DZS Inc (DZSI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 Zhone Technologies, Inc. conference call. I am Whitley and I will be your coordinator for today. (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 first-quarter 2014 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 2014 financial results as recorded in our earnings release and 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 first quarter. Following Mory's comments I will discuss Zhone's detailed financial results for the first quarter 2014 and provide guidance for next quarter. After our prepared remarks we will conclude with questions and answers.

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, 2013. 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 in 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 2014 earnings call. We are pleased to announce that we generated positive net income for the sixth quarter in a row and continue to strengthen our financial position. In 2014 we expect to continue to be profitable each and every quarter adding to that strength.

First-quarter revenue of $28.6 million increased slightly year over year and declined quarter over quarter due to normal seasonal weakness. Meanwhile, gross margin continued to exceed historical levels due to an improved pricing environment and constant traded efforts on reducing the cost of our products.

Most importantly net income of $300,000 or $0.01 per share continued our streak of six consecutive quarters of profitability and strengthening the balance sheet. Kirk will give you more details on the financial side, so let me talk about some improving business fundamentals that we expect will lead to (inaudible) profitability for Zhone in 2014.

We continue to harness momentum with our FiberLAN passive optical LAN solution. We are working with a growing number of new enterprise opportunities while we continue to ship our solution in each of our [submarkets] and we are experiencing broad acceptance of GPON as the new choice for enterprise deployment.

Our main objective now is to increase our (inaudible) of our FiberLAN (inaudible) and educate our customers and targets about the performance characteristics and cost savings of our passive optical LAN solution. Accordingly, we are aggressively marketing to several FiberLAN target markets, primarily hospitals, hospitality and military government.

In the second quarter we plan to continue our existing (inaudible) program while adding education as another target market, specifically targeting college and universities as a (inaudible) FiberLAN (inaudible) program.

We made several significant announcements this quarter. First we announced the launch of our new Zhone optical connect partner program in conjunction with our FiberLAN partner training program. We also completed several new product launches, first we announced the release of two small form factor MX 180 products enabling operators to deliver advanced triple play services to their customers from a more compact footprint.

We are moving even closer to the end customer. In addition, we made significant advances with the MXK by announcing the introduction of the XG-PON1 line card for MXK. This card delivers up to 10 gigabits per second, (inaudible) and 2.5 gigabits per second upstream over a passive optical network, enabling service providers to deliver sophisticated application and video services.

We also announced several customer wins including 3D service provider, government who choose to upgrade its network through installation of Zhone's MXK for VDSL2.

Further, we announced joining forces worth FONEX Data Systems, Inc., A leading telecom equipment supplier to bring high-speed bandwith to the East Central Vermont Community Fiber Network. ECFiber is a group of 24 local municipalities that, in partnership with ValleyNet, a Vermont-based nonprofit organization, is building a fiber optic network capable of delivering high-speed Internet and telephone services to homes and businesses in participating towns.

Lastly, we announced a new FiberLAN deployment with IP UtiliNET helping the Atlanta, Georgia base firm enhance campus security offerings for its customers.

Club Entrepreneur in Atlanta, in addition to enabling more security of for Club E, Zhone's MXK-194 and zNID (inaudible) help reduce ongoing operational costs.

As expected, MXK shipments were really strong in the first quarter. Zhone shipped 535 MXK units in the quarter bringing the total shipment to 6,370 units and approximately 41 million ports of MXK GPON (inaudible) capacity.

Now let me turn the call back 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 first quarter of 2014. First-quarter revenue of $28.6 million grew 1% year over year from 2013 first-quarter revenue of $28.4 million and as expected declined sequentially due to normal seasonal patterns.

Backlog also increased significantly during the quarter so we expect stronger sequential revenue growth for the second quarter of 2014 somewhere in the mid- to upper-single-digit percentage range.

Our international markets continue to produce the majority of our business and represented 65% of revenue for the first quarter as compared to 69% of revenue for the fourth quarter and consistent with the first quarter of 2013.

We experienced slightly higher customer concentration this quarter with the top five customers representing approximately 46% of revenue for the first quarter as compared to 42% of revenue for the fourth quarter. We also had only one 10% customer in the first quarter as well as the fourth quarter.

Gross margins of 38% exceeded our guidance range of 35% to 37% and continue to trend at higher gross margins when compared to historical norms. As Mory mentioned, the gross margin expansion is a result of an improved pricing environment and product cost reductions. However, we are expecting our gross margin to return to historical norms of between 35% and 37% for the second quarter of 2014.

As expected, operating expenses were $10.5 million for the first quarter and was slightly lower than the $10.7 million for the fourth quarter. We anticipate that for the second quarter of 2014 operating expenses will increase only slightly due to the sales commissions on the additional revenue that we are forecasting.

Operating expenses for the first quarter included depreciation of approximately $80,000 and stock-based compensation of approximately $60,000, both of which we expect to continue at about the same level into the second quarter of 2014.

Finally, our adjusted EBITDA profit for the first quarter of 2014 was $500,000 and net income on a GAAP basis was $300,000 or $0.01 per fully diluted share.

Now let's look at the balance sheet. Cash and short-term investments at March 31, 2014, were basically flat at $15.6 million. A net effect of other balance sheet changes was very minor while the specific balance sheet accounts fluctuated to a larger extent.

Accounts receivable decreased to $30.6 million at March 31, 2014 from $33.3 million at December 31, 2013, although the number of days sales outstanding on accounts receivable increased slightly for the first quarter to 96 days as compared to 93 days for the fourth quarter.

