was going to do $65 million of revenue this year from stimulus products and $200 million next year, and they estimated further that Calix -- the combination of Calix and Occam had 70% to 80% of the market. If you assumed that you had 10% of the market -- the domestic market -- or at least got 10% of the projects -- stimulus projects, that would yield something like $16 million to you this year and $50 million to you next year. And -- is that a reasonable way to look at that?

I really don't know what Jefferies came up with their numbers. Based on that, I cannot really comment where they came in, but the way you look at might be correct. But I cannot verify Jefferies' numbers.

Yes. Can you give us any feel -- I mean you've talked about the stimulus projects and stuff and specific customers, but can you give us any feel for what kind of revenues that could potentially contribute this year and potentially contribute next year?

Unfortunately, I cannot comment on that. I cannot speculate on that. Because we are still in the process of dealing with RFPs and RFIs for the stimulus projects, or many projects have been awarded, but the vendors haven't been selected. So I cannot comment on how many of those I can -- I'll be able to win or not.

Yes. What gives you confidence that you're going to grow and get profitable like you have said that you will in the second half?

Well, our plan -- we are [on our] plan, and the forecast that we are seeing is giving us a comfortable position to be [for] the second half [over the first half].

(Operator Instructions). And your next question comes from the line of David Lamond with Artis Capital. Please proceed.

Hi, guys. I may have missed this part of the call, but I was just wondering, Kirk, did you provide any EBITDA guidance for the second half of this year?

We did not.

You did not. From a cash balance perspective we're still very solid, and no need at all to raise capital there?

Well, we've had the improvements in DSOs on the balance sheet, and with the improving EBITDA loss -- or reducing EBITDA loss, we don't anticipate needing additional cash this year.

Okay. Great. And are there any covenants in the line of credit, or anything we need to be aware of that could cause a problem?

There is an EBITDA covenant in the agreement with Silicon Valley Bank, and we were in compliance for this quarter, and we anticipate being in compliance for next quarter as well.

Okay. Great. Thanks, fellows.

Your next question comes from the line of [Ronald Mullins] with [Segmar]. Please proceed.

I'm afraid I have to comment that this quarter is very discouraging, as have many previous quarters been. And you talk very positively in some of the conference calls about the products and the possibilities, but we don't seem to have any encouraging results. I would appreciate it if you'd say anything -- and I believe you were asked about the second half and didn't make any comments -- but I'm thinking somewhat longer-term for the Company for next year. How long [do the] existing products that you have so much confidence going to last, and how much will they contribute to the sales of the Company?

Well, the new products that we have at this point I believe competitively is ahead of everybody else within six to eight months or six to nine months. And we are going to continue developing these products and enhancing it to be there, and our belief is our new MXK product line and associated product that goes with MXK contribute about 80% of our revenue next year.

Your next question comes from the line of [Aleichem Una], private investor. Please proceed.

Hi, guys. First of all, I would like to thank you for giving me the opportunity to ask what appear to be a whole lot of questions, and I hope I'm not going to take too much time. But I have some questions, and as an investor I have been generally disappointed with the stock price performance. And so some of the questions may be a little blunt, but I don't intend them to be rude. I just want to get some insight.

Today's press release there is a quote, "We are encouraged by the increasing demand of our innovative products." And when I look at essentially flat sales for the first three quarter of this year -- last quarter, this quarter and then you are projecting, flat possibly next quarter -- where in the financial statement should we look for that sign of increasing demand?

As we mentioned, we are looking at fourth quarter to be better than Q3, and as you -- as many of the investors know, that when you do International business, Q3, the whole Europe and Middle East is gone on holiday, and also in Middle East there is the holy holiday as well. So that is why we don't see an increase in Q3. But I should mention that from Q1 to Q2 we had an increase of 6%, and that was within our guidance of the Q1 conference call.

Well, I think that going back to that 6% sequential increase, but please correct me if I am wrong. If we take out the $2 million of revenue that you could not ship during the last quarter, your revenue actually has decreased sequentially for this quarter? Isn't that correct?

But if you look at it that way, yes, but you don't know our backlog, and we don't report on our backlog.

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

Hi. I just wanted to ask about -- you mentioned your products currently have a six to nine month lead over the competition, and I wanted to check to see if you thought that your current R&D spending track is enough to maintain that lead?

Yes, it is for the size of our Company. We are spending over 20% on R&D, and that makes us very comfortable to enhance the product line and keep it that way.

Great. Thank you very much.

And at this time I would like to turn the call back over to Mr. Mory for closing remarks.

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. Thank you, operator.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.