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DZS (DZSI)

Participants
Pei Hung VP, Investor Relations
Yung Kim CEO
Michael Golomb CFO, Corporate Treasurer and Secretary
Christian Schwab Craig-Hallum Capital
Dave King B. Riley FBR
Call transcript
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Operator

Good day, ladies and gentlemen and welcome to the DASAN Zhone Solutions Inc.

Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call over to Ms. of President Vice Hung, Investor Relations. Pei may you begin. Ma'am

Pei Hung

And Thank XXXX joining for and earnings afternoon. you, good thank us you operator call. on our QX

Executive issued Solutions, second Joining of Michael as for Golomb. on the its DASAN today quarter release Officer, the me Zhone announcing afternoon Solutions results call Chief Financial DASAN press Kim Yung Chief Zhone This as a well XXXX. are Officer the

Investor it Relations copy a the release, online of website in access the of If you like www.dasanzhone.com. section you press company our can

are the we actual the materially During differ financial will to statements. forward-looking today's to differ forward-looking on cautioned that Company our or course results performance are and on also growth are could by could statements. in operating results quarterly from future SEC. our Factors that expressed our those this no Please refer that filed of this actual release, reverse Listeners obligation strategy. expressed call, annual statements non-GAAP press The we in with a cause use and to financial and contemplated update measures the regarding forward-looking or undertakes in reports basis. call earnings any certain detailed note

of reconciliations We have financials release. to measures in GAAP non-GAAP provided these our financials measures press earnings

mind, January Yung in Solutions. Yung? note our comments Zhone on and on Finally Kim, X, retrospective XXX adopted With CEO QX forward-looking results those XXXX guidance XXXX like ASC DASAN a that, now we are provided to of which under basis. I'd modified introduce

Yung Kim

our second afternoon everyone. I'd results. Thank to like by good you, discussing begin Pei, quarter

I'm fronts. by first in QX, our half our progress at of and XXXX look many performance through I on the pleased XXXX. As

the XX.X% our total higher continue in our QX million $XX.X revenue to and opportunity our business a Access to reflects year-over-year guidance. global the end in On which revenue of as we growth grew the we Fiber-to-the-Home side, Broadband represents core see

$XXX.X totaled XX.X% our half the first XXXX, million year-over-year. up which For revenue of was

QX Pradesh the within sizable by was fiber generation contract of government the Andhra build growth districts to their across optical driven state. next with Our XX infrastructure speed a out network Indian state high

market plus XX opportunities would as technologies to strong India one While broad core made to already I an that the as our for the characterize X,XXX significant based To all opportunity across well favor. across side the our acceleration Indian is work business market GPON very us side exciting that see of customers. Greenfield of and in of from our across states. continue as one the and the given global globally the additive one factors confluence Access economics demand benefits we Broadband based growing opportunities that fiber existing supply diverse has is end, the fastest the

favorably from compare capacity copper bandwidth global On deployment. Access in China especially driven homes. economic of development than this been where are part [ph] markets pricing side, CapEx the costs extremely to XDSL is increasing scale unlimited Fiber the CapEx connected fiber advantages large phenomenon given in difference large network. and deployments believe essential make by to GPON I starting the are that the a fiber have in additional closer now supply upgrade in cases savings economics demonstratively the speed first but is, in there fiber street cost. OpEx, savings superior cabinets moving OpEx The incurred Particularly

others such consumption YouTube the Netflix, as driving On and are never like Amazon, side, the Top providers demand Over bandwidth before.

definition XX XK XK recording for which contents video. in they're and requires XK XK delivering XX and for definition than As high XK and bandwidth bandwidth more ultra times times video increasingly more high

number Fiber-to-the-Home very capitalize becoming footprints ever believe and I available. The proof make the uniquely these serving higher that apparent the Asia bandwidth diverse the of access where option me carriers definition future increasing tailwind more copper limitations copper ubiquitous the midst and technology investment is our $XX of carriers a displays bandwidth before requirements. bypassing the we're are plus of robust product quickly Tier in I multi-year deployments. on our than our factors Middle optic believe most an cycle favor of able high fiber confident of which new billion given scale, is further comprehensive East. As for to are X This markets portfolio and confluence we are driving in important, geographic resulting upgrades in ultra innovative in

