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DZS (DZSI)

Participants
Ted Moreau Vice President of Investor Relations
Charlie Vogt President and Chief Executive Officer
Misty Kawecki Chief Financial Officer
Ryan Koontz Needham & Company
Dave King B. Riley
Tim Savageaux Northland Capital
Christian Schwab Craig-Hallum
Call transcript
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Operator

Ladies and gentlemen, thank you for standing by. And welcome to the DZS Quarter Three 2021 Earnings Conference Call. [Technical Difficulty] mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] [Technical Difficulty] conference is being recorded. now Vice turn President would to call I Difficulty] [Technical of Instructions] like the to over [Operator Investor Relations.

begin. may You

Ted Moreau

that the hosted Difficulty] investor Difficulty] [Technical quarter that reconciliation in GAAP During Needham, items, most documents note forward-looking numbers the recent information. Thank forward-looking business those regarding on we after provide section the Difficulty] as otherwise that to in its participate perspective results Difficulty] with Difficulty] of with section and in market the X-K, Statements financial of the shareholders financial to we our published refer a statements Investor well non-GAAP [Technical and section -- updates, XX-Q differ Vogt; will are materially And Stifel, DZS to the conferences GAAP, Please and shareholder to Investor the results quarter you [Technical insights, or unless close, [Technical CFO, fourth other Difficulty] contained company’s forward-looking materially. files market Please well These financial the being company Margery. to Relations the website. together Craig-Hallum indicated, and future Difficulty] future SEC, Yesterday earnings statements. Charlie Difficulty] the [Technical analysts [Technical available [Technical was DZS [Technical as Kawecki. shareholders differ of Misty projections such the and statements Form cautions the Relations to or documents XXXX including product, on These filed CEO, [Technical as events as from may company company. you, third that plan welcome report basis. the performance with corresponding by of are and The contained the Difficulty] to

Charlie Vogt

nearly the revenue guests. delivered analysts above marked share sales momentum I’m Ted. pleased quarter guidance. quarterly though we guidance. that challenged EBITDA a with and end chain foreign in margin higher you, quarter our our than of QX and and of exchange end above million, resulting our we price strong $XXX consecutive were fifth $XXX we orders of guidance, which million, million X our were the and of increases gross EBITDA Even availability, the well margin consecutive by $XX.X of of Welcome gross ago. with high was year approximately adjusted XX.X% of variations, midpoint XXXX to high exceeding the supply delivered revenue our backlog the exceeded adjusted guidance third investors, midpoint and million, Thank times for $X.X above our adjusted and

quarter, estimate the supply we mix. performance North margin alignment have contract during the Asia third supply challenges our and XX%, and chain -- geographic -- would I’m With EMEA challenges balanced effectiveness more chain current without third America, current approximately manufacturing the gross rationalization, product with our without the without and quarter, been third the sorry, during a illustrating partners, of the component

transformational industry and and we to and financial outlined we opportunity and shareholders XXXX, of half first the growth profitability. themes lead the would market company-related sustainable long-term During analysts to anticipated that

have following laser themes. on we four been expand, focused we As the

within led increase XXX% North European an aggressive to to early ordering gains America of a we’re stages the share market the in period to have in of while early XXXX. growth date, First, year compared and America playbook, and North same regions, results

software platforms. higher across from network enabled is shift is EMEA, introduce that solutions, based shifts with underway and to North also architecture are Second X-gigabit which to margins. is value cycle and and the and evolving investment technology sub high connectivity copper growth next-generation to multi-gigabit DZS legacy technology This broadband and America multi-gigabit subscriber delivering

around who Rakuten technology Third Symphony, towards emerging launched Open designed million next-generation Rakuten has accelerate being which Mobile providers networks design. part RAN customer and is the architecture Asian our third Pan a XG Open and successfully Rakuten, to including of finally, world eventually European the India. reference during and quarter. momentum and transformational and leading the X is equipment such deployment strategic RAN cap shifts as by wireless xHaul service surpassed playing in United suppliers Chinese a solutions the fueled subscribers industry the And our the that of with key a many States our pursued countries, replace are deemphasized

and months connectivity Our large sales project in third encouraging quarter, a provider has X pipeline India. of we RFP and been during secured Tier the nine with the XXXX first a broadband during trial activity service scale

