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DI

DZS INC. (DZSI)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 revenue was $31.066M, flat year-over-year and up ~12% sequentially; GAAP diluted EPS was $0.61 driven by a $41.5M bargain purchase gain from the NetComm acquisition, while non-GAAP diluted EPS was $(0.28) and Adjusted EBITDA was $(7.3)M .
  • GAAP gross margin rose year-over-year to 33.6% (32.7% in Q2’23) but declined versus Q1’24 (45.6%); non-GAAP gross margin was 34.5% vs 36.2% in Q2’23 and 45.8% in Q1’24, reflecting mix and inventory dynamics post ASSIA divestiture and NetComm inclusion .
  • Management guided to double-digit growth in orders and revenue in 2H’24 versus 1H’24, operating expenses exiting 2024 of $15–$17M, and indicated a reasonable shot at breakeven by year-end; gross margins to improve vs 2023 but be slightly lower than 1H’24; BEAD-related demand expected to impact starting 2H’25 .
  • Strategic actions: divested lower-margin Asia/ASSIA business (April), acquired NetComm (June; expected accretive) with cross-selling synergies; backlog ~$150M and paid inventory $75M targeted for cash conversion .
  • A key catalyst is the completion of restatement and becoming current on SEC filings, with a goal to relist on NASDAQ as business stabilizes and working capital is optimized .

What Went Well and What Went Wrong

What Went Well

  • Completion of restatement and current SEC reporting, removing a major overhang; “we are now current with our required SEC periodic report filings” .
  • Strategic portfolio reshaping: ASSIA divestiture and NetComm acquisition expected to be accretive; $41.5M bargain purchase gain recognized in Q2’24, driving positive GAAP EPS . Quote: “We acquired NetComm… recording an estimated bargain purchase gain of $41.5 million, resulting in positive GAAP EPS of $0.61 per share for the quarter” .
  • Cost optimization: non-GAAP operating expenses down 27% YoY in Q2’24; adjusted EBITDA loss improved vs Q2’23; CFO emphasized “optimized our cost structure by 29% year-over-year” .

What Went Wrong

  • Core profitability still negative ex one-time items: Adjusted EBITDA $(7.3)M and non-GAAP EPS $(0.28); gross margin compression vs Q1’24 as mix shifted and industry spending paused .
  • Revenue pressure from industry inventory overhang and delayed government stimulus (BEAD), with 1H’24 revenue down ~21% YoY, and backlog conversion delays .
  • Working capital tied up in inventory: $75M of paid inventory at quarter-end and ~$49M accounts payable; inventory conversion and cash generation are near-term priorities .

Financial Results

MetricQ2 2023Q1 2024Q2 2024
Revenue ($USD Millions)$30.623 $27.667 $31.066
GAAP Gross Margin (%)32.7% 45.6% 33.6%
Non-GAAP Gross Margin (%)36.2% 45.8% 34.5%
GAAP Diluted EPS ($)$(0.72) $(0.36) $0.61
Non-GAAP Diluted EPS ($)$(0.35) $(0.11) $(0.28)
GAAP Total Operating Expenses ($M)$31.092 $23.505 $27.605
GAAP Operating Loss ($M)$(21.072) $(10.892) $(17.166)
Adjusted EBITDA ($M)$(12.784) $(3.878) $(7.267)
Bargain Purchase Gain ($M)——$41.544
Cash & Equivalents ($M)——$8.137

Notes:

  • Q2’24 GAAP net income $23.073M included the $41.5M bargain purchase gain from NetComm .
  • 1H’24 adjusted EBITDA loss improved to $(11.1)M from $(19.8)M in 1H’23 .

KPIs and Operating Metrics

MetricQ2 2023Q1 2024Q2 2024
Orders ($M)$36 —$38
Backlog ($M)—$102 (scheduled backlog as of 3/31/24) ~$150 (as of June)
Paid Inventory ($M)—$31.8 (as of 3/31/24, excl. NetComm) $75 (as of 6/30/24)
Software % of Revenue——17% (1H’24)

Segment breakdown: Not disclosed in the provided materials.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Orders and Revenue Growth2H 2024 vs 1H 2024Not previously providedDouble-digit growth expected vs 1H’24 Introduced
Gross MarginFY 2024Not previously providedImprove vs 2023 but slightly lower than 1H’24 Introduced
Operating Expenses (non-GAAP)Exit 2024Not previously provided$15–$17M per quarter exiting 2024 Introduced
Interest ExpenseAnnualizedNot previously provided~$4M annualized on term debt Introduced
Non-GAAP Tax RateOngoingNot previously provided~21% going forward Introduced
Profitability TrajectoryExit 2024Not previously provided“Reasonable shot at breakeven” exiting 2024 (qualitative) Introduced
BEAD-Driven Demand Timing2025Not previously providedExpect funds to impact 2H’25; certifications achieved for NTIA Build America Introduced

