Q2 2022 DZS Inc Earnings Call
The <unk>.
[music].
Yeah.
Good day, and thank you for standing by welcome to Dizzy.
S second quarter 2022 earnings conference call at.
At this time all participants are in a listen only mode.
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 one one on your telephone please.
Be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Ted Moreau Vice President of Investor Relations. Please go ahead.
Thank you Shannon good morning, and welcome to the Dcs second quarter 2022 earnings conference call joining.
Joining us today, our Dcs, President and CEO , Charlie boat and CFO Mr. Wacky.
Yesterday after market close we published to the Investor Relations section of the Dcs website, our shareholder report for the second quarter of 2022 to provide shareholders perspective shareholders and analysts with market insights product business and financial update as well as forward looking information.
On this call, we will provide projections and other forward looking statements regarding future events or the future financial performance of the company.
<unk> cautions you that such statements are only current expectations and 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 part that was filed on a form 8-K as well as being available on the Investor Relations section of our website.
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 the shareholder part referenced earlier.
During the third quarter, we will we will be participating in investor conferences hosted by three part advisors Rosenblatt and Jefferies.
And Charlie will also be participating in a panel session at a Cowen conference next week.
I now have the pleasure to turn the call over to Charlie.
Thank you Ted and welcome investors analyst and guests.
As Ted shared yesterday after market closed we posted our second quarter shareholder report, which provides an update on our business financial results market trends in 2022 outlook.
We are encouraged that the demand environment has remained robust and resilient in the face of increasing economic uncertainty.
Service providers are laser focused on modernizing and upgrading their fixed and mobile networks to effectively compete.
Lower operating costs reduced customer churn.
And increase revenue.
With a new hybrid work from home environment and play service providers understand that to compete and win in their respective markets. They must deliver smarter faster and more cost effective broadband Internet services.
They are increasingly leaning into the home is consumers design and build smart homes and intelligent Wifi networks.
As such service providers are offering more advanced technologies, and intelligent software solutions than ever before.
Our access edge solutions enables service providers to deliver hyper fast multi gigabit broadband services, our subscriber edge solutions extends the multi gigabit broadband connectivity throughout the home and office and to the specific devices connected to the Wi Fi network.
Our optical edge solutions enables service providers to cost effectively aggregate and transport last mile and mobile traffic Dcs Dcs as new cloud software solutions and power service providers to automate orchestrate and optimize their network performance and leverage advanced data analytics to improve customer satisfaction.
<unk> increased revenue and build customer loyalty.
With over $120 billion of global government broadband infrastructure initiatives, the numerous Chinese vendor replacement opportunity spanning the United States, Canada, Europe , and Pan Asia, We remain confident that the investment cycle for our cloud solutions as well as our access subscriber and optical edge solutions will remain strong.
Provide dcs with revenue and margin expansion growth prospects for the foreseeable future.
The second quarter represented our sixth consecutive quarter with orders in excess of $100 million.
Q2 bookings of $123 million increased our total backlog to $293 million, an increase of 83% year over year.
Combined with $28 million of deferred software and service revenue, our total backlog and deferred revenue is now $321 million.
Our first half bookings performance of $224 million inclusive of 54, new and acquired customers and numerous new project wins highlights strong demand and momentum for.
For our cloud software and our access subscriber and optical edge infrastructure solutions.
The second quarter of 2022 reflected continued supply chain challenges for semiconductors and sub components is manufacturing and shipping port closures in China that began in March extended well into may.
Second quarter revenue of $91 million represented an increase of 18% sequentially and 10% year over year and was unfavorably impacted by approximately $5 million due to unforeseen foreign exchange rate fluctuations during the quarter spanning the Euro Korean won and Japanese yen.
Without these foreign exchange fluctuations revenue for the quarter would have been $96 million, which would have been closer to the top end of our Q2 guidance range.
Likewise gross margin and earnings were also unfavorably impacted by foreign exchange fluctuations as well as the incremental expedited air freight logistics costs to satisfy customer deployment schedules.
As I reflect on the past eight quarters since I joined Dcs. We are pleased with the results we have delivered.
187, new customers $903 million of new orders numerous next generation product innovations and to cloud software acquisitions.
In addition, we have completed our people product and brand transformation initiatives. The only outstanding infrastructure initiative that is still ongoing is our one Dcs ERP systems project, which we expect to be completed in Q1 of 2023.
And just two short years <unk> has built an enviable cloud software portfolio that complements our access subscriber and optical edge infrastructure solutions.
During this time.
We have been strategically focused on alignment with our marquee customers around the world and transforming our portfolio with differentiated high margin software subscription solutions in Q1 of 2021, we acquired rift.