PON XX-gigabit service software rationalization deployed class enhance product world. around next-generation solutions orchestration, and to technology in differentiate than strategic designed experience assurance and more are investments and Our the subscriber XX platforms are million automation,

DZS Our multi-gigabit by year are complemented newly which was on DZS an in of PON of and March Both XCelerate strategy launched and Experience our this solutions. Telus as customer. influence anchor launched subscriber software display is which with Cloud, in

and automation more portfolio the manage residential effectively provide intelligence with communication and business and operational savings. network will revenue providers subscriber and creating to native cloud Our opportunities subscribers service software the new applications,

yielded have by product Our skews rationalization in XX%. streams reductions work nearly

skews operations alignment infrastructure we chain navigate to is through efficiency manufacturing supply risk. our and our valuable environment. chain many the our our resource supply partnerships we reducing improve reduction and continue a Furthermore, as sales also enhanced and manufacturing chain supply successfully supply consolidated chain are there to in across While difficult benefits, service global

QX and -- will Looking Q XXXX. ahead, we anticipate continue experienced XXXX the and into into trends in throughout

accelerated fiber-based XG estimated capital, solutions service for government software subscriber with demand Demand an Chinese fueled challenges. billion persistent provide by in of will stimulus. and influence supply equipment offerings. and adoption solutions Open replacement operators network opportunities for emergence chain consumer and connectivity RAN Specifically, $XXX networks, that The supplier next-generation broadband and differentiated demand

through $XX to revenue are than the supply of wider a current quarter, As chain we environment. million it guiding relates range to the $XXX to fourth usual million

have during anticipate We to deliver XX%, backlog chain foreign high-end a range are yen. range near-term contract assuming fees gross the increases, margin our to to quarter. and of Japanese the the and the variations exchange reflecting component We of not cost specifically supply XX% manufacturing partners with the expedite hindered

call chain would outlined Q&A overcome the will headwinds, believe the our long-term current over efficiencies we growth Operator to report. shareholder strategies I our now As to operational turn the the begin supply deliver expansion QX to session. commercial we underway and and margin Operator? like our the back new in

Operator

the Company. & from [Operator Koontz line Ryan Instructions] comes first Our Needham of from question

Ryan Koontz

Charlie. Good morning,

and a helpful? related shot clock is increase give to that’d old it you One there of you. clarity here Is kind of you you could Thank or be that them walk orders time price freight here like are on a place us through permanent to little change implementing the the a basis? price? temporary to opportunity have Any to

Charlie Vogt

June, increases really dated. components to price many be that began July I May, of permanent, price Well, think, received we likely to are price something has although, increases is timeframe. the the -- we’ve industry has that in group long been assuming supplier that That seeing those from deemed ecosystem been the be our that is our entire not increases

the experiencing increases, which September, we’re of first of see of of Some already which, came some year. as them some part price late increase won’t the we as, next until price

we various in will navigating Florida increases we the increases to increasing we across frankly, channel to to manufacturing the we’re case our spent strategies, been everybody of of in the a what’s that across to being will our or the are believe sector what But material we’re and a XXXX. time than this I on and and we’ve price next time it raw price offset and price into important this, facility term it’s, energy be in the a and the everyone contract that’s when prices delivered our appreciate And to of But commercial put Xst. current about is portfolios. customers we X think of the increases partners for and using is. I Tier manufacturers decided course over consistent thoughtful other components lot pulled implemented do we’ve of more of increases backlog lot we and October I began year. scheduled raw various that one materials either think affect were entire depending because some navigate really mean, was lot our with price that very in

Ryan Koontz

implementation So I it multi-quarter like a it, about to sounds how it’s we think mean…

Charlie Vogt

component, profile. that will our category lot of lot long-term in things, But and two higher indic the excuse maybe industry. deliver late a Tier that the the raw because some to and long we with at timeframe. is shareholders, out helped and referring are at of of profile are, just in you Cloud ahead booking see orders We at supplier fees visibility were a think the to impact. if had the saying get be I better of last about ahead think, our over we’re that’s than we’ve -- perspective, and I especially margin this QX the few very to times from is, should investors I’m think, margins the next our seen a expansion Experience that’s -- of our expedite never term and second I I to But DZS lead you for with September, lot -- software most that talked normal about in really pull DZS in new think, last expect half a that and aligns the year we and margin margin as what mean, that, that could depending think margins. our new near-term as QX, expedite October QX But able think we’re quarters, got portfolio fees. we the weeks. think were year. of begin of I I and really deliver No. Xs, that on fees to We term expedite as us, able margin forecasting aspects with we some I our some level me, requirements that to the a of this I certainly think if systems the I expecting have we our mean, QX, the That look I we’re longer

