Yung Kim President, Director & Chief Executive Officer
Thomas Cancro Chief Financial Officer & Corporate Treasurer
Christian Schwab Craig-Hallum Capital Group
Call transcript
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Good afternoon. Welcome to DASAN Zhone Solutions First Quarter 2020 Conference Call.

Joining us today are the company's CEO, Yung Kim; and CFO, Tom Cancro.

Before we begin, I would like to provide DASAN Zhone Solutions' safe harbor statement.

During this call, management will provide projections and other forward-looking statements regarding future events or the future financial performance of the company. that or are results you and current cautions events actual may company such only statements expectations, The differ materially. documents most XX-K to SEC, press release. statements refer that files today's company Please with section including of its and recent reports and XX-Q the forward-looking the the These important or projections forward-looking that risk include results cause actual company's documents differ in materially the identify to from factors -- those contained statements. determined on on indicated, the non-GAAP financial being this that call note you are unless otherwise Please a provided basis. materials to These with to GAAP which and GAAP DASAN filed numbers are posted X-K. release, Form and Zhone been items, press with corresponding together on a the Solutions website contained reconciliation in has SEC on today's

regarding included of its information on will and of now this the the remainder a Such in record business will version this will historical -- financial information Management operations. is release. discuss available in information of call also And press be the website. and statistical our other

I'll call that, turn the proceed. the Sir, Kim. over please now company's Yung With CEO, to

Yung Kim

and Thank to quarter call. everyone, you, welcome, our first operator,

outlook, our find in. and extraordinary business results situation to ourselves like heading into address Before we briefly recent all I'd the

disease. everyone are On has essential local employees us behalf of DZS, grateful who by the globe. received at around terrible our go governments of the to for been service hearts support and we out have all families and their deeply from providers our this And impacted

our extraordinary forward. drive role made we and our appreciate and our suppliers of efforts business in customers the we with the the our to to services continue by thankful are We partnerships And for being particularly support employees vital strong customers proud play enabling broadband continued worldwide. and

time, as healthy, the the near-term in even our challenges XG throughout from our an APAC the business sales from weeks evaluate in broadband we to to and stronger networks. entire crisis elongated this to fiber of as fundamentally impacted customers to of rest best quarter overcome, cycle Although expect COVID-XX company. the how and our to business March. have already copper impacted emerge we final XG our are has same At customers access global from transition real and

generally While a visibility our in of to ago. the couple revenue our months guidance, with results better than were the or timing quarter our line of into it has than less become conversion just was first of project clear certainly

carriers has shipments We are deployments seeing restarts precautions. around parallel, world from a preventing extended and several and appropriate weeks. eight on In adopt been place. proceed as closed, slow taking And to times warehouses four then customers' cases, ports, components at safety in implement pace the some have critical these

project Taken combination, to in beyond is the of quarter. timing completion difficult predict the it increasingly our current

access is and in it solutions, fiber not near-term the challenges more and enhanced health to impact while the in That pandemic annual created on in becomes the until predictable it broadband next-generation known, general business, guidance. So prudent for need light also the shining unexpected said, tactical and particular. is and a our has service provide capacity XG COVID-XX of several

running are capacity. gatherings overnight, In prolific. Nearly and a to has conferencing. learning. has transitioned of the increase levels near more now remotely, to world lack online. short, video most The Business meetings massive classrooms working personal, never at entertainment so in social travel mobility led impediment are the switch while of been conducted to Streaming and to of peak being online networks

significant to the nearly addressable our true the driver haul early by potential While architecture, we platform revenue is clear remain demonstrating innings our while potential be market $X annual has total of of increasingly XG it expanding any for the that DZS billion. next-generation company in a mobile the

to say Rakuten. have pleased integration on-site of our recently available site, products shipments of commenced activities the that level commercially to depressed we Despite at I'm total customer

