Zhone misses third-quarter revenue target

Zhone Technologies’ third-quarter revenue will be 20% to 24% lower than previously expected, the company announced late Wednesday.

The equipment vendor now expects third-quarter revenue to fall between $41 million and $43 million.

In a statement released Wednesday, Zhone chief executive officer Mory Ejabat attributed the shortfall to sales drops in the Middle East, Latin America and Europe. “Due to this weakness, our [Single-Line Multiservice] revenue will also decline sequentially, which is particularly disappointing after five consecutive quarters of strong growth in both our international and SLMS businesses.”

Forty-five percent of Zhone’s revenue comes from outside North America.

Zhone has now missed its revenue targets for each of this year’s first three quarters. Declining sales of its legacy gear prompted Zhone to write off 80% of its legacy inventory this summer.

“For a company without a recent 10% customer, the magnitude of the [third-quarter] shortfall is severe,” Think Equity analyst Eric Kainer said in a note issued Thursday morning. “There must be extraordinary circumstances in places such as Egypt, United Arab Emirates and Puerto Rico contributing to this unexpectedly large shortfall.”

Kainer lowered his expectations for Zhone’s 2006 revenue from $219 million to $197 million.

“[Zhone’s] story remains attractive, especially given [its] low valuation, for investors seeking exposure to telco access markets around the world, with the exception of the largest carriers,” Kainer said. But “the main challenge for Zhone is competitive, despite a healthy addressable market. As a result, while we believe there will be solid revenue growth for the next couple of years, the risk remains high.”