(ZHNE) Reports Second Quarter 2013 Financial Results

Zhone Technologies, Inc. (NASDAQ: ZHNE), a global pioneer in FTTx network access solutions, today reported its financial results for the second quarter ended June 30, 2013.

Revenue for the second quarter of 2013 was $30.0 million compared to $28.4 million for the first quarter of 2013 and $30.8 million for the second quarter of 2012. Net income for the second quarter of 2013, calculated in accordance with generally accepted accounting principles (“GAAP”), was $1.1 million or $0.03 per share compared with net income of $0.2 million or $0.01 per share for the first quarter of 2013 and a net loss of $2.1 million or $0.07 per share for the second quarter of 2012. Adjusted earnings before stock-based compensation, interest, taxes, and depreciation (“adjusted EBITDA”) was an adjusted EBITDA profit of $1.3 million for the second quarter of 2013, compared to an adjusted EBITDA profit of $0.6 million for the first quarter of 2013 and an adjusted EBITDA loss of $1.7 million for the second quarter of 2012.

“We’re pleased to announce that we achieved or exceeded our revenue, gross margin and expense targets for the quarter thereby generating positive free cash flow from operations,” stated Mory Ejabat, Zhone’s chief executive officer. “For the third quarter in a row, we have generated positive net income and cash flow from operations, further strengthening our financial position. We continue to focus on profitability as our number one financial objective and expect to improve that profitability in the second half of 2013.”

Cash, cash equivalents and short-term investments at June 30, 2013 was $12.7 million compared to $11.1 million at December 31, 2012.

Zhone will conduct a conference call and audio webcast today, July 17, 2013, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its second quarter 2013 results. This call is open to the public by dialing +1 (866) 314-5232 for U.S. callers and +1 (617) 213-8052 for international callers and then entering passcode 59793121. The audio webcast will be simultaneously available on the Investor Relations section of Zhone’s website at http://www.zhone.com/investors/.

A replay of the conference call will be available 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 77481386. An audio webcast replay will also be available online at http://www.zhone.com/investors/ for approximately one week following the original call.

Non-GAAP Financial Measures

To supplement Zhone’s consolidated financial statements presented in accordance with GAAP, Zhone uses adjusted 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 to fund 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 adjusted EBITDA on a non-GAAP basis is provided in a table immediately following the Unaudited Condensed Consolidated Statements of Comprehensive Loss.

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.

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 products names are all subject to change without notice.

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, among others, statements that refer to financial estimates; projections of revenue, margins, expenses or other financial items. 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 the Company’s products; intense competition in the communications equipment market; the Company’s ability to execute on its 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 the Company’s SEC filings available at www.sec.gov, including without limitation, the Company’s annual report on Form 10-K for the year ended December 31, 2012 and the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2013. 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. The Company undertakes no obligation to update or revise any forward-looking statements for any reason.

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIESUnaudited Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands, except per share data)
		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
			2013				2013				2012				2013				2012
Net revenue		$	30,048			$	28,379			$	30,835			$	58,427			$	57,897
Cost of revenue			18,436				17,875				21,556				36,311				40,228
Stock-based compensation			–				–				7				–				17
Gross profit			11,612				10,504				9,272				22,116				17,652
Operating expenses:
Research and product development (1)			3,920				3,660				4,820				7,580				9,745
Sales and marketing (1)			5,073				4,822				4,825				9,895				9,540
General and administrative (1)			1,525				1,689				1,719				3,214				3,813
Total operating expenses			10,518				10,171				11,364				20,689				23,098
Operating income (loss)			1,094				333				(2,092	)			1,427				(5,446	)
Other expense, net			2				(71	)			6				(69	)			(21	)
Income (loss) before income taxes			1,096				262				(2,086	)			1,358				(5,467	)
Income tax provision			40				32				16				72				49
Net income (loss)		$	1,056			$	230			$	(2,102	)		$	1,286			$	(5,516	)
Other comprehensive income (loss)			(78	)			(5	)			(20	)			(83	)			(16	)
Comprehensive income (loss)		$	978			$	225			$	(2,122	)		$	1,203			$	(5,532	)
Weighted average shares outstanding
Basic			31,222				31,118				30,985				31,170				30,871
Diluted			32,696				31,768				30,985				31,859				30,871
Earnings per common share
Basic		$	0.03			$	0.01			$	(0.07	)		$	0.04			$	(0.18	)
Diluted		$	0.03			$	0.01			$	(0.07	)		$	0.04			$	(0.18	)
(1) Amounts include stock-based compensation costs as follows:
Research and product development		$	–			$	–			$	41			$	–			$	85
Sales and marketing			–				–				33				–				68
General and administrative			134				178				182				312				262
		$	134			$	178			$	256			$	312			$	415
GAAP net income (loss)		$	1,056			$	230			$	(2,102	)		$	1,286			$	(5,516	)
Stock-based compensation			134				178				263				312				432
Interest expense			10				39				9				49				27
Income taxes			40				32				16				72				49
Depreciation			92				82				80				174				157
Non-GAAP Adjusted EBITDA income (loss)		$	1,332			$	561			$	(1,734	)		$	1,893			$	(4,851	)

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIESCondensed Consolidated Balance Sheets (In thousands)
		June 30,				December 31,
			2013				2012
Assets
Current assets:
Cash, cash equivalents and short-term investments		$	12,722			$	11,119
Accounts receivable			27,774				25,820
Inventories			20,143				21,404
Prepaid expenses and other current assets			1,945				2,590
Total current assets			62,584				60,933
Property and equipment, net			623				583
Other assets			185				208
Total assets		$	63,392			$	61,724
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	7,904			$	7,229
Line of credit			10,000				10,000
Accrued and other liabilities			9,019				8,836
Total current liabilities			26,923				26,065
Other long-term liabilities			3,011				3,719
Total liabilities			29,934				29,784
Stockholders’ equity:
Common stock			31				31
Additional paid-in capital			1,073,154				1,072,839
Other comprehensive income			133				216
Accumulated deficit			(1,039,860	)			(1,041,146	)
Total stockholders’ equity			33,458				31,940
Total liabilities and stockholders’ equity		$	63,392			$	61,724