DZS Inc.
Q2 2015 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

Good day and welcome to the Second Quarter 2015 Zhone Technologies, Inc. Conference Call. My name is Latoya [ph] 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 turn the call over to Kirk Misaka, Zhone's Chief Financial Officer. Please proceed.

[Kirk Misaka:]

Thank you, operator. Hello and welcome to the second quarter 2015 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 2015 financial results as reported in our earnings release that 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 Jim Norrod, Zhone's Chief Executive Officer. Jim will begin by discussing the key financial results and business developments of the second quarter. Following Jim'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. This conference is being recorded for replay purposes and will be available for approximately one week. The dial-in instructions for 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, 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, 2014, and our quarterly report on Form 10-Q for the quarter ended March 31, 2015. 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'll also make reference to adjusted EBITDA and adjusted operating expenses. Non-GAAP measures we believe are appropriate to enhance an overall understanding of our 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 the 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 competitor's 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, had been posted on our website at www.zhone.com. With those comments in mind, I would now like to introduce Jim Norrod, Zhone's Chief Executive Officer.

[Jim Norrod:]

Thank you, Kirk. Good afternoon and thanks for joining us today for our second quarter 2015 earnings call. We are pleased to announce that we achieved positive adjusted EBITDA for the second quarter through revenue growth, continued strong gross margin, and lower expenses, keeping us on track to be profitable for the year as a whole, which remains our number one financial objective. It's now been a full year since I joined the team here at Zhone. During that time, we completed the transformation of our business to focus on our two key businesses

[Kirk Misaka:]

Thanks, Jim. Today, Zhone announced financial results for the second quarter of 2015. Second quarter revenue of $27.5 million grew 1.4% sequentially from first quarter revenue of $27.1 million. Global economic uncertainties needed to grow somewhat, particularly in our European business, and could continue to influence growth going into the third quarter. Third quarter revenue can also be impacted by seasonal weakness attributable to extended holidays and vacations in some of our international markets. As Jim mentioned, however, we continue to expect overall revenue growth for 2015, which will be driven by the launch of our MXK-F and continued strong growth in fiber net revenue. We experienced slightly less customer concentration this quarter with the top five customers representing approximately 38% of revenue for the second quarter as compared to 42% for the first quarter. We also didn't have any 10% customers in the second quarter as compared to one 10% customer in the first quarter and three 10% customers in the fourth quarter of 2014. Our international markets continued to produce the vast majority of our business and represented 67% of revenue for the second quarter, as compared to 63% of revenue for the first quarter. For the second consecutive quarter, gross margins of 37.2% exceeded our guidance range of 34% to 36%, largely due to stronger domestic margins and continued manufacturing efficiencies. We expect gross margins for the third quarter to return to more normal levels, estimated at between 34% and 36%. Operating expenses of $10.5 million for the second quarter were at the low end of our guidance expectations of between $10.5 million and $11 million. With the completion of our restructuring in the first quarter, we anticipate that operating expenses will continue to range between $10.5 million and $11 million for the remainder of the year, with only slight increases for the additional sales commissions on the anticipated revenue growth. Operating expenses for the second quarter included depreciation of approximately $200,000 and stock-based compensation of approximately $300,000, both of which we expect to continue at roughly the same level into the third quarter of 2015. Finally, our adjusted EBITDA profit for the second quarter of 2015 was $148,000, as compared to an adjusted EBITDA loss of $142,000 for the first quarter. Our net loss on a GAAP basis declined to $366,000 and $0.01 per basic and diluted share in the second quarter of 2015, from $602,000 and $0.02 per basic and diluted share in the first quarter. Improved performance was driven by revenue growth, continued strong gross margins, and reduced expenses. As Jim mentioned, we continue to expect to be profitable for the year as a whole, which remains our number one financial objective. Now let's take a look at the balance sheet. Cash and short-term investments at June 30, 2015 declined to $11.1 million from $11.3 million at March 31st, 2015, primarily due to minor net balance sheet changes, offset by the adjusted EBITDA profit. Although the net effect of balance sheet changes was minor, specific balance sheet accounts fluctuated to a larger extent. Accounts receivable decreased slightly to $31.6 million at June 30, 2015 from $31.9 million at March 31st, 2015, decreasing the number of days sales outstanding on accounts receivable to 103 days, as compared to 106 days for the first quarter. DSOs have been elevated over the last two quarters largely due to the pattern of shipments to and collections from our largest customers. We expect those patterns to normalize and DSOs to continue declining over the coming quarters. We continue to focus on reducing net [ph] inventories, which were $15.4 million at June 30, 2015, as compared to $17.3 million at March 31st, 2015 and $20 million at December 31st, 2014. As for our total debt obligations associated with our Wells Fargo working capital facility, they remain $10 million at both June 30, 2015 and March 31st, 2015. Lastly, the weighted average basic and diluted shares outstanding were $32.7 million for the second quarter of 2015. With that financial overview, let me turn the call back to Jim for a few final comments before we open the call up to questions and answers.

