Q3 2020 DZS Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the D.C.S. third quarter 2020 earnings Conference call.

At this time all participant lines are in listen only mode. So if you require operator assistance. Please press Star then zero.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press Star then one.

Please be advised today's conference maybe recorded.

I'd now like to hand, the conference over to your host today Mr., Ted Moreau Vice President Investor Relations. Please go ahead.

Thank you as well come to DCF is third quarter 2020 earnings conference call.

Before beginning I would like to comment it has been fun working with the management team since I joined Izeax two months ago.

This is an exciting time for the company as we position the business to take advantage of a number of growth opportunities, we see in the coming years does.

This is all outlined in our stockholder letter published last night, the Investor relation section of our website at di di Dot Com.

I look forward to interacting with our analysts shareholders and prospective shareholders.

Joining me today are president and CEO Charlie both.

CFO, Tom can grow and CTO Andrew vendor.

I would now like to provide the DCF safe Harbor statement.

During this call we will provide projections and other forward looking statements regarding future events.

Or the future financial performance of the company.

The company cautions you that such statements are only current expectations and actual results or actual events or results may differ materially.

Please refer to documents that company files with the FCC, including its most recent 10-Q and 10-K reports and the forward looking statements section that better to ship stockholders that was filed on form 8-K.

As well as being available on <unk> Investor Relations section of our website.

These documents identify important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward looking statements.

Please note that unless otherwise indicated.

The financial metrics being provided to you on this call are determined on a non-GAAP basis.

These items together with corresponding GAAP numbers and a reconciliation to GAAP are contained in a letter to stockholders.

So with that I will now turn the call over to Charlie Thanks, Ted and welcome investors and guest.

Especially our west coast, they sent the attendees for getting up early with US This morning.

Following the market close yesterday, we released our inaugural quarterly stockholder letter highlighting our performance for the quarter ending September Thirtyth.

Quarterly stockholder letter, providing an overview of our alignment with today's market trends as well as our regional expansion plans.

Government sponsored programs such as the United States secure Trustee Communications Act as a rule digital opportunity fund.

We also profile the enhancements we have made regarding our new leadership team as well as a broader overview of where our products and solutions are being deployed within fixed mobile and enterprise networks.

As Ted mentioned, our Chief Financial Officer, Ted can't grow and our Chief Technology Officer, Andrew vendor, who recently joined Dcs for being where are here today with me to expand on topics of interest as well as answer any questions. You may have that was represented in our stockholder letter.

Closing out my first quarter I'm thrilled report all time record revenue for the quarter, which was led by growing demand for our next generation mobile transport solutions as well as continued demand for our fiber based broadband access and customer premise solutions.

We had an exceptional top line quarter, delivering 33% revenue growth when compared to Q2, and 31% compared to the same period a year ago.

I want to recognize and applaud our employees and partners for achieving this outstanding milestones, especially in light of the ongoing global pandemic, which has impacted component shortages customer evaluation trials and deployments.

Before I open the call to questions I want to amplify three key themes represented in the stockholder letter.

First is our expansion into North America, Latin America me in India, leveraging our fiber rich portfolio of broadband access solutions and next generation mobile network.

Network solutions, which are being deployed in volume and the world's first open plan network.

Second is our skilled and agile research and development team that spans both fixed and mobile domains and our focus on geographic capabilities across the United States, Germany, South Korea, Vietnam and India.

And finally, the more than 30, new employees, including executive management team members as well as key leaders spanning product engineering supply chain sales marketing finance.

Join Dcs since my appointment in early August.

Over the past three months, we have made significant progress integrating former dasan zhone acai, while creating a one dcs brand and culture.

We have rationalized and accelerate our commitment towards unified technology, Roadmaps and aligned our employees and partners with a vision that strategy to capture market share in the burgeoning fiveg.

But to the premise and connected home and enterprise market segments.

With that I'll turn things back over to the moderator for questions.

Ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound.

Again that is star then one if you'd like to ask a question.

[laughter].

Our first question comes from the line of Dave Kang with B. Riley. Your line is now open.

Yeah. Good morning first of all gutting on gross margin can you just provide more color on the gross margin decline and how should we think about gross margin going forward.