Disruptive cloud software innovator that developed a vendor neutral tier one focused orchestration and software automation platform, which form the foundation of Dcs cloud.
During the second quarter of 2022, we accelerated our vision for Dcs cloud with the acquisition of <unk> service assurance and Wi Fi management software portfolio. The transaction, which included Assia As award winning express service assurance and cloud check Wi Fi experience management software solutions provided Dcs with valuable intellectual property.
31, marquee service provider customers in an elite team of cloud and artificial intelligence software engineers.
We expect pro forma annualized revenue to be approximately $25 million and gross margins to be approximately 80%.
The all cash purchase was equivalent to one times revenue.
Our newly acquired marquee customers spanning primarily North America, and EMEA represents a significant cross selling and market expansion opportunity for our access subscriber and optical edge solutions.
Shifting to our progress with open ran during the second quarter, we began shipping our market defining front haul gateway platform to a new marquee mobile operator in Europe aligned with rocket times symphonies open ran <unk> reference architecture. Additionally.
We unveiled our next generation environmentally hardened 400 gigabit coherent optical aggregation router platform saver Sabre redefines, the optical edge category significantly improving deployment flexibility application optionality and the economics of middle mile Transport we.
We demonstrated favor at the fiber connect 2022 conference in Nashville in June to an audience of service providers poised to leverage the $1 billion middle mile Grant program and aligned with the $10 billion capital projects funds as well as the $42 billion of broadband equity access and deployment program.
The highly scalable sabre 4400 delivers multi terabyte bandwidth in a compact modular platform spanning distances of up to 100 kilometers.
The environmentally hardened platform is perfectly suited for bridging the digital divide allowing deployments virtually anywhere in the network at a fraction of the cost of traditional solutions.
Labor is a daily designed for mobile edge transport applications aligned with five cell sites for aggregating last mile.
Fiber deployments within the broader $17 billion mobile and optical edge transport addressable market.
Our innovation and culture set the tone at Dcs, we are thrilled with the new talent that continues to join the company as we look to the remainder of 2022 and into 2023, we plan to accelerate our go to market strategy and playbook designed to capture new customers and better position Dcs with our existing customers.
Yeah.
In closing despite.
Despite supply chain headwinds and wide fluctuations with foreign exchange during.
During the second quarter, Dcs delivered $123 million in new orders and added 38, new customers, including our newly acquired Assia customers are.
$91 million in revenue was within our guidance range, though it is not for the unforeseen foreign exchange fluctuations revenue would have topped $96 million.
We remain disciplined in our execution and confident in our ability to gain market share in North America and Europe .
While delivering our margin expansion plans, especially as foreign exchange in today's supply chain dynamics stabilize in 2023.
With that I'd like to turn the call over to Missy walk through our Q2 financial highlights and our Q3 and 2022 outlook Misty.
Thank you Charlie and good morning, everyone.
Like to start by discussing our foreign currency exposure in order to help you better understand the impacts on our business in the second quarter.
Many foreign currencies, particularly the Korean won Japanese yen and euro weakened against the us dollar throughout the quarter, creating unexpected headwinds to our Q2 results.
Foreign currency impact is greater on a revenue and gross margins and it is on our operating income as we are partially naturally hedged in our foreign jurisdictions.
During Q2, we generated 28% of our total revenue from Korea, 11% of our total revenue from Japan, and 9% from year end.
As the U S dollar strengthened throughout Q2. These revenues converted to fewer dollars I will provide additional detail as I walk through our financial results.
As Charlie indicated underlying demand remains strong with total orders for Q2 and $123 million, our sixth consecutive quarter with orders exceeding $100 million.
As a result, we have set a new quarterly record for backlog at $293 million up 83% year over year, when combined with $28 million in deferred software and services revenue, our combined backlog plus deferred revenue equaled $321 million.
Backlog is continuously revalued to reflect current foreign currency exchange rate.
As of the strengthened U S. Dollar during Q2, our backlog was unfavorably impacted by $5 million and would have otherwise ended the quarter at $298 million or $326 million when combined with deferred revenue.
Our conversion of backlog to revenue remains challenged due to the ongoing sub component availability.
Might this constraint and $5 million of foreign currency impact, we still increased revenue, 10% year over year to $91 million.
During the second quarter sub component availability skewed towards our customers in Asia, where revenue increased 26% year over year to $50 million within Asia, we have diversified our business beyond our stronghold across Korea, and Japan and into the Pan Asia region.
Of our overall $5 million of total foreign exchange revenue impact of approximately 90% of the impact occurred in converting revenue from Asia.
