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spk01: Good day, and welcome to DVS First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Todd Morrow, Head of Investor Relations at DZS. Sir, the floor is yours.
spk05: Thank you, Lara, and welcome to the DZS First Quarter 2021 Earnings Conference Call. Joining us today are DZS President and CEO Charlie Vogt and CFO Tom Cancro. We are pleased to discuss our first quarter financial results as well as insights and performance spanning our global business, trends driving our market, transformative initiatives, and our outlook for the remainder of 2021. As we've done for the past three quarters, this morning DZSI published our shareholder report for the first quarter of 2021 on the investor relations section of our website at DZSI.com. I'd also like to remind you that we will host our Virtual Horizons 21 Investor and Analyst Day on Thursday, May 13th, And we plan to participate in the Needham, Craig Hallam, and Stiefel investor conferences during Q2. During this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the company. The company cautions you that such statements are only current expectations and actual events or results may differ materially. Please refer to documents that the company files with the SEC, including its most recent 10Q and 10K reports, in the forward-looking statement section of the shareholder report that was filed on a Form 8K, as well as being available on our investor relations section of our website. These documents identify important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Please note that unless otherwise indicated, The financial metrics being provided to you on this call are determined on a non-GAAP basis. These items, together with corresponding GAAP numbers and the reconciliations of GAAP, are contained in the letter to stockholders. I will now turn the call over to Charlie.
spk04: Thank you, Ted, and welcome investors, analysts, and guests. As Ted mentioned, prior to the open, DZS released our quarterly shareholder report providing a market, business, and financial update for the first quarter of 2021. Our report is designed to provide shareholders, prospective shareholders, and analysts with market insights, product and business updates, and our financial performance. The management changes and transformational enhancements executed during the second half of 2020 are delivering encouraging results, and have become the foundation to delivering long-term sustainable shareholder value. With that as a backdrop, the first quarter of 2021 was a strong start to the year with record orders, record backlog, better than expected revenue and gross margin, and positive adjusted EBITDA. Orders increased 163% year over year, yielding $106 million of backlog, our highest ever, and a sequential increase of 49%. Growth in our mobile revenue was exponentially strong, increasing 635%. During the quarter, we added 24 new customers, with North America and EMEA experiencing the strongest customer growth. Revenue of $81 million exceeded guidance for the third consecutive quarter, compared with our $70 to $75 million guidance, representing a 71% year-over-year increase. Better-than-expected revenue, favorable geographic mix, and strong operational execution enable us to deliver favorable gross margins of 35%. resulting in a positive adjusted EBITDA of 3.6 million, which was also above guidance. These results follow a strong second half of 2020 and support an optimistic view of the remainder of 2021 and into 2022. The unexpected global health pandemic, coupled with a surge in demand for networking and communication services, has challenged the global supply chain. To date, our forecasting process, customer relationships, and our robust supply chain ecosystem have limited our exposure to price increases, component availability, as well as manufacturing logistics and delivery delays. With that said, we are not ruling out deviations to the previous statement as the current environment is fluid. Offsetting the supply chain challenges, the pandemic has forever transformed how people rely on high-speed wireless and wireline connectivity for business, education, healthcare, esports, and entertainment. Aligned with these technology requirements and the emerging lifestyle and workplace trends, DCS is well positioned with its innovative lineup of mobile edge transport, broadband connectivity, and now software-defined networking solutions. In February, we acquired Optillion, and in March, we acquired Rift. These two acquisitions have strategically enhanced our mobile edge and broadband connectivity portfolios. Optillion provides our customers with a temperature-hardened, high-capacity, long-reach Rotem transport portfolio that complements our fast-growing mobile edge transport solutions. And our Rift acquisition accelerates and enhances our software portfolio for mobile and broadband connectivity networks. Following our Rift acquisition, we announced TELUS, one of Canada's premier communication service providers, as a new DZS Cloud customer. TELUS will be deploying DZS Cloud for network orchestration, application management, and software automation. As of this earnings call, the integration of both Optillion and Rift are nearly complete. In addition to TELUS, these two new acquisitions add AT&T and Lumen to our lineup of marquee customers. Also in the quarter, we executed a 64 million gross proceeds follow-on equity offering, eliminating debt and strengthening our balance sheet. During the quarter, we began the consolidation of our high-cost manufacturing facility in Germany, which we anticipate will deliver favorable margins and earnings in 2022 and beyond. As Ted stated, on April the 8th, we announced our inaugural Horizons Investor and Analyst Day, which is scheduled for Thursday, May the 13th. I, along with Andrew Bender, our chief technology officer, Miguel Alonso, our product line manager, Tom Cancro, our chief financial officer, and several marquee customers will be presenting as part of this virtual event. To learn more and to register, please visit our investor relations page. Thank you for joining the call. And with that, I'll now turn the call back over to the moderator to facilitate any questions you may have.