Latin green and shoots America, see As America well business. alternative in and carriers as X Fiber-to-the-Home Tier in Besides we providers our X Europe. North also momentum, growth Tier and other

Asia As XG we in an example, primarily ultra their including build low a switches. them to carriers Tier out with X infrastructure latency providing help are our working

this tens to is cross-sold can in Although public forecast, set a of regions. that into translate what a opportunity millions our of other for not believe of I a tangible a would carrier. customers our this type can single I Tier X opportunities in broader consider revenue

We But are NGPONX is Middle X believe primarily transceivers relative also I on and in the Asia this costs of the technology optical market today. that given a Tier high to working take with and carriers time the will East the materialize product testing.

purpose by currently levers would that the on and latter not would offering be our guidance that in very of excited core of built public growing Finally, enterprise these into track fiber and we're be we which additive half Access I'm X.X the launch year our this as be requirements. will are to Broadband meet market the previously plug enterprise mentioned LAN growth our in to for play business.

against of gross driven in mix June to the We EBITDA. to and $X.XX quarter was in financial and $XX.X a our we on met the successfully deliver generated was we guidance focus which the adjusted the Now the initiatives quarter front expenses our to income million continue diluted our bid strong large the XX.X% in range GAAP the containment turning prior impact India. net on mid-range cost margin for due income, Equally in earnings margin to $XX.X which guidance of large reflects the $XX.X quarter by million of operating share results, adjusted which operating the parts million. contract of quarter the per our important, back geographic profitability across were in

a quarterly With result, Michael more the we discuss $X to generated me EBITDA As detail. of turn guidance $X.X adjusted overview, greatly exceeded Michael? results million the million. of let will in call to who our financial range $X.X which million this

Michael Golomb

a and I actual the revenue. $XX.X the higher we EBITDA full QX, expenses, revenue broad million [indiscernible] approximately to our in XX% XX%. what overall to XXXX. the well strength to guidance year-over-year for and guidance the was year-over-year of international America. We be regarding the XX% in XX% geographies. depreciation North provided XX% international called all for we're our which and $XX grew revenue exclude up revenue you range our outlook year guidance, Today Thank Asia grew and and a Adjusted you outside report $XX and discuss generated be at stock-based with will in XX that in Overall XXXX and revenue $XX.X million third Across Yung gross that market, million to revised million of last guidance results QX. to million based for came speak compensation revenue Pac across quarter markets in QX, With XXXX on of May compared reported QX, contributed XXXX our happy in market and $XX.X seeing to XXXX good as In and particular is strength between million, provide between XX.X% million of markets, expenses quarter million $X at second afternoon. operating for a year-over-year second an to approximately Asia I'm XXXX about Pacific a quarter almost between for QX American quarter implied of between with revenue. adjusted margin amortization, which the approximately XX% we our year-over-year gap growth $XX Relative QX, North $XX $X.X $XX.X million million.

Fiber traction customer seeing we a East which QX, sizable Europe strong our We and from optical fiber speed contract or of which our is are accounted collectively in the XX% perspective also APSFL State the of that XXXX is generation owned had infrastructure. Andhra next Limited subsidiary of wholly Pradesh customer a high Pradesh From for wide approximately network Indian markets State deploying Andhra Middle a revenue. state

revenue. second of As and such sizable APSFL quarter the customer in become approximately a contributed the quarter XX%

prior in In the expect of there without contract. customer additive discussed to not tangible we revenue would the to are diversification Yung captured we've public as quarters, in large grow to continued the the in be geographic onetime Indian the relationship APSFL coming opportunity categorize opportunities our As seen and we see impact guidance. and quarters India

our normalized initial see to additive not turn XX.X% more to devices. margin gross higher me I at in state cost. product margins in contract margin out Primarily surprised to profile. XX%. news on of our The gross favorable be margin continue margins as with would add as we mix Gross broaden driven APSFL while came revenue line us the typical mix, India to let profitable gross good which with in Now original APSFL see was as from margin. leveling we APSFL well higher product by of neighboring the India our another to due below customer include in margin XX% guidance and that, do ramp

