DZS Inc (DZSI) 2011 Q3 法說會逐字稿

Good day and welcome to the third-quarter 2011 Zhone Technologies Incorporated conference call. I'm Jennifer and I will be your coordinator for today. At this times 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 third-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 third-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 in the third quarter. Following Mory's comments I will discuss Zhone's detailed financial results for the third 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 1 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 in 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 reports on Form 10-Q for the quarters ended March 31, 2011 and June 30, 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 third-quarter 2011 earnings call. The third-quarter revenue decreased slightly to $30.2 million due to the seasonal slowdown in our international markets and some deferred deployment for a few domestic customers that continue to wait for broadband stimulus funds. More or less as expected the MXK continued to drive new organic customer growth, sustained industry leadership and a strong customer acceptance. As a result, we expect to have earnings growth in the fourth quarter accompanied by adjusted EBITDA profitability. Kirk will discuss our financial results and guidance in greater detail later.

I am proud to announce that Zhone Technologies has been recognized by the industry's leading technology analysts like IDC and Infonetics Research for 6 consecutive quarters of GPON leadership. Zhone is the only North American GPON supplier among the top 5 global GPON vendors. We have a significant number of new product launches in the quarter, helping to further increase our industry leadership and technology differentiation. In September 2011 we announced immediate availability of the MXK 194/198 1U GPON OLT platforms. The new 194/198 1U GPON OLTs provide an outstanding addition to the industry leading MXK MSAN portfolio.

To complement the new MXK 1U GPON OLTs, Zhone also introduced a new portfolio of zNID GPON OLTs targeted for indoor residential use. As part of our ongoing effort to increase cost efficiency and service differentiation, the new indoor zNID 2400 series of GPON OLTs offer a rich area of features and functionality. Optimal for both greenfield or expansion FTTx networks globally and leverage features and best in class performance delivery for Zhone's widely deployed 4200 series outdoor zNID ONTs. These new products help to complement an already powerful solution suite and we are confident these new products targeting both the central office and customer premise, help Zhone to better serve our new and existing customer in all the markets globally.

Zhone continues to win new customers in all of our served markets, including new international, domestic and stimulus customers throughout the quarter. Now let me share a few customer announcements we made during the quarter. These are but just a handful of customer wins during this period. Velocity Network deployed Zhone's industry leading MXK as its multi-service, access solution for business VoIP and high speed Ethernet-over-copper services in Erie, Pennsylvania. The MXK multi-service access node was selected by SRT Communications in combination with Microsoft Media Room to deliver new IPTV and video services via ADSL2+ and fiber-to-the-home networks in North Dakota. In addition, we also worked with SRT Communication on a disaster recovery project wherein the MXK multi-service access node was used during and after the disaster relief in Minot, North Dakota to give cell phone and internet service to nearly 2,100 non-evacuated customers.

Venus Telephone, the 100-year-old local telephone provider in Venus, Pennsylvania currently offers triple-play services to customers and will deploy Zhone's industry-leading MXK as its Primary Gigabit Passive Optical Network access platform for the new fiber-to-the-home FTTH network in its building. Cornerstone Telephone deployed Zhone's industry-leading MXK as its multi-service access solution for business VoIP and high speed Ethernet-over-copper services for area businesses in Syracuse, Oneonta, New York City, Poughkeepsie and Richmond. Cornerstone chooses the MXK to provide both copper and fiber services on a single platform based on their rewarding experience with the deployment of Zhone's multi-service platform within their network.

Finally, we announced that Etisalat will use Zhone's flagship MXK solution and Zhone FiberCell portfolio as part of its effort to enable a 1 Gigabit link to each LTE mobile radio base station as it completes a major network expansion to transition to advanced 4G wireless service throughout the United Arab Emirates. As fiber is getting deployed in base stations, Zhone continues to provide a cost effective upgrade path for operators like Etisalat to transition from circuit to fiber-based connectivity in their mobile backhaul networks. Lastly, Zhone also experienced record MXK growth shipping over 600 units in Q3 with total unit shipments in excess of 2,600 systems deployed since its inception. MXK is now approaching a 2 million GPON subscriber system capacity further proving that MXK is the multi-service platform of choice for the future outpacing the industry average for GPON. 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 next quarter. Kirk?

