Q3 2024 DZS Inc Earnings Call
Good day, Lee, this gentleman. Thank you for standing by. My name is John and I'll be your conference operator for today. At this time, I would like to welcome everyone to the DZS 3rd quarter, 2020, 4 financial results conference call.
At the time, all participants are in a listen all demoted. After the speaker's remarks, there will be a question and answer session. If you will talk to us a question during this time, simply press star, followed by the number one on your telephone keypad. If you will talk to withdraw your question, press star, and again, thank you.
of AdNal Lyccy Thurindical over to Sir Jeff Burke, SVP, Marketing and Investor Relations. Please go ahead.
Jeff Burke: Thank you, John, and welcome to the DZES Conference called to discuss Q3 2024 financial results. Join me today, our DZES President and CEO Charlie Boat, an interim CFO Brian Chestnut.
Jeff Burke: During our call, we will provide projections and other forward-looking statements based on our current expectations regarding future events or future financial performance of the company.
Jeff Burke: 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 DZS's Wednesday, November 6th press release.
Jeff Burke: These documents identify important risk factors which can cause actual results to differ materially from those contained in our projections or forward-looking statements.
Jeff Burke: Please note that unless otherwise indicated, the financial metrics we provide to you on this call include those determined on a non-GAAP basis.
Jeff Burke: These metrics, together with corresponding gap numbers and a reconciliation gap, were contained in the press release issued on Wednesday, November 6th, which we have posted to our website and filed with the SEC on Form 8K.
Jeff Burke: We will also discuss historical, financial, and other statistical information regarding our business and operation, and some of this information is included in the press release. I will now turn the call over to Charlie.
Charlie: Thank you, Jeff. It was a long night for Americans, so good morning and thank you for joining.
Charlie Boat: We are pleased to report that our third quarter financial results delivered $38.1 million in revenue, representing an increase of 23% quarter over quarter.
Jeff Burke: Our operating expense increased during the quarter primarily due to the incremental cost associated with our Netcom acquisition and our final restatement related cost.
Jeff Burke: Our adjusted EBITDA was unfavorable by $2 million compared to Q2 2024 due to our inability to convert backlog shipments by quarter end.
Revenue recognition timing and various cost savings initiatives that are planned and committed though not realized during the quarter.
Despite a challenging marketing environment across the broader industry resulting from
We have delivered sequential revenue growth on a continuing operating basis over the last four quarters.
Jeff Burke: With our restatement behind us, our filings current, the sale of our network assurance and in-home Wi-Fi management portfolio closed, and optimism with a growing sales pipeline and robust backlog, we believe our best days are ahead of us.
Jeff Burke: We chose to divest our network assurance and in-home Wi-Fi management portfolio for three reasons.
Jeff Burke: The first was to create software independence and reduce the competitive friction we were experiencing with our Wi-Fi connectivity and Wi-Fi software management peers.
Jeff Burke: The second was to improve our balance sheet, which we accomplished by securing $34 million.
Jeff Burke: in an all cash transaction.
Jeff Burke: and third was to recalibrate our technology and go-to-market focus centered on our core broadband access and connectivity systems and cloud edge software solutions.
Jeff Burke: The third quarter, during the third quarter, we made meaningful progress across several tactical and strategic initiatives.
Jeff Burke: As we enter the fourth quarter, we established four key performance initiatives that will anchor us in Q4 and into 2025.
Jeff Burke: Our first KPI is centered around growth, profitability, and improving our balance sheet.
Jeff Burke: The strategic divestiture combined with Q3 shipments, inclusive of paid inventory, have improved our balance sheet as of the end of October.
Jeff Burke: Based on a growing sales pipeline, schedule backlog, and interaction with customers and channel partners, we anticipate Q4 revenue and profitability to improve compared to Q3 2024.
Jeff Burke: As we look ahead to 2025, we anticipate service providers will return to pre-COVID spend levels and normalized deployment patterns.
Jeff Burke: We also anticipate the various government stimulus programs around the world, including the United States Broadband Equity Access and Deployment Program, will begin to accelerate funding during the second half of 2025.
Jeff Burke: Our second KPI is focused on completing our cost savings initiatives, including the cost synergies associated with our recent acquisition of Netcom.
Jeff Burke: These cost savings initiatives began in the first half of 2024, and we expect the total savings to be completed by year-end 2024 and reflected in Q1 2025.
Jeff Burke: Our cost optimization programs are inclusive of the divestiture of our former Asia business unit, as well as the divestiture of our network assurance and in-home Wi-Fi management portfolio.
Jeff Burke: Our third KPI is executing the sales synergies resulting from the acquisition of Netcom, which adds market-leading fiber extension, home broadband, and fixed wireless access technology to our market-leading broadband access and connectivity portfolio.
Jeff Burke: We are encouraged with a growing sales pipeline and the revenue conversion and backlog created in just 120 days since acquiring Netcom.
