Kirk Misaka - Chief Financial Officer Yung Kim - Chief Executive Officer.

Analysts:.

Good day ladies and gentlemen and welcome to the Third Quarter 2017 DASAN Zhone Solutions Inc. Conference Call. I’m LaToya 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 call is being recorded for replay purposes. I would now like to introduce your host for today, Kirk Misaka, Please proceed..

Thank you, operator. Hello and welcome to the third quarter 2017 DASAN Zhone Solutions Inc., earnings conference call. I’m here today with the CEO of DASAN Zhone Solutions, Yung Kim. Yung will begin in with comments about the current state of DZSIs business and his priority [ph] for the future of the company.

Following Yung’s comment I will discuss DZSIs financial results for the third quarter 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.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 that are subject to the Safe Harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934.

In addition, forward looking statements include among others statements that refer to financial estimates, projections of revenue margins, expenses or other financial items. Listeners 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 the Company’s ability to realize the anticipated cost savings, synergies and other benefit of the merger of DASAN network solutions team and legacy zone technologies Inc., and any integration risk relating to the merger.

The ability to generate sufficient revenue to achieve or sustained profitability, the ability to raise additional capitals to fund existing and future operation or to re-finance or repay the company’s existing indebtedness.

These facts or other performance [Indiscernible] in the company’s product; any economic slowdown in the telecommunications industry that restrict the ability of the company’s customers to purchase its product. Commercial acceptance of the company’s products.

Intense competition in the communications equipment market, higher than anticipated expenses that the company may incur, any failure to comply with the periodic filing for other requirements of the NASDAQ stock market for continued listing, material weaknesses for other deficiencies in the company’s internal controls over financial reporting and the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects relating to the audit committee investigation or arrears in the consolidated financial statements of legacy zone technologies Inc.

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 filings on Forms 10-K, 10-Q and 8-K. 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 undertakes no obligation to update or revise any forward-looking statements for any reason. During the course of this call, we will also make reference to adjusted EBITDA and non-GAAP measure we believe is appropriate to enhance an overall understanding of the company’s 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 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 flow to invest in research and development and to fund capital expenditures.

In addition, these non-GAAP financial measures facilitate management’s internal comparison 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.

We have provided GAAP reconciliation information for adjusted EBITDA within the press release which was been posted on our website at www.DASANzhone.com With those comments in mind, I would now like to introduce Yung Kim.

Yung?.

Thank you, Kirk and greetings to those participating on today’s call. Its’ been just over a year since we merged DASAN, Network Solutions and Zhone Technologies to create one of the largest and most innovative communications, equipment providers in the world.

The merger generated a greater value than expected through the adoption of best practices, successful integration of our complimentary products, and the cross selling of those products to our customers. We are also seeing improved financial performance sooner than expected which has been led by stronger than expected revenue growth.

As we have discussed before, we began cross selling to each company’s loyal customer base with a unified sales and support team in every major geographic region immediately after the merger. Prior to the merger, the combined companies were generating about $210 million of annual revenue.

In a year’s time annual revenue has grown dramatically and are now expected to exceed $240 million. That topline growth comes from gaining market share because of the broader product portfolio of the combined company as well as an improved career spending environment.

Revenue growth and the cost efficiency were the major contributors to reaching profitability in the third quarter of 2017. Kirk will discuss those details in a minute. We are encouraged to see that revenue strength for the quarter came from all of our geographic regions driven by global sales force collaborating together.

As you know, DASAN was a leading telecom and equipment provider in the Asia Pacific region with the customers representing some of the largest carriers in the region including the three largest carriers in Korea and other tier one carriers in Japan and Vietnam.

So on the other hand was the leading player with alternative carriers in the Americas, Europe and Middle East and Africa in addition to several tier 1 carriers in the Middle East. As excited as we are about the breadth and strength of our customer base, we are equally excited about the breadth and strength of our product portfolio.

As I mentioned, the combination of DNS and Zhone resulted in a robust complementary product portfolio that enabled service providers, enterprises to manage their networks more efficiently and effectively while allowing them to migrate to the latest technologies to satisfy the exploding demand for bandwidth.

We will continue to focus our efforts on delivering best-in-class products in our five key product areas. Broadband access, Ethernet switching, mobile backhaul, passive optical LAN or [Indiscernible] and software defined networks or SDN. In the near future, we expect that revenue growth will continue to be driven by two major product catalysts.

First, we will continue to cross sell DASAN’s Ethernet switching and mobile backhaul products to legacy Zhone customers. Second we will grow revenue in the passive optical LAN business through our enhanced global sales force.

Meanwhile, we expect our broadband access product to continue to be the core of our product portfolio that will enable the growth in our other product segment. With the 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.

Kirk?.