Thanks, Mory. Today, Zhone announced financial results for the third quarter of 2011. Third quarter revenue of $30.2 million decreased slightly from second-quarter revenue of $31.3 million due to normal seasonality in our international markets and deferred deployments for some of our domestic customers waiting for delayed broadband stimulus funding. Going forward, we're forecasting single-digit percentage revenue growth for the fourth quarter, especially as the demand in our international markets returns and broadband spending increases in the domestic market.

Our international markets continue to produce the majority of our business and represented 57% of revenue for the third quarter versus 59% of revenue for the second quarter. We also continue to serve over 750 active customers and have experienced less customer concentration over the past 2 quarters with the top 5 customers representing approximately 37% of revenue for the second and third quarter of 2011. As in prior quarters we had 1 10% customer.

Gross margins were 34% for the third quarter and within our previously provided guidance range of between 34% and 36% but lower than the second quarter gross margins of 35.4%. With the anticipated revenue growth in the fourth quarter, we will have better manufacturing economies of scale, which, when coupled with continued product cost reductions, should lead to improved gross margins next quarter. Nevertheless, we still would expect gross margins to range between 34% and 36%, which it has for every quarter this year.

Operating expenses of $13 million for the third quarter was in the middle of our guidance range of $12.5 million to $13.5 million and consistent with a $12.9 million for the second quarter. We expect operating expenses for the fourth quarter of 2011 to continue to be in the same range. Operating expenses for the third quarter included depreciation of $400,000 and stock-based compensation of approximately $900,000. Stock-based compensation included $600,000 related to the accelerated vesting of certain management stock options to partially offset previous reductions in their cash compensation, as was disclosed in our Form 10-K filed on August 29, 2011. Going forward, we expect approximately the same amount of depreciation and anticipate that stock-based compensation will return to previous levels around $300,000. Finally, our adjusted EBITDA loss for the third quarter of 2011 was approximately $1.3 million as compared to $1.1 million adjusted EBITDA loss for the second quarter. With the anticipated revenue growth, gross margin improvement and stable operating expenses we expect to generate positive adjusted EBITDA for the fourth quarter.

Now turning to the balance sheet, cash and short-term investments at September 30, 2011 declined to $17.8 million from $19.3 million at June 30, 2011, primarily due to the adjusted EBITDA loss. The net effect of other balance sheet changes was only about $200,000. Accounts receivable remained basically flat at $26.9 million at September 30, 2011 while the number of days sales outstanding on accounts receivable for the third quarter increased slightly to 80 days as compared to 77 days for the second quarter. Our total debt obligations associated with our working capital facility with Silicon Valley Bank remained at $10 million at September 30, 2011 and June 30, 2011. As discussed on previous calls, we anticipate renewing this facility in the first quarter of 2012 as we have done for many years. We will provide a more detailed update regarding the renewal of this facility on next quarter's conference call. Lastly, the weighted average basic and diluted shares outstanding was 30.7 million for the third quarter of 2011 and 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. In summary we believe Q4 will be a positive quarter for Zhone. The international market will resume its growth and domestic market will grow regardless of any delays in the stimulus funds. 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)

Wayne Lineman.

Hi Kirk, Mory. I had a question about the MXK product. We keep hearing how good it is but we don't see an increase in revenue or share price. Can you comment on that?

As we ship more MXK, actually MXK has been doing very well. As we mentioned we have shipped over 2,600 of that. Majority of the products shipped with 1 or 2 line cards in there; that's why you see no revenue increase. Also, there has been some price reduction in the last 2 or 3 quarters that hasn't shown any increase in the revenue. We should see some revenue increase this quarter based on MXK as we go forward.

Can you comment on the stock price? I'm a little concerned. The Company already did a reverse split and the stock price is under $1 once again.

I cannot comment on the price of the stock and I don't know -- we don't have any plans for any split reversal or anything like that. Hopefully with our performance, the stock prices will go up again.

If a private equity investment group or another company offered to buy you guys out would you consider it?

You know we would consider any offer, depends on the offer. I have always said that. It has to be an offer that the Board and the stockholders and employees would like that offer.

(Operator Instructions).

There are no further questions at this time. I will turn the call over to Mory Ejabat.

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

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