Q4 2020 DZS Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly.
Please continue to standby and thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the D. C. S Q4, 2020 earnings conference call at.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker for today, Ted Moreau Vice President Investor Relations, Sir you may begin.
Thank you to Wanda welcome to D C assets fourth quarter two.
2020 earnings conference call.
This is an incredibly exciting time at these yes, as our newly assembled senior management team implemented strategic vision for the accelerated in broadband access and mobile transport markets.
This vision and the strategic milestones necessary to achieve it along with guidance and context for the quarter and 2021.
Are all outlined in our Q4 2020 and full year 2000, Twenty's Stockholder report published this morning in the Investor Relations section of our website at <unk> Dot com.
I look forward to interacting with our analysts shareholders and prospective shareholders. Joining me today are president and CEO.
E O Charlie vote, CFO, Tom Cancro and CTO Andrew vendor.
I would now like to provide <unk> 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 events or results may differ materially please.
Please refer to documents that the company files with the SEC, including its most recent 10-Q and 10-K reports and the forward looking statements section of the stock of the letter to stockholders than it was filed on a form 8-K as well as being available.
On our 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 our letter to stockholders with that I will now turn the call over to Charlie.
Thank you Ted and welcome investors and guests.
Prior to the market opening today Dcs released our quarterly stockholder report provides.
<unk> market business and financial update for the fourth quarter and full year 2020, specifically.
Stockholder report provides an in depth insight milestones and performance achieved during the fourth quarter and full year 2020.
Such as the numerous technology supply chain and growth initiatives that are underway.
Providing our mobile transport milestone eclipsing 1.5 million ports shipped.
Our exceptional second half and full year revenue growth across our mobile transport customer sector.
Our acquisition of coherent optics technology innovator octillion comp.
Complementing and expanding our mobile transport portfolio.
Market outlook for open ran and fiber based passive optical networking and.
And the introduction of velocity and Kronos, our new portfolio brands for our market, leading broadband and mobile transport solutions.
Also included in our stockholder report, our timely business governance and financial updates.
Such as the addition of two new board members.
He has more Matt Ross, who was formerly the CTO of Williams communications, the former CTO of British Telecom and the former CTO of Huawei.
And Barbara Carbone, a former KPMG partner with four decades of experience working with public Fortune 1000 companies and subject matter.
And the areas of mergers and acquisitions business transformation and workforce management.
And our execution of a $64 million follow on equity raise which was led by Stifel Needham and B Riley and co managed by Craig Hallum, and Northland Securities with Advisory services provided by Wood driven company.
And finally, our Q1 2021 and full year 'twenty, one 2021 guidance.
As Ted managed as Ted managed mentioned, our stockholder report can be viewed and downloaded by visiting the Dcs website.
Over the past six months management has been diligently transforming and investing in our future.
To our employees our customer first culture is comprised of a faster pace higher expectations.
Our relentless pursuit of operational excellence unification across our global R&D supply chain and customer support teams.
And a higher level of accountability for our customers partners and suppliers.
<unk> proved communications attention to detail sponsored technology workshops and results.
Fostered better alignment and trust.
And while we have much more to accomplish measurable progress has been achieved we anticipate that over the course of 2021 and into 2022, our vision strategy.
Our mutual discipline in our pursuit of operational excellence will translate into a better experience for customers market first innovation and geographic and margin expansion.
Briefly regarding our financial performance. We are pleased to report fourth quarter revenue of $88 7 million, representing a 14.
<unk> finance year over year increase compared with the fourth quarter of 2019, and exceeding our $75 million to $80 million guidance when combined with our third quarter revenue. Our second half revenue results and resulted in the two best consecutive revenue quarters in our company's history, and a 22% increase compared to the same period.
In 2019.
In addition to our record setting second half revenue, we achieved mobile revenue of $77 6 million for the full year, representing a year over year increase of 150% and a fourth quarter increase of 250% compared to the same period in 2019.
Our.
Our mobile transport growth continues to be fueled by the emergence of <unk> and open ran and design wins with marquee operators.
Recognizing 10 of the top 25, wireline and wireless service providers as customers and with customers spanning more than 100 countries. We remain laser focused.
On innovation exceeding customer expectations and market share growth.
With the health care of the COVID-19 pandemic, improving our primary risk as we enter 2021 is supply chain and component availability.
Many of our products rely on semiconductor chips that require the fabrication of silica.
<unk> wafers, which are experiencing extraordinary long lead times due to the impacts of the pandemic and the global demands for such chips from the communications consumer electronics smartphone in the automobile sectors.
With that as the backdrop and a summary.