Sure.

You know margins this quarter were.

Impacted by some significant orders for fiber access infrastructure.

Certain customers, where we had one of the business a few quarters ago.

Giving guidance walk away and just delivered now.

Anymore, just to hit sometimes too.

Share spend.

Right.

HM, particularly when you're taking it from an incumbent.

Can be competitive in an important one so it impacts our gross margins, but it was a contributor to gross profit dollars over all right.

EBITDA.

The point is going forward as we globalize these products.

Sell into less price driven markets markets, where while we doesn't compete.

Oh, well sourced products it further along in their life cycle.

Margin guidance.

Got it and then you talked about some demand was pulled in Oh from fourth quarter could you kind of quantify how much what how much of that was pulled in.

Well, we're not going to we're not going to quantify I think as you may recall on our Q2 are.

Earnings call I had mentioned that we started the quarter out with about $50 million of scheduled backlog.

And based on the guidance that we had provided we had you know somewhere you know in that 30 $35 million go get for the quarter and and we were able to one.

Pull some things and two I think the demand for.

Our mobile products as well as our fixed wireline products exceeded our expectations that we had an original outlook.

Got it and then regarding fourth quarter outlook clearly there was some pull it.

Into third quarter, but what about you know rising cold cases, and an increasing restrictions or what are your assumptions about that regarding the outlook.

I think you're exactly correct and I think thats part of the reason why we guided the way we guided you know we you know.

Yeah, We certainly you know.

Let's see the new cases, not only across the EMEA region, but also in Asia and you look at not only the customers are potentially affected but you look at supply chain and and components.

And we feel like the guidance that we've provided alliance with that.

I think I think the reality is is that when you still take a look at Q3's actual of nearly $94 million and the mid range of what we're guiding of 77.

You know the second half of this year represents.

Sequential combine a half that company has ever had so we're we're not necessarily looking at.

Our revenue on a quarter by quarter basis, but looking at it more on a on a longer term totality basis.

Got it and my last question is on <unk> can you drill goal were other fiveg pipeline previous management, they talked about a two Korean into Japanese customers and are there any opportunities outside of Asia countries.

Well look I mean, I would tell you and Andrew can certainly chime in it's probably one of the most exciting segments within the company right now I mean, you know our base business has been traditionally our fixed wireline.

Core as well as connected premises products, but you know.

With the introduction of our you know really first you know market.

What gives you that into the mobile space.

With with rocket Todd and a couple of other customers in Asia. It certainly gives us a tremendous opportunity in other markets and there's a lot of sales activity underway we have.

We certainly aren't going to represent our pipeline in any of the segments, but I can tell you that theres a lot of excitement on both the customer as well as the sales side.

Got it that was it for me thank you.

Our next question comes from Christian Schwab with Craig Hallum. Your line is now open.

Oh, Hey, congratulations on a strong second half of the year as we look forward to a couple of different questions about the different growth drivers and how they may play out.

In the future could you give us.

Some idea of you know how much you think you'll be shipping you know roughly to a racket did and how much you could be selling to them next year.

Don't want to talk about that maybe just incrementally how much better that customer it could be in 21 than 20.

Yeah, I mean, obviously you know we're not going to share that that data, but you know certainly we expect rocket time to continue to have a strong 2021 with us as they continue to deploy.

No there their Fiveg network.

They've they've certainly been a great advocate for for Dcs and the champion for us.

You know, helping us as a reference with other.

Key accounts that we've been marketing too you know around the globe. So in our outlook for rocket on in 2021 is is you know.

Oh.

Okay, Great and then when you guys think about the the role digital opportunity fund.

Do you expect that to.

Dr.

Meaningful revenue and 21 or would you expect that to be a more.

More in 22 of that typically do spend.

Outlaid between awards in real true aggregate spending just wondering and these government programs. Just wondering how you guys are thinking about that over the next few years.

Yeah, No I mean, you know that the auction began yesterday I think there was approximately four under the 500 recipients that you know.

Were awarded some.

Some element of the program yesterday.

The reality is and I think you said it very well.

We anticipate that a lot of the horrify RFP activity will happen during the first half of next year.

