Zhone Technologies, Inc. (ZHNE)

Q2 2010 Earnings Conference Call

July 21, 2010 5:00 PM ET

Executives

Kirk Misaka – CFO, Corporate Treasurer and Secretary

Mory Ejabat – Chairman, President and CEO

Greg Mesniaeff – Needham & Company

Edward Zabitsky – ACI Research

Wayne Linman [ph]

George Tomsey [ph]

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 Zhone Technologies, Inc. conference call. I am Jennifer and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like the introduction over to Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

Kirk Misaka

Thank you, operator. Hello and welcome to the Second Quarter 2010 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 2010 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 web site 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 second quarter. Following Mory's comments, I will discuss Zhone's detailed financial results for the second quarter 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 this 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, 2009 and our quarterly report on Form 10-Q for the quarter ended March 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 obligations to update any forward-looking statements.

During the course of this call, we will also make reference to pro forma EBITDA and pro forma 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 pro forma 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.

Mory Ejabat

Thank you, Kirk. Good afternoon, and thank you for joining us today for our second quarter 2010 earnings call. We are proud to announce achieving our revenue and margin guidance for Q2 2010 based on the continued growth of our new MXK and the launch of the new zNID ONT. Second quarter revenue was up 10% as compared to the second quarter 2009 and up 7% as compared to the first quarter of 2010.

We continue to remain confident about the remainder of 2010 based on the strong interest in our new products and our end-to-end multi-service solutions being deployed by service providers in North America and continued strength in the Middle East, Caribbean and the new growth in the Nordic Regions. The primary reason for our continued confidence are as follows.

First, service provider demand for our new multi-service solutions remains a strong with continued demand anticipated for the foreseeable future. New industry analysis enthusiasm for the new MXK OLT and newly announced zNID 4200 [inaudible] ONT products. Recent recognition by some of the leading industry analyst firms like Infonetics, Broadband Trends [ph], [inaudible] IDC and others. Recognized for a similar 4500% year-over-year growth for GPON out passing every other vendor in the industry.

Zhone's new flagship MXK product continues to enter strong market recognition and acceptance super passing over 500 MXK system deployed, supporting the total system capacity of over five million subscriber. Additionally, we continued to see a strong response to our solutions globally. We've continued a strength in the Middle East and the new growth in the Nordics. While we remain confident that US broadband stimulus awards will provide additional domestic growth for the broadband network build out.

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