I'll now turn the call back over to the moderator to facilitate.
Questions that you might have.
Thank you.
Ladies and gentlemen, as a reminder to ask a question you would need to press star one on your telephone.
To withdraw your question press the pound key.
Again its star one to ask the question. Please standby, while we compile the Q&A roster.
Yeah.
Sure.
Okay.
Our first question comes from the line of Kristen swap with Craig Hallum. Your line is open.
Great. Thank you it gives as far as the market share gains can you watch.
Take what whether you think thats, an improved spending environment.
Coupled with it.
<unk> share of wallet gains or should or do you anticipate adding any new meaningful customers.
The 20 or so largest spenders.
Hey, Christian Charles.
Thank you.
Well as it specifically relates to the mobile transport portfolio I mean, obviously most of the market share gains really has a lot to do with just the emergence of <unk> and open ran.
Specifically with.
Six of the largest mobile operators in Asia.
And so we're certainly seeing the emergence of <unk>, an open ran starting in Asia, and there's certainly a lot of activity underway in North America, Kalla and in Europe, but as it relates really to the second half of last year, that's where we saw most of the growth that we experience.
Asia.
Okay, Great and then I guess.
My second question.
As it relates to art.
Can you give us an update on where.
Customer dialogue is going where and you may be able to begin to see.
Potentially meaningful.
Revenue from that.
Yes, so I think.
We have been.
On point as it relates to the timing of write off and I think it aligns with what you've probably heard from calix and add train and Nokia but.
The first phase of art of has occurred I think $9 2 billion.
Billion dollars.
Has been approved to I think close to 200 Art off award winners and so we certainly are anticipating the second half of this year is when we're going to begin to see that ramp up.
Obviously, we have a significant number of existing customers, who were award winners and we're.
And very closely with those customers and there is a lot of new customers that arent your traditional.
Traditional regional communication service providers that are.
That have made their way into the <unk>.
The New awards, so that's where that's where most of our focus has been.
Yes.
We're working right.
Good quarter. Thanks, guys no other questions. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Dave Kang with B Riley Your line is open.
Thank you good afternoon.
I have some questions regarding your two.
2021, and the revenue outlook.
310 to 330 million just wondering your mobile.
Second half was about 31% of revenue how should we expect debt number to change for the year. This year.
Well, we haven't provided any specific guidance.
Uh huh.
As it relates to the breakout of our fixed broadband and mobile revenue.
Did for the first time begin to break out revenue by by customer sector. So.
I think as we continue to move forward, we will continue to look at.
The certain metrics that we feel.
Like will be beneficial for analysts and shareholders to begin to evaluate but.
The first step forward is to begin to breakout revenue beyond just regional revenue and we did as you can see.
In the in the Q4 letter to shareholders. So we haven't provided that level of guidance, but certainly we continue to see strong demand.
<unk> for our mobile transport products with the acquisition of Octillion, We certainly have additional opportunities that we will be aggressively pursuing around the world. So theres certainly some upside as it relates to what we're what we're going into the year with as it relates to mobile transport.
Sure speaking of Octillion.
<unk> can you provide any more information on them.
Such as who their customers are.
What kind of margins they have.
Anything will be helpful.
Yes so.
One of the exciting things.
Several things that got us excited about Australian one was just the complementary.
Nature of their products and our existing mobile transport products the.
The second is they've been doing business and have been a key supplier to the world's largest service provider in the world for.
For a number of years and they're in four of the top 35 global service providers.
In the world So.
They certainly give us an opportunity to expand into North America I mean, they have been primarily focused in North America. So that that is where most of their customer traction and revenue has traditionally come from.
As it relates to margins their margins today.
They are higher than ours, I mean looking at our historical margins their margins are significantly higher so we certainly hope that as the revenue ramps over the next year or two that that blended margin and blended revenue will <unk>.
Translate into higher margins for the company.
Got it and then.
Speaking of margin Youre guiding about 34% ish.
Sure.
The presentation, a few weeks ago, you talked about several pillars.
Net to 34% how many.
Pillars are you kind of baking in and how many pillars are left.
To get you to even higher gross margin next year.
Yeah. So there are some.
Work streams underway Dave.
Dave because look obviously, we're not happy with our margins and we're laser focused.
On getting that up in 2021, so the things that are.
Our avail.
Available to US right now that are underway things like merger synergies and integrating the former <unk> zone in key mile.
Purchasing.
Functions into one unified global supply chain.
And product rationalization.
Things like that and then maybe.
Looking at true.
Manufacturing in your Odm's and optimizing that those are all underway and.
