Kirk Misaka - Chief Financial Officer Jim Norrod - Chief Executive Officer.

Christian Schwab - Craig-Hallum Capital Group Alan Davis - L.A. Davis & Associates.

Good day and welcome to the Third Quarter 2014 Zhone Technologies Conference Call. My name is Ryan and I will be the operator on today’s call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. Now, I would like to introduce Kirk Misaka, Zhone’s Chief Financial Officer. Please proceed..

Thank you, operator. Hello and welcome to the third quarter 2014 Zhone Technologies, Inc. conference call. I am Kirk Misaka, Zhone’s Chief Financial Officer.

The purpose of this call is to discuss Zhone’s third quarter 2014 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 am here today with Jim Norrod, Zhone’s Chief Executive Officer.

Jim will begin by discussing the key financial results and business developments of the third quarter. Following Jim’s comments, I will discuss Zhone’s detailed financial results for the third quarter of 2014 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 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, 2013, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014.

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 that management uses as the 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 has 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..

Thank you, Kirk. Good afternoon and thank you for joining us today for our third quarter 2014 earnings call. During the quarter, we are experiencing softness attributed to lower than expected orders in some of our larger service provider customers.

We expect these customers to resume normal network improvement and expansion going forward and for revenue in the fourth quarter to rebound. Fortunately, for Zhone, we have an exciting new business called FiberLAN, an optical LAN solution for the enterprise. We will talk more about this later. Kirk will give you some details on the financial side.

So, let me talk about some important changes at Zhone. With regard to our business, Zhone is moving forward with two primary business focuses, the service provider business and the enterprise business enabled by our industry leading FiberLAN solutions. Let me take a few moments and review our progress so far and discuss some actions we are taking now.

We are making excellent progress with our focus on the FiberLAN business. Domestically, a new sales business unit has been formed with sales and systems engineers 100% dedicated to selling FiberLAN to the enterprise. This new business unit will report directly to me and headed up by a new Vice President, (indiscernible), a true enterprise veteran.

Internationally, each organization has fully trained resources developing new opportunities in each of our regions. This new emphasis has been completed without increasing headcount in the respective organizations.

We continue our business development efforts with several large strategic partners who have compelling business reasons to work directly with Zhone in efforts to make this new optical LAN market highly successful. They see the same powerful value proposition for FiberLAN as we do.

I expect to have some exciting news to report over the next several weeks.

I want to emphasize that more and more companies and enterprises all over the world are now realizing FiberLAN’s amazing attributes and benefits starting with lower capital costs, lower operational maintenance and IT expenditures, higher performance, increased security, and of course, a green solution with reduced carbon footprint, lower power and cooling costs.

Over the past quarter, we initiated aggressive awareness programs for FiberLAN targeting higher education, university and colleges distributing more than 100,000 (infograms) evangelizing the benefits of FiberLAN. We plan to continue this effort in the fourth quarter.

Marketing just launched an entirely new Zhone website with the primary objective to clearly articulate the differences in our two primary businesses, service providers and enterprises. The website provides an interface to our customers and partners. I proudly invite you to view our website and I do encourage your feedback.

I am sure you are going to like it. I have taken decisive actions restructuring Zhone by consolidating its operations to better focus on our two primary businesses. I hired a new Chief Operating Officer and a new Vice President of Manufacturing both with significant experience in running manufacturing and engineering as efficiently as possible.

We will continue to align the appropriate resources to support our two primary businesses in an efficient and focused manner. Now, regarding our customers, we have had numerous exciting new wins in each of our markets. Let me share a few examples.

First here in North America, we announced an important partnership with Fujitsu Network Communications in the development of a new fiber-to-the-home network for Kit Carson Electric Cooperative or KCEC.

Fujitsu worked with KCEC to select Zhone for its ability to meet the standards of the FCC’s National Broadband Plan delivering affordable high-speed broadband service in excess of 100 megabits per second to residents and 1 gigabit per second broadband service to anchor institutions like schools, hospitals and government offices.

Using Zhone MXKs and zNIDs, the GPON network will connect 29 communities comprised of roughly 24,000 households and businesses, 183 community institutions, and two Native American pueblos within a 2,951 square mile area in the Taos, Colfax and the Rio Arriba counties in North New Mexico.

