DZS Inc (DZSI) 2012 Q1 法說會逐字稿

Good day, and welcome to the first quarter 2012 Zhone Technologies, Inc. conference call. I am Regina 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 at the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over so Mr. Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

Thank you, operator. Hello, and welcome to the first quarter 2012 Zhone Technologies, Inc. conference call. I am Kirk Misaka, Zhone's Chief Financial Officer.

The purpose of this call is to discuss Zhone's first quarter 2012 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 development of the first quarter. Following Mory's comments, I will discuss Zhone's detail financial results for the first quarter of 2012, 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 judgement 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, 2011. We would like to caution you that actual results could differed materially from those contemplated by the forward-looking statements and should not place undue reliance on any forward-looking statements. We also undertake no obligations 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 the 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 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.

Thanks, Kirk. Good afternoon, and thank you for joining us for our first quarter 2012 earnings call.

Revenue for the first quarter of 2012 was $27.1 million, which was lower than the fourth quarter of 2011, due to the seasonality of our business as anticipated and mentioned on our previous earnings call. During the quarter, we experienced some weakness in our domestic and western European businesses, and also had some purchase orders that could not be shipped because of unavailability of long lead time components. Despite these conditions, we experienced a strong increase in orders during March, and as a result, we exceeded the first quarter with better than expected backlog, driving optimism for 2012 and a much stronger second quarter.

In the first quarter, we also announced that Zhone entered into a new credit facility arrangement with Wells Fargo Capital Finance, part of Wells Fargo and Company. This facility provides working capital financing up to $25 million to support borrowings and letters of credit. The terms of facility extended for two years to March 2014. Kirk will give you more details on our financials later on.

Now focusing on our market opportunity. The MXK continues to drive new customer growth while also standing industry leadership and a strong customer acceptance through our served markets. As you might recall, several quarters back, we launched a new Zhone FiberHome line.

In Q1, we have started to experience growth of these new products, helping our customers deploy new fiber to the home, curb, and building solutions. Overall, the new FiberHome growth was led primarily by increasing in the number of media sell-though deployments. We expect to sustain this momentum throughout 2012.

We noted a respectable increase in the number of MXK voice deployments, most commonly in combination with GPON. As indicated by a number of new customer announcements, we continue to experience good momentum in our international markets. Where we also launched our new zNID 2400 Series 1 T1 line to the European community in February, we announced the immediate availability of the new zNID 2400 (inaudible) ethernet ONT to the European market at the annual FTTH Conference in Munich, Germany.

The new active ethernet indoor warranties, part of the zNID 2400XS series indoor ONTs, for a cost-effective, high performance solution for delivering high bandwidth services. The new zNID 2400 Series has become very popular with our customers around the globe.

Now, I would like to share a few examples of wins announced throughout the quarter. We announced a new multiple access line concentrator deployment with Convergenze SPA, the leading regional operator in southern Italy. Convergenze is offering affordable and reliable VoIP and high speed internet access services to its customers in southern Italy.

While utilizing Zhone's market-leading products, Convergenze has been able to increase network bandwidth and reach, lower service delivery costs, and provide advance services to its customers. Further, we announced that our MXK would serve as the core enabler of CEdiS deployment of GPON solutions in Italy. Through the channel partner, Dimension Data, a combination of MXKs and ONTs will be deployed to support customers across the service footprint.

We also announced a new MXK deployment with Palm Hills Developments, a leading real estate company in the Egyptian market, to provide the first fiber-to-the-home community in the region. The new real estate complex, consisting of more than 1,000 residences, will provide access to state-of-the-art entertainment services and higher speed bandwidth connectivity to every home within the development.

Lastly, we announced the expansion of one of our largest US-based clients, with the new MXK deployment at Consolidated Communications, an advanced telecommunication provider serving businesses and residential customers in Illinois, Texas, and Pennsylvania. Together, the companies have built a fiber network to support fast delivery of more affordable and reliable high-speed internet access, voice-over-IP, and video services to subscribers.

In general, MXK shipments remain strong, shipping well over 400 units in the first quarter, bringing the total unit shipment to over 3,400 and over 24 million (inaudible) capacity.

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 first quarter of 2012. As expected, first quarter of $27.1 million declined from fourth quarter revenue of $33.4 million, due to the normal seasonal slow down in our business and orders that could not be shipped prior to the end of the quarter as a result of the extended lead times for certain material.

Bookings for new orders were actually stronger than expected during the latter half of the quarter, which led to a substantial increase in backlog going into the second quarter. As a result, we should see strong sequential revenue growth of greater than 10% for the second quarter of 2012. We also still expect revenue for 2012 as a whole to grow over that of 2011.

For the first quarter, 57% of revenue was generated from our international customers, as compared to 60% for the fourth quarter of 2011. We had one 10% customer and experienced less customer concentration this quarter, but the top five customers representing approximately 39% of revenue for the first quarter of 2012, as compared to 46% of revenue for the fourth quarter of 2011.

Gross margins at 31% for the first quarter were below our previously provided guidance range of between 34% and 36%, primarily as a result of the lower volume. As we have discussed before, we expect margin expansion in our long-term model associated with the benefits of the extensive hardware reengineering we have undertaken to cost reduce our products and from additional manufacturing cost leverage at higher future anticipated revenue levels. For the second quarter of 2012, we expect gross margins to rebound to around 34% before improving even more later in the year.

