Q3 2021 DZS Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the T V. S Corp.
I used to be 'twenty or 'twenty, one earnings conference call.
After the speaker's presentation, there will be a question answer session to ask a question. During this session you will need to press star one.
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I would like to turn the call over to Mike.
Do you think of Investor Relations you may begin.
Thank you Margery and welcome to the Dcs.
Quarter 2021 earnings call.
CEO, Charlie boat and CFO Mr correctly, yes.
Yesterday after market close we published at the Investor Relations.
And section of the DCF, yes.
Yeah.
To provide shareholders perspective shareholders and analysts with market insights product business and financial update as well as forward looking statements.
And other forward looking statements regarding future events or the future financial performance of the company the company cautions.
Do you that such statements are only.
Results may differ materially.
Please refer to documents that the company files with the SEC, including its most recent 10-Q.
Statements section of the shareholder report that was filed on a form 8-K as well as being available on the Investor Relations section of our website.
These documents.
The results to differ materially from those contained in the company's projections or forward looking statements.
Please note that unless.
Otherwise indicated the financial.
And GAAP basis.
Items together with correspondent corresponding GAAP numbers and a reconciliation.
GAAP are contained in the shareholder.
During the fourth quarter, we will plan to participate in Investor conferences hosted by Stifel Needham Craig Hallum and Oppenheimer.
Thank you Ted and welcome investors analyst and guests.
I am pleased to share that for the fifth consecutive quarter, we delivered strong sales momentum with quarterly revenue above the midpoint of our guidance and gross margin and adjusted EBITDA exceeded the high end of our guidance.
Q3, 2021, Mark our third consecutive quarter with orders exceeding $100 million, resulting in backlog of approximately $200 million nearly three times higher than a year ago.
Even though we were challenged by supply chain availability price increases and foreign exchange variations, we delivered revenue of $88 $4 million, which was above the midpoint of our guidance and our 36, 8% adjusted gross margin and $5 1 million of adjusted EBITDA were well above the high end of our guidance.
With the current supply chain challenges during the third quarter.
Without I'm, sorry, without the third without the current supply chain challenges during the third quarter, we estimate our gross margin performance would have been approximately 39%.
Illustrating the effectiveness of our product rationalization alignment with component and contract manufacturing partners and a more balanced North America, EMEA and Asia geographic mix.
During the first half of 2021, we outlined to industry and financial analysts and shareholders the market opportunity and company related transformational teams that we anticipated would lead to long term sustainable growth and profitability.
As we expand we have been laser focused on the following four themes first market share gains and growth within North America and European regions. While we're in the early stages of an aggressive playbook early results have led to our North America order increase of 125% year to date compared to the same period.
In 2020.
Second is the technology shifts and investment cycle.
That is underway evolving from legacy copper and sub one gigabit technology.
Next generation multi gigabit broadband connectivity solutions, which are delivering growth across North America, and EMEA and with higher margins. This shift to multi gigabit architecture has also enabled dcs to introduce high value network and subscriber base software platforms.
Third is the transformation of wireless technology shift in industry momentum towards a next generation <unk> architecture fueled by emerging service providers, such as our leading <unk>.
Open ran customer rocket said, we surpassed 5 million subscribers during the third quarter.
Rocket Don has successfully launched rockets on Symphony, which is designed to accelerate the deployment of open ran networks around the world and with our mobile <unk> solutions, playing a key part of their reference design.
And finally, our strategic pursuit the cap and eventually replace Chinese equipment suppliers that are being de emphasized in the United States and many European and Pan Asian countries, including India.
Our sales pipeline RFP and trial activity during the first nine months of 2021 has been encouraging.
And during the third quarter, we secured a large scale broadband connectivity project with a tier one service provider in India.
Our product rationalization next generation 10, gigabit class PON technology, and strategic investments in software orchestration automation service assurance and subscribe.
However experienced solutions are designed to differentiate and enhance our more than $20 million platforms deployed around the world.
Our multi gigabit PON and subscriber influence software strategy is on display and our newly launched accelerate in Dcs experience solutions.
Both of which are complemented by Dcs cloud, which was launched in March of this year with Telus as an anchor customer.
Our cloud Native network and subscriber software portfolio will provide communication service providers with the applications automation and intelligence to more effectively manage their residential and business subscribers, creating new revenue opportunities and operational savings.
Our product rationalization work streams have yielded reductions in skus by nearly 60%.
While there are many valuable sales service and resource alignment benefits the reduction in Skus is also reducing supply chain risk.
Furthermore, we improved our manufacturing and supply chain efficiency across our global infrastructure as we consolidated our manufacturing operations and enhanced our supply chain partnerships to continue to successfully navigate through a difficult supply chain environment.
Looking ahead, we anticipate the trends experienced throughout 2021 will continue in Q4 and into Q and into 2022, specifically.
Demand for next generation fiber based broadband connectivity solutions fueled by consumer demand and accelerated by an estimated $100 billion in government stimulus.
Demand for network and subscriber influence software solutions that will provide operators with differentiated service offerings, the emergence and adoption of open ran <unk> networks.
Chinese equipment supplier cabin replacement opportunities and persistent supply chain challenges.
As it relates to the fourth quarter, we are guiding to a wider than usual revenue range of $80 million to $100 million.
Due to the current supply chain environment.
We have the backlog to deliver to the high end of the range, assuming our component and contract manufacturing partners are not hindered during the quarter.
We anticipate a gross margin range of 32% to 34%, reflecting near term supply chain cost increases expedite fees and foreign exchange variations, specifically with the Japanese yen.
As we overcome the current supply chain headwinds, we believe the operational efficiencies underway and our new commercial strategies will deliver the long term growth and margin expansion outlined in our Q2 shareholder report.
I would now like to turn the call back over to the operator to begin our Q&A session.
Okay.
Operator, as a reminder to ask a question you will need to press star one on your telephone.
A question question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Ryan Koontz Omnichannel company.
Good morning Charley.
If you could walk us through.