spk01: Thank you, Sam. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchstone talisman. Again, that's the star, then the number one key on your touchstone talisman. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question will come from the line of John Marchetti from Stiefel. Your line is now live. Go ahead, please.
spk02: Thanks very much. Charlie, I was wondering if you could spend a minute on some of the software efforts, you know, given the acquisition of RIP, where the, I guess, the overall software portfolio stands now. I know that accelerated some of the efforts and certainly some of the time to market, but where that portfolio stands, what we should still look for there, and maybe, you know, how much of that is really contributing. I know you highlighted TELUS, but I'm just curious if there's others already in that software portfolio now.
spk04: Yeah, so, well, first of all, thank you, John. You know, what I would tell you is, you know, prior to RIFT, you know, there certainly was, you know, a pretty significant software development effort that was underway that was really focused on primarily our fixed wireline network and the products within that portfolio. You know, what RIFT really did was helped us accelerate, you know, our our play in the broader network orchestration, the software automation, lifecycle management, as well as data analytics. And if you dive into the TELUS opportunity, it really opened up a great opportunity for us to participate in their wireless network. And most of the sales projections and this year's pipeline are really focused around the wireless part of our business. That said, I will tell you that a big part of the investment thesis around RIP was really the opportunity to unlock the value that we have with the 20 million products that we have deployed around the world, especially on the fixed wireline side. Look, we've got a pretty substantial R&D team that's in Bangalore as a result of it. It certainly is giving us an opportunity to deliver, you know, a stronger presence in the network and to extract a lot more value with our existing customers.
spk02: Great. And maybe if I can just follow up there for either you or for Tom, you know, given the little bit of the raise in the full year outlook, I'm just curious how much of, you know, that bump has to do with what we're getting here from Optillion and RIFT versus, you know, maybe what you're seeing in the standalone business?
spk04: Are you talking about from a revenue standpoint?
spk02: Yes. I'm sorry, yes.
spk04: Yeah, I mean, I think the way, you know, analysts and shareholders should think of RIFT and Optillion is, you know, we, well, first of all, we've added, you know, an additional $4 million of OPEX spend to this year's incremental forecast as a result of both of the transactions. And, you know, we're not, you know, we didn't have anything baked into this year from a RIF perspective, and we still don't. So, you know, anything that we see, you know, from revenue that's recognized from TELUS as well as, you know, other customers in the pipeline, we would see as upside. From an Optillion perspective, we did have a modest amount of revenue that we had plugged into this year's plan. So, you know, We, you know, we're cautiously optimistic, and we hope that both of these transactions provide some upside that, you know, we didn't have baked into our plan early in the year.
spk02: And if maybe I could just ask one more, and then I'll turn it over. You mentioned in the shareholder letter about some of the momentum that you're starting to see on the RDOF side, particularly in North America. Has that – you know, have you gotten, I guess, real – RDOF-based orders from customers? Can you track it in that way? I'm just curious if there's a metric that you can share along those lines that just helps us sort of measure overall success in North America against maybe what's specifically tied to that program.
spk04: Well, I think what analysts need to think about as it relates to DZS, especially as you guys compare us to Atran and Calix, which have spent a lot of the last 15 to 20 years focused on the rural markets in the U.S. I mean, DZS is a global player, and much of our revenue, as you all know, comes from a lot of Tier 1s around the world. That said, a big initiative that I took on when I joined the company last year was to revamp our sales efforts, our support and service efforts, our innovation alignment with North America and specifically the U.S. And, you know, if you look at Q1, we grew Q1 orders by nearly 85% sequentially and 138% year over year. That was a record for North America. I mean, you know, we've got a small amount of RDOF customers. I think we have close to 40 RDOF customers that are active. But I would... suggest that you look at the participation of RDOF customers as it relates to the size and scale of those RDOF customers and their spending pattern. There's also another, you know, important area that I think is worth noting, and that is, you know, we estimate that about 30% of all the RDOF funds were awarded to non-traditional rural ILACs, meaning that these were not traditional customers of ours, Nokia, Calix, or Atran, and certainly our customers are at least prospective service providers. You know, these are fiber builders, utility operators, and others that, you know, are new, you know, fertile ground for us. So that's where we're spending a lot of our time as well as, you know, spending much of our time with the tier ones in North America.