Revenue from the Americas region increased 7% year over year to $28 million, reflecting our emphasis on expanding the bvs footprint in this strategic region.
Revenue from EMEA declined 22% year over year to $13 million, reflecting the timing of shipments and foreign exchange.
Our Q2 adjusted gross margin of 28% was impacted by unforeseen foreign currency changes about half of our cost of goods sold for our overall Asia business is based in Korean won allowing for a partial natural hedge how's.
However, the remainder of our cost of goods sold are based in U S. Dollars. In addition to FX, we incurred elevated cost of goods increased expedite fees and shipping and logistics costs as we prioritize delivering products to our customers as timely as possible.
The final factor weighing on our gross margins was that our revenue mix was weighted towards the Asia due to sub component availability.
Without the foreign currency and supply chain headwinds, we estimate our gross margin performance would have been approximately 750 basis points higher.
In the second quarter, adjusted operating expenses were $29 million compared with $28 million in Q2 of 2021.
The year over year increase reflects investments in our business, including the acquisition of Assia assets.
The foreign exchange impact of decreased operating expenses by $800000. During Q2, as we have a partial natural foreign currency hedge was approximately 25% of our operating expenses denominated in Korean won.
Our adjusted EBITDA was a loss of $3 million during Q2 of 2022 compared to a slight EBITDA loss in Q2 2021 and.
Our non-GAAP EPS was a loss of <unk> <unk>.
Compared to a loss of three cents in Q2 2021.
The primary factors influencing our Q2 profitability metrics were the unforeseen foreign currency changes and supply chain headwinds.
We ended the quarter was $20 million $23 million in cash and we have availability on our $30 million revolving credit facility as a reminder to pay for the Asti acquisition, we entered into a five year $25 million term loan.
Continued limited component availability has necessitated the increase in raw material inventory levels to align with our strong backlog and customer forecasts.
<unk> delivering products to our customers as timely as possible, which has resulted in a buildup of inventory over the past several quarters and has impacted our working capital.
Inventory increased $19 million year over year or 37%.
Annualized inventory turns were three eight times during the second quarter compared with $4 seven times a year ago.
Days sales outstanding were 105 days in Q2, compared with 94 days in the year ago period, as our Q2 'twenty two shipments were backend loaded due to China ports reopening in May as a result, we experienced a $22 million sequential increase in accounts receivable to 105 million.
Turning to our guidance our updated 2022 guidance now includes seven months of financial contribution from the Aussie asset acquisition.
Finally, we expect the U S dollar to remain strong relative to the euro one in yen in the second half of 2022.
As a result, our full year revenue guidance reflects our anticipated FX impacts and our updated expectation for continued supply chain headwinds as we prioritize delivery to our customers.
Our updated 2022 guidance is as follows.
Revenue of $380 million to $410 million.
Gross margin in a range from 32, and a half to 34, 5%.
Operating expenses in a range from $118 million to $122 million.
And our full year EBITDA guidance is between $7 million and $17 million.
Looking to our third quarter, we are guiding revenue to a range of $100 million to $110 million.
Gross margins of 33% to 35%.
And operating expenses of 31% to $34 million.
As a result, we expect EBITDA between two and $7 million.
We anticipate our cash balance to be relatively flat sequentially at the end of the third quarter and look to improve our cash balance by Q1 of 2023, as we convert working capital to cash.
In order to provide greater transparency into the evolution of our business, we intend to break revenue out by two new product technology categories. When we report Q3 results in approximately 90 days.
The first category will be software and services, which will be an ever increasing portion of our revenue mix as software grows in importance to our business.
In the second quarter of 2022. This category represented approximately 9% of total revenue.
The second category will be the access networking, which will assist our historic broadband connectivity and mobile transport product areas.
We feel this breakout will provide a more useful reflection of our business and directional strategy going forward.
That completes our prepared remarks, I'd now like to hand, the call over to the operator to facilitate the Q&A session.
Yes.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from Paul <unk> with William K Woodruff. Your line is now open.
Thank you for taking my call.
It looks like you guys hit your numbers, if you exclude <unk>.
China, the expediting charges and the currency.
Can you maybe Charlie talk a little bit about how this is going to affect.
The third and fourth quarters.
So maybe your assessment.
Overall in the supply chain going forward and then I have another question.
Okay.
Yes, I mean, it is hard for us to be disappointed when the team certainly executed to the top end of the revenue guidance that we provided as you pointed out $96 million would have been our second best revenue quarter.
Ever.
So it's frustrating with the foreign exchange that hit US I mean, if you look at just what happened within Q2.