The price increase opportunity here and kind of is there a is there a shot clock here that you have to give them time to place orders to the oil price.
It is a temporary change related to freight or are you implementing it on a permanent basis any little clarity like that'd be helpful. Thank you.
Well the price increases that we've received from many of our components supplier ecosystem grew.
Crew has not been something that has been deemed to be permanent. Although I think we are assuming that the price increases that our entire industry is seeing is likely to be long dated.
Net net those those price increases really began in the May June July timeframe. Some of them came as late as September.
Some of which were already experiencing price increases.
Some of which we won't see the price increase until the first part of next year.
I think what's important for everybody to appreciate and I think it's.
Frankly, consistent across everyone in the entire sector.
Is some of the price increases effect.
Current backlog, depending on when raw materials.
Were pulled in either to one of our contract manufacturers or in our case.
Two our Florida manufacturing facility.
And.
And other components and raw material are scheduled to be delivered in 2022.
But we decided to do and we've put a lot of time and energy into this we spent a lot of time with a lot of our tier one customers and channel partners was we began increasing prices October one.
And.
We're using this term commercial strategies, because thats really what it is I mean, we're being very thoughtful about.
The various price increases across the various portfolios, but we believe that the price increases that we've implemented will more than offset the.
The price increases that we've been.
Navigating and we'll navigate over the course of next year.
So it sounds like it's a multi quarter implementation.
We should think about it.
Well I mean, if you look at the if you look at the margins that we were able to deliver in Q3, I think thats and I think from our perspective.
If you pull out some of the expedite fees and Thats, a new term for our industry.
We've really never seen.
This category.
We're referring to is expedite fees, but.
Normal lead times are depending on the component and the supplier could be as long as two weeks. We got ahead of things I think better than most and I talked about this over the last two quarters late last year in the September October timeframe.
Just because we had a lot of visibility with a lot of our tier ones. We were able to get ahead of a lot of the forecasting requirements hit the raw and systems level and I think that has really helped us, especially with our Q3 margins.
But I think that what we're what we're expecting to see in the very near term and Im saying Q4, maybe Q1.
Is some expedite fees that will have some margin impact.
Think that investors and shareholders.
Excuse me.
Should should think about the longer term aspects of new orders that we're booking at the margin profile that I think aligns with our long term margin expansion profile.
And we certainly expect.
Our Dcs cloud and our new ECS experienced software portfolio to begin to deliver higher margin.
In the second half of next year.
Okay and.
On the <unk>.
Timing on the mobile side, so like mobile was a little weak in the quarter sound like timing of some of the deployments.
Is the mix change going to shift in Q4, but there and that's another headwind in Q4 on margins I assume.
Look I mean on the on the on the wireless side.
We're not the only ones, but I, certainly think that the catalyst for Dcs and others in our ecosystem is really.
The adoption and the acceleration of open ran which you don't know.
And the activity and specifically and whats going on from an RFP.
And from a from a trial perspective.
Launching.
Rocket on Symphony, which is leveraging a lot of their own intellectual property that they have garnered.
In Dcs.
As they have success with their own open ran network architecture.
We aim.
To be able to participate in.
Option to open ran and we certainly see that accelerating in 2022.
Okay, that's great and just one last one if I could on.
On the Huawei replacement opportunity timing or use youre starting to see some decisions now there and when should we think about that starting to impact revenues for you.
Well the law our scale project that I just referred to.
During my opening remarks was a Huawei replacement project in India.
And I know the general market gets nervous about large scale projects in India from a margin perspective, but I do think that.
India as a country and at least the four large scale service providers they are realized.
<unk>.
In order for them to adopt.
Technology from North America, and European based companies.
Pricing and margins kind of change so that's an exciting win for US there are several large tier ones that.
We are aggressively pursuing in western Europe, and a lot of those decisions, we expect to be made between now and the end of the year.
And I think there is there is certainly a great opportunity for Dcs, especially with most of those companies already having Nokia in their network and they are looking to replace Huawei with at least one or maybe even two additional technology suppliers.
Great Super helpful. Charlie. Thank you. Thank you.
Our next question comes from the line of Dave Kang from B Riley.
Yes, good morning.
My first question is maybe if I could get a mixed between broadband and mobile for your backlog of $200 million.
Okay.
I don't have that off top my head, Dave I can I can research that before the end of the call to make sure I give you an accurate mix I don't know that we've ever given that number.
So I don't know that we want to start issuing.
Percentage of our backlog as it relates to.
The mix of both.
Got it and then.
I think I think you should assume that it's.
Of what <unk> seen throughout this year from a percentage of fixed and mobile.
I mean, there is there.
Sure sure.
There are some songs.
Got it and then.
Regarding debt that major tier one Indian contract.
That you replaced.
I mean, India was fairly big few years ago can you get back to that level and how long I mean can you talk about sustainability.
But we're certainly encouraged I mean.
Not just with the operator that that were participating in here initially I mean, all four of the operators have pretty.
Pretty significant work streams underway look I mean, I've always been cautious about India, but I would tell you that we're more.
We're more positive on India today, I think than I've ever been just because of the dynamics you don't have the Chinese suppliers that are putting a lot of margin pressure and pricing pressure on the competitive nature of it and frankly, we're able to pick and choose I mean, I think we've tried to make it very clear.
Chip to analyst and shareholders that.
Where things are strategic we may be a little bit more aggressive from a pricing and margin perspective, but we're committed to getting to that 40% gross margin level and I think that we're going to make sure that all the projects that we participate in including the large tier ones will enable us to get.
So the margin profile that we've laid out for ourselves and shareholders. So we're encouraged frankly with the opportunity in India. We're very encouraged with the opportunities we're seeing in western Europe.
And look I mean, North America has been.
Just I mean, it's exceeded all of our expectations. This year I mean, we were obviously very focused on North America. We've got a lot of great relationships that go back 20 years, but the fact of the matter is.
Year to date orders are up 125% compared to the same period last year and the momentum that we're seeing in North America, which obviously garners the highest margins is pretty exciting and encouraging for us.
