Kirk Misaka – Chief Financial Officer Jim Norrod – Co-Chief Executive Officer Yung Kim – Co-Chief Executive Officer.

Alan Davis – LA Davis.

Good day and welcome to the Third Quarter 2016 DASAN Zhone Solutions Incorporated Conference Call. I'm Karen and I'll be your coordinator for today. 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. I would now like to introduce Kirk Misaka, DASAN Zhone Solutions Chief Financial Officer. Please proceed..

Thank you, operator. Hello and welcome to the third quarter 2016 DASAN Zhone Solutions Inc. earnings conference call. I'm here today with Co-CEO's of DASAN Zhone Solutions, Yung Kim and Jim Norrod. Yung has over 30 years of experience in the telecommunications industry and has held executive positions at both, British Telecom and Korea Telecom.

Yung will manage engineering, support and operations while Jim Norrod will run sales, marketing and G&A. Since Yung is response for DZSI's product strategy and technology development, he will begin with comments about DZSI's current product portfolio and future road map.

Jim will follow with comments about DZSI's markets and the delivery of DZSI's products through our combined sales channels. Following Jim's comments, I will discuss DZSI's financial results for the third quarter and provide guidance for next quarter. In addition, I will provide initial thoughts on our 2017 operating model and financial objectives.

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 made available online at www.dasanzhone.com following the call.

Before we begin, I'd like to mention that during the course of this call, we may make forward-looking statements, made in reliance on the Safe Harbor provisions of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended.

Including forward-looking statements such as the amount and timing of cost savings and synergies that maybe achieved in connection with the merger. The strength of the combined company's balance sheet and financial results following the merger -- the theory [ph] to which the combined company will alter that competitive landscape and it's industry.

Prevailing market conditions and the company's ability to successfully fulfill the customer's needs. Actual results could differ materially from those projected in or contemplated by forward-looking statements. Factors that could cause actual results to differ include the possibility that the intended benefits of the merger may not be fully realized.

Unanticipated difficulties or expenditures relating to the transaction, the response of business partners and competitors to the merger. Potential difficulties in employee retention as a result of the merger, legal proceedings that maybe instituted against some and others related to the merger.

The failure of the combined company to manage the cost of integrating the businesses and assets of Zhone Technologies and DASAN Networks Solutions; general economic conditions, the pace of spending and timing of economic recovery in the telecommunications industry, the combined company's inability to sufficiently anticipate market needs and develop products and product enhancements that achieve market acceptance and higher than anticipated expenses that combined company may incur in future quarters.

In addition, please refer to the risk factors contained in Zhone's SEC filings including without limitation, its Annual Report on Form 10-K for the year-ended December 31, 2015 and its Quarterly Report for the periods ended March 31, 2016 and June 30, 2016.

We also refer you to the risk factors and disclosures contained in Zhone's definitive proxy on schedule 14A. Listeners 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's undertake no obligation to update or revise any forward-looking statements.

With those comments in mind, I would now like to introduce Yung Kim.

Yung?.

Thanks, Kirk. As I mentioned on our last call, DASAN Zhone Solutions will deliver a broader ray of products that will allow carriers and enterprises to connect at a tremendous speed. We will provide significantly investments resources and our highly talented teams will deliver the best communication products in the world.

DZSI will focus its efforts delivering best-in-class products in four key products areas; broadband access, Ethernet switching, mobile backhaul and enterprise LAN solutions. Let me spend a few minutes discussing our existing products in each of these areas and our plans for future product development. Let's start with the broadband access.

Both DASAN Networks Solutions and Zhone are market leaders in the broadband access sector with strong and loyal customers around the world. The combination of DASAN Networks Solutions and Zhone enhances this leadership position and carrier solutions for the broadband market.

Since our broadband products solutions have been developed through the unique customer requirements of our respective markets, we plan to continue to support these customers with represent well over half of our current and future revenue.

We will continue to invest in new features and functionalities of these products, including the EPON, GPON, OLTs and ONTs; see that fast products and super-fast GSLANs [ph] for our DASAN customers, as well as the MXK-F, MXK-FC and IDS and residential CPE for our Zhone customers.

Our broadband customers will also continue to have access to our world-class service and support teams who have served them in the past. Our next major area of product focus will be Ethernet switching.