That's what gets you towards the higher margins in the second half of the year and geographic mix I mean, certainly we are seeing.
<unk>.
Pretty significant pipeline that's emerging.
In North America, Kalla and across Europe, Middle East and those margins in those countries are higher than they are in Asia and that will certainly have an impact.
So right now Asia is roughly 60% debt EMEA.
King.
<unk> <unk>.
It costs about 20% each.
So for gross margin to be higher.
What.
Americas.
Revenue to be higher than 20%.
This year is that the target.
Yes, I mean, I think the way you guys should look at it.
It is look theres a number of work streams that are underway I mean, one of the initial work streams that began months ago was just rationalizing the entire portfolio and getting to a place where.
We are streamlining where there was product duplication or overlap.
Reducing the number of suppliers.
Or is that we're doing business with today that is going to allow us to.
Increase the amount of revenue that we're giving to the certain odm's and CMS, which in return gives us.
Better bomb and a better cost basis that ultimately translates into higher product margins.
We've got a pretty significant initiative.
Your way with regards to just service expansion and.
We as we launch new products, especially in the mobile transport area. Some of the new next generation.
Fixed wireline broadband access technologies, we're launching I think you saw in the in the report that we are launching our any port any pond.
Platform or our module and that certainly is going to give us an opportunity to expand margins as well.
Got it thank you.
Thank you.
Our next question comes from the line of Tim Savvis, Joe with Northland. Your line is open.
Okay.
Pardon me hi, good afternoon.
Hey, Hey, I appreciate the.
Incremental.
Reporting and transparency around the on the mobile revenue we're.
Were obviously you saw a pretty significant growth in calendar 'twenty offset.
To some degree.
By you know pretty healthy declines.
Yes, we characterize the remaining revenue is fixed.
And my question is you know with some of the.
Upgrades to 10 gig PON kind of the general momentum around the fiber to the home in PON space, we see kind of heading into 'twenty one.
Bob do you expect that trend to reverse can you grow your fixed broadband revenue.
In calendar 'twenty or is that what you're assuming and I'll follow up from there.
Well I'll start and Tom you can certainly chime in.
First I would tell you that you know really the first five four to five months of.
A 2020.
Was severely impacted by by the pandemic.
We had a $47 million quarter in Q1 $70 million a quarter in Q2 and much of that was you know are fixed.
Broadband access portfolios. We also saw the beginnings.
A pretty significant transition from copper to fiber this year, which I think is a really good thing as we enter 2021 and beyond most of our customers in Europe and even places in North America, we're beginning to make that transition. So there was a bit of a revenue lag as those customers evaluate a lot of the newer.
Server based technologies, we also had a contract manufacturing partnership.
In Germany that.
We transitioned away from and it was a lower margin manufacturing only relationship that we didn't seem that we didn't deem to be strategically important going.
Forward. So it did have some revenue associated with it in the second half of the year and it certainly.
We will not be part of our revenue profile going forward and that was roughly $15 million and so if you look at that $50 million on an annual basis and you look at our growth trajectory in 2000.
'twenty, one backing out that $15 million from 2020, you can get a better appreciation for from a revenue growth both on the on the on the fixed wireline side as well as on the mobile side.
Okay. Thank you.
Our next question comes from the line of John Mckechnie with Stifel. Your line is open.
Thanks, very much I was wondering if you could talk for a moment again about some of the issues that you were talking around the supply chain and maybe indicated that really you know if you've had to be a little bit more conservative.
<unk>, maybe with the <unk> of our full year outlook as a result of that and how maybe we should think about that playing out both over the near term and through the course of the year.
Yes.
And in all my years, I don't know that I have ever seen.
The sourcing of components in semiconductors.
<unk> is challenged as they are right now I mean, I think we've done a really good job John of navigating through 2020, and I think we've got pretty good line of sight.
Into the first two or three quarters, but.
Look at it it is challenging and I think that we are being you know.
I don't want to say, we're being conservative, but I think that.
We're being.
Cautious as it relates to where we entered the quarter end, where we had fulfillment against <unk>.
Backlog that was already aligned with Q1 versus what our go get revenue was profiled for Q1.
As it relates to the outlying quarters throughout the year.
There's a lot of them.
Time and effort that's going into working with.
Our our semiconductor chip suppliers like Broadcom and others. So it's a real challenge I mean, I think everyone in our space, including other sectors are seeing the the long lead times, especially from the.
Silicon fabricators.
Of wafers I think thats part of the bottleneck right now and I think that stemmed primarily going back to the first half of 2020.
And everything that we're hearing from our strategic semiconductor chip partners is that by Q3, they feel like there'll be in a much better place than where they.