Yen was was up 12%. The one was up 6% Euro was up 6% and so with as much exposure that we have to Asia and Europe , we certainly.
What we're dealing with some things that obviously as we were going into Q2 didn't see and certainly didn't see.
As it relates to the second half of the year.
Working very closely with our global banking partner JP Morgan and looking at what the anticipated foreign exchange fluctuations are likely to be in the second half.
The outlook that <unk> provided and she can comment on it.
Incorporates what J P Morgan and other key banking partners have provided us with so the outlook that we have.
Assumes that foreign exchange doesn't change much in the second half of the year. What we are hearing from our banking partners is as we exit this year and enter 2023 that we believe that.
Foreign exchange will return to normal levels, which will certainly be beneficial for the company.
Mr. I don't know if you want to comment on any of that.
Yeah.
As it relates to foreign currency, we certainly had to project a bit of what we expect given some of the.
Significant variances that occurred in the second quarter of 2022, and so we took some of those.
Forecast views and incorporated that into the second half to have a better view of how we will perform in the second half.
I think the other thing that's important to appreciate from from a margin perspective is.
You look at the.
$321 million of total backlog and deferred more than 50% of that is North America and Europe .
So as we unlock more and more of our backlog into North America and Europe . The margin profiles, we expect to be much better.
Okay. Thank you.
My second question, maybe a little bit of shifting gears I noticed that you have.
Contract liabilities now on your balance sheet.
About three quarters of them are correct and I assume these are from the <unk> acquisition.
This would imply that good portion maybe three quarters of your contracts are renewed each year, which provides a nice opportunity to increase revenues.
Two questions first can you give us a little color on maybe what your game plan is the next 12 months or so.
And secondly, how long do you expect it to take to fully integrate.
You'll see it into your cloud offering.
Where you have two good.
Good value, where you can get a little bit more aggressive on the pricing and will this be done in phases or all at once.
Yes, I mean, the expressed in cloud software portfolios are already fully integrated into <unk> cloud. So there's there's really no gap in the in the integration because it really filled a void. If you think about where we were prior to the Aussie a transaction.
Rick was really all about network orchestration for mobile which over the last year.
We've tilted that to be able to provide fixed access orchestration, which we think is a game changing software platform somewhat something that nobody is doing in the space.
And what what obviously you gave us was really.
The service assurance and network aware.
Software attributes from the <unk> to the <unk> to the to where fiber and DSL is terminated at the house and then the Wi Fi experience management software is really all about software management inside the home in the Wi Fi part of the network. So all of that is net new and that's all.
<unk> fully integrated the employees have been fully integrated even the systems have been fully integrated into the way Dcs is managing that business.
You said something that's pretty important and it was obviously something that was really important to us as we were assessing the transaction through due diligence.
It's just the timing of when some of these contracts renew and we certainly have an opportunity as some of these contracts renew in 2023 to provide more value, which we expect that will translate into an overall better RFP for customers and better margin and revenue profile for us.
Well thank you.
Ill pass it on.
Yeah.
Thank you.
Our next question.
Comes from Dave Kang with B Riley Your line is now open.
Yes, good morning.
Just wondering.
How big is India, right now and how big can again next year I'm hearing some major upgrades coming over the next couple of years.
Well as I think.
You all are aware we did announce.
I think two quarters ago that we were awarded at least phase one of a pretty significant tier one in India.
We see that opportunity expanding for us.
There's there's obviously different parts of the network that we participate in from.
Optical transport side to the <unk> to the <unk> to the in home Wi Fi and phase one of that was.
With the <unk> the second phase of that is <unk>, which comes with a much higher profile and margin profile. So we certainly are being really thoughtful about the opportunity in India. I mean, it clearly is a country that has opened up for companies like Dcs to be able.
To participate in their aggressive cap and replacement of the China former China.
Vendors in that particular region I think it is important also for investors and shareholders to appreciate we are being thoughtful about it we're not rushing into India to go chase low margin deals but.
There are different bookends that come with different margin profiles, obviously, the <unk> are a much lower margin profile and to be able to complement that with the <unk> and the software attributed to the <unk> is what it is in phase II, So phase one for us.
Was the <unk> phase two is the <unk> the middle mile Transport and Thats something that we expect that we will book in the second half of this year and begin shipping in early 2023.
Got it and my next question is.
Your APAC was fairly strong, but your mobile transport continues to be we got a significant portion of that was mobile.
Can you kind of go over that and what we'll get mobile transport get going.
Second half and beyond.
Well in my comments I did share with you that we did we did win a large mobile operator in Europe in Q2.
We will begin shipping.
On that project, which is a high margin project in Q3 and Q4.
