Q1 2021 DZS Inc Earnings Call
Good day and welcome to the DVS, the first quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. Later, we will conduct the question answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone line.
As a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr. Ted Moreau head of Investor Relations at <unk>, Sir the floor is yours.
Thank you Laura and welcome to the <unk> first quarter of 2021 earnings Conference call.
Joining us today are <unk>, president and CEO, Charlie books, and CFO Tom Cancro.
We are pleased to discuss our first quarter of financial results as well as inside a day performance of expanding our global business trends driving our market transformative initiatives and our outlook for the remainder of 2021.
As we've done for the past three quarters.
Morning, Dcs published our shareholder report for the <unk>.
First quarter of 2021 on the Investor Relations section of our website at BDSI Dot com.
I'd also like to remind you that we will host our virtual horizons 21, investor and analyst day on Thursday may 13th.
And we plan to participate in the Nida, Craig Hallum and Stifel Investor conferences during the Q2.
During this call we will provide projections and other forward looking statements regarding future events or of the future financial performance of the company.
The company cautions you that such statements are only current expectations and actual actual events or results may differ materially.
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 shareholder report that 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 matrix ease of added to you on this part of determined out of non-GAAP basis.
The items together with the corresponding GAAP numbers.
Reconciliations of GAAP are contained in the letter to stockholders.
Now I'll turn the call over to Charlie.
Thank you Ted and welcome investors analyst and guests.
As Ted mentioned prior to the open Dcs released our quarterly shareholder report, providing the market business from financial update for the first quarter of 2021.
Our reported is designed to provide shareholders perspective shareholders and analysts with market insights product and business updates and our financial performance.
The management changes and transformational enhancements executed during the second half of 2020 are delivering encouraging results.
And we've become and it becomes the foundation to delivering long term sustainable shareholder value.
With that as the backdrop. The first quarter of 2021 was a strong start to the year with record orders record backlog of better than expected revenue and gross margin and positive adjusted EBITDA.
Orders increased 163% year over year, yielding $106 million of backlog, our highest ever and the sequential increase of 49%.
Growth in our mobile revenue was exponentially strong increasing 635%.
During the quarter, we added 24, new customers with North America, and EMEA experiencing the strongest customer growth.
Revenue of $81 million exceeded guidance for the third consecutive quarter compared with our $70 million to $75 million guidance, representing a 71% year over year increase.
Better than expected revenue favorable geographic mix and strong operational execution enabled us to deliver favorable gross margins of 35%.
Resulting in a positive adjusted EBITDA of $3 6 million, which was also above guidance.
These results follow of strong second half of 2020 can support an optimistic view of the remainder of 2021 and into 2022.
The unexpected global health pandemic, coupled with the surge in demand for networking and communication services has challenged the global supply chain the.
<unk> are forecasting process customer relationships and a robust supply chain ecosystem.
Have limited our exposure to price increases component availability as well as manufacturing logistics and delivery delays.
With that said, we are not ruling out deviations to the previous statement has the current environment is fluid.
Offsetting the supply chain challenges the pandemic has forever transform how people rely on high speed wireless and wireline connectivity for business Education Health care E Sports and entertainment.
Aligned with these technology requirements and the emerging lifestyle and workplace trends.
Tcs is well positioned with its innovative lineup of mobile edge transport broadband connectivity and now software defined networking solutions.
In February we acquired of Pelion and in March we acquired rich.
These two acquisitions have strategically enhanced our mobile edge and Bravo.
The band connectivity portfolios.
I've Chilean provides our customers with the temperature hardened high capacity long reach Rotem transport portfolio the <unk>.
Compliments, our fast growing mobile edge transport solutions.
And our risk the acquisition accelerates and enhances our software portfolio for mobile and broadband connectivity networks.
Following our risk acquisition, we announced tell US one of Canada's Premier communication service providers as the new Dcs cloud customer.
Tell us will be deploying Dcs cloud for network orchestration application management and software automation.
As of this earnings call the integration of both of Chilean and ripped are nearly complete.
In addition to tell US. These two these two new acquisitions at AT&T and lumen to our lineup of marquee customers.
Also in the quarter, we executed of 64 million gross proceeds follow on equity offering eliminating debt and strengthening our balance sheet.
