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Press ReleaseZhone Technologies Reports Third Quarter 2006 Financial ResultsOakland, CA — October 19, 2006 — Zhone Technologies, Inc. (NASDAQ:ZHNE), a global provider of advanced communications equipment and a leader in VoIP, IPTV, and Ethernet over both copper and fiber access lines, today reported its results for the third quarter ended September 30, 2006. Revenue for the third quarter of 2006 was $43.1 million compared with $54.2 million for the second quarter of 2006 and $40.6 million for the third quarter of 2005. Net loss for the third quarter of 2006, calculated in accordance with generally accepted accounting principles ("GAAP"), was $121.0 million or $0.81 per share compared with a net loss of $13.1 million or $0.09 per share for the second quarter of 2006, and a net loss of $11.3 million or $0.10 per share for the third quarter of 2005. The third quarter 2006 results included a $113.7 million charge for impairment of goodwill and intangible assets. This non-cash impairment charge was calculated in accordance with GAAP and is expected to be non-recurring. The second quarter 2006 results included a $7.2 million inventory write-off related to Zhone's legacy business. The results for 2006 also included incremental non-cash employee stock-based compensation expense associated with the implementation of SFAS 123R. Pro forma earnings before stock-based compensation, interest, taxes, impairment, depreciation and amortization (EBITDA) was a $5.1 million loss for the third quarter of 2006, compared to pro forma EBITDA loss of $10.1 million for the second quarter of 2006 and pro forma EBITDA earnings of $27,000 for the third quarter of 2005. "The decline in third quarter revenues was disappointing; however, we expect to rebound over the next few quarters," said Mory Ejabat, Chairman and Chief Executive Officer of Zhone. "We do not view the current quarter as indicative of any negative long-term trend as seasonal issues in our international market will return to normal and buying patterns of our largest customers resolve themselves. Nonetheless, we have taken steps to streamline our business and improve operational execution with expectations of achieving profitability." Zhone continued to maintain its broad base of service provider customers with significant sales into each of its operating regions. Service providers continue to migrate to the next generation of IP-based networks, installing Zhone's innovative solutions to enhance their service offerings with VoIP, IPTV, and broadband. Zhone believes its products are interoperable with more VoIP softswitch platforms and protocols than those of any other access equipment provider in the industry. Zhone will hold a conference call today, October 19, 2006, at approximately 5:00 p.m. Eastern Time to review its third quarter results. This call is open to the public by dialing +1 (866) 362-4820 for U.S. callers and +1 (617) 597-5345 for international callers and then entering passcode 22654363. The audio webcast will be simultaneously available on the Investor Relations section of Zhone's website at http://www.zhone.com/about/investors/. A replay of the conference call will be available for approximately one week after the original call by dialing +1 (888) 286-8010 for U.S. callers and +1 (617) 801-6888 for international callers and then entering passcode 75427209. An audio webcast replay will also be available online at www.zhone.com/about/investors/ following the original call. Non-GAAP Financial Measures To supplement Zhone's consolidated financial statements presented in accordance with GAAP, Zhone uses pro forma EBITDA, a non-GAAP measure Zhone believes is appropriate to enhance an overall understanding of Zhone's past financial performance and prospects for the future. These adjustments to 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 the company's operational performance, including the company's ability to provide cash flows to invest in research and development, and fund acquisitions and capital expenditures. In addition, these non-GAAP financial measures 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. A reconciliation between net loss calculated on a GAAP basis and pro forma EBITDA on a non-GAAP basis is provided in a table immediately following the Unaudited Condensed Consolidated Statements of Operations. Forward-Looking Statements This press release contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "goal," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would," variations of such words, and similar expressions are intended to identify forward-looking statements. In addition, forward-looking statements include statements that refer to the expected rebound in revenue, return to normalcy, and customer buying patterns. Readers are cautioned that actual results could differ materially from those expressed in or contemplated by the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, commercial acceptance of our SLMS and optical products; intense competition in the communications equipment market; our ability to execute on our strategy and operating plans; and economic conditions specific to the communications, networking, internet and related industries. In addition, please refer to the risk factors contained in Zhone's SEC filings available at www.sec.gov, including without limitation, Zhone's annual report on Form 10-K for the year ended December 31, 2005 and Zhone's quarterly reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. Zhone undertakes no obligation to update or revise any forward-looking statements for any reason. About Zhone Technologies, Inc. Zhone Technologies, Inc. (NASDAQ:ZHNE) is a global provider of advanced communications equipment to more than 600 operators in both emerging and established markets. Zhone's market-leading Broadband Loop Carrier equipment enables operators to rapidly deploy revenue-generating access services using their existing infrastructure, while providing a migration path to a cost-efficient, all-IP access network. The company's products address a broad range of applications including residential and business broadband, VoIP, IPTV, and Ethernet over both copper and fiber access