We did see.
Yes.
Softbank drove a lot of our revenue over the last let's call. It 567 years and in the first half of this year. They are going through a reevaluation of their next generation <unk>.
Pond based mobile transport platform that we're working on with them and so the pause that I think youre seeing in some of the mobile transport revenue has to do with where Softbank is in sort of their phase four of their <unk> mobile transport architecture with Dcs something that we anticipate we will.
<unk>.
Contract on in the second half of this year and begin to ship. The next phase of that which is a multiyear phase starting in 'twenty three.
Got it and my last question is regarding U S. Various.
Government funds such as ours.
Have they been released yet.
Yes, sure I mean, we've got a lot of customers that are participating.
I mean, I think what we've been articulating and I think it's fair to assess.
Our three peers in North America, I think for the most part outside of what we would refer to as sort of new entrants into the traditional regional ilex.
Most of those funds are flowing.
Two service providers and through to the.
The equipment supplier partners that they have historically been using where we've been seeing a lot of excitement frankly is a lot of the the new fiber overbuild errors in some of the utility co ops, who are entering into the market that gives dcs frankly, an opportunity to participate where we werent historically an incumbent.
Got it actually.
One more question.
Because I guess.
Just a question a lot is that how solid is your backlog maybe can you go over like contract policies, how much can be cancelled after so many months.
Well Ironically, we were just talking about this before the call.
And I think its speaks volumes of the technology and the relationship and the dependency on our technology.
And the two years I've been here, we Havent had a book.
No.
When we look at the historical backlog over the last two years and including the $293 million, which would have been $298 million if not for some of the foreign exchange impacts we haven't seen any D books, and so look I mean customers can do whatever they want I mean independent of contracts I mean.
No.
I don't know in 30 years I've been here, Dave that I've ever pulled out of contract and and fought with a customer on it we're trying to do the right thing for customers, but I think customers have been very supportive and they've been very patient.
With the extended an elongated lead times and we've been very fortunate.
We've not seen any customers derail from the committed orders that they have.
To add to that Dave I think Paul mentioned, it earlier, but on the contract liabilities, which we have Ms <unk>.
We referred to as deferred revenue those are projects that are.
As we build that we havent recognized the revenue for example in maintenance contract rate and that can vary.
Terms from one month to three years and so deferred revenues are already bill.
<unk> and solid.
Backlog, if you will.
Thank you.
Okay.
Thank you.
Our next question comes from tore Svanberg with Stifel. Your line is open.
Yes.
Thank you.
Congratulations on the continuous.
Okay.
Information here and certainly the record backlog.
It sounds like you have a handle on the Forex now.
But I was just wondering on the backlog conversion Charlie.
How is that trending, especially in light of the component shortages and things like that is that really starting to ease and you're starting to see that backlog conversion now moving in the right direction.
Yes, I mean, one of the things I mean, we certainly are trying to align with this sort of first in first out mindset. I mean, we are trying to do everything we possibly can to meet.
<unk> customer deployment schedules and so we're trying to adhere to the best we can to the sort of first in first out from a backlog perspective.
We're we're in August of 'twenty, two and sometimes we forget that there were significant price increases that all of the equipment suppliers in this industry incurred starting in the second half of last year. So we're trying to aggressively flush out a lot of the.
Backlog that was impacted by the price increases, but not yet.
Favorably impacted by price increases that we pass along to customers and so some of that youre seeing in and what we delivered in Q2, I think youll see some of it in Q3, but as as we've been sort of articulating. This whole year, we had sort of expected that by the end of Q3.
Most all of the backlog that was attributed to the higher price and not.
<unk> two price increases pass along to our customers will have flushed out. So we look at some low margin projects that we have on the books that will flush out in Q3.
And a little bit left in Q4, and then most everything is frankly.
Based on new pricing and the current cost structure that we have I mean, what the only real variable being.
The foreign exchange fluctuations, which.
Let's hope that that stabilizes and.
We're seeing less and less I mean, there was the other thing Thats important to appreciate is the way expedite fees work I mean at least with Dcs and I speak to a lot of my peers. The way. The expedite charges were implemented is if you agreed to an expedited six months ago for something that you are pulling in to <unk>.
This quarter you were paying for it and it was on the books six months ago as a reserve, but you are paying $4 six months ago. So it wasn't like you get an expedite you agreed to an expedited today, it's going to ship in six months and that cash in that and that expense follows it youre paying for it now and the.
Impact from a margin perspective happens when it ships. So theres some of that this lingering from we saw some of that in Q1, we saw starting in Q2, we will see some of that in Q3, but I will tell you that we are seeing much more cooperative.