During the quarter, we began the consolidation of our high cost of manufacturing facility in Germany, which we anticipate will deliver favorable margins and earnings in 2022 and beyond.
As Ted stated on April the eight we announced our inaugural Horizons Investor and Analyst day, which is scheduled for Thursday may the 13th.
I, along with Andrew Bender, our Chief Technology Officer, Miguel Alonso, our product line manager top can't grow our Chief financial Officer, and several marquee customers, who will be presenting as part of this virtual events.
To learn more and the register please visit our Investor Relations page.
Thank you for joining the call and with that I'll now turn the call back over to the moderator to facilitate any questions you may have.
Thank you Sir.
Ladies and gentlemen, if you have a question of the best time. Please press. The Star then the number one key Touchtone telephone line again, that's the Star then the number one key on your Touchtone telephone line. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question will come from the line of John <unk> from Stifel. Your line is now line go ahead. Please.
Thanks, very much Charlie I was wondering if you could spend a minute on some of the software efforts youre given the the acquisition of <unk>, where the I guess the overall software portfolio stands now I know that accelerated some of the efforts of and certainly some of the time to market, but where that portfolio stands what we should still look.
For there and maybe how much of a bad age is really contributing I know you highlighted tell us, but I'm just curious if theres theres others already in that software portfolio now.
Yeah, So well first of all thank you John.
You know what I would tell you is you know.
Prior to rift there certainly was.
No of pretty significant.
Software development effort that was underway that was really focused on primarily our fixed wireline network.
And in the products within that portfolio you know what we really did was helped us accelerate you know.
Our our play in the broader network orchestration of the software automation lifestyle.
Lifecycle management as well as the data analytics.
And you know if you're if you dive into the the tell us opportunity. It really opened up a great opportunity for us to participate in the wireless network and most of the sales projections and this year's pipeline are really focused.
Around the wireless part of our business that said I will tell you that a big part of the investment thesis around Rip was really the opportunity to unlock the value that we have with the 20 million products that we have deployed around the world, especially on the fixed wireline side. So.
Look we've got a pretty substantial R&D team that's in Bangalore as the result of it.
And.
It certainly is giving us an opportunity to.
The deliver.
A stronger presence in the network into abstract lot more value with our existing customers.
Great and maybe if I can just follow up their proprietary your per Tom you know given the the the little bit of of the raise in the full year outlook.
Just curious how much of.
That that bump has to do with what we're getting here from Octillion in rent versus maybe what youre seeing in the in the Standalone business or are you talking about from a revenue standpoint.
Yes, I'm, sorry, yes, yes, I mean, I think the way you know analysts and shareholders should think of rip and octillion as well.
Well first of all we've added an additional $4 million of of Opex spend to this year's incremental forecast. The result of both of the transactions.
And you know we're not we didn't have anything baked into this year from a risk perspective, and we still don't.
So anything that we see from revenue that's recognized from Telus as well as other customers in the pipeline, we would see as upside.
From an optimization perspective, we did have a modest amount of of revenue that we had plugged into this year's plan. So.
We were cautiously optimistic and we hope that both of these transactions provide some upside that we didn't have baked into our plan early in the year.
And if maybe I could just ask one more and then I'll turn it over.
In the shareholder letter about some of the momentum that you are starting to see.
On the <unk> side, particularly in North America.
Has that have you gotten I guess real hard off base orders from from customers as the can you track it in that way I'm. Just curious if there's a metric that you can share along those lines that just helps us sort of measure.
Overall success in North America.
Maybe whats specifically tied to that program.
Well I think what I think what analysts need to think about as it relates to Dcs, especially as you guys compare us to add train of Calix, which have spent a lot of.
The last 15 to 20 years focused on the rural markets in the U S. I mean, Dcs as a global player in much of our revenue as you all know.
Comes from a lot of tier ones around the world that said.
Big initiative that I took on when I joined the company last year was to revamp our sales efforts, our support and service efforts of our innovation alignment with North America.
And specifically the U S and if you look at it at Q1.
We grew Q1 orders by nearly 85% sequentially and 138% year over year.
That was a record for North America I mean.
We've got a small amount of art of customers I think we have close to 40 art of customers that are active.
