DZS Inc.

Ladies and gentlemen, thank you for standing by and welcome to the DZS Quarter 3 2021 Earnings Conference call. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on the screen. The conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to one of the students of Investor Relations. You may begin.

Thank you, Marjorie, and welcome to the DZS Third Quarter 2021 Earnings Conference. I'm your host, DZS CEO, Charlie Vogt, and CFO, Misty Kowicki. Yesterday, after market closed, we published to the Investor Relations section of the DZS website to provide shareholders, prospective shareholders, and analysts with market insights, product, business, and financial updates, as well as forward-looking statements. 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 because the results may differ materially. Please refer to documents that the company files with the SEC, including its most recent 10Q statement section of the shareholder report that was filed on a Form 8K, as well as being available on the Investor Relations section of our website these documents results to differ materially from those contained in the company's projections or forward-looking statements please note that unless otherwise indicated a financial and gap basis these items together with correspondent corresponding gap numbers and the reconciliation gap are contained in the shareholder During the fourth quarter, we will plan to participate in investor conferences hosted by Stiefel, Needham, Craig Hallam, and Oppenheim.

Thank you. Thank you, Ted, and welcome investors, analysts, and guests. I am pleased to share that for the fifth consecutive quarter, we delivered strong sales momentum with quarterly revenue above the midpoint of our guidance and gross margin and adjusted EBITDA that exceeded the high end of our guidance. Q3 2021 marked our third consecutive quarter with orders exceeding $100 million, resulting in backlog of approximately $200 million, nearly three times higher than a year ago. Even though we were challenged by supply chain availability, price increases, and foreign exchange variations, we delivered revenue of $88.4 million, which was above the midpoint of our guidance, and our 36.8% adjusted gross margin and $5.1 million of adjusted EBITDA were well above the high end of our guidance. With the current supply chain challenges during the third quarter, without the current supply chain challenges during the third quarter, we estimate our gross margin performance would have been approximately 39%, illustrating the effectiveness of our product rationalization, alignment with component and contract manufacturing partners, and a more balanced North America, EMEA, and Asia geographic mix. During the first half of 2021, we outlined to industry and financial analysts and shareholders the market opportunity and company-related transformational themes that we anticipated would lead to long-term sustainable growth and profitability. As we expand, we have been laser-focused on the following four themes. First, market share gains and growth within North America and European regions. While we're in the early stages of an aggressive playbook, Early results have led to a North America order increase of 125% year-to-date compared to the same period in 2020. Second is the technology shifts and investment cycle that is underway evolving from legacy copper and sub-1 gigabit technology to next-generation multi-gigabit broadband connectivity solutions, which are delivering growth across North America and EMEA and with higher margins. This shift to multi-gigabit architecture has also enabled DZS to introduce high-value network and subscriber-based software platforms. Third is a transformational wireless technology shift in industry momentum towards a next-generation 5G architecture fueled by emerging service providers such as our leading Open RAN customer, Rakuten, who surpassed 5 million subscribers during the third quarter. Rakuten has successfully launched Rakuten Symphony, which is designed to accelerate the deployment of Open RAN networks around the world, and with our mobile XR solutions playing a key part of the reference design. And finally, our strategic pursuit to cap and eventually replace Chinese equipment suppliers that are being de-emphasized in the United States and many European and Pan-Asian countries, including India. Our sales pipeline RFP and trial activity during the first nine months of 2021 has been encouraging, And during the third quarter, we secured a large scale broadband connectivity project with a tier one service provider in India. Our product rationalization, next generation 10 gigabit class PON technology and strategic investments in software orchestration, automation, service assurance and subscriber experience solutions are designed to differentiate and enhance our more than 20 million platforms deployed around the world. Our multi gigabit PON and subscriber influence software strategy is on display and our newly launched Accelerate and DZS Experience solutions, both of which are complemented by DZS Cloud, which was launched in March of this year with TELUS as an anchor customer. Our cloud-native network and subscriber software portfolio will provide communication service providers with the applications, automation, and intelligence to more effectively manage the residential and business subscribers, creating new revenue opportunities and operational savings. Our product rationalization workstreams have yielded reductions in SKUs by nearly 60%. While there are many valuable sales, service, and resource alignment benefits, the reduction in SKUs is also reducing supply chain risk. Furthermore, we improved our manufacturing and supply chain efficiency across our global infrastructure as we consolidated our manufacturing operations and enhanced our supply chain partnerships to continue to successfully navigate through a difficult supply chain environment. Looking ahead, We anticipate the trends experienced throughout 2021 will continue in Q4 and into 2022. Specifically, demand for next generation fiber-based broadband connectivity solutions fueled by consumer demand and accelerated by an estimated $100 billion in government stimulus. Demand for network and subscriber-influenced software solutions that will provide operators with differentiated service offerings. The emergence and adoption of Open RAN 5G networks. Chinese equipment supplier cap and replacement opportunities, and persistent supply chain challenges. As it relates to the fourth quarter, we are guiding to a wider than usual revenue range of $80 to $100 million due to the current supply chain environment. We have the backlog to deliver to the high end of the range, assuming our component and contract manufacturing partners are not hindered during the quarter. We anticipate a gross margin range of 32 to 34 percent, reflecting near-term supply chain cost increases, expedite fees, and foreign exchange variations, specifically with the Japanese yen. As we overcome the current supply chain headwinds, we believe the operational efficiencies underway and our new commercial strategies will deliver the long-term growth and margin expansion outlined in our Q2 shareholder report. I would now like to turn the call back over to the operator to begin our Q&A session.