Got it and speaking of Americas, It was 31% trending up nicely at this rate I mean can we expect maybe 40% maybe.
Second half next year is that a realistic goal.
Yes.
I won't comment I won't comment on it.
It certainly is is in line with.
With a lot of our expectations.
Got it and my last question is just wanted to.
Clarification on the gross margin so it's going to be approximately about 33%.
Fourth quarter.
It sounds like there's going to be a bottom maybe first quarter kind of maybe.
Flat to up a little bit, but then you know going back to your <unk>.
I get a 40% I mean with 33% as the starting point I mean.
Is 40% maybe by late next year is that still achievable and if so can you kind of walk us through the steps of how you're going to get there.
Again, I think what what shareholders and analysts ought to be looking at.
Across our entire sector, especially where there is a lot of systems and hardware content.
Even even with some of the software elements.
Everyone's backlog is being impacted by the price increases.
Most of the price increases have been implemented by the broader ecosystem is such that regardless of whether or not there were orders in the system or not.
When they began shipping to you based on whatever active data. It is that was the effective price increase so.
And that's why I think we're going to see a slightly lower margin profile in Q4, and probably Q1 as we flush out the backlog Paul the new orders that were bringing in.
That began in Q1 will be at the new margin profile, which aligns with our target margin for 2022, and I think we had sort of outlined in our Q2 shareholder letter that we thought we could get to a margin profile in that.
37% range next year and 40% in 2023 and that still holds true for the model that we have internally.
I guess, the expedite fees I guess thats, a big component of elevated supply chain cost has that kind of.
Stabilized.
And is that why were thinking right now we are kind of bottoming here.
I know a lot of people keep say we're bottoming.
I think that.
I think that the expedite fees like I said, it's sort of a new phenomena.
I don't from our perspective, we're not modeling in a lot of expedite fees in 2022.
Certainly has been expedite fees that we've navigated in Q2 Q3, and we will see some in Q4.
With a couple of large projects that we need to deliver on and I think thats really the way everyone should look at it I mean, if if in a perfect world you're forecasting perfectly and you're receiving orders aligned with that forecast. There's no expedite fee. It's when you have an unexpected project are you pulling in a project that you need for.
Or a customer that you are trying to pull forward the delivery dates from some of the component suppliers.
That's when they are charging you a quote unquote expedite fee.
We as I said, we saw some in Q2 and Q3 I think we did a great job navigating the expedite fees in Q3, we haven't really talked about the.
Foreign exchange impacts that we saw this year, especially with the large amount of business, we do in Japan, but when you look the dollar against the yen. It's certainly been something that surprised us. This year I think we will do a much better job managing that next year.
But I think to your question Dave.
We don't expect to see the same amount of expedite fees next year, just based on the alignment of our backlog and the alignment.
With a forecast plan that we have next year so.
I think the price increases that the commercial strategies that we'll be implementing we will.
Certainly offset the price increases that we're seeing at least.
In the near term from our ecosystem.
Got it thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Our next question comes from the line of.
TB Savage al.
Hi, good morning.
Question more around that.
Topline outlook.
And I know you've been targeting.
Kind of a need to 10% sort of growth range and I'm not sure whether you've quantified the impact on revenue.
From supply issues this year, but obviously you are building backlog.
Significantly you've mentioned this order in India, which I guess is looking to ramp sometime in calendar 'twenty two I mean, given the combination of maybe backlog increase in supply issues pushed into 'twenty two.
Overall kind of market growth in the U S and some of these new projects is it fair to expect.
Above trend growth.
Calendar 'twenty, two driven by all of those factors.
Sure.
Yes, Thanks, Tim.
Look we haven't.
We expense as most companies do this time of the year. We spent a lot of time analyzing 2022 already.
We're not prepared to talk about 2022 on this call, but I would say that the 8% to 10% that we had profiles.
Last quarter, we still feel very confident that that's achievable.
As with almost every year.
I participated in over the last 25 30 years.
There's the known and the unknown and when we entered 2022, we're excited about that.
None.
But there's always upside and there is also a risk that you've got a balanced but.
If I look at.
The amount of RFP and trial activity that that at least we're involved with today. We certainly are entering 2022 with a lot more enthusiasm and a lot more excitement than I think we did in 2021.
And we enter 2021 not seeing.
The supply chain challenges hitting this entire segment as it has and I think I think we've actually done.
Extremely good job navigating the supply chain challenges I mean, we've got a very unique.
Sales and sales finance and supply chain interlock process that we have implemented when I got here I think that has really helped us.
But to answer your question I think we feel.
Yes.
Very optimistic about 2022, despite the supply chain headwinds and I think as.
As you think about.
Revenue, if we're successful with our commercial strategies and price increases that certainly is going to have a positive impact on topline revenue.
Great. Thanks very much.
Our next question comes from the line of questions Ross.
All of them.
Great. Thanks, guys for taking my question I just have a quick question on clarity on on backlog.
With the price increases taking effect on October one and the significant backlog increase in September was that telegraphed it with.
Some of that business pulled in or where should we think about that is true backlog strength that was going to occur.
Just due to end market demand in the big growth drivers that you hit that you that you outlined earlier in the call. Just wondering if you could clarify that for me. Please.
No. It's a great question and.
I'll give you a straight answer we havent pulled forward anything.
Everything.
I'd like to think that we can pull forward more than what we have.
Certainly.
<unk> up our sleeves with our large tier one customers to make sure that they are well educated about the supply chain environment, and making sure that we're not hindering their deployment strategy, but.
The backlog that we've created in 'twenty one.
<unk> has really been all demand related in fact.
For the most part I would say, 75% to 80% of our $200 million backlog. If we had all of the components, we could ship it tomorrow.
So we don't have we don't have any backlog that's sort of we're not piling up backlog for 'twenty three.
We're facilitating a backlog for immediate projects today and that's why we've got a wide range.
For Q4 revenue I mean, if we're if we're successful in aligning.
The components to that there's the requested ship dates.