The entire area will be serviced with new fiber network in four phases with completion expected in approximately two years. We also announced a new GPON and Active Ethernet deployment with Century City Connect in Cape Town, South Africa.

Century City Connect provides fast broadband access within the Century City precinct mixed use development in Cape Town that combines office, retail, residential and hospital components in an integrated urban environment delivering not only traditional GPON fiber access, but also a FiberLAN network.

Finally, Zhone was awarded a new FiberLAN contract for deployment at Washington State University. WSU or Washington State University will deploy MXKs and zNIDs for their new GPON passive optical LAN network. The deployment will span student housing, IT and ultimately transition across the entire campus.

Stay tuned for more detail in this exciting new customer. MXK shipments remained strong in the third quarter. Zhone shipped 274 MXK units in the quarter bringing total shipments to 7,050 units and MXK GPON subscriber capacity is rapidly approaching 45 million.

In summary, we continue to be bullish about our FiberLAN business and we are taking clear decisive actions to prepare this organization to focus and win this very important opportunity. Now, let me turn the call back to Kirk to provide more details about our financial results for last quarter and to discuss our financial guidance for next quarter.

Kirk?.

Thanks, Jim. Today, Zhone announced financial results for the third quarter of 2014. Third quarter revenue of $29.4 million decreased 7% year-over-year from 2013 third quarter revenue of $31.5 million and 9% quarter-over-quarter from second quarter revenue of $32.4 million.

As Jim mentioned, we expect fourth quarter revenue to rebound resulting in sequential revenue growth in the mid single-digit percentage range. Our international markets continued to produce the majority of our business and represented 61% of revenue for the third quarter as compared to 73% of revenue for the second quarter.

We experienced slightly lower customer concentration this quarter with the top five customers representing approximately 44% of revenue for the third quarter as compared to 51% for the second quarter, but continued to have (inaudible) 10% customers in the third quarter as compared to the second quarter.

Gross margins of 36.5%, was at the upper end of our original guidance range at 35% to 37%, with a return to more normal product mix. However, we are expecting our gross margins to dip slightly next quarter and should range between 33% and 35% for the fourth quarter of 2014.

As announced, operating expenses of $13.4 million for the third quarter were approximately $2 million higher than our original guidance, primarily as a result of the CEO transition and related business restructuring as Jim mentioned. We anticipate that our fourth quarter 2014 operating expenses will return to previous levels around $11.5 million.

Operating expenses for the third quarter included depreciation of approximately $100,000 and stock-based compensation of approximately $400,000, both of which we expect to continue at the same level into the fourth quarter of 2014.

Finally, our adjusted EBITDA loss for the third quarter of 2014 was $2.2 million and net loss on a GAAP basis was $2.7 million or $0.08 per basic and fully diluted share. Now, let’s look at the balance sheet.

Cash and short-term investments at September 30, 2014 declined to $13.5 million from $15.6 million at June 30, 2014 due primarily to the adjusted EBITDA loss. The net effect of other balance sheet changes was very minor, although specific balance sheet accounts fluctuated to a larger extent.

The accounts receivables decreased to $34.2 million at September 30, 2014 from $35.4 million at June 30, 2014, but the number of days sales outstanding on the accounts receivable increased slightly for the third quarter to 104 days as compared to 98 days for the second quarter.

Our total debt obligations associated with our working capital facility with Wells Fargo remained $10 million at both September 30, 2014 and June 30, 2014. Lastly, the weighted average basic and diluted shares outstanding were $32.4 million for the third quarter of 2014.

And 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..

Thank you, Kirk. We enter Q4 with a new level of confidence. The outlook for the remainder of this year and our future is optimistic. I am confident the new focused business structure and decisively structured plan will help to grow the business and increase FiberLAN sales. Ultimately, our primary objective is unchanged.

To achieve our financial objective sustaining growth and profitability for the company, our MXK and zNID solutions continued to be deployed by service providers’ enterprises globally with FiberLAN sales increasing each quarter. We would now like to open up the call to questions. Operator, please begin the Q&A session of the call..

(Operator Instructions) Our first question comes from Christian Schwab with Craig-Hallum Capital Group..

Good morning. Good afternoon, I guess.

On the service provider side, what do you think is the growth rate of that business is?.

