DZS Inc.

Good day, ladies and gentlemen. Thank you for standing by. My name is John, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the DZS Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Mr. Jeff Burke, SVP, Marketing and Investor Relations. Please go ahead.

Thank you, John, and welcome to the DZS conference call to discuss Q3 2024 financial results. Joining me today are DZS President and CEO Charlie Vogt and Interim CFO Brian Chestnut. During our call, we will provide projections and other forward-looking statements based on our current expectations regarding future events or future financial performance of the company. Such statements are subject to risks and uncertainties, 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, and the forward-looking statements section of DZS's Wednesday, November 6th press release. These documents identify important risk factors which can cause actual results to differ materially from those contained in our projections or forward-looking statements. Please note that unless otherwise indicated, the financial metrics we provide to you on this call include those determined on a non-GAAP basis. These metrics, together with corresponding GAAP numbers and a reconciliation GAAP, were contained in the press release issued on Wednesday, November 6th, which we have posted to our website and filed with the SEC on Form 8K. We will also discuss historical, financial, and other statistical information regarding our business and operation, and some of this information is included in the press release. I will now turn the call over to Charlie.

Thank you, Jeff. It was a long night for Americans, so good morning and thank you for joining. We are pleased to report that our third quarter financial results delivered $38.1 million in revenue, representing an increase of 23 percent quarter-over-quarter. Our non-GAAP-adjusted gross margin was 36.7 percent, representing an increase of 6.5 percent quarter-over-quarter. Our operating expense increased during the quarter primarily due to the incremental cost associated with our netcom acquisition and our final restatement-related cost. Our adjusted EBITDA was unfavorable by $2 million compared to Q2 2024 due to our inability to convert backlog shipments by quarter end, revenue recognition timing, and various cost savings initiatives that are planned and committed, though not realized during the quarter. Despite a challenging marketing environment across the broader industry resulting from an over-rotation of inventory, higher cost of capital, and delays with numerous government stimulus programs, we have delivered sequential revenue growth on a continuing operating basis over the last four quarters. With our restatement behind us, our filings current, the sale of our network assurance and in-home Wi-Fi management portfolio closed, and optimism with a growing sales pipeline and robust backlog, we believe our best days are ahead of us. We chose to divest our network assurance and in-home Wi-Fi management portfolio for three reasons. The first was to create software independence and reduce the competitive friction we were experiencing with our Wi-Fi connectivity and Wi-Fi software management peers. The second was to improve our balance sheet, which we accomplished by securing $34 million in an all-cash transaction. And third was to recalibrate our technology and go-to-market focus centered on our core broadband access and connectivity systems and cloud-edge software solutions. During the third quarter, we made meaningful progress across several tactical and strategic initiatives. As we enter the fourth quarter, we established four key performance initiatives that will anchor us in Q4 and into 2025. Our first KPI is centered around growth, profitability, and improving our balance sheet. The recent $34 million sale of our network assurance and Wi-Fi management portfolio is reduced our debt by $15 million, and added $15 million of cash to our balance sheet. The strategic divestiture combined with Q3 shipments, inclusive of paid inventory, have improved our balance sheet as of the end of October. Based on a growing sales pipeline, schedule backlog, and interaction with customers and channel partners, we anticipate Q4 revenue and profitability to improve compared to Q3 2024. As we look ahead to 2025, we anticipate service providers will return to pre-COVID spend levels and normalize deployment patterns. We also anticipate the various government stimulus programs around the world, including the United States Broadband Equity Access and Deployment Program, will begin to accelerate funding during the second half of 2025. Our second KPI is focused on completing our cost savings initiatives, including the cost synergies associated with our recent acquisition of NetCom. These cost savings initiatives began in the first half of 2024, and we expect the total savings to be completed by year end 2024 and reflected in Q1 2025. Our cost optimization programs are inclusive of the divestiture of our former Asia business unit, as well as the divestiture of our network assurance and in-home Wi-Fi management portfolio. Our third KPI is executing the sales synergies resulting from the acquisition of Netcom, which adds market-leading fiber extension, home broadband, and fixed wireless access technology to our market-leading broadband access and connectivity portfolio. We are encouraged with a growing sales pipeline and the revenue conversion and backlog created in just 120 days since acquiring Netcom. During the past four months, we have begun to validate the cross-selling synergies with our existing customers and, likewise, the prospective synergies with our core broadband portfolio with the former Netcom customers established as part of our acquisition thesis. Our fourth KPI is focused on monetizing $79 million of inventory, which is aligned with our sales pipeline, schedule backlog, and projects in flight. While progress was made in Q3 relative to sales and shipments of paid inventory, a revitalized and growing sales pipeline and improved visibility with our scheduled backlog gives us better line of sight to inventory conversion to cash over the next four to five quarters. Our vision and strategy established over the past several years has been centered around the introduction of open, standards-based, next-generation broadband access and network systems and cloud orchestration and software automation solutions aligned with the large-scale incumbent service providers and emerging five-roller builders as well as utility providers. Announced a few weeks ago, our broadband access portfolio was formally certified as Build America, Buy America compliant, aligned with the $42 billion broadband equity access and deployment program. While the U.S. BEAD program has been front and center in the United States and has garnered much of the excitement across our industry, other countries, such as Germany, aim to make available billions of euros for the incumbent broadband service providers, emerging alternative fiber providers, utility operators, as well as other types of ISPs. We expect that the decisions and investments that we've made over the past few years, which includes more than $100 million of invested technology, will result in the continued growth and ultimately sustained profitability and positive cash flow. As many of you are aware, we appointed Brian Chestnut as our interim CFO in September following five months as Chief Accounting Officer, leading and managing the final phase of our restatement process. Prior to DZS, Brian was the Vice President and Corporate Controller of Continental Battery Systems, a billion-dollar U.S. distribution company, where he oversaw global accounting operations across the United States and Canada. Additionally, Brian held senior finance management positions at Jacobs Engineering and one main financial position and he began his career at PricewaterhouseCoopers. Brian, I want to thank you for the comprehensive and diligent work you and the team accomplished over the past seven months. The results have improved our internal controls, corporate governance, and overall close process. With that as a brief introduction, I'll now turn the call over to you to share more on our financial results.