We've got an opportunity to have a really strong Q4.
But I think we're still in this sort of period Christian Ware.
All it takes is one component to cause us to not build.
A lot of systems and so we're being I think fair.
Fairly conservative and relatively cautious just because we don't want to mislead in misguide, but the backlog that we have today is backlog that.
We can ship as soon as we have the parts, which by the way we're trying to balance I mean, if we pull everything forward from an expedite fee youre going to have a margin impact.
And so we're we're trying to balance out the best we possibly can and I think for the most part you should look at the $200 million, where the backlog is backlog that we'll likely flush out and in Q4 and mostly in Q1.
Great. Thanks for that clarity that was my only question. Thank you.
Our next question comes from the line of Paul.
Thanks for taking my question.
Wanted to get a little bit more color on this.
Partnership.
How does it work.
What does the service providers what are their benefits from this what do you guys benefit and how quickly can you.
Expected to penetrate the 20 million subscribers you've got out there.
Please.
No I appreciate the question Yeah as I think most people know, we announced a strategic partnership with Bloom.
During the quarter, it's a race relationship that we've been fostering throughout 2021, and I think as we as we successfully rolled out Dcs cloud, which is really a network as a service software platform. So so dcs cloud is really designed to deliver.
Orchestration automation service assurance.
Application management type services that will come in the form of either.
Enterprise licenses for subscriber base licenses or I'm, sorry application licenses.
What <unk> does is it really complements what we're doing with Vcs cloud and it allows us to participate inside the home. It allows us to differentiate our next generation Wi Fi six CPE portfolio with embedded on sync software from plume that allows.
Service providers to have a much different experience as it relates to Wi Fi performance enhancement capabilities more data analytics.
<unk> abilities that ultimately are going to.
Allow service providers to just think about new revenue opportunities, it's going to allow them to reduce the amount of truck rolls.
And when you combine Dcs cloud and flume.
We're the only company in the broadband industry.
Industry that has a complete end to end software portfolio from what's going on at the core all the way inside the home or small business.
Okay.
Quickly you can roll that out in the first quarter as well.
We've been forecasting I mean, we were very thoughtful about this because.
What we're doing a plume really aligns with Wi Fi six.
And our Wi Fi six portfolio is launching from a product availability perspective in Q1.
And so we wanted to make sure that we didn't launch something that customers.
Have access to and so we will have products.
<unk> for shipment towards the end of Q1 and into Q2, and so right now we're focusing on booking orders.
For our cloud based portfolio that we expect that the bundle of the software solution with our CPE products will ship towards the end of Q1 and into Q2. So we certainly got a pretty ambitious appetite for for the second half of 2022.
Okay got.
And by the way, we've got a whole series of of what we call Dcs experienced webinars that will launch this month in the month of November.
Okay.
A couple of questions on <unk>.
Some of the <unk>.
Subsidies the U S government's putting through our Pos we're hearing it's just been kind of trickling in what's what's your assessment of that and also in Europe. You said a lot of the money is poised to be.
Let go soon can you update us on both of those situations.
Yes, so I mean, if you go back 18 months everyone's been talking about the.
The infamous $20 billion of hard off funds, which is a.
So everyone knows is a multi year deployment up until really Q3, there was only about $300 million of that.
The initial phase $109 billion that got deployed as of right. Now there is a $1 billion thats been released so that's good.
So we're starting to finally see a lot of the <unk> dollars.
That are impacting some of our large customers like consolidated communications and others that are beginning to see some of those dollars go to work we don't talk.
Jeff about what's going on in Europe, but there is a number of countries that have significant multibillion dollar stimulus.
Funds that are coming out of their government institutions that are also fueling a lot of broadband initiatives across many countries around the world and then.
Assuming that the infrastructure Bill gets passed and we're still assuming that the broadband element of that is still about $42 billion that certainly is going to have an impact I think more in the 2023 timeframe just because by the time it gets implemented.
In Q1 of this year it'll be something that.
Begins to rollout towards the very end of 2022 and into 2023, but.
UK has got their freedom freedom fiber Germany's got their utility utilities.
Of area and so I think that between just the UK and Germany, there is close to $20 billion.
<unk>.
Yes.
Okay.
One last question.
You mentioned in your letter.
A lot of open ran or more open ran opportunities in Asia can you discuss them deal outside of <unk>.
Who else you're talking to if you can or what types of projects youre running into there.
Yes, I mean, just from a competitive standpoint, I'm not going to share the projects and the companies that we're engaged with but I would tell you that there's a tremendous amount of momentum across Europe middle East.
There's a lot of activity across the Pan Asian markets for Oran.
And I think even here in the U S and Canada. There is a significant amount of activity. That's underway Pearl ran so I think Oran is here to stay I think it's something that.
Carriers that had already begun to roll out their <unk> networks are are sticking with that initial deployment, but I think phase two of their <unk> deployment will lean in towards more open ran architectures and I think that certainly opens.
The opportunity for companies like us to participate in a more meaningful way.
Okay do you have a sense of.
Timing when that could be.
We keep.
What we're seeing on our <unk>.
We've got I mean, if you just look at rocket sound alone, which I think what they've done is pretty unique I mean, they've gone to market themselves.
Going from zero to 5 million subscribers in Japan.
We're today, we're exclusively providing their front haul gateway solution for their growth. They have I think 16 trials underway with customers that are leveraging their architecture.
Any of those will have a need to deleverage.
Their platform, a reference design, which were a big part of.
There is some meaningful business there that we're not unfortunately in a position to disclose right now that we think closes in Q4 and begins to rollout in the first half of next year, which could be very exciting for us.
And separate and apart from that I mean, we continue to be very.
Pursuant with the tier ones, both on the fixed wireline side as well as on the on the mobile side.
Okay.
Thank you very much thanks.
Thanks for the questions.
There are no further questions at this time, ladies and gentlemen.
This concludes today's conference call. Thank you everyone for participating you may now disconnect.