spk02: Thanks very much.
spk04: Thank you.
spk01: Thank you, sir. Your next question will come from the line of Dave Kang from B Reilly. Your line is online. Go ahead, please.
spk06: Thank you. Good afternoon. My first question is regarding your second quarter outlook. Despite your commentaries about, you know, strong visibility and backlog, you're guiding kind of flat to down a little bit. Just wondering if that's based on conservatism, which wouldn't be too surprising, or perhaps other factors such as a chip situation?
spk04: I don't know if we're forecasting decline. I think that we've kept our Q2 outlook somewhat consistent with where we were prior to our Q1 shareholder report. Look, I think that we continue to remain, as I shared earlier, optimistic about the year and into next year, but we are certainly taking a cautious approach to the unknown and You know, what gives us, you know, confidence in our ability to deliver Q2 is we go into, you know, we enter the quarter with our strongest backlog ever. And, you know, it's, you know, but as you get closer to the quarter, you know, you certainly have shorter cycles to be able to deliver, you know, stronger upside. So I think that, you know, the forecast that we've provided is a forecast that, you know, the analysts should align to.
spk06: Got it. Can you just talk about the chip situation? Because some of the other common equipment companies, they are feeling some pinch as far as availability is concerned, as well as prices going up that's impacting their margins.
spk04: Yeah, I mean, prices certainly have unexpectedly gone up. I mean, prices went up in Q1, and we were still able to navigate around some of those increases, delivering a higher-than-expected price. margin profile for Q1, but it is real. I mean, for us, our largest semiconductor partner is Broadcom, and we've got a great relationship with them, which certainly helps. But when you just look at all the factors, I mean, everything that our You know, our semiconductor ecosystem continues to articulate to us is they're six months behind from the impacts of COVID. And then you had a surge in demand from, you know, both the communication sector as well as the networking and consumer-related markets that, you know, have them stacked up at least through 2021. Now, I would tell you that, you know, mix has a lot to do with where the impacts are and how well and aggressive you were in forecasting you know, back in, you know, August, September of last year, I would tell you that, you know, we got ahead of the curve, I feel like. When I first joined back in August, we sat down with our ecosystem supply chain partners and, you know, I think we did a really good job of forecasting what we thought 2021 was going to require and that has so far, you know, helped us. And, you know, we're right now not expecting that there's going to be and impairment or impacts on what we're forecasting for the rest of the year due to supply chain.
spk06: Got it. And my follow-up question is regarding your backlog, $106 million. Can you just provide some color as far as how the mix looks like between broadband versus mobile?
spk04: I don't have that right off the top of my head. I would say it's roughly... Eric, do you know what that is, roughly speaking? It would be about 60-40. 60-40. 60-40.
spk06: Got it.
spk04: 60-40 fixed versus mobile.
spk06: Yep.
spk04: Got it. We expect most of that to ship this year.
spk06: Got it. And then my last question is regarding Asia, specifically on India. I guess that was a pretty big market for you a couple of years ago. It has gone down. And, you know, were you expecting India to – recover this year? And if so, you know, what's the current status, I guess, with their situation with COVID cases?
spk04: Well, we have we have increased our sales personnel in India. And, you know, just just for the record, I mean, we have one really large project in India back in the 2016 to 2018 timeframe. It was a large FTTX project with one of the government entities in India, which really did give us a notable footprint. We have since then engaged with the four tier ones in India. We are not forecasting anything significant from India, despite the fact that our pipeline has increased. And I think you guys are probably seeing that. especially with India, like the United States, becoming very anti-China. And so we are getting pulled into a lot of new opportunities and projects that, you know, we weren't part of, you know, a year ago.
spk06: Got it. Thank you.