Hi, Chris, it’s Jim Norrod. Yes, first of all, we still think that there is plenty of room to grow these businesses. The slowness that we had this last quarter happened to be very European focused.

There were just some deals that didn’t get done in the Middle East and some deals didn’t get done in Europe, but we expect to see those come back to a relatively normal rate here in the fourth quarter. So I think historically it’s the business has been growing slightly over the last several quarters and I expected that that will continue.

Kirk, do you have anything you want to add to that on a percentage basis?.

Yes, Christian, it’s been in the low single-digit percentage range growth and that’s we are still thinking that year-over-year that’s where we will end up..

Okay, great.

And then as we look at FiberLAN and you are more used to discuss numbers of what you thought that would be, you have kind of been there long enough, how should we be thinking about the ramp in FiberLAN over the next few years?.

Well, that of course is the ultimate question that everybody is asking and I have been pretty careful to say that it is the startup business and I expect that over five years it clearly can be in excess of over $100 million.

I would hate to put a number on it for 2015 and that I literally just started the new business unit as I said earlier with a dedicated Vice President, a dedicated sales and support team. And so I am bullish in 2015 what it could be, but again I would hate to put a specific number on it..

Can you give us an idea of what revenue FiberLAN will represents in calendar ’14 plus or minus?.

Christian, I think we are going to defer to answer what that was until the end of the year. There is just as we have gone through the year what we have learned is what’s in the pipeline doesn’t necessarily convert to revenue as quickly as we have thought.

The sales cycle has been pushed out on us on a number of occasions, so we are hesitant to do that. We will however, if FiberLAN revenue exceeds 10% of our quarterly revenue discussed at specific amount and that’s what we said we would do throughout the year..

Alright.

Can you give us an idea of what that number is year-to-date then or you just don’t want to talk about at all?.

The only statement we are making is that it’s less than 10% of our quarterly revenue..

Okay, great. No other questions. Thank you..

The next question comes through from Alan Davis with L.A. Davis & Associates..

Well, hi guys. It’s a couple of questions in regards to I guess the business – service provider business in Europe and Middle East.

Are those deals – would you characterize those, I am assuming (inaudible) the quarter, but are those pushed out or would you characterize them as still open, just a little more information on if those are still deals you can close?.

Yes. They didn’t go away, they were pushed out. There were some holy holidays over there. We had some softness due to the summer months.

And so yes they didn’t go away, they got pushed out as a matter of fact here in the last 24 hours we have seen a decent order from one of our service providers in the Middle East, so we are starting to see these come in now. So it just was the timing thing that they just didn’t happen at the end of the quarter. So now they didn’t go away..

Okay.

And then on the domestic service provider business would you characterize that as right in line with what you expected going into the quarter or was there some mild weakness there as well?.

No that was pretty well in line in the U.S. We tracked it pretty carefully and the deals that we expected would close closed and so I didn’t see any big change on the forecast that I had when I came into the company. So yes, U.S. was pretty well in line so the softness that we saw clearly was the Middle East as well as the European service providers.

I had a chance to spend a week over in Europe a few weeks ago and meet some of them. Actually, I am leaving tomorrow morning at 6 AM to meet our largest service providers in the Middle East. And again, I expect to see those come back in the fourth quarter and get back on a normal run rate basis..

Okay.

And lastly on the domestic business -- on the service provider business, were there any trends either in terms of deal sizes going up or down or the customers we are dealing with larger or smaller regional types?.

No. Again, we saw pretty well the trend for the year was pretty consistent domestically. So, I didn’t see any real change for the year. I don’t expect to see a real change in the fourth quarter as well domestically. So, we are not doing Tier 1 as you know in the U.S. So, they are really Tier 3 through Tier 5 kind of companies.

And there one of our major players is out doing some consolidation and buying some smaller companies and they seem to be stepping up their run rate business, but all-in-all, it looks pretty solid, it looks pretty consistent moving forward..

Okay, thank you..

Thank you..

Okay. And we have no further questions. So, I will pass it back to Jim for any closing remarks..

Alright. Once again, thank you all for joining us today and of course for your continued support and we look forward to speaking with you on next quarter’s earnings conference call. Again, thanks for your time today..

Okay. Thanks everyone for your time and your participation and have a good rest of the day..