Ryan Koontz

on a timing was -- on side, weak so mobile the like little quarter. mobile the in And the Okay.

timing some shift like, going another I that’s assume? that there is change deployments, QX margins, on but in in and headwind of QX of mix is to So the

Charlie Vogt

and is Look, Symphony, which of I of Rakuten in have launching what’s for in in mean, perspective, aim I which our an is trial DZS be their adoption and as the others I lot we’re DZS, a intellectual garnered in property think that RAN that we leveraging to own on acceleration and the architecture, to that we the see RAN, wireless But RAN going ecosystem Open not with ones. certainly specifically own think from from Open activity they’ve able participate the Open RFP accelerating and a only on side really option their they to the network XXXX. and catalyst the in, and certainly success

Ryan Koontz

Okay. are on you for -- Great. see starting replacement the I And now you? you decisions Huawei could, if opportunity revenues just that last impact we and think some one starting when one, about should to there timing, to are

Charlie Vogt

large India project least remarks, mean, scale from but them and North about my project margins America I realize general the that India. I during service and know, for opening that a scale as I refer pricing do to providers gets in in Huawei margin I India and kind in scale perspective, the at market large of country the a the that, to, European there nervous from just replacement for adopt and projects change. Well, a order think companies, technology based large was

Huawei several we the an to we large the made lot year. Europe us. they’re maybe two and are aggressively Western expect in end that of opportunity that’s exciting for win pursuing Nokia or suppliers. additional DZS, with even So, those And to having are great companies between those at replace of of I decisions already one be There least with and Xs in a for and certainly their there’s technology most Tier looking a now network especially think

Ryan Koontz

Charlie. Super you. Great. Thank helpful,

Charlie Vogt

Thank you.

Operator

of next comes the from question King from Riley. Our line B. Dave

Dave King

your maybe a could million? My first mobile is, mix Good I morning. for between $XXX if and Yeah. get broadband backlog of question

Charlie Vogt

the before have call head, don’t we’ve know that top that end I that you I I sure number. my an mix. Dave. off give accurate research I to the of don’t ever can make given that

of both. percentage a that backlog as the know issuing start don’t want to I of So we mix our

Dave King

Got then got… And it. we

Charlie Vogt

And I in is… think I fixed mean what percentage this we a year could mobile. assume you’ve seen there throughout that of it’s from

Dave King

Sure.

Charlie Vogt

that …bank curious.

Dave King

it. Difficulty] major ago, I long, X get you fairly you can Indian mean that can contract was mean, Tier that And you then and years India how a that -- to Got and level regarding sustainability? talk few I big [Technical about back

Charlie Vogt

Yeah.

we’re not gross mean, very a that, projects Tier a where strategic, we mean, that streams us always the will just operators We’re you but but it’s it. and Chinese participate I pressure we’ve putting margin pricing margin the don’t level margin on are pressure to and shareholders. think, frankly, participating that we in sure to because including and XX% than and that we’ve India have Xs it about I getting we’re think, the and more work I’ve that make four from I’ve positive tell been suppliers, I of And, we’re of that pricing out been, underway. to the today, think competitive able the we’re I bit dynamics, more cautious of going get just enable with of laid committed tried I nature certainly a to the mean, shareholders operator may be to pick I on mean, encouraged. are that ourselves to profile India, choose. to that ever perspective, to lot analysts things all here the all margin significant have I pretty for aggressive and you make Look, the large I clear would in, little initially. we’re that

So we’re the India. encouraged, in frankly, with opportunity

period North with look, just, the I Western highest XXX%, margins back were of the relationships we very been great But encouraged on Europe. to pretty we’re very lot I and obviously obviously, of in I seeing it’s exceeded us. XX We’re the a which got opportunities matter that expectations seeing has we’re momentum and North the We’ve this years. fact And last all focused North up go mean, encouraging compared mean, mean, our is, America, America America. of year-to-date, year. same that the the orders are garners year is for in exciting

Dave King

goal? was year? it. XX% half mean, At XX% And Is that it Got speaking of nicely. coming I this maybe by up we can next Americas, expect rate, second maybe realistic

Charlie Vogt

of comment lot It line certainly is won’t in I it. a on with our expectations.