We certainly are cautiously optimistic second half of next year, we'll certainly provide an uptick for us, especially since that's a market that we haven't.

As you know we haven't aggressively pursue that market as we are today, but I think it's more of a 2022 acceleration than it is in 2021.

Okay, Great and then in that just trying to better understand.

Your highlight in the in the stockholder letter of opportunities versus Nokia and walk away and certainly I think I understand.

The political environment.

Opportunities in what way, but is there any geography is you know where you think you.

You know people might be more receptive.

The hearing from from Dcs, then may have over the last few years ago.

I think one of the things that we get excited about and certainly investors should get excited about with Dcs is especially when you compare us to others.

You know most network most large scale, even medium to large scale network providers are.

Selecting at least two suppliers and one of the things that.

We have found across all of them is obviously a lot of the APAC regions. Latin America, you know over the last 10 years, while we have made significant inroads into those markets and in just the calls that I've had with dozens and dozens of customers since I joined.

The company, there's certainly an appetite.

To to look at someone like Dcs that has the resources the products and the scale in those particular regions to augment as a deemphasize wildly and those particular networks and you've been here in the United States I think a lot of people don't appreciate that there's you know $2 billion.

Worth of Rip and replace of Wild way that the U.S. government is sponsoring that were certainly involved with so I see I certainly see us as a an ideal.

Sooner to to be able to participate alongside Nokia I mean, Nokia as you know with the combination of Lucent Alcatel and NSN.

There are a lot of accounts, just because the commodity nature of those three companies, but when you look at work. If he is and you look where while we was we certainly see Dcs as a natural company to be able to participate in a lot of the markets.

Including the U.S., but certainly were where they were strong outside of the U.S.

Great. Thank you and then my last.

Last question has to do with fiber land in a previous management teams have.

Significantly talked up the opportunity of of that as a as a new product category and now that you've been there for a while Charlie I'm just wondering what is your thoughts on that.

Clinic line and its potential you know over the over the next few years.

You know is it realistically have an opportunity to be a material contributor to the top line of Dcs.

So first of all Fiberlan is a solution brand and the way I want you guys to look at this is fiberlan represents existing products that we sell into the core as well as customer premise network solutions in the traditional service providers.

So it is intended for the enterprise verticals and I think the reality is is that the products and solutions have always been there. It's really been the focus and the go to market and systems integrator alignment that was required and I can tell you that I'm very passionate about this market I think it's a significant opportunity for us Weve recently hired.

Several.

Enterprise lead salespeople to to help us accelerate the pace, but I.

I think it's a great question because when you look at the market, we think its a $10 billion market.

You know the copper in traditional co ax infrastructure with a lot of the enterprise verticals is going to be completely transformed and I think it's a significant opportunity for us. So we're aggressively planning on going after that market and and we will do it through the service provider channel as well as through a lot of systems integrators, who are focused on that market.

Okay, Great no. Other questions. Thank you guys. Andrew do you want to comment on that yeah, a quick comment about farberware and I I think one of the exciting things that we see with that solution set is also the adjacent sees to the licensed and unlicensed mobile market as Charlie correct, We said the.

We see networks transforming and that includes.

In the in the premises and enterprise customers. So as they embrace more with technologies in building and across campus farberware is well positioned to enable that transformation.

It is a natural for us to extend into the fixed wireline part of the market as well right that's right.

Fantastic. Thanks.

Our next question comes from Tim Savageaux with Northland. Your line is now open.

Hi, good morning, and congrats on the strong Q3 results.

Obviously it looks like.

Asia Pacific from a geographic standpoint was a big driver there I'm wondering if you could.

Speak to you know any more specific color around geographic market, perhaps in Korea, and Japan and also any 10%.

Customer concentration in the quarter.

And then you know should we assume that you're trying to extend.

You saw some of this business come sooner than expected that that you know the the Asia Pacific region, and the deployment patterns or specific carriers or what.

What's driving that pull in from Q3 to Q4, then I'll follow up.

Well first of all Tim I appreciate.

The.

Congrats.

Hi, guys I think you probably saw in the cycle letter Asia represented 60% of the revenue yes.