And the first three quarters. The good news for US is we got ahead of it and we were forecasting and ordering.
Back in the second half of 2020 and that has given us I think a much better position to de risk. The first half of this year.
Got it and maybe just as a follow up to that I mean does that change conversations with.
Say, new customers, who may be a little bit more reluctant to move to a new platform or new solution, rather than stay with somebody where maybe they do feel like they've got a little bit.
A little bit more history, they have a little bit more confident that supply or particularly you mentioned, bringing <unk> in and given their exposure to north American tier.
Tier ones does it change the tenor of those conversations at all or do you do you still see.
Pretty open willingness to work with new partners, who have the right solutions.
Well I mean, I think it's I think there's three pieces to that one is I think that there is an availability challenge for certain suppliers and.
Where where suppliers have.
Challenges in the supply chain I, certainly think it's going to open the door for others and we see that as an opportunity.
Two I think it's given us a great opportunity to sit down with our larger customers and be able to secure.
Larger.
Orders and in fact, even full year orders.
Giving us a lot more visibility so I think that at the customer level, they really understand whats going on.
In the semiconductor and the overall sourcing of components and they want to make sure that their deployments are delayed so in our particular case.
Roger we got.
Pretty significant jumpstart on this really in the second half of the year last year, when I joined and we sat down with with our largest customers began to have these dialogues, which have really helped and so getting that alignment with your core customers getting those customers to give you a firm orders.
In the first.
Half of 2021 for the full year is certainly helping us significantly, but I mean for us I mean, we see it as an opportunity and we're going to leverage it. The best we can to be able to take share at a time when we feel like the sourcing is a bit more favorable for us than maybe for others.
Thanks very much.
Thank you.
We have a follow up question from the line of Tim <unk>. Your line is open.
Hey, sorry about that was on mute there.
And I just want to follow up on net debt fixed versus mobile discussion internally I think I heard a couple of your comments there.
On the <unk> front and also note that Youre I guess youre in a run rate for the second half of the year at least that would imply.
Growth for 'twenty, one even if just staying at that run rate.
When you add to that I'd, just like to get a sense of what if anything you've built into your assumptions.
In terms.
Material Octillion contribution.
Or anything meaningful on the enterprise side as you look at share your kind of initial calendar 'twenty one guidance yes.
Yes, so we've been pretty conservative with Octillion, and our 2021 forecast and we've been pretty conservative in.
<unk> enterprise.
Outlook for this year, so two good questions and they're fair questions, but.
We have it is a global product I mean, we're excited about the ability most likely in the second half of the year I mean, the first half of the year most of the European and Latin America.
And our functional teams, which just got trained up on the entire product line will be spending a lot of other energy introducing that portfolio into customers in the first half and getting it into labs and so it's most likely a second half of the year uptick or regions outside of North America in North America, There's a lot of traction and we certainly are optimistic.
<unk> about the year for that particular portfolio.
Fiber Lan look I mean fiber Lan as I've said, many times I think it's a wildcard as a company I mean, we've got the.
The technology, it's really about the go to market strategy and I think as is the overall.
Market reopens here over the next several months.
And talking with a lot of our larger systems integrator partners, who are serving some of the verticals like the hospitality industry like the educational market like the health care industry will.
We will be I think a second half of the year 2021 and into 2022 sort of growth opportunity for us.
Got it and last question for me I think it's also I'd say one other thing that I didn't I didn't get a chance.
To add earlier I mean, theres some recent data out.
That debt.
As aligning with a lot of what we're hearing.
A lot of our fixed wireline customers and that is that the.
Service providers are anticipating and building their network capacities to support about a 30%.
Capacity increase over 2020, and Thats just due to the forecast that I think a lot of operators are getting as it relates to more.
More employees, having more flexibility to work from home and they've got to keep the network.
Network up.
As if those employees were there Monday through Friday, So I think thats going to continue to fuel a lot of growth for us over the next several years.
And certainly pawn in general is I mean, the evolution from sub one gig to 10 gig is something we're seeing everywhere I mean, even our smaller.
Mahler customers are pushing 10 gig PON honest and.
And almost every one of their markets. So that's also an exciting opportunity for us this year.
And Thats.
Pretty related to where I was going to have there maybe.
Maybe focused on larger versus larger potential customers.
If you can give us.
As an update I don't know.
Qualitatively perhaps.
Hmm.
And what Youre seeing from an overall pipeline or RFP RF Q type perspective, as you survey the carrier landscape.
Globally kind of.
You would assume there is an element.
Element of just adding capacity to current networks.
That.