Ecosystem of sub component in semiconductors.
And you're covering that space more cooperative.
Ecosystem of sub component in semiconductors and.
And you're covering that space. So you know it probably better than anyone on the call that we are seeing a bit of a shift as consumers.
And a lot of consumer electronics technologies sort of pumped the brakes on a lot of those wafers and chips are finding their way to ease into our space I'm, hoping.
The second half of this year, we're seeing a lot less need for expedite fees and also remember we've got an aggressive plan.
Two to exit China, we're still we're still incurring some tariffs.
With some of the existing backlog into the U S, which we expect a lot of that will go away in 2023, just based on some of the consolidation decisions that we're making on the <unk> side. So there is there is a lot of multifaceted margin enhancement elements that will attribute to a much different business profile in 'twenty three.
As we flush out some of the old backlog as we move out of China and not incur some of the tariffs and we certainly hopefully are seeing a more stabilized FX and less expedite charges that we're incurring in 'twenty two.
That's great perspective, Thank you and my next question is and by the way I really appreciate youre going to start sort of reporting revenues by software versus product.
And related to that.
Hi.
I assume that the sort of mix trajectory of software and a move towards 40% gross margin does all of that is still on track is just basically just being delayed by a couple of quarters because of the.
Forex issues, that's exactly right that's exactly right.
Inventory when you look at our normalized <unk> you added back the 750 basis points you get to this quarter around 35% on a year to date basis were around 36%.
Again add our Aussie a contribution to that of 250 to 350 basis points Youre getting really close to the 40%.
Very good and then just one last question on inventory.
Should we assume that the inventory will be back to sort of the normalized range by Q1 of 'twenty three.
Target.
Well as we define a new normal and we're growing our business, we will get back to normalized ranges for a <unk>.
Stronger bigger company.
Okay perfect great answers. Thank you.
Thank you.
Our next question comes from Christian Schwab with Craig Hallum. Your line is now open.
Hey, guys just.
Unfortunately, just unprecedented.
Currency swings on such a short.
Timeframe that everyone's facing but.
Charlie your aggregate topline growth rate.
For the company.
On a go forward basis.
That hasnt changed has it.
It hasn't in fact.
The guidance that we provided for the year really was just haircut. It by the foreign exchange impacts that we anticipate for taken into consideration Q2, and the rest of the year. So if you back out the foreign exchange fluctuations, we didn't change our guidance for the year.
All we did was incorporate what we believe to be.
The impacts of foreign exchange in the second half, obviously, if that changes and it becomes favorable then.
Then our ability to deliver on the higher end of the range is still there I mean, we.
We've got a range of 100.
$110 million in Q3 and.
We.
We continue to struggle because the majority of our backlog is still with customer request ship dates of as soon as possible. So I think if we can continue to unlock.
Some of the some of the backlog in access to sub components, we certainly have an opportunity to exceed that and we need to do that first and foremost.
Just satisfy customer requirements and customer deployment schedules. So that's been our number one priority and I Hope you guys appreciate that where we're being thoughtful and spending money and expedites.
Which is a frustrating.
Great.
Situation for all of US were doing because we want to make sure that we're doing everything we can to keep customers happy.
Great and then.
Just on the commentary on inventory and increase.
Raw materials and working capital.
Can you can you tell us why you would be putting on raw materials on your own balance sheet instead of your contract manufacturing partners.
Securing that for you.
Yes, so one of the things that is this.
This is <unk>.
Nobody has asked me. This question quite the way you did I'm glad you asked it.
Remember that when I got here two years ago, we didn't have one but we had two manufacturing facilities. So we have one in Hanover, Germany, and we still have one in Tampa, Florida. So we're building.
Today, we have we're vertically integrated with a portion of our business, where we're manufacturing.
And in Tampa in Korea.
We still buy and manage a lot of the semiconductors and so our philosophy that the company had before I got here was to do everything we could to manage the cost and manage the accessibility of those chips and then provide those chips to the downstream.
<unk> to build the product I will tell you that we have a very aggressive plan as we exit this year and into 2023 to consolidate or CMS wants to be more meaningful with them, obviously to lower our cost and to free up a ton of cash and so theres, a great opportunity and significant upside for us we.
Believe in 'twenty, three as we execute our our cm consolidation strategy.
I'm not prepared to give you the details on today for obvious reasons, but I will share more details as we get closer to our final execution on that which we believe has upside that's not baked into the outlook that we're providing today.
Yes, I would think that that would be.
Very wise and a leading contract manufacturers have hundreds if not thousands of people.
Working on supply we're not we're not a manufacturing company, we are a technology company and as we ship more and more of our emphasis towards software.