Ethernet switching represents approximately half of DASAN's revenue for the past 12 months, and we will continue to support and build upon the V-Series of layer two and layer three switches, delivering cost efficient solutions to our customers.

Since Zhone did not have comparable products for Ethernet switching, this represent a revenue growth opportunity that Jim will talk more about later. In addition to our strength in broadband access and Ethernet switching, we will deliver the broadest and best-in-class solutions for mobile backhaul and passive optical LAN.

We believe that combining the talents and assets from DASAN Network Solutions and Zhone; will build a strong leader in these products segments accompanying with strength in the market well beyond the current set of competitors. DASAN has been investing in mobile backhaul technologies for the past year investments to-date are approximately $7 million.

The outcome is a backhaul solution that addresses the many problems that carriers are facing with the tremendous traffic increases associated with 4G LTE and future 5G. DASAN's M-Series of cell site routers and aggregators were launched in early 2016. Tier 1 carrier trails are currently being held and we have just begun to tap the market potential.

Since mobile backhaul is another area where Zhone did not have comparable products, this represent another growth opportunity for both businesses. As a full passive optical LAN, we are well aware that Zhone has been a major player in this nascent area with its fiber LAN product.

DASAN's W-Series of Wifi access points and controllers enhances the functionality of the fiber LAN solution for enterprise customers and we plan to continue to support and develop all of these products to address the future needs of enterprise networking.

Enterprise LAN market is now ready to move from the copper-based technology to optical one with many advantages including cost and as the final solution.

As you know, fiber LAN is just an extension of our broadband access technologies, and therefore, the incremental investment in this area is small but as Jim has mentioned before, the market potential is tremendous. With that said, I will turn the call over to Jim Norrod..

Thank you, Yung and thank you all for joining us today. We are genuinely excited about the market opportunity in front of us.

With the combination of DASAN Networks Solutions and Zhone, we are immediately positioned to take advantage of the market opportunity to be a leading provider of broadband access, Ethernet switching, mobile backhaul and passive optical LAN products.

We know demand for these solutions is high and we have already begun to cross-sell to each other's loyal customer base with unified sales and support team in every major geographic region. Our merger combines best-of-class technology with large and loyal customer base. Our products are complimentary and our customers just do not overlap.

Where we are strong, DASAN is not active; and where DASAN is strong, Zhone has not been active. Jointly, we have a stronger sales and support organization.

DASAN has been a leading telecom equipment provider in the Asia Pacific region to some of the largest carriers in the region including the three largest carriers in Korea, and other Tier 1 carriers in Japan and Vietnam.

DASAN generates about 85% of its revenue from the Asia Pacific region and Zhone on the other hand generates less than 5% of its revenue from the Asia Pacific region but has been a leading player with alternate carriers in the Americas, Europe and the Middle East including several Tier 1 carriers in the Middle East.

We see revenue growth being driven by three major callus; first, we will cross-sell DASAN's Ethernet switching and mobile backhaul products to historical Zhone customers. As Yung mentioned, Zhone never had these types of products, so many Zhone customers are already requesting products to test in their networks.

Secondly, we will go revenue in the passive optical LAN business which I still believe can be a $100 million in five years with an appropriate increase in the sales and marketing efforts in our worldwide customer base. And our third major catalyst comes from the merger itself.

By taking the best people, processes and products of both companies, I'm convinced that we will grow revenue even if we can counter difficult market conditions. Together the combined company with a strong presence in every geographic region in the world for growth of sales, service and support.

Together we have best-in-class products to serve these customers. Together we will increase operational efficiency and strengthen our balance sheet. Together we will be a leading provider of telecom equipment to our customers worldwide.

With that brief overview, let me turn the call back to Kirk to provide more details about our financial results for the third quarter and our financial guidance for the future..

Thanks, Jim. As previously announced, DASAN Networks Solutions and Zhone Technologies completed announced their merger on September 9, 2016, resulting in the company emerging as a global leader in broadband network access solutions.

In connection with the merger, Zhone Technologies issued approximately 47.5 million shares of its common stock representing 58% of the merged company to DASAN Networks Inc., the former sole shareholder of DASAN Networks Solutions and change its name to DASAN Zhone Solutions Inc.

