Zhone Technologies Annual Report 2004

Information about our revenue for North America and International markets for 2004 and 2003 is
summarized below (in millions):
2004 2003
Increase
(Decrease)
%
change
North America ...................................... $75.5 $75.5 $ — NM
International ....................................... 21.7 7.6 14.1 186%
$97.2 $83.1 $14.1 17%
Information about our revenue by product line for 2004 and 2003 is summarized below (in millions):
2004 2003
Increase
(Decrease)
%
change
SLMS ............................................ $29.4 $20.9 $ 8.5 41%
Optical Transport .................................... 8.9 — 8.9 100%
Legacy and Service .................................. 58.9 62.2 (3.3) (5)%
$97.2 $83.1 $14.1 17%
Total revenue increased 17% or $14.1 million to $97.2 million for 2004 compared to $83.1 million for 2003.
The increase in total revenue was due to incremental revenue relating to the acquisition of our new optical
transport product line from Sorrento in July 2004, as well as increased demand for our SLMS products compared
to the prior year. In 2004, product revenue increased 17% or $13.1 million and service revenue increased by 13%
or $1.0 million compared to 2003. Service revenue represents revenue from maintenance and other services
associated with product shipments. The increase in both product and service revenue was due to the stabilization
of the overall economic environment as well as incremental revenue associated with our new optical transport
product family. International revenue increased 186% or $14.1 million to $21.7 million in 2004 and represented
22% of total revenue compared with 9% in 2003. The significant increase in international revenue represents the
increasing opportunity for our next generation products in both existing and new network deployments among
international carriers, as well as incremental revenue from our new optical transport product family.
By product family, revenue for our SLMS product family increased $8.5 million or 41% in 2004 compared
to 2003 as demand has increased, particularly in international territories. Revenue for our legacy products and
services decreased $3.3 million or 5% in 2004 as we continue to focus our marketing efforts on our next
generation SLMS products. Revenue for our optical transport products was $8.9 million in 2004. No revenue was
generated from our optical transport product line in 2003 as this product family was acquired in July 2004.
While we anticipate focusing our sales and marketing efforts on our SLMS and optical transport product
families in 2005, revenue from our legacy products and services is expected to continue to represent a significant
percentage of total revenue in the near term, given current trends in service provider capital spending, which tend
to focus more on supporting legacy type products, rather than investing in newer, more technologically advanced
products. We expect that over time, the product mix will continue to shift toward next generation products in
SLMS and optical transport. While we have experienced significant growth in international markets, we do not
anticipate international revenues to continue to grow at the same rates experienced in 2004.
In 2004, Motorola accounted for approximately 15% of total revenue. In 2003, Motorola and Qwest
accounted for 17% and 11% of total revenue, respectively. No other customer accounted for 10% or more of total
revenue in either period. We anticipate that our results of operations in any given period will continue to depend
to a large extent on sales to a small number of large accounts. As a result, our revenue for any quarter may be
subject to significant volatility based upon changes in orders from one or a small number of key customers.
8