Executive Summary

DZS did not report Q2 2023 financial results; the company filed an NT 10‑Q and disclosed it would be late due to an audit committee review and a restatement of Q1 2023 related to revenue recognition timing .
Nasdaq sent a delinquency notice for the late Form 10‑Q; DZS must submit a compliance plan and may receive an extension to February 5, 2024 if accepted .
Liquidity was bolstered post‑quarter: DZS secured $29.7M in loans, including a $24.5M three‑year term loan at 8% with shareholder Dasan Networks, to pay down its term debt and revolver; management expects quarterly OpEx to be ~$10M lower by Q1 2024 vs Q1 2023 ($24M vs $34M) .
Strategic upside: DZS highlighted “Build America, Buy America”/BEAD eligibility, asserting its OLTs/ONTs meet proposed waiver requirements, a potential catalyst for growth in U.S. broadband deployments .

What Went Well and What Went Wrong

What Went Well

Financing and covenant relief: “The new financing from DNI will ease our financial covenants, lower our interest cost basis and…fully pay off our existing loans” (Charlie Vogt, CEO) .
Cost discipline: “We expect to lower our quarterly operating spend by nearly $10 million by the first quarter of 2024 compared with the first quarter of 2023, specifically, $24 million in Q1 2024 versus $34 million in Q1 2023” .
BEAD/BABA positioning: Management stated DZS is “among a short list of technology suppliers meeting the requirements for Optical Line Terminals (OLTs)…and Optical Network Terminals (ONTs)” under the proposed BEAD waiver, enabling compliant procurement now .

What Went Wrong

Reporting delay and restatement: The audit committee initiated a review and Q1 2023 will be restated due to revenue recognition timing errors; Q2 2023 Form 10‑Q was delayed with no expected filing date .
Listing compliance risk: Nasdaq notified DZS of non‑compliance for not timely filing Q2 10‑Q; DZS must submit a plan to regain compliance, creating uncertainty and headline risk .
Credit agreement defaults: Lenders documented “Specified Defaults,” including failure to maintain minimum liquidity and minimum EBITDA, late delivery of Q2 financials, and banking relationship requirements; a limited consent permitted new loans only if proceeds repaid existing obligations promptly .

Financial Results

Note: DZS did not file Q2 2023 results due to a delayed Form 10‑Q; Q4 2022 and Q1 2023 are shown for trend. Q2 2023 cells marked N/A reference the delayed filing.

Metric	Q4 2022	Q1 2023	Q2 2023
Revenue ($USD Millions)	$100.177	$90.812	N/A (10-Q delayed)
Diluted EPS (GAAP) ($USD)	$(0.50)	$(0.55)	N/A (10-Q delayed)
Adjusted EPS ($USD)	$(0.10)	$(0.06)	N/A (10-Q delayed)
Gross Margin % (GAAP)	30.0%	32.8%	N/A (10-Q delayed)
Adjusted Gross Margin %	30.6%	33.3%	N/A (10-Q delayed)
Total Operating Expenses (GAAP, $USD Millions)	$44.697	$45.055	N/A (10-Q delayed)
Adjusted Operating Expenses ($USD Millions)	$33.801	$34.226	N/A (10-Q delayed)
Adjusted EBITDA ($USD Millions)	$(3.146)	$(3.981)	N/A (10-Q delayed)

Segment breakdown – Product Technology:

Metric	Q4 2022	Q1 2023	Q2 2023
Access Networking Infrastructure Revenue ($USD Millions)	$87.8	$79.5	N/A (10-Q delayed)
Cloud Software & Services Revenue ($USD Millions)	$12.4	$11.3	N/A (10-Q delayed)

Geographic mix:

Metric	Q4 2022	Q1 2023	Q2 2023
Americas Revenue ($USD Millions)	$28.4	$24.8	N/A (10-Q delayed)
EMEA Revenue ($USD Millions)	$21.0	$19.2	N/A (10-Q delayed)
Asia Revenue ($USD Millions)	$50.8	$46.8	N/A (10-Q delayed)

KPIs (as disclosed):

Metric	Q1 2023
Orders ($USD Millions)	$80
Book-to-Bill	0.9
RPOs ($USD Millions)	$304

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Net Revenue ($USD Millions)	Q2 2023	N/A	$90–95	Introduced
Adjusted Gross Margin (%)	Q2 2023	N/A	33–35%	Introduced
Adjusted Operating Expenses ($USD Millions)	Q2 2023	N/A	$29–31	Introduced
Adjusted EBITDA ($USD Millions)	Q2 2023	N/A	$(1)–4	Introduced
Net Revenue ($USD Millions)	FY 2023	N/A	~$400	Introduced
Adjusted Gross Margin (%)	FY 2023	N/A	35–37%	Introduced
Adjusted Operating Expenses ($USD Millions)	FY 2023	N/A	$115–120	Introduced
Adjusted EBITDA ($USD Millions)	FY 2023	N/A	$22–27	Introduced