$XX I some [ph] operating spend in expenses cost from basis since year-over-year of approximately million $XX.X total XXXX. $XX only last million to million, the the million made in QX, total a expenses million quarter-over-quarter our the GAAP reduction our meaningful our operating to increase $X.X time quarter were second Where more operating than for believe of million our $XX.X due revenue addressing with now. In expenses continued even strides growing in me XXXX, an GAAP of QX containment basis. On QX, initiatives. have compared Let in we reflect $XX.X quarter

quarter to $XX.X QX operating of due a basis versus reflecting in non-GAAP quarter below adjusted the depreciation GAAP Our significantly $X.X guidance margin million difference amortization expenses. was expenses the the million, non-GAAP On the million expenses million and of were a EBITDA non-GAAP compensation which between stock-based $XX.X was XXXX adjusted came X.X%. the for and second our in for operating expenses $XX.X

or or GAAP for XXXX. to $X from exceeded from second EBITDA our the guidance in we prior provided and decrease benefiting approximately $X.X continue basis to $X.XX $X.XX quarter in range of net per operating million share previously $X.XX quarters. share loss of of strong profitable attributed revenue between of Solutions growth and Zhone million quarter second adjusted XXXX, diluted posting be $X.X of per DASAN next loss million Our million to as income compare In expenses diluted

another from Also of like Florida XX% the out turning own our would our at and in-house potential materialize between simply, if outside facility manufacturing revenue Korean contract relatively our is approximately we're able generate risks. Even tariff in we're tax as manufacturers. Now of topic geographically and very hand. already to diverse United States. pre-emptively to shielded flexible tariffs Put quarter, I the discussed. this, to address States potential United to we production Depending China. XX% on revenue of base from leverage our

Now like provide for guidance. to outlook XXXX full turn revenue the third year our revised XXXX discussion quarter, the I to revenue would to and

from XXXX rate quarter, of increase $XX large the business the million This continued the quarter XX% reflects be run of solid in without one-time range the to approximately million. X% to revenue growth million of opportunities. benefits to $XX third year prior For over $XX year-over-year in we expect

XX% region. our Pacific approximately from be GAAP We margins does QX, gross revenue our which impact to expect increased Asia of reflect XXXX

capabilities We than to QX, expenses million our be modestly adjusted Vietnam. expect out QX non-GAAP in levels like reflect XXXX is build ongoing R&D approximately regions higher $XX to to operating which initiative

million on compared of For year range prior in year-over-year range are to provided revenue to in approximate we the XX% or growth revising million XXXX, of to of XX May $XXX year-over-year growth. guidance $XXX full to $XXX to XX% XX% approximately as $XXX the million the approximate be million XX% to

enterprise is our growth let year me Thank significant LAN the our and we not our is the believe call point, continued fiber this to consider India like Yung. top outlook. launch greenshot XXXX focused line by a in did there including in turn product At markets growth which further you. full back X.X we bolstered While opportunities opportunities

Yung Kim

loss $X.X wrap the adjusted of XXXX. To and $XXX,XXX up, of to million our Michael. first in to proud progress, half grew an EBITDA from our Thank our of first you we made half Where XXXX. grew revenue of EBITDA are we in XX.X% we adjusted close year-over-year the

Operator, believe is for our long-term prospect and ready have. that ours to listeners We the are opportunities to excited for now profitability might to the any that open seize. continue market up and our growth questions revenue we're

Operator

comes [Operator Instructions] line Capital. Schwab and our from of of first question Craig-Hallum Christian the

Your line is open.