Our total debt obligations associated with our working capital facility with Wells Fargo remained $10 million at both March 31, 2014 and December 31, 2013.

Lastly, the weighted average basic shares outstanding were 32.3 million and the diluted shares outstanding were 34.8 million for the first quarter of 2014. And with that financial overview let me 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 enter 2014 confident that we can deliver on our primary financial goal which is to generate greater profitability for the year as a whole. Having achieved both top-line growth and profitability for all of 2013 we enter 2014 mainly focused on our two primary financial objectives -- generating continued (inaudible) growth and improving profitability.

MXK continues to pay dividends for Zhone resulting in outstanding quarterly shipments, while our FiberLAN optical LAN solution continues to outpace our expectation on the strength of optimism. We would now like to open the call to questions. Operator, please begin the Q&A portion of the call.

(Operator Instructions). Alan Davis, L.A. Davis.

Solid quarter, good margins. Just curious if you could break out -- you talked about strong pricing environment. Can you give us a little more information on that kind of breaking out what you are seeing domestically in your key international markets?

Okay, Alan, on the pricing side we have seen pricing stabilizing mainly on the ONT or CP product line, it has been like this for several quarters. We believe that it is very sustainable and it has hit bottom at this time.

So we don't see very competitive pricing actually. We see that our Chinese competitors have stabilized their pricing and actually they are demanding higher price for their ONTs. That is everywhere in the international market. And the pricing has been very stable in the United States as well.

Okay. And then the guidance for the next quarter, that shows the margins coming down just a bit. Is that product mix, geographic mix shifting or conservatism kind of all of the above?

I think you will see that as more of product mix because we shipped a little more OLTs last quarter than normally we do. But those [OLTs need some ONT]. So we are -- that is what we are projecting for gross margin. But our goal is to actually smash the gross margin for here, for this quarter.

The other thing is that the international percentage of the total declined from 69% in the fourth quarter to 65% in the first quarter. And we are expecting perhaps a larger percentage of international business, which is slightly lower margin as well.

Okay, great, thank you. And one last one here. I know you probably don't want to provide any specific guidance on FiberLAN, but maybe give us a sense for kind of your -- how your view has changed or not changed in terms of the timing of that product line becoming significant in terms of kind of how it is being received in the market?

Well, Alan, you know we are still very much in favor of FiberLAN, it has hit momentum as we have seen in the last quarter comparing to 2012. We see more requests and more RFPs when we address that, especially in the hospitality arena.

As you know, this market is competing against a traditional switch market which is almost a $20 billion market. We are waiting to see about where this product is going and the type of acceptance we are seeing in this market.

Okay, great. Thanks, guys.

Christian Schwab, Craig-Hallum.

Sorry, guys, I got disconnected from the conference call, I apologize. I missed what you guided the top-line to do in Q2 on a sequential basis.

We said that it would be in the mid- to upper-single-digit percentage range, stronger than what we expected this quarter.

Okay, perfect. And then on the FiberLAN initiative, have you quantified your pipeline of activity for this year at all?

I tell you we are quantifying our Q2 plan. Q3 and Q4 we have lots in the pipeline but how to quantify that remains to be seen. But we are very optimistic about what we are seeing in the market.

Can you give us an idea of how big the potential pipeline is? Is it -- can we do $10 million of revenue in FiberLAN this year, $5 million, $20 million? What is a realistic number for us to start thinking about now?

The numbers that we have said, you mentioned $10 million or plus, we are still looking forward to this kind of a number and what we have seen in Q1 has given us some confidence that, yes, that number is doable.

Was the FiberLAN revenue in Q1 greater than Q4?

No, it wasn't but definitely it was much greater than Q1 of 2012.

Great. And then are you guys and a position to quantify what that revenue number is on a quarterly basis yet or are you still not going to break that out yet?

It is too early, Christian. We'd love to do that but we think it is too early to do that.

Okay, great. No other questions. Thanks, guys.

(Operator Instructions). Michael (inaudible), Sidoti.

Just a few questions, just regarding the US spending. Can you just throw some color on what you are seeing out there in terms of the stimulus funding? It looks like the domestic revenue increased as a portion of total revenue from the fourth quarter.

Michael, as you know, Q1 is normally a slow quarter for our industry and it is very seasonal. Obviously it was less than last quarter. But we have seen some spending in the carrier space. But our FiberLAN has been pretty strong domestically in Q1.

Okay. And then I guess can you just talk about the -- I guess the pace of US revenue over the first quarter from January to March? I guess did you exit the quarter on a strong note as compared to last year? Any comment on that?

We exited the quarter with a stronger backlog going to Q2 than we had previously, that exited Q4 to Q1. So we have build up a good backlog going to Q2.

Okay, great. And I think I missed it, how many of the MXK shipments did you guys have this quarter?

It was around 535, I believe, in last quarter.

Okay, because that is significantly higher than the first quarter of March -- the first quarter of 2013 rather. So I guess what is the revenue mix in that number?

We don't give out the revenue mix on that. But one other reason we ship more MXK than we normally do is some of that went to our FiberLAN customers.

Okay, so I can assume that a majority of it was related to FiberLAN then?

No, no, no. That it wasn't the majority of it, the majority of it went to our core business customers, but we had MXK FiberLAN to our enterprise customers.

Got it, perfect. Okay, that is all I have, thanks.

We have no further questions. I would now like to turn the conference back over to Mory, please proceed.

Once again thanks for joining us today and for your continued support. We are looking forward to speaking with you on the next quarter's earnings conference call. When we expect to announce continued profitability and improving fundamentals. Operator.

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