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Ladies and gentlemen, thank you for standing by and welcome to the D. E. F requires the 2021 earnings conference call.
After the speaker's presentation, there will be a question answer session to ask a question. During this session you will need to press star one.
And for instance.
We quoted it require any further assistance. Please press star zero I would now like to turn the call over to.
<unk> of Investor Relations you may begin.
Thank you Margaret and welcome to the <unk> third quarter 2021 earnings.
CEO, Charlie boat and CFO Mr correctly.
Yesterday after market close we published to the Investor Relations section of the disease.
To provide shareholders prospective shareholders and analysts with market insights product and business and financial update as well as forward looking statements.
These and other forward looking statements regarding future events or the future financial performance of the company. The company cautions you that such statements are.
Results may differ materially.
Please refer to documents that the company files with the SEC, including its most recent 10-Q.
Statements section of the shareholder report that was filed on form 8-K, as well as being available in the Investor Relations section of our website.
Scott.
The results to differ materially from those contained in the company's projections or forward looking statements.
Please note that unless otherwise indicated.
And GAAP basis.
Items together with correspondent corresponding GAAP numbers and a reconciliation to GAAP are contained in that.
During the fourth quarter, we will plan to participate in Investor conferences hosted by Stifel Needham Craig Hallum.
Okay.
Thank you Chad and welcome investors analyst and guests.
I am pleased to share that for the fifth consecutive quarter, we delivered strong sales momentum with quarterly revenue above the midpoint of our guidance and gross margin and adjusted EBITDA.
At the high end of our guidance Q.
Q3, 2021, Mark our third consecutive quarter with quarters exceeding $100 million, resulting in backlog of approximately $200 million nearly three times higher than a year ago.
Even though we were challenged by supply chain availability price increases and foreign exchange variations, we delivered revenue of $88 $4 million, which was above the midpoint of our guidance and our 36, 8% adjusted gross margin and $5 $1 million of adjusted EBITDA, We are well above the high end of our guidance.
With the current supply chain challenges during the third quarter.
Without I'm, sorry, without the third without the current supply chain challenges during the third quarter, we estimate our gross margin performance would have been approximately 39%.
Illustrating the effectiveness of our product rationalization alignment with component and contract manufacturing partners and a more balanced North America, EMEA and Asia geographic mix.
During the first half of 2021, we outlined to industry and financial analysts and shareholders the market opportunity and company related transformational teams that we anticipated would lead to long term sustainable growth and profitability as.
As we expand we have been laser focused on the following four themes first market share gains and growth within North America and European regions. While we're in the early stages of an aggressive playbook early results have led to our North America order increase of 125% year to date compared to the same period.
In 2020.
Second is the technology shifts and investment cycle.
That is underway evolving from legacy copper and sub one gigabit technology next generation multi gigabit broadband connectivity solutions, which are delivering growth across North America, and EMEA and with higher margins. This.
This shift to multi gigabit architecture has also enabled dcs to introduce high value network and subscriber base software platforms.
Third is the transformation of wireless technology shift in industry momentum towards our next generation <unk> architecture fueled by emerging service providers, such as our leading.
Open ran customer rockets AD, we surpassed 5 million subscribers during the third quarter.
<unk> has successfully launched rocket on Symphony, which is designed to accelerate the deployment of open ran networks around the world and with our mobile <unk> solutions, playing a key part of their reference design.
And finally, our strategic pursuit of cap and eventually replace Chinese equipment suppliers that are being de emphasized in the United States and many European and Pan Asian countries, including India.
Our sales pipeline RFP and trial activity during the first nine months of 2021 has been encouraging.
And during the third quarter, we secured a large scale broadband connectivity project with a tier one service provider in India.
Our product rationalization next generation 10, gigabit class PON technology, and strategic investments in software orchestration and automation service assurance and subscriber experience solutions are designed to differentiate and enhance our more than 20 million platforms deployed around the world.
Our multi gigabit PON and subscriber influence software strategy is on display and our newly launched accelerate in Dcs experienced solutions.
Both of which are complemented by Dcs cloud, which was launched in March of this year with Telus as an anchor customer.
Our cloud Native network and subscriber software portfolio will provide communication service providers with the applications automation and intelligence to more effectively manage their residential and business subscribers, creating new revenue opportunities and operational savings.
Our product rationalization work streams have yielded reductions in skus by nearly 60%.
While there are many valuable sales service and resource alignment benefits the reduction in Skus is also reducing supply chain risk.
Furthermore, we improved our manufacturing and supply chain efficiency across our global infrastructure as we consolidated our manufacturing operations and enhanced our supply chain partnerships to continue to successfully navigate through a difficult supply chain environment.
Looking ahead, we anticipate the trends experienced throughout 2021 will continue in Q4 and into Q and into 2022, specifically.
Demand for next generation fiber based broadband connectivity solutions fueled by consumer demand and accelerated by an estimated $100 billion in government stimulus.
Demand for network and subscriber influenced software solutions that will provide operators with differentiated service offerings, the emergence and adoption of open ran <unk> networks.
Chinese equipment supplier cabin replacement opportunities and persistent supply chain challenges.
As it relates to the fourth quarter, we are guiding to a wider than usual revenue range of $80 million to $100 million.
Due to the current supply chain environment.
We have the backlog to deliver to the high end of the range, assuming our component and contract manufacturing partners are not hindered during the quarter.
We anticipate a gross margin range of 32% to 34%, reflecting near term supply chain cost increases expedite fees and foreign exchange variations, specifically with the Japanese yen.
As we overcome the current supply chain headwinds, we believe the operational efficiencies underway and our new commercial strategies will deliver the long term growth and margin expansion outlined in our Q2 shareholder report.
I would now like to turn the call back over to the operator to begin our Q&A session.
Yes.
Yes.
Okay.
Operator, as a reminder to ask a question you will need to press star one on your telephone.
A question press the pound key.
Sangamo the compile the Q&A roster.
Our first question comes from the line of Ryan Koontz from Needham and company.
Hey, good morning, Charlie I Wonder if you could walk us through.