Dave King

gross last just my to Got clarification it. wanted margin. And the get question on is

walk can as year, you’re is mean, of is to maybe I the it’s of XX% be to be what target mean, a quarter I get sounds this your So to little still going starting fourth like, it you up maybe flat quarter. kind going kind I with of there? bottom it and the next to XX% point. how like, and XX% of bit, approximately by if to so, late us achievable, then back steps through the assume maybe is first XX%, going but going

Charlie Vogt

what increase. activate of content. by a increases. looking systems to backlog across have broader on I it whatever there’s lot be orders elements, implemented ecosystem or some of way system such software shipping Even and that, was shareholders the Again, of the you were increases at and sector, price they the been that entire especially everyone’s when the price our not, to regardless The not hardware effective is where most began think, or being there is analysts impacted with based of the price in by the whether ought is,

that XXXX. true internally. And QX we began see Letter we QX orders all the bringing the I a and as margin next which think new for new to the we I and and we’re QX, aligns outlined margin our be get slightly with of thought XX% that in that model profile, backlog, QX profile still our in margin we’re profile XXXX we have a Shareholder in why in margin in, target holds will think year that at flush we the to had could that’s lower sort XX% So that out for probably range going that

Dave King

guess thinking guess, we’re kind I right is bottoming of kind expedite costs, fees and that of stabilized of and that chain now -- here? a big has we’re elevated supply component Has I there’s why

Charlie Vogt

lot people I bottoming. a we’re saying keep of know

pull mean, fees QX, you’re fee. forecasting I fees, don’t that a they’re I you’re QX It’s I not look need no and a the and unexpected some as a navigated that’s some with phenomena. forward lot you’re think new really the in when perfectly you charging said, I -- you’re to deliver that’s of if a been -- a will or of see it’s there’s it. receiving that the in project in at our saw from when a couple orders that we’ve perfect There large customer suppliers, fee. way forecast, and expedite expedite for should we that of expedite we like, that expedite component of have you an some perspective, in QX. world, has we’re in think We aligned delivery in pulling on fees said, a QX, projects QX, sort I we expedite everyone from I quote-unquote trying and you in dates to certainly project XXXX. the that with modeling need

I a fees navigating think we did job the great QX. expedite in

that talked dollar when do really something been business the that exchange especially this we foreign this the certainly us surprised in look saw year. of yen, you the with Japan. amount about we But it’s impacts the year, haven’t We large against

to your next to question, year, on of our think But better year. with the and Dave, think that alignment the based job we much the do of that alignment a just managing next forecast backlog year. amount plan fees the the we have expect don’t same we’ll see I I expedite next

So increases at offset we’re ecosystem. that in price price commercial seeing, and be I certainly think the that the from we’ll least, near-term will increases strategies our that the implementing the

Dave King

it. Got you. Thank

Operator

[Operator Instructions] of Our next from question the Savageaux. Tim line comes

Tim Savageaux

know been but sort not given impact morning. in kind building sometime of factors? market quantified question around supply Significantly, overall XXXX, targeting X% mean, backlog? these projects, Good order outlook in year, from Thanks. issues ramp to which I’m in the some the I supply the this trend expect you’ve more of and to the growth by those whether sure revenue you’ve of And of calendar A in this all and you’re looking XX% is kind of new Hi. range. pushed of mentioned guess driven obviously, India, topline maybe increase on kind calendar into U.S. an you’ve issues XXXX. I I fair above backlog growth is combination it XXXX to and growth