The company commenced trading on the NASDAQ capital market under the new symbol DZSI on Monday, September 12, 2016. At the same time, the NASDAQ notified the company of its non-compliance with its initial listing requirements. But its delisting action was stayed pending a formal decision by the NASDAQ hearings panel.

The company's hearing before the panel occurred on November 3, 2016, and on November 8, 2016, the panel granted the company's request for continued listing until March 13, 2017, by which time the company must regain compliance with the initial listing requirements.

In order to regain compliance, the company share price must meet one of the re-criteria; $4 per share at any point in time, a closing price of $3 per share for five consecutive trading days, or a closing price of $2 per share for 90 consecutive trading days.

In order to meet one of these criteria, the company may need to complete a reverse stock split. Among other things, the panel's decision requires the company to file a preliminary proxy with the SEC by January 31, 2017, requesting shareholder approval for a reverse stock split.

In that regard, the company anticipates requesting approval of a whomever [ph] stock split of upto 1 for 5 and to provide the company upto one year to complete the reverse stock split.

If the company's plans with respect to the reverse stock split change or events occur to delay it, the company must immediately inform the panel and will make another announcement at that time.

Now before proceeding with the discussion of the DZSI financial results for the third quarter, let me provide some background concerning what these financial results represent. As mentioned before, Zhone was the legal acquirer in this transaction because it issued shares to acquire the stock of DASAN Networks Solutions.

However, for accounting purposes, DASAN Networks Solutions was treated as the accounting acquirer based on a variety of factors governed by GAAP. Accordingly, the financial operations of Zhone are reflected from September 9 forward and its balance sheet was recorded based on the fair value of its assets and liabilities as of the merger date.

Those assets include the value of acquired intangible assets and goodwill.

Therefore, the DZSI financial results for the third quarter represent the financial results of DASAN Networks Solutions for the entire quarter but only the financial results of Zhone from September 9 through the end of the quarter making the DZSI financial results for the third quarter not comparable to prior operating results of just DASAN Networks Solutions.

Also the financial results of Zhone differ from Zhone's historical operating results in part because its current operating results reflect amortization of the acquired intangible assets that were recorded. With that in mind, we will discuss the third quarter financial results of DZSI but will not make comparisons to prior operating results.

In addition, we'll provide financial guidance regarding our anticipated fourth quarter combined operating results and our initial view of the 2017 combined operating model. Revenue for the third quarter was $32.2 million and gross margin was 29.5%.

For the fourth quarter, we expect normal seasonal improvement for both businesses which should generate approximately $60 million of combined revenue.

Based on normal seasonality, we would expect revenue to grow from approximately $45 million in the first quarter of 2017 to about $60 million in the fourth quarter of 2017, absent in a real revenue rate. For 2017 as a whole, revenue should be at least $210 million.

Additional growth will depend on how quickly we can cross-sell DASAN products to Zhone customers, and how quickly we can grow revenue in the mobile backhaul and passive optical LAN markets as Jim previously discussed.

Combined gross margins for 2017 should be close to 30% with longer term gross margin expansion coming from product cost reductions and manufacturing economies of scale. We will provide further details regarding that potential on subsequent earnings calls after we have integrated the manufacturing operations of both businesses.

Operating expenses for the third quarter totaled $14.4 million and included merger related costs of approximately $3.5 million.

Fourth quarter adjusted operating expenses excluding depreciation, amortization, stock-based compensation and restructuring cost should continue at roughly the same level for both businesses and would be about $19 million combined. However, we expect operating expenses for 2017 to drop by about 5% due to cost synergies associated with merger.

Our non-GAAP operating loss for the third quarter was $0.5 million and for the fourth quarter we expect a similar adjusted EBITDA loss. Depending on the level of costs synergies, we expect approximately breakeven adjusted EBITDA for 2017 as a whole.

Our immediate and primary financial goal for 2017 will be to exit 2017 with positive adjusted EBITDA which can be accomplished from a combination of revenue growth from cross-selling opportunities and new growing markets in mobile backhaul and passive optical LAN, gross margin expansion from cost reductions and manufacturing economies of scale, and operating expense reductions due to cost synergies associated with the merger.