Obviously software needs to reside on infrastructure and so we're going to be on the in the access infrastructure business for a very very long time, but as we.
As we are able to participate more in the intelligence side of the way. These networks are being built managed in an orchestrated theres a great opportunity there, but we don't want to be in the manufacturing business long term.
To your point there is large multibillion dollar companies that should be doing that.
That means that there'll be buying inventory and managing the cash differently and that to me.
Frees up a lot of working capital for us in 'twenty three and it certainly we believe we will help our margins as well.
Perfect and then just one quick follow up question.
On slot supply chain and expedited fees.
The majority of all the networking chip companies have sent letters out for you.
We received one.
Talking about price increases that are going to begin to happen. This fall and we will certainly start.
On January one.
Is that kind of incorporated.
I assume in into your outlook and do you believe there'll be an opportunity.
Pass those costs on.
Again.
With price increases.
I'll point to take effect in 'twenty three.
Yes. So the answer is we like everyone else have been sort of communicated that there is an anticipated.
Price increase coming.
I would tell you we haven't accepted that.
Sure.
And we certainly are in dialogue.
With.
Key.
Downstream semiconductor companies, who are speaking to those price increases, but yes, I mean, we have baked in our margin profile for the second half.
Nothing that has taken a hold in the second half right now they are communicated they are telegraphing that the prices would be.
<unk> January one assuming that.
They take hold.
But.
The answer is yes, I mean, we're certainly taking.
The price increases under consideration I think we've done a really good job of partnering with our end user customers on the necessary price increases, but it becomes a very delicate.
Process and.
It's something that I'm not prepared to talk about in granular detail, but I will acknowledge that we did we did receive communication that there is potential price increases that R.
Our or at least.
Desired to be increased in January of 'twenty three.
Great. Thanks, guys no other questions.
Okay.
Thank you.
Our next question comes from Tim <unk> with Northland Capital markets. Your line is now open.
Hi, good morning.
Couple of questions on the demand side.
And while you are.
Seeing these FX headwinds even in or on an organic basis. It looks like you're looking for a pretty good ramp in the second half.
From a revenue standpoint I.
I Wonder if you could and I think you mentioned the backlog.
Being significantly or at least reasonably.
Bias towards Europe , and North America, but as you look at that.
That ramp in the second half are there any kind of particular drivers that standout I assume you have good visibility based on backlog.
Either in North America or Europe .
As you contemplate that I guess, there's been a lot going on with one of your tier two customers consolidated communications sector.
Being pretty aggressive in terms of fiber and I'm going to get more so is that.
Can something like that moved the needle for you guys. As you think about your your business in North America.
Yes, so we don't talk about it enough.
But your points are very fair Tim.
Yes.
75% of our business is with 20 of the top 30 telecommunications service providers around the world. So we continue to drive a lot of new business and certainly much of our backlog is tied to.
Lot of large.
We would refer to as tier one and tier twos consolidated at 2 million subscribers.
Excuse me.
Is sort of teetering on that.
Tier three tier two but theyre meaningful I mean, there are very significant customer for us they are very.
I think they are one of the best customers that we have just from a technology partnership perspective, they've been very loyal to our entire portfolio and.
They also represent today, a significant amount of our backlog that we intend to unlock in the second half of the year. So I think your comments are spot on.
Okay, and then maybe shifting back to that.
Tier one area of focus I think you mentioned a win with a large European mobile operator, but.
I'm wondering if you could step back and review.
You made reference to this in your in your letter the pipeline of opportunities.
That youre seeing develop whether they are fixed or mobile.
Huawei replacement.
And.
Whether we can count that win that you mentioned is one of those and what the go forward pipeline looks like for.
For you guys.
Yes, I would say that the I mean, we've got a very strong loyal run rate business in Korea and Japan.
Pan Asia, which.
Ben.
A very exciting new market for us we've been investing in that particular region.
It's a region that I think Dave.
Dave mentioned, India, but if you think about even Vietnam and Taiwan.
And.
Singapore and Australia. There is a lot of countries there that are aggressively capping and moving away from some of the Chinese suppliers and we've got a large base. There we've got close to a 100 engineers in Vietnam in Hanoi and so it is certainly giving us an opportunity to participate in expanding our sort of two pillars.
<unk> in Korea, and Japan, and that Pan Asia market, but we're I would tell you the most exciting.
Future opportunity for US is the pipeline that we have in North America and Europe .
It's by far the most trial activity I mean, we've moved from sort of that proposal phase two proof of value to physical trials and as we close out on the feature gaps and closing out on those trials youre moving into that contract and then.