March, is important downstream see this services video XX%. and traffic XX from more wavelength. applications. XX% apart pace and increased nearly increase cable of traffic, peak association The cable the accelerate internet downstream XGS-PON since doubled adoption enable upstream customers to through up interactive tremendous COVID-XX, reports the the existing gigabit early of particularly in was During single the a levels the on encouraging is significantly it upstream growth a context, to accelerated symmetrical of driven In of new the part use traffic to

this rural through as wave funding of of many opportunity customers next $XX networks the is important ahead, strategically fund. Looking billion digital the for stimulus broadband our are preparing

has leading several Following recently we broadband optical global DZS formerly to Omdia, and than the next-generation leader access published have line any more last Ovum, DZS by quarters, a vendor solutions. than data optical more a Xx terminals trusted other vendor optical -- outside as itself fiber-based XX-gig as XXXX, According shipments. network in years North established X any American terminal of was competitors. focused China known And in our over terminal investment, in shipped of

days we solid the a noticeable amidst in is activity adoption Although market in levels. increase early DZS leader the of here, early in remain customer a clearly demonstrating

how level. seeing on more to months we quarters. in evolving on trend now an see And how Asia, Let's color and business I'll up. business are pivot our bit at update to provide we regional In coming our business the starts the a pick

was pipeline business While a growing kicked QX, of opportunity. see Korea we in new hard

strong the to have as and with in carriers X a base We such Great are fortunate Uplus. Telecom Korea Tier Telecom, SK key customer LG

armed operational customers of executing on manage while virus and also are to to the carriers challenges broadband their Following respective strategic XG initiatives. with the initial reaction now all these by ability the COVID-XX,

the SoftBank. in call our Japan expect was we market Japan new quarter. and Rakuten geography from deployments by largest is And our remain revenue in we I anticipate mentioned largest The our prior target by you, both growth opportunity as XXXX. XG Japan led to in with

activity, the loosen. conditions lock activities integration see broadly have it deployment facility on-site good Although down pace to of slowed is

growth second sequential anticipate the and stronger to continue to QX in year. half the We

North expectations. America with line performed in

closed, shipments preventing from the the quarter occurring. the Although challenged warehouses weeks final few were of customers' and

able We customer and of America, to vendors. In complete impact we consolidation from the will be field continue deployment Latin and some Chinese activities facilities customer heightened to closed. experience further competition

are modest improvement introduction region. OLTs Although in the carrier new Tier with recent for and sign from X of seeing orders and ONTs the niche some our we into wireless our a product of lower-cost Chile

In business North Europe, final same March. weeks also dynamics impacted our experienced and through in the Asia America the of we

technologies, customers in The a business, spot While generally delays by shortages has material continues front the be access spending we assigned fiber sequential the East also on upright activity. new and our expect of of it the back is to new as in investments QX. product to pulled but in number do softened people project some Middle in qualification impacted the improvement

extensive conversations, half quarter together, we second focused expect customer strategy will all sales on by part of investment to driven solutions. and the this in the market begin in based channel slowly activity the planned and through year, second more improve partner Putting reaccelerate next-generation

on Many schedule. of our flagship initiatives remain

function Germany partners back Our And work. manufacturing getting have the Asia our in throughout continued crisis. this to capabilities are U.S. OEM to in and

take will Sourcing a components challenge and recover. still a time bit is to more

there perhaps returns to access optimistic into healthy, normal the meantime, mid- visibility is we a and So broadband projects remain to world against business, our the to believe about don't reason is or our when have a strategic and market to long-term to in we new ability evolves while the good our do execute normal, initiatives.

for anticipated let do opportunity believe business be competitive reasons, losing we are not clear, disappear. In we believe business permanently we me nor do summary, will

risk, headwind business mid- long-term near-term remains a for outlook While COVID-XX to the created and fundamental positive. our

now details the Tom? turn Cancro, Tom CFO, the will our provide I'll to call further quarter. over on who

Thomas Cancro

speak a to you, you pleasure with It's of Yung. all Thank today.

financial $XX.X $XX.X for quarter first XXXX. for QX Turning March ended results of our QX million in XXXX. to revenue Net XX, of million, in to XXXX net was $XX.X which the quarter million and the of revenue compares

First from of was to of quarter The 'XX COVID-XX. revenue XX% QX XX% in from was and impact net down the year. revenue of due last decline quarter primarily XXXX fourth down