[Jim Norrod:]

Thank you, Kirk. We continue to believe that we can grow revenue for the year in both our service provider and enterprise businesses. As I mentioned, the growth drivers stem from the launch of our highly anticipated MXK-F and the execution of our sales and marketing strategy for FiberLAN. Our second quarter results illustrate that we are on track in our focused business structure lean profitability, which remains our primary financial objective. We are very excited about the opportunity because we know that revenue growth, coupled with operating expense leverage, leads to improve profitability. Now we'd like to open up the call to questions. So, operator, please begin with the Q&A portion of the call.

[Operator:]

[Operator Instructions] Your first question comes from Alan Davis with L.A. Davis. Please proceed.

[Alan Davis:]

Hi guys. Just a couple of questions. First, in regards to the service provider business. As you look at your pipeline in the second half of the year, any significant shift in product mix or geography? And then on the MXK-F, when that starts shipping, will we see any positive gross margin implications there?

[Jim Norrod:]

Hey, Alan, this is Jim. Thanks for the questions. Yeah, we do watch that funnel very closely. And I've not seen a major shift on the service provider business. It seems to be pretty well-stable both on international and domestic. So we, again, we do about two-thirds of our business outside the U.S. That really -- it moves around a point or two, but it stays pretty close to being two-thirds. So I don't see a big shift. We had a little better domestic this last quarter and maybe a little less in the Middle East due to the seasonality, but it doesn't shift but a point or two off. On the MXK-F, yes, by the way, we've got several customers that are using that product live as we speak. We've not yet announced it formally but we will later this year. And yes, the gross margins are higher on that product, so we're very excited to get it out to the general population as soon as possible.

[Alan Davis:]

Okay, great. And then on FiberLAN, it sounds like there were comments kind of sticking with your long-term guidance. Anything else you'd like to add there in terms of the expectations for that product, anything that’s changed over the last three months?

[Jim Norrod:]

Yeah. Get me started and I'll stay on the phone for a long time with you on this. This is where I spend, as you know, a lot of my time here. As everyone knows, we're in really the two markets, service provider business and then the enterprise business with FiberLAN. We have continued to be a strong believer in that business opportunity where our business has more than doubled in the first half of this year versus the first half of last year, again, more than doubled. We've more than doubled the number of resellers that we have that we're working with, and more than doubled the number of customers that have bought the products. So yes, I and the Company continue to be very, very bullish on FiberLAN and we still believe that the goal that we stated to be -- that business be a $100 million business in five years is right on. So again we're bullish about the opportunity. I spend a lot of time on the road for this Company, almost more than half of my time I'm out with customers. As an example, I'll be in Israel this weekend working with one of our very large opportunities in Israel, that is the largest opportunity identified to us in the FiberLAN area. So again we're very bullish as to what we see. And again, we're sticking to our guns that we think it's a $100 million business in five years.

[Alan Davis:]

Okay, great. And last thing is, I wanted to gain some perspective here and just see how your first year at Zhone kind of compared to maybe your expectations going in, any challenges or successes that stand out?

[Jim Norrod:]

Yes. Again good question. I think we're exactly where we want to be. The thing that, as I said, I spend a lot of time visiting our customers early on to understand what products they want, and we directed our R&D team to focus on those requirements. So I think we're exactly where we want to be in both the markets, and we will continue to focus on the service provider and the FiberLAN business. Again, where I thought we would be is where we are. We have really done a good job getting our expenses lined up. You see the numbers there. We continue to manage those expenses very carefully. And I will say that, when I came into the Company, I said we wanted to be a profitable business, and our goal is still to be profitable this year. We think we got a great shot at doing that. But more importantly than just the short-term goal, we've set the foundation for the future, 2016 and beyond, of both the service provider technology with the MXK-F, which is just a phenomenal product, there's nothing like it in the industry today, and so we set the foundation there. And we've used the same technology that we've developed for the service provider business for the FiberLAN enterprise business. And again, I will just reiterate that, when I say more than doubled, we're on track to do very well both with revenue, with customers, and with resellers. I mean, it's right where we want it to be. So I am not disappointed at all on that.

[Alan Davis:]

Great, Jim. Thanks. That's all for me.

[Operator:]

[Operator Instructions] We have a question from Jim Lenobel from Haywood Securities. Please proceed.

[Jim Lenobel:]

Yes. Could you provide some background of detail on what if any the dollar strength has had on your financial results?

[Kirk Misaka:]

Sure. This is Kirk Misaka, Jim. Most of our customers are international customers, are in countries where the currency at the foreign country is pegged to the U.S. dollar, so there's a little impact. There have been some impact with regard to Europe, and that may be some other reason why Europe experienced some weakness. But I wouldn't say that there's a major macro trend with regard to the strength of the dollar that's influencing our business. We're not completely resilient from that, but we have less impact in other companies.

[Jim Lenobel:]

Great. Thank you very much.

[Operator:]

I would now turn the call over to Mr. Jim Norrod for closing remarks.

[Jim Norrod:]

All right, folks. As always, we want to thank you for joining us today and your continued support. We are very excited about the growth opportunities that position us for this year and beyond. And again, I want to remind you, our number one goal is, Kirk has mentioned and I mentioned, is to be profitable this year, and build the correct foundation going forward. And we think we're on track to do both of those. So again we're committed to making this a successful business. We're making great progress. And again we appreciate all your support throughout the year and look forward to building this into a valuable company going forward. So again, thanks for attending.

[Operator:]

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