Jeff Burke: During the past four months, we have begun to validate the cross-selling synergies with our existing customers and likewise, the prospective synergies with our core broadband portfolio with the former Netcom customers established as part of our acquisition thesis.
Jeff Burke: Our fourth KPI is focused on monetizing $79 million of inventory, which is aligned with our sales pipeline, schedule, backlog, and projects in flight.
Jeff Burke: Our vision and strategy established
Jeff Burke: Aligned with the large-scale incumbent service providers and emerging fiber overbuilders, as well as utility providers.
Jeff Burke: While the U.S. BEAD program has been front and center in the United States and has garnered much of the excitement across our industry, other countries, such as Germany, aim to make available billions of euros for the incumbent broadband service providers, emerging alternative fiber providers, and other providers.
Jeff Burke: Utility Operators, as well as other types of ISPs.
Jeff Burke: We expect that the decisions and investments that we've made over the past few years, which includes more than $100 million of invested technology, will result in the continued growth and ultimately sustained profitability and positive cash flow.
Jeff Burke: Prior to DZS, Brian was the Vice President and Corporate Controller of Continental Battery Systems, a billion-dollar U.S. distribution company where he oversaw global accounting operations across the United States and Canada.
Jeff Burke: Additionally, Brian held senior finance management positions at Jacobs Engineering and one main financial and he began his career at Price Waterhouse Coopers.
Speaker Change: Brian, I want to thank you for the comprehensive and diligent work you and the team accomplished over the past seven months. The results have improved our internal controls, corporate governance, and overall close process.
Brian Chestnut: With that as a brief introduction, I'll now turn the call over to you to share more on our financial results.
Brian Chestnut: Thank you, Charlie. And good morning, everyone. As Charlie mentioned, I've been with DZS for seven months, with the first five months focused on completing our restatement.
Brian Chestnut: I appreciate the opportunity to lead finance as the interim CFO as we look forward, focused on sustainable growth and profitability.
Jeff Burke: Over the past year, the company has made improvements across the business, including internal controls, corporate governance, cybersecurity, supply chain management, and quota cash.
Jeff Burke: While we delivered favorable revenue and gross margin growth during the third quarter, our expectations and work streams underway are designed to deliver better overall results in Q4 and across 2025. The leadership team is focused on balancing an encouraging sales pipeline with profitable growth and free cash flow.
Jeff Burke: Adjusted gross margin from continuing operations for the third quarter was 36.7% compared to 34.5% in Q2 and 17.4% compared to the same period a year ago.
Jeff Burke: Adjusted operating expenses increased incrementally by $1.9 million, or 8.9%, during the third quarter compared to the same period in 2023, primarily driven by the additional operational costs associated with our Netcom acquisition.
Jeff Burke: Adjusted EBITDA for the third quarter was a loss of 9.3 million dollars compared to a loss of 17.5 million dollars in Q3 2023, an improvement of 8.2 million dollars or 46.8 percent.
Jeff Burke: While our balance sheet ended the quarter with 5.7 million dollars of cash and cash equivalents, our in-home Wi-Fi management network assurance divestiture closed on October 25th generating 30 million dollars of cash which reduced our debt by 15 million dollars and increased our cash balance by 15 million dollars.
Jeff Burke: During the quarter, our DSO significantly improved from 120 days to 83 days as a result of favorable collections.
Jeff Burke: Our DPO at 242 days continued to lag during the third quarter, though with a combination of our network assurance and in-home Wi-Fi management sale, plus favorable sales during the third quarter, we expect to improve our DPO during the fourth quarter and into the first quarter of 2025.
Jeff Burke: At the end of the third quarter, inventory was valued at $79 million, working capital was $24 million, and quarterly interest expense was $2.2 million, which includes interest and debt discount amortization.
Jeff Burke: With the SEC risk statement behind us and our public filings current, we are turning the page to more favorable outcomes. We are lowering our working capital by executing our scheduled backlog, converting inventory to cash, and micromanaging our operating expenses.
Jeff Burke: Current KPIs and work streams underway, we expect to achieve break-even on an adjusted EBITDA basis and positive cash results in 2025.
Jeff Burke: Our acquisition of Netcom has resulted in accretive results to date.
Jeff Burke: The acquisition, excuse me, enhanced our broadband connectivity portfolio with market-leading fiber extension.
Jeff Burke: Home Broadband and Fixed Wireless Access Solutions as well as 8 Marquee Service Providers Spanning the United States
Jeff Burke: Europe and Australia.
Jeff Burke: As we enter the fourth quarter, and as we prepare for 2025,
Jeff Burke: Charlie highlighted our four key performance indicators which are focused on growth,
Jeff Burke: Profitability, Balance Sheet Improvements, Cost Savings and Business Optimization, and Synergies from our Netcom Acquisition and Converting the $79 Million of Inventory to Cash. With that, I'll hand the call back to Charlie for his final comments.