spk01: Thank you, sir. Your next question will come from the line of Christian Schwab from Craig Helen. Your line is now live. Go ahead, please.
spk07: Great, thanks. Congrats on solid results. Can we just update, Charlie, just what we just talked about there? Can you tell us or quantify potentially the positive impact of new opportunities because of Chinese vendors?
spk04: Well, I would tell you, and I think I spoke a bit of this the last time we were on the call, that our Our sales pipeline, specifically across the EMEA region and the APAC region, and I'm speaking outside of Korea and Japan, has more than doubled. And so we are seeing a lot of opportunities across Europe, across India. Those are probably the two regions, the European, Central Europe, and India regions regions are probably driving the most near-term activity with real projects that we are, from a product alignment perspective, best suited to be able to participate.
spk07: Okay, that's fair. Is any of the new customers on the list due to that, or is it just a share of wallet potential as existing customers?
spk04: Are you talking about the 24 new customers we announced?
spk07: Yeah. Are any of those have to do with the China marketplace opportunities that you just elaborated on and discussed at first last quarter? Is some of that new customer opportunities or is the opportunities really more with existing customers?
spk04: Well, the 24 new customers that we announced were primarily in North America and Europe and Middle East. I mean, those were the three regions that we saw most of those new customers come in. And not really any notable customers that we can represent as a new design win relative to share from Huawei. I mean, most of the Huawei customers, I think people have to understand, are large tier one fixed and mobile operators. And the process that we are embarking on right now, it just takes some time. I mean, I can tell you that there's a pretty significant... log of activity across EMEA, especially in India, where while we had a pretty strong presence, but we haven't gotten to the stage where we can credibly announce any design wins. Okay, that's fair.
spk07: My last question has to do with analytics and cloud. Can you help us quantify how big that opportunity is you know, will be for you guys this year and what type of growth rates you would expect there going forward?
spk04: I think the opportunity this year should be tempered, you know, just based on the longer sales cycle that comes along with at least the mobile side of the network orchestration and the software automation and 5G slicing As it relates to our plans to embed, you know, the software attributes into our fixed wireline portfolio, I think that there's, you know, a meaningful opportunity for us in 2022 and beyond. Okay. That's fair. Great. Thank you.
spk01: Thank you, sir. Your next question will come from the line of Tim Savagell from Northland Capital. Your line is now live. Go ahead, please.
spk03: Hi, good afternoon, and congrats on the results as well. I made a couple of references to Tier 1 opportunities, one earlier in the call with regard to spending time focusing there in the U.S. and then in reference to Huawei opportunities, maybe principally in EMEA, and realizing there is a sales cycle here, but I wonder if you can give us your best update on when you think decisions might be made there or you might be in a position to talk about something with more specificity. And, of course, any color on the size of those opportunities, either individually or in the aggregate, if there's any update there, I'd be interested in that as well.
spk04: Yeah, I would say that the projects that we're currently involved in as it relates to, you know, being able to cap and grow a Huawei network is most likely in the Q3 to Q4 timeframe, just based on where that cycle is. And I would tell you that all of the projects that we're working on are what we would consider as Tier 1 operators. So, you know, the opportunity for those projects, you know, could be sizable over a period of years.
spk03: Right. And obviously, you know, Huawei not operating in the U.S. previously. You know, you have different drivers for those opportunities, though. You know, several of the big carriers in the U.S. seem to have gotten off to a pretty strong start in terms of investments in access in particular. You know, I wonder, given that it appears that your sales efforts among smaller carriers in North America have borne fruit, I guess, a bit quicker than you may have expected, any comments on that would be interesting, is... How are you feeling about that same dynamic with regard to U.S. Tier 1?
spk04: Yeah, I mean, we're pretty encouraged with what's going on right now in the U.S. and Canada. And that's coming from, you know, a technology company that, you know, arguably was, you know, lagging Nokia, Calix, and Adran from a, you know, footprint perspective. But I would tell you that we're making progress. great progress. And to your point, I think the relationships that we've fostered have helped us better align on a more robust forecast for this year and next year with those operators. And several of the regional operators are pretty significant. I mean, you've got some really small tier three operators that have thousands of subscribers and you've got you know, some of the tier threes that have millions of subscribers. And I would tell you that we're fortunate. They, you know, have several of the, you know, the ILECs in the U.S. that are relatively sizable and they're expanding their networks. And, you know, we feel like we're getting a larger portion of the network split than we have historically. And I think that's attributed to you know, where we are on the technology curve and where we are in just, you know, our focus on these customers from a sales and service perspective.