Christian Schwab

As us outlook multi-year an and of to fiber update the and opportunity LAN you from initiatives, guys give kind kind look that yet? you of can on

Yung Kim

we I me we're is for development world. think we're because you potentials and the guidance barely a into it and too entering to early distributed around give global distributors with the finished gauging the trial

the first inevitably heart. the maybe So that's that Fiber-to-the-Home to my some may I all better, that GPON the [indiscernible] then be technology the of belief number in think staying the until in you market I'm out can't tackle probably why Access to will my I the run I you give what's something dear to that I enterprise something and Broadband year play that, but to best that. able delivering market And give gigabit is a next this but company and in sorry have technology in is to happening that is today. That

Christian Schwab

opportunities the driving year-over-year type the over look to guys for opportunities to next of or the problem, think of different in XXXX you line? in revenue the you in of growth growth whether opportunities Fiber five capable be you given strong front you what No as it years, at India do growth three top on are etc. XXXX LAN

Yung Kim

streaming from it's we and this YouTube have Netflix, XX% market reports solution really I have as than locals some the and to is now next Even displayed. there my we that no compound is said Walmart And think I rather that, and years. tailing sensible to for us Amazon. growth long-term earnings therefore, also call, of literally business see is the Fiber-to-the-Home that. it think It's the coming I off than XX other see the other plus

I So to a are product. solutions, I continuously bullish there always people to that I too want see be but because business, better have to this grow like competitors, much better don't try

to and I pull be my So and Michael. cautious out part have

Michael Golomb

appetite gives an for plus diversified if geographically we're than also And us more others.

Christian Schwab

I Okay, that other don't makes Great have Thank any perfect sense. questions. you.

Operator

next Instructions] [Operator of from of the Dave question our FBR. is line King B. Riley

is line Your open.

Dave King

first just this get of focus quarter wanted this Indian more outlook on third to market, Just wanted so customer. of Indian to all particular your assumption

Yung Kim

OLT. years opportunity which we think working OLT much are they I office Cisco. have from fill telecom is equipment we many - very system an by essential on may approach the Because which integrated ago which called call the it a

there than we us be a opportunities Whole kind with smaller and out. I'm OLT. government the give could future are grow the of that OLTs. are in are provided provide similar But numbers us will large Fiber-To-the-Home that is who a again because number money but rollout. trying try sure have not significantly to which rollout to it's agency Now are and for the of the to PVVNL it QX, opportunity there working dish OLT India we is of rushed to the neighboring trying also state, is to

Dave King

Right.

modestly, and Let's then heard you dropping yet quarter. off like correctly, said revenue third $XX customer that and was will see you, well I from down Last you sales million. believe if so $XX supply which making second just this quarter million, is that's up XX% be mid-teens I like of to your what's

Yung Kim

Asian We and American South generally strength strength coming have coming.

in again building opportunities up Middle have We East.

diverse very a have we sort said Michael of customers. robust as So

affected customer. we're not So big or by single

Michael Golomb

I to add can actually that.

one one-time in this take you this month customer quarter. If or out

comes they close And over or and and actually X% good XX%, customers All level. of over nine only so. took nine a don't they between the X%, don't single even also, other customer we have months bit it this X%, come six go our any and little Indian

is whole exciting. So that's and those world, of actually bad which not across are the spread geographically all they're customers

Dave King

your lead lead is typical few your few typical maybe Got it. time, it - Is characterize is? your I it what guess time a like weeks you your can is months, or - assume I what's the

Yung Kim

time lead mean to order. engagement the I from customer the

Dave King

actually to No ship. orders

Yung Kim

ship. and a about orders build the things don't we take two orders and and weeks very as much once small big six usually weeks. six onwards. delivery to ship. time, inventory amount between give Order It's of we Mostly We are and lot stock so about it's a months,

we take inventory ship and building it. don't customers expecting So any risk of and

floor flexible we what strength excellence, our and our from space and is of run production borrow completely one say is set different our we own manufacturer, to in I factory. the which up people would that. our not have, it go that then, all We production of So test the with the operational competitors. and line engineers factory do and our manufacturing outsource We equipment and

that So orders for months of example they companies kind give we orders, long-term ask don't but to maybe orders don't six that a flexibility have outsourcing because of advance like of year of will them a and we forecast you Foxconn which thing. do normal

Dave King

Actually is turns or that's what I backlog like, after? I more was your was more business thinking business,

