Zhone Technologies Reports Third Quarter 2009 Financial Results

Revenue for the third quarter of 2009 was $36.0 million compared with $30.3 million for the second quarter of 2009 and $32.0 million for the third quarter of 2008. Net loss for the third quarter of 2009, calculated in accordance with generally accepted accounting principles ("GAAP"), was $1.2 million or $0.01 per share compared with a net loss of $2.3 million or $0.02 per share for the second quarter of 2009, and a net loss of $6.5 million or $0.04 per share for the third quarter of 2008. Pro forma earnings before stock-based compensation, interest, taxes, depreciation, restructuring, lease liability accrual, gain on sale of intangible assets and goodwill impairment ("EBITDA") was a $0.1 million profit for the third quarter of 2009, compared to a pro forma EBITDA loss of $0.9 million for the second quarter of 2009, and pro forma EBITDA loss of $4.6 million for the third quarter of 2008.

"Strong sequential revenue growth for the second straight quarter led to better than expected earnings. This revenue growth was driven by broad based deployment of our new products in the U.S. and abroad as we begin a new major product cycle for the company," stated Mory Ejabat, Zhone's chief executive officer. "As a result, we generated slightly positive proforma EBITDA ahead of schedule and are on track to improve proforma EBITDA profitability in the fourth quarter."

Zhone will conduct a conference call and audio webcast today, October 20, 2009, at approximately 2:00 p.m. PT / 5:00 p.m. ET to review its third quarter 2009 results. This call is open to the public by dialing +1 (800) 237-9752 for U.S. callers and +1 (617) 847-8706 for international callers and then entering passcode 18383089. 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 48028058. 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 pro forma 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 pro forma EBITDA on a non-GAAP basis is provided in a table immediately following the Unaudited Condensed Consolidated Statements of Operations.

About Zhone Technologies -- Access for a Converging World

Zhone Technologies, Inc. (NASDAQ:ZHNE) is a global leader in multi-service access solutions, serving more than 700 of the world's most innovative network operators. The company offers the industry's only fully-integrated portfolio of MSAP, FTTx, EFM and Wi-Fi access technologies, improving network agility and reducing the costs of delivering the full spectrum of access services, including residential and business broadband, VoIP, and High-Definition IPTV over copper, fiber, and wireless. Zhone is headquartered in California, and its MSAP products are all manufactured in the USA, in a facility that is emission, waste-water, and CFC free.

www.zhone.com

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.

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 third quarter 2009 financial estimates; projections of revenue, margins, expenses or other financial items; and improvement of financial markets. 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 our products; intense competition in the communications equipment market; our ability to execute on our 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, 2008 and Zhone's quarterly report on Form 10-Q for the quarters ended June 30, 2009 and March 31, 2009. 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. Zhone 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                                   Nine Months Ended
                                                                September 30,      June 30,       September 30,      September 30,      September 30,
                                                                2009               2009           2008               2009               2008
Net revenue                                                     $    36,016        $  30,346      $    32,020        $    90,465        $    115,122
Cost of revenue                                                      23,929           19,266           22,332             59,457             79,921
Stock-based compensation                                             20               24               44                 72                 135
Gross profit                                                         12,067           11,056           9,644              30,936             35,066
Operating expenses:
Research and product development (1)                                 5,338            5,565            6,480              16,699             20,780
Sales and marketing (1)                                              5,323            5,014            6,483              16,372             22,080
General and administrative (1)                                       2,300            2,431            2,834              7,309              12,234
Gain on sale of intangible assets                                    -                -                -                  -                  (3,297  )
Goodwill impairment                                                  -                -                -                  -                  70,401
Total operating expenses                                             12,961           13,010           15,797             40,380             122,198
Operating loss                                                       (894    )        (1,954  )        (6,153  )          (9,444  )          (87,132 )
Other expense, net                                                   (302    )        (263    )        (326    )          (858    )          (496    )
Loss before income taxes                                             (1,196  )        (2,217  )        (6,479  )          (10,302 )          (87,628 )
Income tax provision                                                 8                47               50                 69                 176
Net loss                                                        $    (1,204  )     $  (2,264  )   $    (6,529  )     $    (10,371 )     $    (87,804 )
Basic and diluted net loss per share                            $    (0.01   )     $  (0.02   )   $    (0.04   )     $    (0.07   )     $    (0.58   )
Weighted average shares outstanding used to compute basic and        151,108          150,916          150,443            150,914            150,258
diluted net loss per share
(1) Amounts include stock-based compensation costs as follows:
Research and product development                                     90               94               116                281                389
Sales and marketing                                                  104              110              146                328                412
General and administrative                                           266              315              292                862                938
                                                                     460              519              554                1,471              1,739
GAAP net loss                                                   $    (1,204  )     $  (2,264  )   $    (6,529  )     $    (10,371 )     $    (87,804 )
Stock-based compensation                                             480              543              598                1,543              1,874
Interest expense, net                                                349              325              293                1,043              619
Income taxes                                                         8                47               50                 69                 176
Depreciation                                                         446              468              573                1,406              1,708
Restructuring                                                        -                -                380                -                  380
Lease liability accrual                                              -                -                -                  -                  3,305
Gain on sale of intangible assets                                    -                -                -                  -                  (3,297  )
Goodwill impairment                                                  -                -                -                  -                  70,401
Non-GAAP pro forma EBITDA                                       $    79            $  (881    )   $    (4,635  )     $    (6,310  )     $    (12,638 )

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
                                                   September 30,       December 31,
                                                         2009                2008
Assets
Current assets:
Cash, cash equivalents and short-term investments  $22,027             $36,243
Accounts receivable                                      31,990              23,665
Inventories                                              30,518              40,706
Prepaid expenses and other current assets                2,621               2,654
Total current assets                                     87,156              103,268
Property and equipment, net                              18,994              20,003
Restricted cash                                          58                  123
Other assets                                             41                  55
Total assets                                       $106,249            $123,449
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable                                   $10,525             $12,719
Line of credit                                           10,000              15,000
Current portion of long-term debt                        403                 380
Accrued and other liabilities                            13,357              13,162
Total current liabilities                                34,285              41,261
Long-term debt, less current portion                     18,392              18,698
Other long-term liabilities                              3,038               4,193
Total liabilities                                        55,715              64,152
Stockholders' equity:
Common stock                                             151                 151
Additional paid-in capital                               1,066,083           1,064,493
Other stockholders' equity                               268                 250
Accumulated deficit                                      (1,015,968 )        (1,005,597 )
Total stockholders' equity                               50,534              59,297
Total liabilities and stockholders' equity         $106,249            $123,449

SOURCE: Zhone Technologies, Inc.

Zhone Investor Relations: 
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Fax: +1 510-777-7001 
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