But I would suggest that you look at the participation of art of customers as it relates to the size and scale of those art of customers and their spending pattern.
There's also another.
Important area that I think is worth noting and that is we estimate that about 30% of all of the art of funds were awarded the non traditional or rule of lilacs, meaning that these were not traditional customers of ours, Nokia calyx of AD trend and certainly.
Our customers are at least perspective service providers. These are fiber builders the utility operators and others that are new fertile ground for us. So that's where we're spending a lot of our time as well as spending much of our time with the tier ones in North America.
Thanks very much.
Thank you.
Your next question will come from the line of Dave Kang from B Riley. Your line is now line go ahead. Please.
All right. Thank you good afternoon.
My first question is regarding your second quarter outlook.
Despite your commentaries about the strong visibility and backlog.
Youre guiding kind of flat to down a little bit just wondering if that's based on conservatism, which wouldn't be too surprising or perhaps other factors such as the chips situation.
I don't know if we're the.
The forecasting decline I think that we've kept our Q2 outlook somewhat consistent with where we were you know prior to.
Our Q1 shareholder report, but.
Look I mean, I think that we continue to remain you know as I shared earlier optimistic about the year.
And into next year, but you know we are certainly taking a cautious approach to the unknown and you know what.
What gives us confidence in our ability to deliver Q2 as we go into you know we entered the quarter with our strongest backlog ever.
You know it.
But as you get closer to the quarter you.
Certainly have.
Shorter cycles to be able to deliver stronger upside.
I think the forecast that we've provided is of forecasts that you know the the analysts you the line too.
Got it.
Can you just talk about the chip situation because of some of it all.
Although comm equipment companies around the hurricane and from change as far as the OBL availability is concerned as well as prices going up that's impacting the margins.
Yes, I mean prices certainly have unexpectedly gone up I mean prices went up in Q1, and we were still able to navigate around some of those increases delivering a higher than expected.
Margin profile for Q1, but it is real I mean, you know for US our largest semiconductor partner is broadcom and we've got a great relationship with them, which which certainly helps.
But it's.
When you just look at all the factors I mean everything that are you know.
Our our semiconductor ecosystem continues to articulate to US is there six months behind from the impacts of COVID-19 and then you had a surge in demand from.
Both of the communication sector as well as the networking end consumer related markets that have the stacked up at least through 2021 now I would tell you that mix has a lot to do with where the impacts are and how well an aggressive you were in forecasting back.
Back in August September of last year, I would tell you that we got ahead of the curve I feel like when I first joined back in August we sat down with our ecosystem supply chain partners and.
We did a really good job of forecasting what we thought 2021 was going to require and that has so far helped us.
Uh huh.
We're right now not expecting that there's going to be an impairment.
There are impacts on what we're what we're forecasting for the rest of the year due to supply chain.
Got it and my follow up question is regarding your backlog of $106 million.
Can you just provide some color as far as how the mix looks like between broadband versus mobile.
I don't have that wrapped up my head.
I would say it's roughly.
Eric do you have deep you know what that is roughly speaking it would be about 60 40 60.
The $60 60, 40 got at 46 versus mobile Yep.
Got it.
We expect most of that to ship this year.
Got it and then my last question is regarding Asia, specifically on India, I guess that was a pretty big market for you. A couple of years ago has gone down and you know where do you expect the India too.
Recover these share and if so.
What's the current status I guess.
The situation with COVID-19 cases.
We have we have increased our sales personnel in India.
Just just for the record I mean, we have one, particularly large project in India back in the 2016 of 2018 timeframe.
The large F T T X project.
With the one of the.
Entities in India, which really did give us.
A notable footprint we have since then engaged with the four tier ones in India.
We are not forecasting anything significant from India. Despite the fact that our pipeline has increased and I think you guys are probably seeing that especially with India like the United States.
Becoming very anti China, and so we are getting pulled into a lot of new opportunities of the projects.
Yeah.
Weren't part of you know a year ago.
Got it thank you.
Thank you Sir your next question will come from the line of Christian Schwab from Craig Hallum. Your line is now line go ahead.
Great. Thanks, Congrats on solid results can you can we just update.
Charlie just what we just talked about there can you can you tell us.
Quantified potentially the positive impact of.