spk03: Got it. Thanks very much. I'll pass it along.
spk01: Thank you, sir. And at this time, ladies and gentlemen, just to remind you, if you have a question, please press star then the number one key on your touchtone telephone. Again, that's to start in the number one key on your touchstone telephone. Your next question will come from the line of Ryan Coons from Needham and Company. Your line is now live, so go ahead, please.
spk08: Hi, thanks. Thanks for the question. Charlie, I'm trying to slice it maybe a different way and try to understand the dynamics a little bit. Can you maybe give us some qualitative insights as to, if you look at your revenue mix today, how much of it is roughly you know, long-time to SunZone customers versus newer customers in the last, you know, 18, 24 months?
spk04: I would say that most of the revenue globally is, you know, sustainable historical revenue that we've been able to capture a larger proportion of their network. I mean, as you can probably appreciate, you know, there's a lot to be said about being an incumbent because it certainly gives you the opportunity to participate in other adjacent projects that you're much more easily able to show your value than being a supplier that's trying to wedge their way in. So I would tell you that the bulk of our revenue continues to to come from existing customers that we've been able to go in and represent our newer product. I mean, we've introduced a lot of new products over the last year. And if you look at what we're doing with some of the large-scale mobile operators like Rakuten and SoftBank and LGU, a lot of the revenue there is attributed to some evolving network projects that have given us you know, more upside than I think we were expecting. And I think that when you think about, you know, the overall mix, I would say it's probably 90-10. You know, 10% of our revenue is coming from new customers and 90% is coming from existing customers. That's great.
spk08: So you're seeing a pretty good dollar expansion rate for your current customers.
spk04: Yeah, I mean, again, I continue to highlight, you know, the success that we had in Q1. I mean, we don't profile orders. but you can probably back into a rough estimate of what our order profile was in Q1, especially when you factor in that we ended December at $71 million in backlog, and we ended March at $106, so we had a pretty significant bookings ratio in Q1.
spk08: Yeah, it's outstanding.
spk04: It still exceeded the top-line range of our revenue for the quarter.
spk08: Yeah, you bet. And just another quick follow-up on your strength in the Middle East. You know, I typically think of that as a region that's dominated by, you know, the Chinese and the big multinationals. And have you seen shifts in the competitive landscape there, or do you have long-time customer relationships in that area?
spk04: So Ifti Salat has been a long-time customer, 20 years, and they continue to grow, as does Mobiley and the STC. So it's a really strong region for us. and it's a meaningful region for us, and they continue to throw new projects at us. So I am seeing Huawei being de-emphasized in the Middle East. So for what you may have recalled, I mean, those three customers especially, we're seeing more de-emphasizing the Chinese suppliers, at least with those customers, than maybe what you might have thought.
spk08: Yeah. That's great and super helpful. Thanks for the questions and congrats on the quarter.
spk04: Thank you. Thank you.
spk01: Thank you, sir. And I am showing no further questions at this time. I would like to turn the conference back to Mr. Charlie Vogt for the closing remarks.
spk04: Well, I just want to say thanks to the DGS team for delivering an outstanding quarter. We continue to navigate what I think is a fantastic opportunity for the company and As I said earlier, we're very optimistic about the remainder of this year and into 2022. And when I think about the two technology acquisitions that we acquired with Rift and Optillion, they were great fits into an existing portfolio of products that helps us accelerate what we're doing within those particular technology areas that I think gives us a lot of upside, especially as we go into 2022. So I just want to thank the employees of DZS, and I appreciate the interest that the analysts and shareholders have. And remember that we've got our investor day on May the 13th. I think it'll be three hours of time well spent if you can afford it, but we're going to go into a lot more detail as it relates to our product portfolio, why we believe we will continue to succeed and win against our competitive landscape. You know, we'll talk in a lot more detail about, you know, the various opportunities. We've got a number of our marquee customers that are going to participate. We've got a board member that's also participating. So we're excited about that as well. So I guess with that, I just say thanks for the time this afternoon.
spk01: Thank you, sir. Thank you so much, presenters. And again, thank you, everyone, for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.
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