Longer term, our primary financial goal will be to increase adjusted operating margins to 10% before making any other major structural changes to our operating model. Now let's turn to the balance sheet; cash and cash equivalents at September 30, 2016 were $34.4 million, reflecting the additional liquidity created by the merger.

Also debt of $26.9 million at September 30, 2016 is only partially indicative of the much larger borrowing capacity of the combined companies. As previously mentioned, the significant increase in intangible asset reflects the purchase accounting associated with the acquisition of Zhone.

Finally, all historical equity accounts of DNS and its subsidiaries, including power value per share -- share and per share numbers, have been adjusted to reflect the shares of the company's common stock issued in connection with the merger. And with that financial overview, we'd now like to open up the call to questions.

Operator, please begin the Q&A portion of the call..

Thank you. [Operator Instructions] We have a question from the line of Alan Davis from LA Davis..

Hi guys, just a couple of quick questions.

Kirk, can you give us any kind of apples-to-apples comparison; specifically or generally speaking to get a quarter-on-quarter or year-on-year but could you look at the result as a whole for both companies?.

It's a little too difficult to go through all those details and since we are not going to report those results, I think we should stay away from comparisons to financial statements that don't exist..

Okay, that's fair enough.

And I guess, instead of that as you look at your four products segments; have you talk about those in the quarter, strength and weaknesses, and maybe if there is any disruptions due to the merger?.

Yes, I don't see any -- the answer to last part of your question, I don't see any disruptions because of the merger. We -- the merger concluded on September 9 and we really could not begin cross-selling and talking to each other's customers until that day.

And so those are the rules we operated under, so September 9 was effectively the first day that we could reach out to each other's customers and so we're two months into that and there has been no disruption on either side.

We don't see a disruption this quarter, we in fact -- we see just the opposite, we see several new opportunities that have come up, really reasonable opportunities have come up for both sets of customers that we have.

So again, the cross-selling just started two months ago, I think you will start to see the results of that cross-selling pretty quickly, frankly..

Okay.

And then just lastly, as you are looking forward to booking your guidance as it stands now, I guess within those four product segments, which would expect to be the stronger product segment over the next four quarters, which one's are you expecting maybe not so strong?.

Well, as Yung said, Ethernet switching represented significant percentage of the DASAN business, and so we see that continuing, that strength will continue moving forward. The broadband access which is really the core of what we do -- again, that area is continuing to remain strong.

Mobile backhaul is relatively new, the mobile backhaul area -- DASAN had several successful installations but we have just started introducing those technologies to the Zhone customers and we don't have our first trials in our customers yet but we expect those soon. So that's kind of -- new area for us.

And then of course, passive optical LAN, something I continue to be very bullish about, see that as an area that's going to -- we believe it's going to continue to grow, and again, we're just introducing passive optical LAN into the DASAN customer base right now.

So it's -- and you know, it's a fairly long sales cycle on passive optical LAN, we've all talked about it before. So we're just introducing those two to the DASAN customers..

Okay.

Then passive optical LAN on target in terms of growth, it sounds like, I heard you right, maybe you need to invest more in sales and marketing on that side of the business to kind of track with the growth you've been expecting?.

Yes, no question we've got to figure out how to put more resources in that. It's a growing area, it's our fastest growing area, and I've got to figure out how to put more resources in it yet, make the budget that we set for ourselves.

So -- now that's the real challenge and again, we've introduced that internationally throughout the Zhone customers that we're just now starting to introduce into the DASAN customer area. So we've got training to do, we've got resources to put into it, so it's going to take some more work..

Okay, that's it for me. Thank you..

Thank you. [Operator Instructions] And that concludes our question-and-answer session for today. I would like to turn the conference back over to Jim Norrod for any closing comments..

Thank you very much operator.

And as always, we want to thank all of you for joining us today and for your continued support over the years and we're genuinely excited about the potential value that the merger will create for our customers and investors, and we're committed to converting that potential value into reality by adopting our best practices between the businesses as quickly and efficiently as we possibly can.

Our number one financial goal remains the same, and that is returning to profitability and generating shareholder value.

And we really look forward to speaking with you again on the next quarter's earnings conference call when we will discuss our progress towards extracting the value associated with the merger that will lead to corresponding financial benefits. So again, thank you all and we'll be in touch with many of you soon. Thank you, again..

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. That concludes today's program, you may now disconnect..