Note: No formal guidance update was issued in August; Q2 10‑Q remained delayed .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q-2 and Q-1)	Current Period (Q2 2023)	Trend
Supply chain and lead times	Mgmt expected improvement; lead times normalizing to 3–6 months, aiming 3–4 months in 2024	No Q2 call; operational commentary not updated due to delayed filing	Improving but unconfirmed in Q2
Gross margin trajectory	Q1 non‑GAAP GM 33.3%; mgmt expected sequential GM improvement through 2023	No results reported; guidance prior indicated Q2 adj GM 33–35%	Intended improvement; validation pending
Liquidity/financing	Q1: revolver drawn; waiver received; target ~$40M year‑end cash	Secured $29.7M financing to retire term debt/revolver; ABL contemplated	Positive liquidity inflection
Regulatory/BABA/BEAD	Not emphasized in Q1 call	Asserted BEAD/BABA eligibility for OLTs/ONTs under proposed waiver	Positive policy tailwind
Product performance (Sabre 4400, Velocity V6, Xtreme)	Launch timing impacted 2023 revenue; higher margin portfolio expected to lift GM	No Q2 results; continued marketing at Fiber Connect	Pipeline building; timing risk remains
Regional trends	Asia growth; N.A./EMEA targeted share gains	No Q2 update	Neutral (information gap)

Management Commentary

“The new financing from DNI will ease our financial covenants, lower our interest cost basis and…fully pay off our existing loans” (Charlie Vogt, CEO) .
“We expect to lower our quarterly operating spend by nearly $10 million by the first quarter of 2024 compared with the first quarter of 2023, specifically, $24 million in Q1 2024 versus $34 million in Q1 2023” .
“We anticipate that 1Q 2023 will mark the low point for gross margin…we expect to deliver gross margin and earnings improvement throughout the balance of 2023” (CEO prepared remarks) .
“Our updated full year outlook includes revenue of approximately $400 million; gross margin between 35% and 37%…Adjusted EBITDA between $22 million and $27 million” (CFO) .
BEAD/BABA: “Assuming the…waiver…stands as proposed, DZS is among a short list of technology suppliers meeting the requirements for OLTs… and ONTs” .

Q&A Highlights

Guidance recalibration: ~10% revenue reduction vs prior expectations driven by product launch timing (Sabre 4400 and Velocity V6) and trial conversion timing .
Lead times: Normalizing from >52 weeks to 3–6 months, targeting 3–4 months by 2024; variability by product BOM .
Gross margin target: Path to sustainable ~40% GM hinges on N.A./EMEA mix, third‑party manufacturing scale (Fabrinet phase II), and software pricing/cross‑sell (Xtreme, CloudCheck) .
OpEx discipline: Sales/marketing to remain elevated; operations efficiencies and product completion to drive savings and EBITDA progression in 2024–2025 .
Working capital: DSOs at 140 days in Q1 due to Vietnam milestone timing, ASSIA billing integration, and ERP timing; expected to fall below 100 days by year‑end .

Estimates Context

Wall Street consensus estimates via S&P Global for DZSI Q2 2023 were unavailable in our system at the time of request; as a result, no comparison vs consensus is presented.
Given the delayed 10‑Q and restatement review, sell‑side models are likely to revisit revenue timing, margin trajectory, liquidity and credit terms once filings resume .

Key Takeaways for Investors

The absence of filed Q2 2023 results and the Nasdaq delinquency notice introduce near‑term headline and listing risk; monitor timing and outcomes of the audit committee review and compliance plan .
Post‑quarter financing (~$29.7M total; $24.5M term loan at 8%) reduces near‑term covenant pressure and retires higher‑cost debt; an ABL facility is being pursued to support growth .
Cost actions are material: management targets ~$10M quarterly OpEx reduction by Q1 2024 vs Q1 2023, supporting margin and cash flow improvements even amid revenue timing variability .
Policy tailwinds: Claimed BEAD/BABA eligibility for OLTs/ONTs positions DZS to benefit from U.S. broadband subsidies; track any awards and U.S. order flow .
Medium‑term thesis rests on higher‑margin product ramp (Sabre 4400, Velocity V6) and software attach (Xtreme), driving GM toward ~40% and EBITDA scaling; execution on trials/design wins remains the key gating factor .
Near‑term trading: Expect volatility around filing status updates/restatement scope; upside catalysts include filing resumption, confirmation of BEAD/BABA orders, and ABL closure .
Watch credit and working capital metrics (liquidity, DSOs) as filings resume; lenders’ “Specified Defaults” underscore the importance of sustained operational improvements .

DZS INC. (DZSI)·Q2 2023 Earnings Summary