Zhone Technologies (ZHNE) Direction with New CEO = M&A Target

July 18, 2014 • Analysis • Tags:

Zhone Technologies, a company that focuses on expanding the bandwidth of its clients, recently announced 2Q 2014 results and the appointment of a new CEO. Due to this news, the company jumped 30%. As a standalone, Zhone is not all that attractive. However, with the appointment of CEO Norrod, a strategic exit is likely, making the near term outlook much more promising for investors.

Zhone Operations

For Q2 2014, Zhone revenue came in at $32.4M, a 13% increase over Q1 2014 and 8% over the same period in 2013. The company was barely profitable with a net income of $400k. Management projected Q3 2014 top line to show low single digit percentage growth with operating expenditures to be roughly $11M.

Zhone Q3 Picture

 

From the projections above, the Q3 picture will not look much different than Q2 2014. Top line growth is only expected to grow low single digit which would mean the company barely brakes even, net of interest and taxes. In addition, 51% of revenues come from Zhone’s top 5 customers leaving the company vulnerable to a revenue decline. Zhone had $15.6M in cash balance at the end of the second quarter, which is a good insurance policy and attractive feature for potential acquirers.

From the above figures, Q2 2014 was a good quarter, but nothing extraordinary. Certainly not worthy of a 30% spike in price.

M&A Target with Newly Appointed CEO

James Norrod was brought on as CEO of Zhone to arrange a buyout. His experience in the enterprise space bodes well for Zhone’s operations and setting the company up for an acquisition. Norrod’s history in upper management is filled with acquisitions. It’s his specialty and what Zhone is heading towards.

acquisition history of Zhone CEO

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