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2’23 and Q1’24)Current Period (Q2’24)Trend
AI/Technology InitiativesFocus on advancing broadband and cloud software; optimization initiatives Embedding AI/ML at network edge; WiFi7, Saber-4400 ROADM, Velocity V6 OLT shipping Improving product execution
Supply Chain & InventoryIndustry over-rotation of inventory; excess reserves ~$25M in 2023 Customers depleting excess inventory; $75M paid inventory targeted for conversion Normalizing through 2H’24
Macro/Stimulus (BEAD)Delays in government broadband stimulus programs NTIA certifications achieved; meaningful funding flow expected 2H’25 Positive leading indicators
Product PerformanceTrials and RFPs delayed in 2023 Saber-4400 gaining references; Velocity V6 OLT shipments; NetComm portfolio adds FWA/fiber extension Building references and scale
Regional TrendsAmericas softness; Tier-1 traction in EMEA Europe resilient; regional mix driven by customers able to deploy; more traditional mix expected in 2H Stabilizing
Regulatory/LegalRestatement across 2022–Q1’23; Nasdaq delisting notice Filings current; goal to relist NASDAQ; enhanced controls and governance Risk reduced
R&D ExecutionContinuing investments despite market challenges ~$130M invested over recent years; portfolio differentiation across access/optical/software Sustained investment

Management Commentary

  • CEO on filings and priorities: “We are now current with our required SEC periodic report filings… our #1 priority remains delivering for customers, gaining the synergies from our newly acquired NetComm business and converting $75 million of paid inventory to cash” .
  • CFO on profitability drivers: “Adjusted gross margin… 39.8% in 1H 2024 vs 38.1% in 1H 2023… Adjusted operating expenses declined by $14 million, down 29%… estimated bargain purchase gain of $41.5 million, resulting in positive GAAP EPS of $0.61 per share for the quarter” .
  • CEO on product edge: “We have… Build and Buy America ready OLT systems and fiber terminating ONTs… responding with embedded software-defined elements, including AI and machine learning” .

Q&A Highlights

  • Regional mix: Europe showed resilience; Americas down more than market due to inventory dynamics. Management expects a more traditional regional mix in 2H as inventory normalizes .
  • Saber-4400 “Middle Mile”: Designed to aggregate last-mile fiber economically at access edge; product now has key references; opportunity viewed as encouraging despite a ~6-month later launch .
  • 2H’24 trajectory: With full-quarter NetComm inclusion, organic growth expected; management acknowledges a thoughtful “soft guide” approach post-restatement, but sees “no reason why we can’t exit 2024 as a breakeven business” .
  • BEAD pipeline: NTIA certifications in place; activity building with state broadband offices; meaningful funding expected on electronics in 2H’25 .

Estimates Context

  • S&P Global consensus was unavailable for DZSI due to a missing CIQ mapping when retrieving Q2’24 EPS and revenue estimates. We attempted to fetch S&P Global estimates but could not complete due to mapping errors; as a result, estimate comparisons are not provided [SpgiEstimatesError: Missing CIQ mapping for ticker 'DZSI' in spgi_ciq_company_map].

Key Takeaways for Investors

  • Near-term earnings optics benefited from a one-time $41.5M bargain purchase gain; underlying non-GAAP profitability remains negative, making inventory conversion and cost discipline critical in 2H’24 .
  • The portfolio is better positioned post-ASSIA divestiture and NetComm acquisition; cross-sell opportunities and broader Tier-1 footprint should support orders/revenue growth in 2H’24 and 2025 .
  • Watch the cadence of backlog consumption and paid inventory drawdown ($75M) as key cash generation catalysts and de-risking events through year-end .
  • Gross margin trajectory should improve vs 2023 but may be below 1H’24 levels given product mix; operating expenses targeted to $15–$17M exiting 2024 supports breakeven potential .
  • Regulatory overhang reduced with filings current; any progress on NASDAQ relisting and working capital facilities could be stock-positive signal events .
  • Product momentum (Saber-4400, Velocity V6 OLT, WiFi7 roadmap) and NTIA certifications align with anticipated BEAD cycle; expect more tangible demand impact beginning 2H’25 .
  • Near-term trading: stock likely sensitive to H2 bookings/order updates, margin realization, and cash conversion; medium term thesis hinges on normalized spending, BEAD funding, and NetComm-driven accretion .