Charlie Vogt

Look, lot we’ve haven’t of feel Yeah. that last we this that Thanks, we’re the already. X% spent time the very -- say a Tim. not achievable. prepared to on of analyzing we quarter, still we year, companies most this to profiled we would -- I time But spent about call. talk I -- XX% XXXX had as do that XXXX that’s confident

we’ve we has. challenges it enter supply every done I more think actually the lot I least entire that there’s XXXX in involved trial sales activity chain And and balance. interlock as we’ve a the chain amount an job have upside excited we more supply years, today, the also but if and XXXX this over and about XXXX think lot And there’s here. at had did always excitement process extremely and XX navigating a chain known XX certainly I there’s last a supply with unknown. sales the good and As we when are mean, the XXXX finance RFP hitting with when got in risks challenges. participated enthusiasm with we’re look But known, enter very almost and seeing that you the and not we we of that year, I’ve than implemented got at years, to unique I segment I entering we’re the

topline price about answer a your about I you XXXX, helped strategies that And But is we’re commercial feel think, despite supply really positive think question, going think that headwinds. I we to our if us. impact the chain certainly have and to I very revenue. revenue, increases, on as think, is successful optimistic with

Tim Savageaux

Great. very Thanks much.

Operator

the Our next of comes Craig-Hallum. Christian line question from from Schwab

Christian Schwab

my I question. have Great. and Thanks, just backlog. on clarity quick guys, for a question taking

four that price that With it true significant business increase think was hit occur, October please? the for market or in taking strength if to growth call, wondering is earlier could due we I’m about that that drivers the backlog backlog on was that and just effect increases was in and of that the you to big telegraphed the clarify -- you and end that September, Xst just should pulled you demand outlined going in some me,

Charlie Vogt

great question I’ll a It’s a give you answer. straight No. and

that environment pull pulled large haven’t sure and more forward the supply our can our have, deployment We everything that chain backlog educated like we up that I’d XXXX mean, about we’re really I been we’re sleeves think with not that has Tier injuring created anything. But their forward demand we’ve X make to to rolling certainly the customers what related. in we all than sure well making strategy. they’re

to of can we backlog, tomorrow. if XX% components, part, the for $XXX In the I say, we have million fact, our XX% ship would most it of all

that’s have -- sort don’t of backlog up So for we not we’re XXXX. any piling backlog

QX to got not opportunity the of is a to still revenue. have the this dates, we’ve systems. cause I backlog of components a aligning in strong we’re really I we’re build facilitating for period, lot had think why component, it a projects in to today requested immediate all sort But mean, Christian, one that where an us takes QX. We’re for wide successful and a range we’ve if that’s the ship

to as mean, the balance. we’re which backlog But I parts, if conservative trying I by just the that want possibly part, backlog think, QX. way, don’t a we going cautious an pull flush to expedite you’re look the $XXX backlog most misguide. balance that from fee, QX because the as forward mostly the that as will fairly best and margin in at we likely and impact the trying million for And everything mislead out today so should ship to we the we I and think, is have that in have backlog have you we’re we so, to relatively and soon can. we’re being, for can we And

Christian Schwab

Great. Thanks my That clarity. for you. that was Thank question. only

Operator

Our next question Paul SC line [ph]. comes the from of

Unidentified Analyst

want little penetrate Thanks to for What you work? you are this? to providers? partnership? question. And more taking you from the their my that bit got quickly subscribers do get guys What the $XX I does How out there a are million service can are color on expect this in it Plume do place? benefits What you how benefit?

Charlie Vogt

appreciate question. No. Yes. the I

during network-as-a-service people which really throughout DZS rolled we think most I Cloud, I think out relationship platform. successfully a we’ve strategic we a with the quarter. as is that know, Plume XXXX. a announced software As It’s partnership been fostering And

more subscriber assurance, software us embedded broadband what’s about portfolio to going next-generation going combine that inside have different end-to-end doing enhancement to allows the revenue providers business. and differentiate opportunities, from home Cloud us to DZS it and with to automation, are analytics that a experience management sorry, service we’re at So on complete in new WiFi core Plume DZS industry ultimately is inside WiFiX Cloud is truck either DZS sync licenses to deliver on licenses, when I what to reduce performance really the orchestration, What of designed think, type or really the or allow it come Plume in all form enterprise to capabilities, company service license. I’m capabilities relates or application application them will the only home. It based data going Plume, Cloud participate it’s to does way that portfolio services that amount allow a to as think CPE the providers the you software much of it has with the small complements allows the allows rolls. from we’re And our service

Unidentified Analyst

that you’re do out first I How in am reading… Okay. quickly what roll going is the quarter, to

Charlie Vogt

Yeah.