North America was also 11 I think what we get excited about going forward and I'll talk about.

Q3, but as as we as we think about our business going forward Theres, just a tremendous amount of.

Locus an effort that's been in place right now on expanding into North America, EMEA, Latin America, and India and I think these are markets that traditionally have been underserved and under focused.

He appreciated the new sales talent talent that we brought into the company, especially around these regions.

Certainly are optimistic about.

The prospects for these regions in 2021.

As it relates to third quarter you can appreciate the fact that you know are our core customers in Korea and Japan.

And you continue to deliver strong results both on the mobile side as well as on the fixed wireline side.

No rocket time continues to accelerate their deployment, there which is very exciting.

And.

We.

You know.

We got to be careful about who we represent and in the region just based on our confidentiality with those customers, but you can imagine the tier ones in both Japan, and Korea that make up the lion's share of that 60% of revenue.

Got it and last quarter you'd referenced some comment on backlog is shippable backlog and as.

As you look in to.

Your Q4 guide here maybe.

I don't know whether it's you.

Accurate to say you haircut that number based on from risk factor from potential pandemic impact.

Or whether that's really kind of a pull forward dynamic but yes.

To the extent you have kind of taken some conservatism with regard to uncertainties around pandemic.

Could you possibly.

Quantify that.

And is there any are there any similar metrics that you can offer relative to last quarter you'd indicated that you had.

Three quarters of your plan and blew up in backlog or something like that any comment around visibility heading into Q4.

Yes so.

We entered Q3 as I articulated last quarter, we entered Q3 with about $50 million and scheduled backlog and so we had a go get.

Based on our guidance.

As you mentioned, 25% of our original $74 million to $79 million guidance in Q3, we entered Q4 with $45 million of scheduled backlog.

And so when you look at the current guidance that we have we got similar metrics and so ill.

Are we being cautiously optimistic maybe but I think we're we're guiding what we think is aligned with where we see.

The pipeline and the go get and other dynamics as I think we've all talked about as it relates to just the spike in Cove it.

There's a pretty significant component shortage out there we did a great job of navigating through that Q3, I expect that we will do a good job of navigating through it in Q4, but it's there it's real and there are risks that we all need to be aware of.

But there is some upside in Q4 as well.

Got it appreciate that color and.

Looking into next year you mentioned.

North America, which has seen a relatively small market for you now but.

At this point would would it be too much to say that you expect North America to perhaps be your fastest growing segment.

For the company and 21, given the opportunities and obviously, we've seen a lot of strength.

You're not rural broadband area even prior.

Two two are not taking off.

When you consider that Merck market backdrop, and and your increased sales efforts.

What are you thinking about growth in North America, and and 21.

I think there's two very significant growth opportunities for us next year, one and I think we're trying to do the best job that we can do to really articulate just how significant.

The mobile segment opportunity is for us because it's a it's a brand new market segment for us and if you look at the historical revenue profile of the company going back a decade, it's been almost a 100% fixed wireline and so now you open up a brand new market segment that has probably more investment focus.

And any segment that is in the mobile space and when you look at the front haul you look at front all men all backhaul fronthaul as of magnitude difference in the number of aggregation devices that will be will be deployed so that alone.

I I talk to the sales team the management team all the time that if.

If we can just secure five more rock at times, you can only imagine the size and scale that.

It has as a multiplication effect for the company.

But to your point, we certainly think that North America represents the single biggest growth opportunity for us over the next several years, we've invested significantly in a very senior sales organization over the last several months.

And it's not just about art off I think it's about the overall dynamics to focus the alignment of our products.

And.

And I think the consolidation that's certainly continue to occur here has helped us so.

I think your assumption is right.

Great and then your last question for me and when you consider you mentioned kind of the the walk away.

Rip and replace program and also just Nokia being.

Pretty concentrated everywhere.

You know at least at first from Mcguire, where you would think thats focused on a large number of small carriers.

But you know maybe a different opportunity relative to Nokia maybe not I I guess, when you talk about opportunities to displace larger vendors either because of political pressure or.

Carriers looking to diversify vendors.

Should we think about it is mostly kind.

Kind of a tier two tier three carrier focused opportunity for these yes.