The price increase opportunity here and kind of is there a is there a shot clock here that you have to give them time to place orders to the oil price is it is a temporary change related to freight or are you implementing it on a permanent basis any little clarity like that'd be helpful. Thank you.
Well the price increases that we've received from many of our component supplier ecosystem.
Crew has not been something that has been deemed to be permanent. Although I think we are assuming that the price increases that our entire industry is seeing is likely to be.
David.
Net net those those price increases really began in the May June July timeframe. Some of them came as late as September.
Some of which were already experiencing price increases.
Of which we won't see the price increase until the first part of next year.
I think what's important for everybody to appreciate and I think it's.
Frankly, consistent across everyone in the entire sector.
As some of the price increases affect current backlog, depending on when raw materials.
Were pulled in either to one of our contract manufacturers or in our case.
Now to our Florida manufacturing facility.
And other components and raw material are scheduled to be delivered in 2022.
But we decided to do and we've put a lot of time and energy into this we spent a lot of time with a lot of our tier one customers and channel partners was we began increasing prices.
<unk>.
We're using this term commercial strategies, because thats really what it is I mean, we're being very thoughtful about.
The various price increases across the various portfolios, but we believe that the price increases that we've implemented will more than offset the.
The price increases that we've been.
Navigating and we'll navigate over the course of next year.
So it sounds like it's a multi quarter implementation.
We should think about it.
Well I mean, if you look at the if you look at the margins that we were able to deliver in Q3 I think thats it.
I think from our perspective.
If you pull out some of the expedite fees and Thats, a new term for our industry.
We've really never seen.
This category.
We're referring to is an expedite fees, but.
Normal lead times are depending on the component and a supplier can be as long as two weeks. We got ahead of things I think better than most and I talked about this over the last two quarters late last year in the September October timeframe.
Just because we had a lot of visibility with lot of our tier ones. We were able to get ahead of a lot of the forecasting requirements at the raw and systems level and I think that has really helped us, especially with our Q3 margins.
But I think that what we're what we're expecting to see in the very near term and I am saying Q4, maybe Q1.
As some expedite fees that we will have some margin impact, but I think that investors and shareholders.
Excuse me.
Should should think about the longer term aspects of new orders that we're booking at the margin profile that I think aligns with our long term margin expansion profile.
And we certainly expect.
Our our Dcs cloud and our new <unk> experienced software portfolio to begin to deliver higher margin.
In the second half of next year.
Okay and.
On the <unk>.
Timing on the mobile side, so like mobile was a little weak in the quarter sound like timing of some of the deployments.
Is that mix change going to shift in Q4, a bit there and that's another headwind in Q4 on margins I assume.
Look I mean on the on the on the wireless side.
We're not the only ones, but I, certainly think that the catalyst for Dcs and others in our ecosystem is really.
The adoption and the acceleration of open ran which.
And the activity and specifically and whats going on from an RFP in.
And from a from a trial trial perspective.
Launching.
Rocket on Symphony, which is leveraging a lot of their own intellectual property that they have garnered.
In Dcs.
As they have success with their own open ran network architecture.
Aimed to be able to participate.
Option to open ran and we certainly see that accelerating in 2022.
Okay. That's great and then just one last one if I could on.
On the Huawei replacement opportunity timing are you starting to see some decisions now there and when should we think about any of that starting to impact.
Revenues for you.
While the large scale project that I just referred to.
During my opening remarks was a Huawei replacement project in India.
No the general market gets nervous about large scale projects in India from a margin perspective, but I do think that.
India as a country and at least.
For large scale service providers they are realized that.
In order for them to adopt technology from North American and European based companies.
The pricing and margins kind of change so that's an exciting win for US there are several.
Large tier ones that that we are aggressively pursuing in western Europe and a lot of those decisions. We expect to be made between now and the end of the year.
And I think there is there is certainly a great opportunity for Dcs, especially with most of those companies already having Nokia in their network and Theyre looking to to replace Huawei with at least one or maybe even two additional technology suppliers.
Great Super helpful. Charlie Thank you.
Thank you.
Our next question comes from the line of Dave Kang from B Riley.
Yes, good morning.
My first question is maybe if I could get a mixed between broadband and mobile for your backlog of $200 million.
I don't have that off top my head, Dave I can I can research that before the end of the call to make sure I give you an accurate mix I don't know that we've ever given that number.
So I don't know that we want to start issuing.
Percentage of our backlog is at.
The mix of both.
Got it and then.
I think I mean, I think you should assume that it's.
Of what <unk> seen throughout this year from a percentage of fixed and mobile.
I mean, there is there sure.
Got it and then.
Regarding debt that major tier one Indian contract.
Yeah.
I mean, India was fairly big few years ago can you get back to that level and how long I mean can you talk about talk about sustainability.
But we're certainly encouraged I mean.
Not just with the operator that that were.
Participating in here initially I mean, all four of the operators have.
Pretty significant work streams underway look I mean, I've always been cautious about India, but I would tell you that we're more.
We're more positive on India today, I think than I've ever been just because of the dynamics you don't have the Chinese suppliers that are putting a lot of margin pressure and pricing pressure on the competitive nature of it and frankly, we're able to pick and choose I mean, I think we've tried to make it very clear.
To to analyst and shareholders that.
Where things are strategic we may be a little bit more aggressive from a pricing and margin perspective, but we're committed to getting to that 40% gross margin level and I think that we're going to make sure that all the projects that we participate in including the large tier ones will enable us to get.
So the margin profile that we've laid out for ourselves and shareholders. So.
We're encouraged frankly with the opportunity in India, we're very encouraged with the opportunities we're seeing in western Europe.
And look I mean, North America has been.
Just I mean, it's exceeded all of our expectations. This year I mean, we were obviously very focused on North America. We've got a lot of great relationships that go back 20 years, but the fact of the matter is.
Year to date orders are up 125% compared to the same period last year and the momentum that we're seeing in North America, which obviously garners the highest margins is pretty exciting and encouraging for us.
