Zhone Technologies, Inc. : Zhone Technologies Reports Fourth Quarter 2011 Financial Results

Zhone Technologies, Inc. (NASDAQ: ZHNE), a global leader in FTTx network access solutions, today reported its financial results for the fourth quarter ended December 31, 2011.

Revenue for the fourth quarter of 2011 was $33.4 million compared to $30.2 million for the third quarter of 2011 and $31.0 million for the fourth quarter of 2010. Adjusted earnings before stock-based compensation, interest, taxes, depreciation, and impairment of long-lived assets ("adjusted EBITDA") was an adjusted EBITDA profit of $0.3 million for the fourth quarter of 2011, compared to an adjusted EBITDA loss of $1.3 million for the third quarter of 2011 and an adjusted EBITDA loss of $0.7 million for the fourth quarter of 2010. During the fourth quarter of 2011, an impairment charge of $4.2 million was recorded against long-lived assets. The resulting net loss for the fourth quarter of 2011, calculated in accordance with generally accepted accounting principles ("GAAP"), was $4.6 million or $0.15 per share compared with a net loss of $2.7 million or $0.09 per share for the third quarter of 2011 and a net loss of $1.3 million or $0.04 per share for the fourth quarter of 2010.

"We're pleased to announce strong revenue growth across all regions during the quarter," stated Mory Ejabat, Zhone's chief executive officer. "Fourth quarter revenue grew 11 percent sequentially over third quarter revenue and 8 percent year over year as compared to last year's fourth quarter revenue. With this strong top line growth, we also achieved our other major financial objective for the quarter and generated positive adjusted EBITDA."

Total revenue for 2011 was $124.5 million as compared to $129.0 million for 2010. Adjusted earnings before stock-based compensation, interest, taxes, depreciation, gain on sale of the Oakland Campus, and impairment of long-lived assets ("adjusted EBITDA") was an adjusted EBITDA loss of $3.9 million for 2011, compared to an adjusted EBITDA loss of $2.0 million for 2010. Net loss for 2011, calculated in accordance with generally accepted accounting principles ("GAAP"), was $11.7 million or $0.38 per share compared to a net loss of $4.8 million or $0.16 per share for 2010. The net loss for 2011 includes the $4.2 million impairment charge recorded against long-lived assets. The Company reviews long-lived assets, including intangible assets, for impairment annually or whenever changes in circumstances indicate that the carrying value of an asset may not be recoverable. Due to the significant decrease in the market capitalization recently, the Company determined that the indicators of impairment existed similar to the conditions that existed during the second quarter of 2008 when the Company last impaired assets.

Cash, cash equivalents and short-term investments at December 31, 2011 was $18.2 million compared to $21.2 million at December 31, 2010.

Zhone will conduct a conference call and audio webcast today, January 25, 2012, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its fourth quarter 2011 results. This call is open to the public by dialing [phone] for U.S. callers and [phone] for international callers and then entering passcode 36366758. 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 [phone] for U.S. callers and [phone] for international callers and then entering passcode 64982630. 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 Operations.

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, 2010 and the Company's quarterly report on Form 10-Q for the quarters ended March 31, 2011, June 30, 2011, and September 30, 2011. 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.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)
		Three Months Ended												Year Ended
		December 31,				September 30,				December 31,				December 31,				December 31,
			2011				2011				2010				2011				2010
Net revenue		$	33,432			$	30,204			$	31,016			$	124,502			$	129,036
Cost of revenue			21,379				19,901				18,731				80,480				79,770
Stock-based compensation			11				29				11				61				94
Gross profit			12,042				10,274				12,274				43,961				49,172
Operating expenses:
Research and product development (1)			5,121				5,294				5,430				21,380				21,188
Sales and marketing (1)			5,847				5,557				6,147				22,297				23,982
General and administrative (1)			1,466				2,154				1,926				7,784				9,855
Gain on sale of Oakland Campus			-				-				-				-				(1,959	)
Impairment of long-lived assets			4,236				-				-				4,236				-
Total operating expenses			16,670				13,005				13,503				55,697				53,066
Operating income (loss)			(4,628	)			(2,731	)			(1,229	)			(11,736	)			(3,894	)
Other expense, net			79				(4	)			(49	)			70				(988	)
Income (loss) before income taxes			(4,549	)			(2,735	)			(1,278	)			(11,666	)			(4,882	)
Income tax provision (benefit)			93				13				(6	)			60				(101	)
Net income (loss)		$	(4,642	)		$	(2,748	)		$	(1,272	)		$	(11,726	)		$	(4,781	)
Weighted average shares outstanding
Basic			30,766				30,701				30,515				30,671				30,393
Diluted			30,766				30,701				30,515				30,671				30,393
Net income (loss) per common share
Basic		$	(0.15	)		$	(0.09	)		$	(0.04	)		$	(0.38	)		$	(0.16	)
Diluted		$	(0.15	)		$	(0.09	)		$	(0.04	)		$	(0.38	)		$	(0.16	)
(1) Amounts include stock-based compensation costs as follows:
Research and product development			55				89				49				244				362
Sales and marketing			71				174				53				350				421
General and administrative			79				639				90				1,015				1,388
			205				902				192				1,609				2,171
GAAP net income (loss)		$	(4,642	)		$	(2,748	)		$	(1,272	)			(11,726	)		$	(4,781	)
Stock-based compensation			216				931				203				1,670				2,265
Interest expense			(66	)			33				30				44				996
Income taxes			93				13				(6	)			60				(101	)
Depreciation			467				447				324				1,810				1,585
Gain on sale of Oakland Campus			-				-				-				-				(1,959	)
Impairment of long-lived assets			4,236				-				-				4,236				-
Non-GAAP Adjusted EBITDA profit (loss)		$	304			$	(1,324	)		$	(721	)		$	(3,906	)		$	(1,995	)

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
		December 31,				December 31,
			2011				2010
Assets
Current assets:
Cash, cash equivalents and short-term investments		$	18,190			$	21,174
Accounts receivable			31,598				29,747
Inventories			27,393				31,048
Prepaid expenses and other current assets			2,672				2,514
Total current assets			79,853				84,483
Property and equipment, net			608				5,274
Restricted cash			58				58
Other assets			213				296
Total assets		$	80,732			$	90,111
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	11,797			$	11,864
Line of credit			15,000				10,000
Accrued and other liabilities			10,029				13,217
Total current liabilities			36,826				35,081
Other long-term liabilities			4,379				5,615
Total liabilities			41,205				40,696
Stockholders' equity:
Common stock			31				30
Additional paid-in capital			1,071,390				1,069,513
Other stockholders' equity			237				277
Accumulated deficit			(1,032,131	)			(1,020,405	)
Total stockholders' equity			39,527				49,415
Total liabilities and stockholders' equity		$	80,732			$	90,111

Zhone Investor Relations:
Tel: [phone]
Fax: [phone]
E: [e-mail]
or
Zhone Public Relations:
Tel: [phone]
E: [e-mail]