Or are there larger tier one opportunities out there that kind of have the same profile.

So Tim it's Andrew vendor here.

I guess one of the things that we have seen in the market dynamics surrounding this this.

This regime that you mentioned is not just the geopolitical aspects but.

The changing landscape of the network of the concept of open.

The concept of standardized interfaces in fact, there is some legislation. The U.S. is supporting that I think we talked about in in our letter to stockholders. So part of our success factors in addressing incumbents large and small is our ability to be agile.

To bring new products to market and to embrace the open network standards like the open ran alliance family of standards and similar.

Similar initiatives in the wireline network, we've seen that being a big reality for us and the product space well and the other thing I would comment Andrew is to Tim's point most of the success that we've always had around the world as well and with the tier ones and so even when you look at North America, which includes Canada.

Which is where they've had some success.

There is significant tier ones that.

There will be replacing and a lot of wireless infrastructure as you would.

Appreciate it and a lot of to your point, Andrew and a lot of close in proprietary networks that.

You know, obviously with the momentum that we have and.

And the architecture that rocket on and ourselves and the ecosystem that we're forming right. Now is promoting is really an open ran network architecture, which really fosters an opportunity a unique opportunity for us.

Good thanks, Thanks very much.

Our next question comes from Georgia with Oppenheimer. Your line is now open.

Good morning, and thank you for taking my questions.

Charlie with all the additions that you've made can you give us a sense.

Well as you know the go to market changes, you're making at the same time with with the new sales leadership.

No I appreciate it I mean.

I wish everybody give me a fly on the wall over the last 90 days.

As Weve really accomplished a lot and first and foremost we're technology company and so.

You know what we've spent a lot of time over the last three months focusing on is really rationalizing the product portfolio and aligning the product portfolio.

With our resources around the world and how that aligns with where we believe we have the best chance of winning looking at the geopolitical landscape as well as the competitive landscape and.

We've just calling it like it is I mean, we put together a very significant wildly playbook look at every single while we account there is and we're engaged in all those accounts as it relates to how we might be able to participate either it.

At the at the edge are in the core.

And and then you know here and here in North America.

We certainly are competing heavily with with.

With that trend and a few and calix and we certainly think there's a growing opportunity for us.

Especially with the fact that.

Both airtran and Felix don't really participate on the mobile side like we do I don't think neither of them have the same size and scale of portfolio on the enterprise side.

The site and so there's certainly an opportunity for us to continue to grow there but.

Our focus has really been where we feel like we have the best chance of winning based on our product alignment and.

The overall competitive landscape.

All right and so thank you for that perspective, and as you look at.

Expanding.

Regionally as well as looking at the product synergies can you give us a sense of how long the customer engagements are probably likely to take and we.

The timing of ramps and the newer regions and the newer areas.

Well on the on the enterprise side on on the fiber Lan solution portfolio side, the sales cycle can be relatively short and fat.

We.

Just had a very large recent project that.

Hi, Jim.

No and and the opportunity came pretty quickly.

And the opportunity to be able to engage and deploy that was.

In 90 days.

If you look at you know participating in the core.

Actually if you are dealing with a tier one or tier two the sales cycle can last anywhere from six to six months to a year.

Having said that I think that you know the enterprise or the CP.

At home or enterprise CBD portfolio seems to be an opportunity that we can get into relatively quickly. We've got a new line of life by six and mesh products that are being very well received around the world and so our sort of strategy and game plan is especially on the wildly side is for us to be able I mean, one thing we don't talk enough about that the company has done a phenomenal job.

And that is just having to compete in Asia, we've had to interrupt with just about everyone. So we interrupt RCB products and our core products of Interop with wild way in GTN fiber Wholl add transkei likes and so we sort of look at ourselves as a pretty nimble and agile company to where we can deploy our products anywhere in the network and B.

Comparable and complement the existing infrastructure, that's there and there's several very large customers in EMEA that have entertain the idea of bringing us and on the on the in home and enterprise side with our CD portfolio, and then giving US an opportunity that you know we've our way back into the core of the network over time.

All right just last question from me maybe this one's for Tom can you give us a sense of.