I launching mean, this, a WiFiX I portfolio doing product aligns with really been perspective thoughtful what mean, forecasting. from very because we’ve -- our WiFiX. we’re availability were will about We at is we in And QX. Plume

we to sure make we have customers wanted to. didn’t that that, so didn’t access something And launch

for available QX. have the and And shipment so towards we’ll of end into QX products

And portfolio now our of that will orders ship cloud-based the focusing CPE QX. we’re bundle end so products expect software with into the on that QX our booking right the for and we solution towards of

So, we XXXX. of second half pretty certainly the ambitious appetite for a got

Unidentified Analyst

Okay. And…

Charlie Vogt

a of And call, launch November. by whole month this the month, the way, we’ve of series got we Experience what DZS webinars in that

Unidentified Analyst

Europe, your of through Okay. to on soon. go let is some A and Can RDOF, couple the putting of like, lot a you in. the Government’s questions in -- the update poised been those of we’re that on be us subsidies, What’s -- also our assessment said of U.S. situations? of hearing it’s just money you both kind trickling of

Charlie Vogt

Yeah.

talking really million $XXX go know there which deployed. everyone of if as back about mean, you deployment. is I multiyear of funds, -- of $X RDOF the infamous I a a initial Up only QX, until $XX been So, billion about got everyone’s that XX -- Phase is months, knows, that was billion X the

that’s now, As right there’s been of released. $X billion

So that’s good.

QX RDOF We across government enough out that But impacting go about Consolidated countries that there’s that the what’s to some work. because, of a XXXX. number end talk like initiatives don’t that has of of assuming are still of passed gets assuming utilities beginning timeframe, their world. that a of out dollars so of those lot that that still course broadband XXXX the fiber. to U.K. million just Bill I just this funding. something our of institutions see the to going are have in then, element $XX see the their that into have are between stimulus customers and countries impact, significant Infrastructure and around the Germany, in also time I it’ll Germany’s Bavaria we’re dollar the that to others year, of funds very coming some that, are multibillion And it is of that dollars of billion, and their fueling So be lot to Europe. far we’re think Communications more close in on starting the begins a large got to of XXXX broadband finally and many about utility in gets -- by freedom $XX think, the is roll implemented an But U.K. and there’s got going certainly

Unidentified Analyst

One can mentioned of letter Rakuten, opportunities that of what in running types can Okay. lot talking you’re them into or to, last discuss you RAN you RAN there? there’s you of you’re your projects else Open outside or more question, Asia, in who if a Open

Charlie Vogt

U.S. the There’s mean, there’s even And amount I a But East. the for underway activity companies here engaged I’m from significant Europe, to not going activity tell Canada, for momentum you O-RAN. of think Asian Middle in that’s a the a we and markets a the across and I of Pan with. share Yeah. of I amount O-RAN. would the lot standpoint, projects competitive just tremendous that that there’s are across

to here I So O-RAN is stay. think

initial opportunity certainly had for begun think to I deployment. that RAN meaningful like of will architectures their think X companies towards way. think the it’s and in deployment that us already their opens a out networks lean more roll that something I I to in with participate are Open XG sticking that, more XG But carriers Phase

Unidentified Analyst

you of timing, Do a could be? sense when have Okay. that

Charlie Vogt

I alone, from subscribers just are done pretty to I we themselves, -- to I X what is I mean, they’ve think I keep what our got -- mean we’re -- going -- look gone zero you mean, Japan. unique. we’ve Rakuten million they’ve on seeing mean if which in at market We million

We’re closes position platform -- in their gateway which leverage leveraging with will need exclusively a some They customers QX today business half for wireline their of. next with design, I in to to not from a part on we’re meaningful side, have front-haul as of providing a are And we that as think their continue is exciting the on architecture. well I pursuant and solution Xs we be year, big fixed and us. we’re mean, roll separate of side. There XX be trials we have, the unfortunately underway Tier which to mobile the in begins that, think, those there are could disclose that right now, for out Many apart very to the growth. both a their very that reference first

Unidentified Analyst

Okay. very Thank much. you

Charlie Vogt

questions. Yeah. Thanks the for

Operator

concludes There Thank participating. further gentlemen, and this everyone for today’s at time. are conference no Ladies you this questions call.

You may now disconnect.