Got it and then speaking of Americas. It was 31% trending up nicely at this rate I mean can we expect maybe 40% maybe.
Maybe.
Half next year is that a realistic goal.
Yeah.
I won't comment I won't comment on it.
It certainly is is in line with.
With a lot of our expectations.
Got it and my last question is just wanted to.
Yes.
Vacation on the gross margin so it's going to be approximately 33%.
Fourth quarter.
It sounds like this is going to be a bottom maybe first quarter kind of maybe.
That to us a little bit, but then going back to your.
Target of 40%.
With 33% as the starting point.
Is 40% maybe by late next year is that still achievable and if so can you kind of walk us through the steps of how you're going to get there.
Again, I think what what shareholders and analysts ought to be looking at.
Across our entire sector, especially where there is a lot of systems and hardware content.
Even even with some of the software elements.
Everyone's backlog is being impacted by the price increases.
The way most of the price increases have been implemented by the broader ecosystem is such that regardless of whether or not there were orders in the system or not.
When they began shipping to you based on whatever active data. It is that was the effective price increase so.
And that's why I think we're going to see a slightly lower margin profile in Q4, and probably Q1 as we flesh out the backlog Paul the new orders that were bringing in.
That began in Q1 will be at the new margin profile, which aligns with our target margin for 2022, and I think we had sort of outlined in our Q2 shareholder letter that we thought we could get to a margin profile in that.
37% range next year and 40% in 2023 and that still holds true for the model that we have internally.
I guess, the expedite fees I guess thats, a big component of elevated supply chain cost has that kind of.
The stabilized.
And is that why were thinking right now we are kind of bottoming here.
I know a lot of people keep say we're bottoming.
I think that.
I think that the expedite fees like I said, it's sort of a new phenomena.
I don't from our perspective, we're not modeling in a lot of expedite fees in 2022.
Certainly has been expedite fees that we've navigated in Q2 Q3, and we will see some in Q4.
With a couple of large projects that we need to deliver on and I think thats really the way everyone should look at it I mean, if if in a perfect world you're forecasting perfectly and year receiving orders aligned with that forecast. There's no expedite fee. It's when you have an unexpected project are you pulling in a project that you need for <unk>.
Customer that you are trying to pull forward the delivery dates from some of the component suppliers.
That's when they are charging you a quote unquote expedite fee.
We as I said, we saw some in Q2 and Q3 I think we did a great job navigating the expedite fees in Q3.
Haven't really talked about the.
Foreign exchange impacts that we saw this year, especially with the large amount of business, we do in Japan, but when you look the dollar against the yen. It's certainly been something that surprised us. This year I think we'll do a much better job managing that next year.
But I think to your question Dave.
We don't expect to see the same amount of expedite fees next year, just based on the alignment of our backlog and the alignment.
With the forecast plan that we have next year so.
I think the price increases that the commercial strategies that we'll be implementing.
We will certainly offset the price increases that we're seeing at least.
In the near term from our ecosystem.
Got it thank you.
Yeah.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Our next question comes from the line of.
Thanks, Joe.
Hi, good morning.
Question more around them.
Kind of top line outlook and I know you've been targeting.
Kind of an 8% to 10% sort of growth range and I'm not sure whether you've quantified the impact on revenue.
From supply issues this year, but obviously youre building backlog.
Significantly you've mentioned this order in India, which I guess is looking to ramp sometime in calendar 'twenty two I mean, given the combination of maybe backlog increase in supply issues pushed into 'twenty two.
Overall kind of market growth in the U S and some of these new projects is it fair to expect.
Above churn growth in calendar 'twenty, two driven by all those factors. Thanks.
Yes, Thanks, Tim.
Look we haven't.
We've spent as most companies do this time of the year. We spent a lot of time analyzing 2022 already.
We're not prepared to talk about 2022 on this call, but I would say that the 8%, 10% that we had profiled.
Last quarter, we still feel very confident that thats achievable.
As as with almost every year I've.
I participated in over the last 25 30 years.
There is the known and the unknown and when we entered 2022, we're excited about that.
Known.
But there is always upside and there is also a risk that you've got a balanced but.
If I look at the amount of RFP and trial activity that that at least we're involved with today. We certainly are entering 2022 with a lot more enthusiasm and a lot more excitement than I think we did in 2021.
And we enter 2021 not seeing.
The supply chain challenges hitting this entire segment.
As it has.
I think I think we've actually done.
STREAMWAY good job navigating the supply chain challenges I mean, we've got a very unique.
Sales and sales finance and supply chain interlock process that we have implemented when I got here I think that has really helped us.
But to answer your question I think we feel.
Very optimistic about 2022, despite the supply chain headwinds and I think as you think about.
Revenue, if we're successful with our commercial strategies and price increases that certainly is going to have a positive impact on topline revenue.
Great. Thanks very much.
Our next question comes from the line of questions Ross.
Uh huh.
Great. Thanks, guys for taking my question I just have a quick question on clarity on backlog.
With the price increases taking effect on October one and the significant backlog increase in September was that telegraphed it with some of that business pulled in or where should we think about that is true backlog strength that was going to occur.
Just due to end market demand in the big growth drivers that you that you that you outlined earlier in the call I'm. Just wondering if you could clarify that for me. Please.
It's a great question and.
I'll give you a straight answer we havent pulled forward anything.
Everything.
I'd like to think that we can pull forward more than what we have.
We're certainly.
Pulling up our sleeves with our large tier one customers to make sure that they're well educated about the supply chain environment, and making sure that we're not entering their deployment strategy, but.
The backlog that we've created in 'twenty one.
It's really been all demand related in fact.
For the most part I would say.
75% to 80% of our $200 million backlog, if we have all of the components, we can ship it tomorrow.
So we don't have we don't have any backlog there.
Sort of we're not piling up backlog for 'twenty, three we're facilitating a backlog for immediate projects today.
And that's why we've got a wide range.
Q4 revenue I mean, if we're if we're successful in aligning.
Components.