As you do more on the CP side focused with some of those opportunities how the product margins look across the portfolio.

Yes, I mean, I'm not going to get into.

Screen detail on it but pretty much as you say.

Specked in as you see throughout the industry with CP never is.

The highest margin.

The product that you have.

Certainly some of what we're doing on the mobile transport side.

Some of the higher margin.

No.

Products in our portfolio and machine.

Greater growth there, but.

But as much of it has to do with geography.

Product mix right and as you start to we've seen we've invested a little bit in R&D. This quarter as we sort to mobilize some of these products.

You can sell them into markets that or less twice focused that'll impact your margins going forward as well.

Yes, I would just I would just echo the fact that there's there's several dynamics on the margin mix. One is just what cycle you're in settling chassis.

Chassis based core systems versus the service module. So you know the chassis extend that to come with large less margins than the service module. So as we deployed a new core chassis into a central office and we start deploying service modules as more subscribers come online the margin profile of that is much higher and then.

As Tom said, where we have an opportunity to truly differentiate.

Especially with newer disruptive technology the margin profile is is much greater.

Thank you.

Our next question comes from John Gruber with group, Brian Maclean. Your line is now open.

John as you remember your line may be on mute.

John.

Let's maybe move onto the next question then.

Our next question comes from Bill <unk> with William Blair and company. Your line is now open good.

Morning.

How does what you're doing in Fiveg and open Rand complement our compare with NAV and ears open Ram product offerings.

So thanks for the question Bill Andrew vendor here.

What Uh huh.

We are engaged with mavenir as with a lot of the ecosystem vendors as Charlie mentioned tier we're not today and end to end provider of the radio access network in Fiveg, but we are providing some key enabling technology with unique products and that's what's.

Wed to our early wins in the in the Emmy Hall, or the front in the backhaul space. So.

That's I guess, that's probably the best answer I can give about where we're we're complimentary there that were providing unique networking and transport capabilities in in Iran. That are complimentary to the BBU functions. The centralized unit distributed unit that you would.

See in a in the open Rand architectures there yeah, we're certainly.

Fostering relationships with the overall mobile ecosystem that complements and open ran architecture as Andrew said and May have anywhere.

It was down the street here in Dallas is certainly an ideal ecosystem partner that complements us.

And where they are participating in that four versus where we're participating at the mobile edge.

Okay.

Last election results. If there is a change in administration do you think it will be a change in policy regarding Wally.

No we've actually been pretty engaged with the white house over the last few months.

And.

What I would tell you.

As we in fact, we were on a call with the.

Pretty large team last week and I asked the same question.

As a group and I think that the.

Feeling of the current administration is that the current policies as well as some of the programs that have already been approved like for example, if.

If you look at the.

Steve the secure trusted Communications Act, a $2 billion rip and replace of wildly that program has already been approved.

It's just waiting for funding so the question that I had for them.

Is there any risk in that program going away and the answer was no.

As it relates to things like real digital opportunity fund.

Or anything that would impact that particular program the answer was no.

And so we don't see.

The.

A change in administration habit, a change in views as it relates to Wally.

Go ahead.

Yeah sure one thing I would quickly add there bill is that if.

If you look at some other legislation in this area, particularly the.

You saw the or the utilizing strategic Hawaii Telecommunications Act that is bipartisan legislation or proposals that support the adoption of open standards to enable the creation of the ecosystem that we've been talking about on on this call. So one.

I would suspect that that will be enduring.

Thank you.

Thanks Bill.

That concludes today's question and answer session I'd like to turn the call back to Charlie vote for closing remarks.

Well I just like to thank everyone for joining our earnings call and especially our analysts for their questions.

Our industry has experienced transformational change, which is resulting from disruptive technology shifts accelerate network upgrades fueled by today's net work work and learn from home dynamics and certainly the geopolitical security concerns that we were just talking about.

We think Dcs is well positioned to capitalize on these opportunities with a clear vision and strategy and we're committed and experienced employee systems integrator distributor and technology partner base, so with that.

I just like to say, thank you and have a great weekend.

Ladies and gentlemen, thank you for your participation in today's conference.

Everyone. Thanks.

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Sure.

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