Operating expenses of $11.7 million for the first quarter was lower than our previous guidance of approximately $12.5 million, primarily due to lower sales commissions and other expenses incurred on lower revenue. We expect operating expenses for the second quarter of 2012 to increase with the higher anticipated revenue to between approximately $12 million and $12.5 million.

Operating expenses for the first quarter included depreciation of approximately $100,000 and stock-based compensation of approximately $200,000. Going forward, we expect to approximate the same amount of depreciation and stock-based compensation for the second quarter.

Finally, our adjusted EBITDA loss for the first quarter of 2012 was approximately $3.1 million due to the lower revenue level and gross margins, partially offset by lower operating expenses. The sequential quarterly revenue growth during 2012, we expect to return to profitability on an adjusted EBITDA basis in the second half of 2012. The revenue growth should also allow us to exit 2012 with more cash than we started the year with.

While we are on that topic, cash and short-term investments at March 31, 2012, were $15 million, which decreased from $18.2 million at December 31, 2011, or roughly equal to the adjusted EBITDA loss for the quarter. As for other significant balance sheet changes, the day sales outstanding on accounts receivable improved substantially, allowing us to reduce our working capital debt back to previous levels.

Accounts receivable decreased to $23.7 million at March 31, 2012, from $31.6 million at December 31, 2011, dropping DSOs to 79 days for the first quarter, as compared to 85 days for the fourth quarter. DSOs continue to be affected by the shipment and payment cycle with our largest customer, which, for this year, had a positive affect. With the substantial improvement in DSOs this quarter, we were able to reduce our total debt obligations to $10 million at March 31, 2012, from $15 million at December 31, 2011.

As previously announced and as Mory mentioned, we also entered into a new credit facility with Wells Fargo Capital Finance during the quarter. This new credit facility allows us to continue investing in the development of leading technology for our customers. We are pleased to work with the business credit team at Wells Fargo Capital Finance, which is providing us with the flexible financing to meet the changing needs of our business. A quick and smooth transition to this new credit facility during the quarter makes us optimistic that this new banking relationship will continue for many years.

Lastly, the weighted average basic and diluted shares outstanding were $30.9 million for the first quarter of 2012, and $30.8 million for the fourth 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 Q1 2012, MXK continues to be the most successful product for our Company and our customers. Although this quarters' revenue was seasonally weak, there are several reasons for enthusiasm as we focus on our efforts on 2012. We are successfully expanding our market share and footprint globally.

We launched our popular new zNID 2400 Series ONT to the European market, we experienced new growth with our Zhone FiberHome media sell-through products, and experienced new growth of MXK voice services over GPON, proving that MXK is not only an access solution, moreover, a multi-service solution for the future. During 2012, we will continue announcing new products and customer agreements, expanding our international and domestic footprint.

We would now like to open the call up for questions. Operation, please begin the Q&A portion of the call.

(Operator Instructions). Your first question today comes from the line of Wayne Lindemann with Lindemann.

Hi, Kirk and Mory. I have a question. Have you guys given any thought to selling the Company to a private investor or group or a publicly-traded company?

Well, we look at all strategic alternatives available to us. We haven't done anything that jeopardizes our relationship with our customers or shareholders and our employees.

And do you see profitability for next quarter or by the end of the year?

We mentioned the second half of this year.

Thank you.

Your next question comes from the line of Larry Lavin with ATT.

Yes, hi. Where it's common for any company introducing a new product line to provide substantial support, my question is, it seems like every single press release I see released from Zhone shows that the products have already started being shipped and were involved in the implementation and installation of the network prior to any press releases, contracts, or the same being released. So my question is, why?

I really don't understand your question.

Okay. A company goes and comes out with a new product. Now prior to -- you need to go and establish a certain amount of customer base for that product line to really go and push your sales, correct?

Correct.

So my question is every press release that I have seen basically shows that Zhone is involved in the implementation, installation of or systems before contracts are signed or I'm going to also assume any revenue is being generated.

That's not correct.

Okay.

That's the wrong assumption.

I mean, if I go and I look at some of the most recent press releases, you will see that the press releases will show that -- a company started installing the system six months ago. So this is going on before a press release is actually initiated. So why is that?

Well, because the customers, they want it installed and make sure the product works to their satisfaction before they allow us to release that press release.

And is Zhone --

And that is not a one-time deal with that certain customer. They do install that, they allow us to establish press release, then it becomes a customer annuity for us that we sell to that customer.

Well, like I said, it is very common for any company that comes out with a new product to provide a lot of assistance until they have established a certain customer base. Now, the MXK has been out there now for two years and yet we still seem to be providing an awful lot of additional assistance prior to actually getting the sale.

That is not correct.

No?

No, we don't sell -- we don't give product for free, wedon't install any product unless we have a purchase order, and we don't announce any product, or any press release that we have a purchase order with that customer. Either we fulfill the first portion of the order or some of them. We don't announce based on our feeling, let's say.

Okay, thank you.

(Operator Instructions). And it doesn't look like we have any further questions at this time, so I will turn the call back over to Mory for some closing remarks.

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

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation and you may now disconnect. Have a wonderful day.