Charlie Boat: As we look ahead to the immediate and medium-term future,
Charlie Boat: Many of our projects in flight and active technology trials are expected to convert to design wins into revenue in 2025.
Charlie Boat: Our interactions with prospective customers and channel partners indicate an improvement across the overall sector is underway, and a resounding commitment to fiber and fixed wireless deployments over the coming years.
Jeff Burke: We also expect excess inventory caused by abnormal lead times among service providers and distributors to continue to normalize over the course of 2025.
Jeff Burke: With an encouraging sales pipeline, $90 million of backlog, $79 million of inventory, and with annual operating expenses lower by more than $20 million,
Jeff Burke: We anticipate our financial performance will improve in Q4 and throughout 2025. We also expect favorable sales synergies from the Netcom acquisition, and we remain focused on converting technology trials to design wins and inventory into cash.
Jeff Burke: Furthermore, I want to thank our loyal and committed customers who continue to benefit from our technology differentiation and our customer first culture.
Jeff Burke: Finally, I want to thank our technology, manufacturing, and broader supplier ecosystem who remained aligned and committed to our next chapter together.
Jeff Burke: Looking ahead, we plan to share our Q4 business and financial results in early March.
Jeff Burke: Until then, thank you for your time and attention today. I'll now turn the call back to you, Operator, assuming there's any questions for Brian and I. Thank you.
Speaker Change: Thank you.
Speaker Change: We'll pause for a moment to compile the Q&A roster.
Charles Vogt: Unknown Executive, Charles Vogt
Jeff Burke: Unknown Executive, Charles Vogt
Speaker Change: Unknown Executive, Charles Vogt
Speaker Change: Our first question comes from the line of Ryan Kunz with Needham. Please go ahead.
Speaker Change: Yeah, I mean, we just we just finished our preliminary 2025 AOP last week, which, you know, really encompasses three buckets. The first is just our schedule backlog for next year.
Speaker Change: The second is, you know, our pipeline and the way we slice and dice our pipeline. And then it's just, you know, the overall synergies from the Netcom acquisition, which
Speaker Change: are working through a lot of excess inventory that they, you know, took on in 2023 and certainly this year. And so, you know, we're cautiously optimistic about the first half of next year.
Speaker Change: With Netcom, we do bring on a new region in Australia and New Zealand, which will begin to be a reporting region in 2025. But those are the three core markets that we're seeing more visibility, certainly.
Speaker Change: Okay, and then kind of double clicking on on the European opportunities and Middle East any, any particular large opportunities that you're competing for you, you'd point out, you don't have to list customer names, but.
Charles Vogt: Unknown Executive, Charles Vogt
Speaker Change: and, you know, that'll certainly generate, we believe, significant revenue for us in 2025 and over the next, you know, five to seven years.
Speaker Change: You know, across markets like France and Spain, we're certainly very involved with the two large incumbents there. And there's certainly projects that we're hoping that will evolve in 2025. And so
Speaker Change: Great. And one last one.
Charles Vogt: Unknown Executive, Charles Vogt
Charles Vogt: Unknown Executive, Charles Vogt
Charles Vogt: You know, Toronto is, you know, certainly emerging, they have a proprietary platform from the core to the home, and we're certainly seeing them.
Charles Vogt: Emerge into the market. I think you know, it's just
Charles Vogt: a different proprietary and cost structure that they have that I think the larger tier ones, which even in that market we're focused on.
Charles Vogt: is a bit more challenging.
Speaker Change: Got it. And on the on the gross margin front, any any commentary there in terms of you know how you feel about that trajectory going forward?
Speaker Change: Well, I mean, look, it wasn't in the commentary margins would have been in the 40s. We did take some inventory reserves during the quarter. So our margin profile was was actually
Speaker Change: Close to 650 basis points higher, had we had not chosen to take some inventory reserves in the quarter. So I'd say that our margins are actually returning to where we expected them to be.
Charles Vogt: You know, as I know, you know, and your peers know, you know, when you look at our core broadband access portfolio, which represents our optical transport and OLTs.
Charles Vogt: You know, as we divested Asia, which certainly was much more challenged from a margin perspective, you know, we think there's a path to sustaining margins, even without the
Speaker Change: Great, Charlie. Thanks a lot. That's all I've got.
Speaker Change: Thank you.
Speaker Change: Again, if you are dialed in and would like to ask a question, please press star 1.
Speaker Change: Unknown Executive, Charles Vogt
Charles Vogt: Unknown Executive, Charles Vogt
Charles Vogt: Unknown Executive, Charles Vogt
Speaker Change: As there are no further questions at this time, that concludes the Q&A session and today's conference call. Thank you everyone for participating. Have a pleasant day.