To the the requested ship dates we've got an opportunity to have a really strong Q4.
But I think we're still in this sort of period Christian Ware.
All it takes is one component fit to cause us to not build.
A lot of systems and so we're being I think fair.
Fairly conservative and relatively cautious just because we don't want to mislead in misguide, but the backlog that we have today is backlog that.
We can ship as soon as we have the parts, which by the way we're trying to balance I mean, if we pull everything forward from an expedite fee youre going to have a margin impact.
And so we're we're trying to balance out the best we possibly can and I think for the most part you should look at the $200 million, where the backlog is backlog that we'll likely flush out and in Q4 and mostly in Q1.
Great. Thanks for that clarity that was my only question. Thank you.
Our next question comes from the line of Paul.
Thanks for taking my question.
Wanted to get a little bit more color on this.
Partnership.
How does it work.
Where does the service providers what are their benefits from this what do you guys benefit and how quickly can you.
We expect you to penetrate the 20 million subscribers you've got out there is there in place.
No I appreciate the question Yeah as I think most people know, we announced a strategic partnership with loans during.
During the quarter, it's a race relationship that we've been fostering throughout 2021.
And I think as we as we successfully rolled out Dcs cloud, which is really a network as a service software platform. So so vcs cloud is really designed to deliver.
Orchestration automation service assurance.
Application management type services that will come in the form of either.
Enterprise licenses for subscriber base licenses or I'm, sorry application licenses.
What <unk> does is it really complements what we're doing with Vcs cloud and it allows us to participate inside the home. It allows us to differentiate our next generation Wi Fi six CPE portfolio with embedded on sync software from plume that allows.
Service providers to have a much different experience as it relates to Wi Fi performance enhancement capabilities more data analytics.
Capabilities that ultimately are going to.
Allows service providers to just think about new revenue opportunities, it's going to allow them to reduce the amount of truck rolls.
And when you combine Dcs cloud and flume.
We're the only company in the broadband.
Industry that has a complete end to end software portfolio from what's going on at the core all the way inside the home or small business.
Okay.
Quickly you're going to roll that out in the first quarter as well.
We've been forecasting I mean, we were very thoughtful about this because.
What we're doing a plume really aligns with Wi Fi six.
And our Wi Fi six portfolio is launching from a product availability perspective in Q1.
And so we wanted to make sure that we didn't launch something that customers.
Didn't have access to and so we will have products.
<unk> for shipment towards the end of Q1 and into Q2, and so right now we're focusing on on booking orders.
For our cloud based portfolio that we expect that the bundle of the software solution with our CPE products will ship towards the end of Q1 and into Q2. So we certainly got a pretty ambitious appetite for for the second half of 2022.
Okay got.
Got it and by the way we've got a whole series of of what we call Dcs experienced webinars that will launch this month in the month of November.
Okay.
A couple of questions on <unk>.
Some of the <unk>.
Subsidies the U S government's putting through our Pos we're hearing it's just been kind of trickling in what's what's your assessment of that and also in Europe. You said a lot of the money is poised to be.
Let go soon can you update us on both of those situations yes.
Yes, so I mean, if you go back 18 months everyone's been talking about the.
<unk> $20 billion of hard off funds, which is a as I know everyone knows there's a multiyear deployment.
Up until really Q3, there was only about $300 million of that.
The initial phase $109 billion that got deployed as of right. Now there is a $1 billion thats been released so that's good.
So we're starting to finally see a lot of the art of dollars.
That are impacting some of our large customers like consolidated communications and others that are beginning to see some of those dollars go to work.
Don't talk enough about what's going on in Europe.
But there is a number of countries that have significant multibillion dollar stimulus.
Funds that are coming out of their government institutions that are also fueling a lot of broadband initiatives across many countries around the world and then.
Assuming that the infrastructure Bill gets passed and we are.
Still assuming that the broadband element of that is still about $42 billion that certainly is going to have an impact I think more in the 2023 timeframe just because by the time it gets implemented and.
In Q1 of this year it'll be something that.
Begins to rollout for us the very far end of 2022 and into 2023, but.
UK has got their freedom freedom fiber Germany's got their utility utilities.
Of area and so I think that between just the UK and Germany, there is close to $20 billion.
Sunday.
Yes.
Okay.
One last question.
You mentioned in your letter.
A lot of open ran or more open ran opportunities in Asia can you discuss them deal outside of <unk>.
Who else you're talking to if you can or what types of projects youre running into there.
Yes, I mean, just from a competitive standpoint, I'm not going to share the projects and the companies that we're engaged with but I would tell you that there is a tremendous amount of momentum across Europe middle East.
There's a lot of activity across the Pan Asian markets for Oran.
And I think even here in the U S and Canada.
A significant amount of activity that's underway for Oran. So I think Oran is here to stay I think it's something that.
Carriers that had already begun to roll out their <unk> networks are are sticking with that initial deployment, but I think phase two of their <unk> deployment will lean in towards more open ran architectures and I think that certainly opens.
The opportunity for companies like us to participate in a more meaningful way.
Okay do you have a sense of timing when that could be.
We keep.
What we're seeing on our <unk>.
We've got I mean, if you just look at rocket sound alone, which I think what they've done is pretty unique I mean, they've gone.
Gone to market themselves.
Going from zero to 5 million subscribers in Japan.
We're today, we're exclusively providing their front haul gateway solution for their growth they have.
I think 16 trials underway with customers that are leveraging their architecture.
Many of those will have a need to deleverage.
Their platform, a reference design, which were a big part of.
There is some meaningful business there that we're not unfortunately in a position to disclose right now that we think closes in Q4 and begins to rollout in the first half of next year, which could be very exciting for us.
And separate and apart from that I mean.
We continue to be very <unk>.
Pursuant with the tier ones, both on the fixed wireline side as well as on the on the mobile side.
Okay.
Thank you very much.
Thanks for the questions.
There are no further questions at this time, ladies and gentlemen.
This concludes today's conference call. Thank you everyone for participating you may now disconnect.