COVID-XX of were than a LG From customer throughout customers Combined, of XX% only that entire business the standpoint, of business moment [ph] global Uplus and As the in revenue. our revenue Denki they Oke our Yung and XX% quarter impacted of March. more represented mentioned our were in a ago, net weeks final quarter. the rest the APAC the in

customers the revenue, Our last top net of was XX in in year. period the first represented XX% our quarter XX% from up same which

better XX than to amortization geographic and last we well higher XXXX points net XXXX, in year GAAP first of the changes. The excludes ago Africa the accounted for quarter Korea of mix XX%; year. reflects prior margin depreciation and XX% gross was in gross in quarter Other North of XXXX was for XXX XX.X% East XX.X% which XX%; achieved QX XX.X%, geographies both period. XX.X% compensation, compared first as points what was of QX as was and better in stock-based and Europe, the Latin Asia quarter to from for fourth 'XX revenue. America in America accounted the Middle was and the Pacific of of first basis XX%; at X%. margin margin, Adjusted periods Looking basis gross quarter than relative product

'XX. 'XX to expenses down GAAP quarter Turning in benefit excludes in quarter compared reduction in million million year. negative to operating compared QX of control EBITDA QX 'XX the in and was operating EBITDA of XXXX. taken QX cost of which revenue year-over-year compared million primarily the and first in depreciation of QX and decline the GAAP due 'XX and was in a $X.X amortization our our $XX.X to QX in stock-based XXXX. QX in in of Adjusted compensation, quarter to operating last million million expense, resulted in and $X of activities first in were $XX million of quarter adjusted good million $XX.X in QX of $X.X of both the $XX.X million non-GAAP expenses; adjusted quarter to A restructuring to expenses million first in the and and and in Sequential $XX.X $XX.X

million of diluted or loss quarter 'XX share was compares GAAP the ago in share. or of QX diluted loss share This diluted per GAAP of $XX.X per net a $X.X year $X.XX the to $X.XX first $X.XX or period. a million loss Our million to $X.X in for and net DZS attributable per

agreement During X-year with of a and loan term to and This the quarter, executed amount cash carries the used credit. carry loans interest to PNC collateralize our rate. of significantly fixed facility outstanding with terminate a of fees X.X% and proceeds credit which new our XX.X million cost the or Citi, in is of DNI undrawn interest a XX.X USD XX% Inc., billion an with DASAN shareholder loan approximately term on company. we Networks KRW The were higher

result As interest we annualized a achieve of in $XXX,XXX. of new XXXX savings an at rate will the financing, approximately

undrawn $XX.X refinancing million suggest At and QX cash prior rate compared used $X having in of letters are end XXXX, million the cash associated and credit increase a burn quarter cash collateralize March QX from of our optimization positive cash cash a were following the and further to cost credit 'XX. slow a restricted facility. in equivalents million A effect. our the of largely outstanding with that the million our relatively efforts XX, of at is quarter COVID-XX-depressed decline was XXXX to in $XX.X $XX.X

year for sales ago of important XXXX were XXX XXX day end QX Our days which our days DSO unbilled was a The DSOs and changed the to have in in at note significant revenue compared the increase contract QX backward-looking assets, low DSOs that to represent calculate to days XXX period. calculation. we me It's outstanding by in quarter including sequential AR. methodology since reflects the

revenue metric expect XX, We XXXX, Backlog March December from returns to of $XX.X improve million slightly million increased $XX.X to normal. as this at as XX, to XXXX.

financial outlook. built of this the half XXXX. backlog call, On good latter year the discussed ramp in customer we our last XG leading and to up, we as momentum our on as of the into expected Moving healthy well

anticipate will do strong, this impact continue remain the the quarter. our optimistic remains to about following opportunities, guidance. the are Based be providing throughout While second backlog of long-term we and felt our we COVID-XX assumption, we on

$XX to $XX expenses the of to million, quarter million For negative of negative second XXXX, net adjusted million $X.X EBITDA to million, XX.X%, to of adjusted gross operating of $X margin we $XX and $XX million. of revenue adjusted million XX.X% expect

intact, Yung and to As are our mid- remain positioned discussed, competitively both and drivers we well business long-term in markets the believe we we strategically address.

annual guidance. previously near-term year XXXX of guidance reassess We'll we're to at the second to from due economic However, our COVID-XX ability arising uncertainty the the quarter. provide withdrawing crisis, issued full our end

CEO. I'll With that, over turn back our call Yung? to the

Yung Kim

Tom. you, Thank

for call open We to are ready questions. Operator? the


[Operator comes the Schwab. line of from Christian Instructions] your question And first

Christian Schwab

the Personally, patterns? been backlog on. Or quarter, changed? would going million crisis components, or to the last COVID-XX on hand. change Any And $XX movement outlook Is about the there any hasn't of about push-outs cancellations? that kind be you second more half the backlog, Just in Has talked is withdraw great. those order guidance the that and withdrawing color around and obviously, critical really number are backlog any controls that that? of