It relates to what you were talking about with these capacity demands, but also larger upgrades and maybe more formal processes I'm wondering what your what youre seeing out there.
But I'll tell you I'll tell you a couple of things one.
As we entered January.
Our sales pipeline was about three five times or our forecast or our guidance, which is a good trend.
And two.
We have.
Because of the changes that I think we've made across the globe with regards to our sales force focus.
And just go to market strategy, but we have we have responded to the largest rfps. This company has ever participated in in the Companys history, I think over the last six months in and whether or not we'll win some part or all of those is to be determined, but it's pretty exciting to one now be in a position.
We are beginning to participate in some of these large very strategic tier one rfps.
And in our ability to really transform the company over the next several years.
Great. Thanks very much.
Thank you.
Our next question comes from the line of John Baugh with.
<unk> Your line is open.
Hi, good afternoon.
This is John.
Cup two related questions one.
With this phenomenal.
Uh huh.
Shortage in components, how are we able to exceed fourth quarter revenue by some.
It would make much.
And then I have a related question after that.
Well as I think I've shared in the past I mean, the cadence and the governance by which we're managing the forecasting process has significantly changed over the last six months and we have daily revenue calls daily forecast.
So my calls with sales, our key customers and supply chain and I think the team did a fantastic job.
In the second half of last year, just aligning with our customer demands and getting ahead of the supply chain.
Shortage and so.
I would tell you it wasn't easy to navigate.
<unk> second half of the year and even into Q4, but I attribute a lot of the success that we had to just the micro managed and discipline that came with our.
Our our sales operations team and the sales team was supply chain.
As it relates to this year as I said earlier we.
Through the really got on this supply chain forecasting.
Endeavour backend.
<unk> September and I think we put ourselves in as good a position as we can as we entered this year.
Aligning with as much detail as you can.
As it relates to just the backlog that we entered the year.
As well as the high degree of confidence that we had with forecasting from from a lot of our key customers. So my hat goes off to the supply chain team and our forecasting team that really.
Delivered strong alliance alignment with the requirements that we have.
Well given that and given the first quarter.
With a revenue bump from the depressed level of last year's first quarter.
Yearly forecast assumes no growth in.
In the nine months after the first quarter.
Is that conservative like you've been so far to us or is that realistic.
You had.
The piece of new information on the $15 million.
Business.
You did.
Yes.
<unk> sold.
Just stop.
Yes, I think theres still I think that that's a small growth.
Yes, I think the best way for shareholders and analysts to look at the year over year.
The wonder of $285 million year too.
Our guidance of $3 10 to $3 30.
Just because we.
There was a strategic decision we made the right decision for us to make and so when you look at it at that that sort of year over year growth I mean, we're in the double digit growth.
The range for 2021.
We.
Youre backing us into a quarter as it relates to the level of confidence in the level of conservatism that we have in the year I mean, I think the items that we provided of $3 10 to $3 30 is in line with.
Our level of confidence at this point.
Thank you very much.
Thank you.
Our next question comes from the line of Jay <unk> with Needham <unk> Company. Your line is open.
Hey, it's Chad on for Rich Valera, we're wondering if you could provide any additional information on pipeline.
Okay. Thanks for open ran opportunities and then second on the CTC partnership.
Yes. The <unk> partnership is exciting we have been working on that for most of 2020 and it certainly opens up.
<unk> opportunity for us to align and partner with the U S Regional service.
<unk> providers and so it's certainly an exciting opportunity that we feel like provide some upside for us in 2021.
As it relates to open ran I would I would maybe change the question to what our outlook is for <unk> in general and virtual ran in general.
I personally believe and it was noted in the stockholder report.
And just every conversation, we're having with traditional mobile operators as well as emerging mobile operators. I think open ran is something that will be embraced over time.
Certainly the emerging mobile operators.
Service like a rocket on which we're obviously.
A big part of that network deployment and the dishes in the world.
Our.
Or certainly starting from a different place than AT&T, or Verizon or T mobile and that said I think that they've made comments and I think other.
<unk> operators have made comments that.
Open ran is something that youre going to see this industry continue to adopt and embrace and it's the right thing to do and we feel like the ecosystem that we are.
Part of today and that we are creating will position us well for the future.
Great. Thank you.
And I think if you look at some of the data that's out there.
<unk> I think they are expecting all ran to grow by 10 times by 2025. So it's it's certainly.
Where the industry I think ends up going over time.
One are there any questions left in the queue, Hi, I'm showing no further questions in the queue, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect everyone have a wonderful day.
Thank you. Thank you.
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Yes.
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True.
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Okay.
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Yes.
Okay.
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