Yung Kim

have backlog. We a sizable

So by any production in out be our fluctuation that smoothed comes can our backlog.

cash this we compensation thing the and smooth taking I So we and process. that whole changed they that collection on, order have can production that delivery the incentives early our to to the our orders take in one cycle such delivery. joined by of that's that way a since sales is Therefore, to actually our company incentivized the so

usually year, months get time. orders something three unusual kind of some goes have we like that months So six a to to we up but

Michael Golomb

from came revenue Dave from - a couple in XX% States to our United QX, so X% and of answer Canada. relate, to

we you and to Pac, give a North bump, XX% about which of came to XX% give we're then from America from including that from Again and and you just Latin about then flavor. just North from Asia right had to from give States. then XX% you Year-to-date, half flavor. America flavor from a United So Asia XX% America XX% Pac

see deal. that diversified. We're you that, of So big that's very not Yes. can

Dave King

is wider at give The your that's the company like I follow and looking and because typically, window reason was that mean quarter. the just million I for much asking annual they I guidance $X it's window only

things what kind are quarters pretty It this develop, So out. you for to multi visibility idea, just you wondering a have going like seems have year. how of good

Yung Kim

I window about to usually up a have two quarters. good pretty

Dave King

see. I

Michael Golomb

meet our numbers. We

Dave King

And couple if could. it. I more, just Got

ZTE the there are between Now lot back, was and ZTE? is a overlap of you

Yung Kim

lot compete in Huawei compete severe, that, and at ZTE favorably heavily a a countries Not Asia work into have reputation. some We're to and in battle used Nokia. we're We some some all We quite we've but [indiscernible]. not ZTE invited where in getting compete to because - and was we South America, we Asia, a been Europe. with It because Asian in help very doing ground. a of operators

Michael Golomb

to Dave revenue, about breakdown even And just the telling you point, heard our add of right? you me with to that just

Dave King

Right.

Michael Golomb

competing DSOs when lower XX so to Even on with were lower you compete DSOs were competing sometimes payment term, give below a Huawei, we to to below all, XX. grounds ground, We against able year competing those able with heavily ZTE. with on they that

Dave King

it. Got

Michael Golomb

[Indiscernible].

Dave King

overall that year? you negative and impact then about about for from you will And potential I positive whether on this whether US Yes. or can tariffs, your how just industry summarize net but the business talk you can Michael, it's impact talked think

Michael Golomb

very diversified. we yes we especially it's are be believe going to of revenue so us the probably our company, positive Okay, for for very global, breakdown because

impact be, us. be going going it's any So to we think don't there to for is

United Florida As produce we're to in have products we and we at discussed, States. proud location manufacturing a

discussed manufacturing also have location flexible in a we Korea. have just as We Yung

close and Vietnam also China. We also production we and [indiscernible] have also in have to some work in

we're we So diversified customer, produce depending, we our customer very what listen wants. to

of Now diversifying very they our sometimes market, effect risk. our some of and they're don't COGS cost in [ph] don't, to care the focused

show happens. will the So it market

Yung Kim

manufacturing we expect technique, I way I the quickly. actually fairly as earlier Actually for manufacturing shift how it can us, mentioned

America North small. side to think I are China However, to is very our we dependency big shipping at or plus is US

Dave King

other then but think China. and they China quickly - of and competitors regions. major also your domestic in some Right, out products made into of do you How can their shift

Yung Kim

[indiscernible]. think I

Dave King

into for open opportunity that market? up you kind Could an of US to the get

Yung Kim

quickly do it's they me It's - really how know move. And realm. can well I their kind of it, I how for

Michael Golomb

scale company now would right Huawei, time all to and important the been to like and this good for margins line That ZTE money the - and investors. bottom and companies. been what's a be - the has big projects that in competing Dave, is waiting global competing other bring test those companies a

what that see have Now global basis let's in they to happens. a compete to,

Dave King

much. it. Got you very Thank

Operator

for you. And does participation. our with Thank thank and conclude for that call that, you today. gentlemen, Ladies your

You may now disconnect.