Order and eventually deployment phase so.
I am cautiously optimistic that some of that activity will close in the second half of this year and convert into revenue opportunity for us in 'twenty three it certainly has been a lot of our focus and if you look at the Aussie of customers Theyre, all tier ones that came over I mean.
I mean, virtually all of the 30, Mark key operators that we talk about for the most part our tier one operators and they've given us a great opportunity to really invoke.
Ross cell opportunity I mean, if you think about the express product that sits between the <unk> and the <unk> and the cloud check that sits inside the home I mean, it's very complementary to our <unk>, two <unk> and our Wi Fi products and we're in deep discussions already with a lot of those customers as to how we might be able to help them.
Better manage their network and be able to participate in some of those broadband network projects that maybe historically, we haven't been involved in.
Great and last question for me.
Going back to the kind of fixed.
Fixed versus mobile broadband.
And I certainly understand the drivers for the pause in mobile side, what I wanted more color on was obviously youre strong in Asia, So whats kind of filling the gap, there and I'm guessing that might be more fixed fiber to the home business in Korea, and elsewhere, but any more color on that would be appreciated. Thanks.
Yes, its all fixed broadband.
That's filling the gap right now.
Obviously, Japan and Softbank has historically been a 10% customer rocket on mobile their core network in Japan has historically been a 10% customer.
With with rocket on Symphony.
Being very successful out in the market.
Deploying their IP and software into a lot of these.
Third party service provider networks, we are today.
They are exclusive front haul gateway reference.
Platform and as they have success, we're seeing success in.
One of the one of the new mobile operators in Europe , which I had mentioned, which is pretty significant will be utilizing our front haul gateway for their next generation <unk> rollout with rock Tenn Symphony software. So we're seeing our pipeline mature there were.
We're excited about the evolution of the <unk> and eventually <unk> network with Softbank and I think we're in a very good position to participate in that as that rolls out in 'twenty three and.
With our new optical transport platform sabre that we rolled out.
We think that's a huge opportunity for the company were filling a pretty huge void.
At the Investor Day, we sort of did a soft launch and shared some of the details.
<unk>.
At the Nashville fiber connect show, we actually demonstrated it we had a lot of interest in that product and with the middle mile.
Optical transport funds that are now being deployed we see that as something that could could provide some upside with decent margins.
<unk> <unk> 23, as well so we're still very optimistic.
And our very aggressive on what we're doing on the mobile side. It's just for US we need open ran to continue to take hold and we are seeing open ran gain a lot of momentum around the world. It is new and for our analysts partners and for shareholders, who are looking at Dcs I think everyone has to just appreciate.
The timeline around open ran and as that mobile network.
It becomes much more open it allows for us to participate differently than historically, where you've got closed mobile networks, but we are seeing a lot of activity. There is a lot of trials going on right. Now. It's just it's just going to take some time to unlock a lot of that.
Yes.
Okay. Thanks very much.
Thanks, Tim.
Thank you.
Our next question comes from Ryan Koontz with Needham <unk> Company. Your line is open.
Great. Thanks for the question most of mine have been answered, but I wanted to see if I could ask about the gross margin outlook in the supply chain impacts there in a different way.
What's changed in the last 60 days.
Since you guided there it looks it sounds like several hundred basis points hit kind of for the rest of the year. There is most of this freight that was already in inventory or is it new new new cost increases or maybe you're seeing more of a.
Our revenue mix shift towards towards APAC as you saw in the quarter. Thanks.
So Ryan Great question, so on the supply chain side that we've certainly seen some of the new cost increases come through right as we move through the year.
We're seeing new cost increases more recently.
And you've got the FX piece that was right.
The most significant piece Ryan.
As I as I sort of was saying earlier I mean, just in Q2 alone you had the yen.
It was it was it was weak and 12% yet the one that was weak in 6% euro weak and that was.
More than 50% of our revenue in Q2, and so the regional mix associated with those currencies was it was a surprise obviously, we didn't we didn't see that coming into Q2.
Okay right.
So the strength in APAC on fixed in APAC that we saw into Q.
That <unk> necessarily continue into the second half would be much of a headwind to margins.
Well, we've factored in what we have been educated by JP Morgan and other banks based on what they anticipate.
Foreign currency to fluctuate.
Within Q3 and Q4, so we've done the best we can to hedge in and to incorporate.
<unk> outlook for.
What we have in backlog and what we expect to ship in Q3 and Q4 to the best that we can.
Okay. Thanks, Charlie Thanks, Mr.
Thanks Ryan.
Thank you and I'm currently showing no further questions at this time.
This does conclude the call. Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial one one.
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