Of new opportunities.
Because of Chinese vendors.
Well I would tell you and I think I spoke of a bit of this over the last time, we were on the call that are in our sales pipeline, specifically across the EMEA region and the APAC region.
And I'm speaking outside of Korea, and Japan has more than doubled and so we are we are seeing a lot of opportunities across Europe across India.
Those are probably the two regions of the European Central Europe, and India regions are probably driving the most near term activity.
With real projects.
We are you know.
From a product.
Alignment perspective, best suited to be able to participate.
Okay, that's fair.
Is any of the new customers on the list due to that or is it just the share of wallet potential of existing customers.
Are you talking about the 24, new customers, we announced yeah or any of those have to do with the the China marketplace opportunities that you just elaborated on and discussed at first last quarter is some of that new customer opportunities or is it or is the opportunity is really more with existing customers well.
Well the 24, new customers that we announced were primarily in North America and Europe.
And in Middle East I mean, those were the three regions that we saw most of those new customers come in and not really any notable customers that we can represent as a new design win relative to.
<unk>.
Share from from Huawei, I mean, most of the Huawei customers I think people have to understand our large tier one fixed and mobile operators and the process that we're embarking on right now it just takes some time I mean I can tell you that there's a pretty significant.
You know log of activity you know across EMEA.
Specially in India, where while we had a pretty strong presence, but we haven't gotten to the stage, where we can you know incredibly announce any any design wins.
Okay. That's fair of my last question has to do with analytics and cloud.
Can you help us quantify how.
How big that opportunity.
B for you guys this year.
The growth rates, you would expect there going forward.
I think the opportunity of this year should be tempered.
Just based on the longer sales cycle.
That comes along with at least the the mobile side of.
The.
The network orchestration and the software automation and <unk> slicing.
As it relates to our plans to embed.
The software attributes into our fixed wireline.
Portfolio I think that there is.
A meaningful opportunity for us from 2022 and beyond.
Okay. That's fair great. Thank you.
Thank you Sir your line.
Next question will come from the line of Tim <unk> from Northland Capital. Your line is now line go ahead. Please.
Hi, good afternoon and congrats.
Congrats on the results as well.
Hello.
We had a couple of references.
Tier one opportunities one earlier in the call with regarding with regard to spending time.
Focusing there in the U S and then with.
In reference to Huawei opportunities, maybe principally in EMEA.
There is a sales.
Sales cycle here, but I wonder if you can give us your best update on.
When you think.
<unk> might be made there or you might be in a position to talk about something.
With more specificity and of course any color on.
The size of those opportunities either individually or in the aggregate if theres any update there.
I'd be interested in that as well.
Yeah, I would say that the projects that we're currently involved in.
As it relates to being able to cap and grow of Huawei network is most likely in the Q3 of the Q4 time frame.
Just based on where that cycle is.
And I would tell you the all of the projects that we're working on are or what we would consider as tier one operators. So the.
The opportunity for those projects could be sizeable over a period of years.
Right and obviously the.
Huawei not operating in the U S. Previously those you know you have different drivers for those opportunities though.
Both of the several of the big carriers in the U S seem to have gotten off to a pretty strong start.
In terms of investments in <unk>.
Access in particular, you know of.
I wonder.
Given that it appears.
Your sales efforts among smaller carriers in North America.
Born fruit I guess a bit quicker than you may have expected.
Any comments on that would be interesting is how.
How are you feeling about that same dynamic with regard to the U S tier one.
Yes.
I mean, we're pretty encouraged with what's going on right now in the U S and Canada and and that's coming from.
You know of technology company that arguably was.
Lagging Nokia Calix can address from a from a.
Footprint perspective, but I would tell you that we're making great progress and to your point I think the relationships that we have fostered have helped us better align on a more robust forecast for this year of next year with those operators in.
Several of the.
Yes.
Regional operators are pretty significant I mean, you know you've got some really small.
Tier three operators that have thousands of subscribers and you've got.
Some of the tier threes that have millions of subscribers and I would tell you that we're fortunate the.
Have several of the.
The ilex and.
In the U S that are relatively sizable and they're expanding their networks and we feel like we're getting a larger portion of the network split than we have historically and.
And I think that's attributed to.