Thanks, Yung. Revenue for the third quarter of 2017 was $66.4 million, up 11% from second quarter revenue of $59.9 million and much higher then our upwardly revised guidance of approximately $62 million. As Yung mentioned, revenue strength came from all geographic regions and all product categories.

Backlog also continue to increase, giving us confidence that fourth quarter revenue will increase to about $68 million and annually revenue will easily exceed our upwardly revised forecast of $240 million. Annual revenue is now expected to grow by more than 15% over the 2016 pro forma combined revenue of the merged companies.

We are well on our way to closing out a strong year of topline growth and are beginning to focus on our business plan for 2018 which will discuss with you on our next earnings call.

Gross margins for the third quarter of 2017 were also strong at 33.2% as compared to 32% for the second quarter and much higher than our roughly 30% pro forma historical norms.

Earlier this year we mentioned that longer-term gross margin expansion should come from product cost reductions and manufacturing economy of scale and now we are seeing those benefits being captured. Gross margins for the fourth quarter should be roughly the same till the last few quarters around 32% to 33%.

Operating expenses for the third quarter of 2017 total $20.4 million and include depreciation and amortization of approximately $800,000 and stock-based compensation of approximately $200,000. Operating expenses were higher than our forecast largely due to unexpected legal and accounting costs.

For the fourth quarter 2017 we expect operating expenses to be lower by about $500,000. Depreciation and amortization should continue to be about $800,000 and stock-based compensation should continue to be about $200,000 for the fourth quarter.

Our non-GAAP adjusted EBITDA profit for the third quarter was $2,668,000 significantly better than $853,000 of the second quarter. We also became profitable on a GAAP based posting net income attributable to DZSI of $1,399,000 and $0.09 per basic and diluted share as compared to the net loss of $809,000 in the second quarter.

Based on a revised financial guidance, we expect that our positive adjusted EBITDA and GAAP net income attributable to DZSI will be even better in the fourth quarter. As we’ve talked about all year profitability was and is our immediate and primary financial goal.

We’re able to achieve profitability sooner than expected because of the quick and successful integration of our businesses.

As Yung mentioned that profitability was driven by revenue growth from cross-selling opportunities and new growing markets in mobile backhaul and passive optical LAN, improved gross margins through manufacturing cost reductions and economies of scale and operating expense reductions from cost synergies associated with the merger.

With that overview we’d now like to open the call up to questions. Operator please begin the Q&A portion of the call..

Thank you. [Operator Instructions] The first question is from Christian Schwab of Craig-Hallum Capital. Your line is open..

Hi. This is Tyler on behalf of Christian. Thanks. Let me ask couple of questions.

First, the CEO portion, is there any update there on a plan or possibly timeline?.

Yes. We have now short listed two people and literally we are days away from making that decision. And with that, we know both of them can start in November. So yes, we are progressing well. And both of them have experiences in public company accounting..

Great. All right.

Then could you possibly talk to us and maybe rank specifically two or three things that you’re focusing on to drive topline growth going forward?.

The couple of things to our topline for two areas; I would say that, the first one is a mobile backhaul, even though we call it mobile backhaul it can be used as carrier Ethernet for enterprises and so we see a lots of application in that.

We already doing some enterprise or enterprise sales in Taiwan, and also mobile backhaul in Vietnam and other place. In U.S. we also do a few trials. So that’s one area. The other one is passive optical LAN.

This is one area that we have successful did a big stadiums and university campuses, but next year we are going to launch a very simplified version with easy to install and catching more enterprises of the smaller sizes. I think that would be the one to know.

We’ll do increases and if I may put another one is a cross-selling to some customers of Ethernet switching..

All right. Great. Thank you. And then lastly, maybe little bit more of a modeling question. So at the inflection point of profitability here and I know you mentioned you expect Q4 to be 500,000 lower on the OpEx line.

Do you see that is kind of a base? Would you expecting more cost to come out and if that is the base, is that the spending level that you think you could support revenue growth for the foreseeable future?.

Yes. The 500,000 is a reduction that we expect in the fourth quarter. And we think that that can stay at that level or approximately at that level and leverage significant additional growth on the topline. We would expect in 2018 at least that OpEx would stay at that level..

All right. Perfect. That’s all from me..

Thanks..

Thank you. [Operator Instructions] I’m not showing any further questions at this time. I would like to turn the call back over to Yung for closing remarks..

Thank you again for joining us today and for your continued support that successful merger and integration of our two great companies has been accomplished. We are now fully prepared to compete successfully in a unified and stronger company going forward. The merger also has created a significant value for our customers and investors.

Our financial results are already reflecting that value and we expect the momentum will continue into next year. We look forward to speaking with you again on next quarter’s earnings conference call when we will discuss our 2018 business plan and the financial goal. Thank you..

That concludes the conference today. Thank you for your participation..