Zhone Technologies' CEO Discusses F2Q12 Results - Earnings Call Transcript

Zhone Technologies (ZHNE)

F2Q12 Earnings Call

July 18, 2012 5:00 p.m. ET

Executives

Kirk Misaka – CFO

Mory Ejabat – Chairman and CEO

Analysts

Wayne Lindemann – Private Investor

Ronald Mullins - Private Investor

Presentation

Operator

Good day and welcome to the second quarter 2012 Zhone Technologies Incorporated earnings conference call. [Operator instructions.] I would now like to introduce Kirk Misaka, Zhone’s chief financial officer. Please proceed.

Kirk Misaka

Thank you, operator. Hello and welcome to the second quarter 2012 Zhone Technologies, Inc. conference call. I'm Kirk Misaka, Zhone’s chief financial officer.

The purpose of this call is to discuss Zhone’s second quarter 2012 financial results as reported in our earnings release, which was distributed over BusinessWire 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 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. 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, 2011, and our quarterly report on form 10-Q for the quarter ended March 31, 2012.

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 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 with 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.

Mory Ejabat

Thanks, Kirk. Good afternoon and thank you for joining us for our second quarter 2012 earnings call. Revenue for the second quarter of 2012 grew by 14% over last quarter to $30.8 million from broad-based demand for our products, both domestically and abroad.

As we mentioned last quarter, we exited the first quarter with a significant backlog of orders which got us off to a great start. Although we expect to continue to see growth over the remainder of the year, that growth should be at a more moderate pace.

Gross margins this quarter were below our original expectations, largely because of a single transaction with one of our 10% customers, where we decided to accommodate their request to provide a temporary deep discount on pricing to offset the effect of significant dollar appreciation against the local currency. We do not anticipate making any further accommodations of this magnitude, and therefore expect gross margins to migrate back toward historical levels.

With the moderate growth in revenue and improving gross margins, we are still hopeful that we can generate positive adjusted EBITDA for the second half of 2012, which remains our primary financial goal.

Also, let me make a few comments about our NASDAQ listing. As you know, we received a notice from NASDAQ that we have until December 18 to get our share price above their $1 minimum price requirement. Last year, we received a similar notice, and we were able to regain compliance by posting a strong fourth quarter earnings. This year, we hope that our strong second half performance will have similar results. Regardless, we continue to evaluate alternatives and develop a contingency plan if necessary.

Since Kirk will give you more details on our financial results later on, let me brief you on the state of our business. In Q2 we launched Zhone FiberLAN, an innovative and exciting new product line. We believe FiberLAN is the most cost effective, efficient, and environmentally friendly alternative to existing copper-based internet switch LAN infrastructure available in the market today.

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