Yung Kim


one think could QX. the two not are or there bookings happened the we of I orders things -- take in is things

traditionally, Korea about to down. from of for customers Korea, increased question that's Top in put As like, we to in and less Even this the and we XX% -- we yes, but have have you XX into or newer can And But Japan see more revenue orders Korea, it XX% gone not our but though two massive XX%. we coming have so example, activities, coming same slightly between is, back that. that's Pac. Asia could is your backlog, time,

delivery is is catch QX by to a that that -- certainly, impacted we QX issue COVID. So moves have it remains and think to on I And backlog up. QX, a

Christian Schwab

Okay, are things spend But the we giving great. already we're Tom, for we've line year? $XX to $XX million discussed. know top to expecting this And million still I guidance not

Thomas Cancro

we this a for reasonably guidance if I I at think to job want undo control and cost a I look retrieved that. will with did quarter, good it. say, reason, our We you don't

And and we were were things containment quarters, of previous these quarter. in some some this exercises started cash of in we them initiated

planned. next this going better track in to be we're than don't or -- pandemic. So is I want think the I page on what to to on continue of us But none perform global to knows

for to second we're right think for without I quarter going guidance sit So giving now.

Christian Schwab

of then was due to that that And fine. some gross mix in margins that's Okay, unanticipated? better-than-expected sort the was quarter, the change

Thomas Cancro

Yes. it's factors, of mixed out. I just percent this a region number changes when right? that's America, for business. North a the represented change always of because way us, played in larger a sales, mean gross and your the is of It's which high-margin margin virus

So it in Asia nearly the impacted mostly quarter, for last impacted entire that but of North only quarter. the the America month

sales, sales in in even higher were were -- higher a down shipment they had percent you So of less Americas. down though the total, much

a Looking expect QX. very unusual That's APAC watermark ahead, we high-margin low also in from rebound to region. a

in mentioned our Yung this target As previously, we become expect year in market, largest Japan to Korea XG. expected ramp an surpassing

expected So those margin. gross recent have our been the to and near-term impacts

Christian Schwab

could and potential idea an in opportunity Japan you a basis? from Is opportunity of the And us range guys Rakuten that? line have between of you the multiyear the -- XG there a give SoftBank, outcomes top Great. on revenue have over

Yung Kim

Tom, I'll answer that.

order. about QX. with And to starts the are think in talking ramp-up we follow-on already the Rakuten, then But October. the goes I the it

ramping SoftBank XG up is in QX.

the activity at the We are integration technical moment. going through

and integration production QX the through will base in systems a the delivered. the with going are contract the that's And activity, in We're start numbers. orders. multiyear So

only don't So contract. received we when in the I have is bigger. hand. say calculate we say And the calculate that's second orders the we much half why orders, We that

the of can't millions a we it's to double-digit for but a need deliver the two midrange Rakuten. It's Now good we reveal size, exact digits.

but less And off SoftBank than is not from that, far that.

relationship I that. of from together, KDDI and your represent with Japanese think opportunities CTC comes year. this those and two will the put all rest you revenue if So And the say about will the eye two XX% our

then the I are XX% other SoftBank also So of which Rakuten And sort not within there opportunities mentioned. are and that's also, the color.

Christian Schwab

that finally is expansion And new opportunities any and T-Mobile America here for in able customer now North there Sprint merge? Yes. have been to

Yung Kim

of for we the and are sort XX three activities reveal I I Tier North stage can't And to wall about but quotations front cellular in are X keeping think American based customer our Rakuten. we proposals. asking Europe the X. that's Tier of And the on -- name,

backstage, are predictory the numbers and going it's sort the across. So initial then discussion of

Thomas Cancro

dialing trouble some in. know folks I have

or suggest we question to going else a can wait their and I'm if see So across. get moment two anyone


to Instructions] At time, his for the Kim like Yung to over closing turn Mr. I'd this remarks. [Operator call back

Yung Kim

Thank their thank like today. employees, us joining you, for operator. our and continued on I'd support. customers, to you to our global look Operator? Thank next call. for shareholders forward you, partners We updating you


Mr. Yes, Kim?

Yung Kim


Okay, so I close. think much. to we're Thank you very going


for today for you presentation. our joining Thank us

You may now disconnect.