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Zhone Regroups With Gluon

Zhone Technologies Inc. (Nasdaq: ZHNE) paid about $7 million for the assets of Gluon Networks, which is more than many industry observers anticipated.

The Zhone-Gluon transaction, announced February 3, was first reported by Light Reading on January 29 (see Zhone to Buy Gluon Scraps). The deal gives Zhone Gluon's CLX switching system, a Class 5 replacement switch that helps carriers begin to migrate circuit-switched gear to a packet-based network. Gluon also markets a signaling gateway interface for hooking legacy telephone networks to VOIP networks (see Poll Points to Rising VOIP Revenues).

The deal seems pretty risky, especially for a company that has burned through more than $500 million buying startups -- and has little to show for it. But Zhone is sticking to its guns, insisting the deal will be a winner by the end of 2005.

The company's president and CEO Mory Ejabat says Zhone's purchase of Gluon's guts should likely account for between 10 percent and 15 percent of Zhone's yearly revenues next year. The Gluon products, now in trials with carriers, will generate "some revenues, but nothing major" in 2004, Ejabat said during Zhone's quarterly conference call on Tuesday.

Zhone brought in about $83 million in revenues during 2003, according to its SEC filings. It hasn't given a forecast for 2004, but even if revenues stay flat, Ejabat's comments hint that Gluon's gear will mean something between $8.3 million and $12.5 million in revenues.

The Tellium acquisition gave Zhone more cash, access to the public markets, and a yet-to-be discussed metro switching system.

Shortly after the Tellium buy closed, Zhone nuked the staff and closed Tellium's old headquarters (see Zhone Closes NJ Center). It also rewarded Tellium's executives handsomely for their failure to dominate the switching market (see Exec Payoffs Dog Zhone/Tellium Merger and Zhone Forgives Exec Loans). A good bit of Tellium's physical assets – network equipment, servers, test and measurement gear -- are being auctioned off later this month by Biditup, an industrial liquidator.

Gluon's gear, however, is set to become a big part of Zhone's product line. "It fits right into our channel," Ejabat said on the conference call. "The customers we have are very attracted to this product."

Zhone expects its first-quarter 2004 revenues to increase more than 20 percent over its first-quarter 2003 revenues, which were $17.1 million.

Meanwhile, the company's revenues slipped slightly during the fourth quarter, but its losses decreased dramatically. Zhone brought in revenues of $23.3 million during the fourth quarter of 2003, compared to $25 million during the year-ago quarter. It recorded a net loss of $6.4 milion for the quarter, compared to its net loss of $62.7 million for the fourth quarter of 2002.

The company says its one-time items during the quarter included an unusually large excess inventory charge of $4.7 million; an income tax benefit of $4.9 million; and about $2.4 million of operating expenses related to winding down Tellium's business. The company ended 2003 with $98.3 million in cash and investments.

Zhone shares were down $0.64 (10.44%) to $5.49 in trading on Wednesday.

— Phil Harvey, News Editor, Light Reading

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morye 12/5/2012 | 2:30:43 AM
re: Zhone Regroups With Gluon They paid 650k in cash and 1 million shares and gained a product line with no obligations and liabilities from the gluon operation. This deal has a dilution value of 1.2% and virtually no hit on the cash balance (less than the interest payment for 2 quarters on 100 million). The Gluon founders spent 76 million developing that product line, which we know is the future of telecom. Since you said there are folks who say they could have made a better deal, please let us know their names, I am sure Larry and other tycoons on the verge of M&A want to pick their brains.
truelight 12/5/2012 | 2:30:40 AM
re: Zhone Regroups With Gluon The Gloun founders did not know what they where doing based on the companies demise !
sevenbrooks 12/5/2012 | 2:30:36 AM
re: Zhone Regroups With Gluon
Could have had it for 20 cents + the cost of the equipment. Nobody else was going to buy it. First things the customers will require is that the product works.

seven
ms_mailinator 12/5/2012 | 2:30:30 AM
re: Zhone Regroups With Gluon Looks like the Zhone management still dreams about late 1990 era. Make quick money and run. Sorry guys, you have to deliver something that works.
DCITDave 12/5/2012 | 2:30:28 AM
re: Zhone Regroups With Gluon re: "Since you said there are folks who say they could have made a better deal..."

I didn't say that. I said that Zhone paid more than some folks expected. Word on the street, days before the announcement, was that the deal would be in the range of $1M to $3.5M.

The real story here is how quickly the product will contribute to revenues, etc.
canada1 12/5/2012 | 2:30:23 AM
re: Zhone Regroups With Gluon I tend to think with the right marketing team that the gluon clx can be successful. Some parts of the (sw) engineering that was done on the clx is pretty suspect and perhaps needs to be redone. Whether zhone will put this investment in, I dont know. If they just sell the box the way it is now, it will be difficult to maintain. Remember this box was supposed to be ready Jan 2002 and it ended up in trials Aug 2003.
Lazercat 12/5/2012 | 2:30:19 AM
re: Zhone Regroups With Gluon That picture shows a glimpse into Tellium's core (no phun intended). I wonder what all will be for sale at the auction. Maybe I can get some great piece of Optical Networking memorabilia. I might want Harry Carr's desk or Krishna Bala's chair. On second thought an Aurora switch might be nice for my coffee table.....
Scott Raynovich 12/5/2012 | 2:30:05 AM
re: Zhone Regroups With Gluon Considering that many assets of failed startups are being picked up for next to nothing these days, the analysis in the story does not seem far-fetched to me.
WiserNow 12/5/2012 | 2:30:02 AM
re: Zhone Regroups With Gluon Canada1 said:
"I tend to think with the right marketing team that the gluon clx can be successful. Some parts of the (sw) engineering that was done on the clx is pretty suspect and perhaps needs to be redone."

Mory Ejabat & Jeanette Symons, Zhone's dynamic duo, have never been know for improving marketing or for producing high quality software. They destroyed Cascade after they bought it. Cascade did produce high quality software.

Ascend was the luck of the bubble along with cronyism of the sort that the SEC is belatedly investigating.

The SEC should investigate Zhone and it's crony investors including John Sigemore and Rich McGinn.

Rich, while CEO of Lucent, put his personal money into Zhone after putting Lucent's shareholders money in the shell that was Ascend.
palaeozoic 12/5/2012 | 2:30:00 AM
re: Zhone Regroups With Gluon With probably close to a billion invested in the combination of Zhone and Tellium producing just $23 million in revenue for the most recent quarter--and even that is a sequential and year-over-year decline for the combined companies--it would seem incredibly unlikely that $650K and a little stock for a recently-shutdown softswitch startup would turn things around.

But who knows. Mory's strategy of buying bricks will eventually pay off...
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