lines. Zhone's advanced networking solutions include the Single Line Multi-Service architecture (SLMS(TM)), Multi-Access Line Concentrator (MALC(TM)), Raptor(TM) ATM/IP DSLAMs, Zhone Residential Gateways (ZRG(TM)), GigaMux(TM) Optical Transport Systems and Zhone Management System (ZMS(TM)). For more information, please visit www.zhone.com. Zhone, the Zhone logo, and all Zhone product names are trademarks of Zhone Technologies, Inc. Other brand and product names are trademarks of their respective holders. Specifications, products, and/or product names are all subject to change without notice. Copyright (C) 2006 Zhone Technologies, Inc. All rights reserved. ZHONE TECHNOLOGIES, INC. Unaudited Condensed Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended (a) Nine Months Ended (a) ------------------------------------------------- September September September September 30, June 30, 30, 30, 30, 2006 2006 2005 2006 2005 ------------------------------------------------- Net revenue $ 43,138 $ 54,214 $ 40,615 $ 150,038 $ 98,623 Cost of revenue 27,848 42,291 23,824 102,643 57,012 Stock-based compensation 181 235 22 737 74 ------------------------------------------------- Gross profit 15,109 11,688 16,769 46,658 41,537 ------------------------------------------------- Operating expenses: Research and product development (b) 9,042 9,817 7,413 27,471 18,988 Sales and marketing (b) 9,308 10,684 7,441 29,582 20,391 General and administrative (b) 3,930 3,627 8,067 11,068 10,975 Purchased in-process research and development - 1,190 - 1,190 Amortization of intangible assets 307 559 3,214 2,764 7,728 Impairment of intangible assets and goodwill 113,666 - - 113,666 ------------------------------------------------- Total operating expenses 136,253 24,687 27,325 184,551 59,272 ------------------------------------------------- Operating loss (121,144) (12,999) (10,556) (137,893) (17,735) Other income (expense), net 134 (46) (618) 41 (1,872) ------------------------------------------------- Loss before income taxes (121,010) (13,045) (11,174) (137,852) (19,607) Income tax provision 22 55 80 184 133 ------------------------------------------------- Net loss $(121,032)$(13,100)$(11,254)$ (138,036)$(19,740) ================================================= Basic and diluted net loss per share ($0.81) ($0.09) ($0.10) ($0.93) ($0.20) Weighted average shares outstanding used to compute basic and diluted net loss per share 148,905 148,721 112,099 148,589 100,198 (a) 2006 includes incremental employee stock-based compensation expense associated with the implementation of SFAS 123R. 2005 stock- based compensation expense has been reclassified to conform to current year presentation. (b) Amounts include stock-based compensation cost as follows: Research and product development 370 391 52 1,299 171 Sales and marketing 310 332 54 1,086 156 General and administrative 457 478 2,617 1,103 2,651 ------------------------------------------------- 1,137 1,201 2,723 3,488 2,978 GAAP net loss $(121,032)$(13,100)$(11,254)$ (138,036)$(19,740) Stock-based compensation 1,318 1,436 2,745 4,225 3,052 Acquisition-related charges - - 3,101 - 3,101 Purchased in-process research and development - - 1,190 - 1,190 Interest expense, net (87) 235 508 147 1,696 Income taxes 22 55 80 184 133 Depreciation 692 678 443 1,957 1,248 Amortization and impairment of intangible assets 113,973 559 3,214 116,430 7,728 ------------------------------------------------- Non-GAAP pro forma EBITDA $ (5,114)$(10,137)$ 27 $ (15,093)$ (1,592) ================================================= Revenue by product line: SLMS 23,608 35,272 18,145 92,035 37,090 Legacy and Service 15,081 12,690 17,261 42,444 44,440 Optical Transport 4,449 6,252 5,209 15,559 17,093 ------------------------------------------------- 43,138 54,214 40,615 150,038 98,623 ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands) September December 30, 31, 2006 2005 ---------- ---------- Assets Current assets: Cash, cash equivalents and short-term investments $65,803 $71,140 Accounts receivable 35,497 35,392 Inventories 48,408 48,370 Prepaid expenses and other current assets 3,464 5,811 --------------------- Total current assets 153,172 160,713 --------------------- Property and equipment, net 24,127 24,097 Goodwill 70,541 180,001 Other acquisition-related intangible assets - 14,638 Restricted cash 547 547 Other assets 79 109 --------------------- Total assets $248,466 $380,105 ===================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $21,048 $17,912 Line of credit 14,500 14,500 Current portion of long-term debt 7,667 1,170 Accrued and other liabilities 23,380 24,610 --------------------- Total current liabilities 66,595 58,192 Long-term debt, less current portion 19,445 28,597 Other long-term liabilities 1,515 1,527 --------------------- Total liabilities 87,555 88,316 --------------------- Stockholders' equity: Common stock 149 148 Additional paid-in capital 1,056,829 1,051,320 Other stockholders' equity 263 (1,385) Accumulated deficit (896,330) (758,294) --------------------- Total stockholders' equity 160,911 291,789 --------------------- Total liabilities and stockholders' equity $248,466 $380,105 ===================== About Zhone Technologies
Zhone Technologies, Inc. (NASDAQ: ZHNE) is a global leader in all IP
multi-service access solutions, serving more than 750 of the world's most
innovative network operators.
The IP Zhone is the only solution that enables service providers to build the
network of the future…today, supporting end-to-end Voice, Data, Entertainment
Social Media, Business, Mobile Backhaul and Mobility service.
Zhone is committed to building the fastest and highest quality All IP
Multi-Service solution for its customers.
Zhone is headquartered in California and its products are manufactured in the
USA in a facility that is emission, waste-water and CFC free.
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Zhone, the Zhone logo, and all Zhone product names are trademarks of Zhone Technologies, Inc. Other brand and product names are trademarks of their respective holders. Specifications, products, and/or product names are all subject to change without notice. |
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