Where we are on the technology curve and where we are and just.
Our focus on these customers from a sales and service perspective.
Got it thanks very much on personal loans.
Thank you Sir.
And at this time, ladies and gentlemen, just a reminder, if you have a question. Please press Star then the number one key touchstone telephone line.
Again thats.
The style and the number one key on your Touchtone telephone line.
Your next question will come from the line of Ryan Cary from Needham <unk> Company. Your line is now lifestyle go ahead. Please.
Hi, Thanks, Thanks for the question.
Charlie trying to slice of maybe different way and try to understand the dynamics of little bit can you maybe give us some qualitative insights as to if you look at your revenue mix today, how much of the how much of it is roughly <unk>.
Long time.
The songs on customers versus newer customers in the last Ah.
18 to 24 months.
I would say that most of the revenue globally is.
Sustainable of historical revenue that we've been able to capture a larger proportion of the network I mean as you can probably appreciate.
<unk>.
There's a lot to the sad about being an incumbent because it certainly gives you the opportunity to participate in other adjacent projects that.
Here here.
Much more easily able to you know.
Show your value then being somewhere in the <unk> being a supplier of that's trying to wedge of their way in so I would tell you that the bulk of our revenue continues to come from existing customers that we've been able to go in and represent.
<unk>.
The.
Our newer products I mean, we've introduced a lot of new products over the last year and if you look at what we're doing with some of the large scale mobile operators like rockets on and Softbank and LG U.
A lot of the lot of the revenue there is attributed to some evolving network projects that they.
They have given us.
More upside than I think we were expecting and I think that when you when you think about the.
Overall mix I would say, it's probably 90 10, 10% of our.
It's coming from new customers and 90% is coming from existing customers.
That's great so you're seeing a pretty pretty good dollar expansion rate what are the current customers.
I mean again.
Continue to highlight the success that we had in Q1 I mean, we don't profile of orders, but you can probably back into a rough estimate of what our order profile was in Q1, especially when you factor in that we ended we ended December at $71 million in backlog and we ended March at.
106, so we had a pretty significant bookings ratio in Q1.
Yes sure.
Still exceeded the top line range of our revenue for the quarter.
Yeah, you bet.
Just another quick follow up on your strength in the Middle East I typically think of that as the.
The region is dominated by the.
The Chinese and the big multinationals.
Have you seen shifts in the competitive landscape there or do you have a longtime customer relationships in that area.
So it takes a lot of it's been a long time customer 20 years and they continue they continue to grow as does mobile in the STC. So it's a really strong region for us and it's a meaningful region for us.
And they continue to throw of new projects at us So I am seeing.
Huawei being de emphasized in the middle East. So for what you may have recalled I mean, those three customers, especially are we're seeing more deemphasizing the Chinese suppliers at least with those.
<unk>.
And then maybe what you might have thought.
That's great Super helpful. Thanks for the questions and congrats on the quarter. Thank you. Thank you.
Thank you Sir.
And I am showing no further questions at this time I would like to turn the conference back to Mr. Charlie the political.
Moving remarks.
Well I guess I just wanted to say thanks to the Dcs team for delivering an outstanding quarter.
We continue to navigate what I think is a fantastic opportunity for the company and as I said earlier, we're very optimistic.
The remainder of this year and into 2022 and.
When I think about the debt.
The two technology acquisitions that we acquired with written up Jillian.
We are great fits into an existing portfolio of products that helps us accelerate what we're doing within those particular technology areas that I think gives us a lot of upside, especially as we go into 2022 so.
I just want to thank the employees of the Dcs and I appreciate the interest that the analyst of shareholders have and and remember that we've got our Investor day on May the 13th I think.
It'll be three hours of of.
The time well spent if you can afford it but we're going to go into a lot more detail as it relates to our product portfolio of why we believe.
We will continue to succeed and win.
Against our competitive the competitive landscape will talk in a lot more detail about the various opportunities we've got a number of.
Of our marquee customers that are going to participate in we've got a board meeting the board member. That's also participating so we're excited about that as well so.
I guess with that I would just say thanks for.
For the times afternoon.
Thank you Sir thank you so much presenting the and again. Thank you everyone for participating. This concludes today's conference you may now disconnect.
And have a lovely day.
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