Name: DZS INC. Q3 2023 Earnings Call
Start: 2023-11-09T00:00:00.000Z

Executive Summary

DZS did not report Q3 2023 financial results; the company announced delayed 10‑Q filings and a restatement of 2022 and Q1 2023 financials, rendering comparisons and estimate checks for Q3 not applicable. Nasdaq issued delinquency notices for both Q2 and Q3 filings, increasing listing risk and uncertainty for investors .
Liquidity and balance sheet actions: DZS secured $29.7M in loans (including a $24.5M three‑year term loan at 8%) to repay its term debt facility and line of credit; management also targeted lowering quarterly operating spend by ~$10M by Q1 2024 versus Q1 2023, and cited ~$30M annualized cost savings actioned in 2023 to be fully realized in 2024 .
Operations and strategy: DZS highlighted BABA/BEAD eligibility with its FiberWay solution and U.S. manufacturing footprint; new product momentum includes Velocity V6 OLT, Saber 4400 optical edge platform, and AI‑driven cloud software (Xtreme), intended to improve margins and mix over time .
Prior guidance (from Q1 2023) called for FY 2023 revenue of ~$400M and margin expansion, but this was before the restatement announcement; no updated guidance was provided in Q3 due to the delayed filings, making the prior outlook effectively suspended .

What Went Well and What Went Wrong

What Went Well

Strategic financing and covenant relief: $24.5M term loan at 8% (plus ~$5.2M short‑term loans) to retire existing facilities, easing covenants and lowering interest cost basis; management planned a new ABL facility to support growth .
U.S. manufacturing and BABA eligibility: DZS positioned FiberWay (Velocity OLTs/ONTs + AI cloud software) as compliant with proposed BABA waiver for BEAD, asserting it is among a short list of suppliers meeting OLT/ONT requirements; Saber 4400 optical edge is manufactured in the U.S. .
Product and margin strategy: Management emphasized higher‑margin products (Velocity V6, Saber 4400), software bundling (Xtreme orchestration/automation), and Fabrinet outsourcing to improve margins toward a sustainable 40% profile over time .

What Went Wrong

Financial reporting breakdown: Audit Committee determined 2022 annual/interim and Q1 2023 financials should no longer be relied upon; Q2 and Q3 10‑Qs were delayed, and restatements are pending, introducing material weakness in internal controls and elevating listing and credibility risks .
Nasdaq delinquency notices: Received notices for late Q2 and Q3 filings; while no immediate effect on listing, the company must submit compliance plans and faces potential extensions only to Feb 5, 2024 .
Near‑term execution/working capital strain: Elevated DSOs (140 days in Q1 2023) and adverse mix/FX pressured margins and profitability; these issues were expected to improve but remained investor concerns before the restatement .

Financial Results

Note: DZS did not report Q2 or Q3 2023 financial results due to delayed filings and restatement; Q1 2023 results are shown for context.

Metric	Q1 2022	Q4 2022	Q1 2023	Q2 2023	Q3 2023
Revenue ($USD Millions)	$77.040	$100.177	$90.812	Not filed	Not filed
GAAP Gross Margin %	34.8%	30.0%	32.8%	Not filed	Not filed
Adjusted Gross Margin %	35.2%	30.6%	33.3%	Not filed	Not filed
GAAP Diluted EPS ($USD)	-$0.11	-$0.50	-$0.55	Not filed	Not filed
Adjusted EPS ($USD)	-$0.01	-$0.10	-$0.06	Not filed	Not filed

Segment breakdown (product technology):

Metric	Q1 2022	Q4 2022	Q1 2023
Access Networking Infrastructure Revenue ($USD Millions)	$72.4	$87.8	$79.5
Cloud Software & Services Revenue ($USD Millions)	$4.6	$12.4	$11.3
Total Revenue ($USD Millions)	$77.0	$100.2	$90.8

Revenue mix by geography:

Region	Q1 2022 ($USD Millions)	Q4 2022 ($USD Millions)	Q1 2023 ($USD Millions)
Americas	$22.9	$28.4	$24.8
EMEA	$18.8	$21.0	$19.2
Asia	$35.3	$50.8	$46.8
Total	$77.0	$100.2	$90.8

KPIs:

KPI	Q1 2022	Q4 2022	Q1 2023
Orders ($USD Millions)	$101 (reference)	N/A	$80
Book-to-Bill (x)	N/A	N/A	0.9
RPOs ($USD Millions)	$252	N/A	$304
DSOs (days)	N/A	N/A	140

Guidance Changes

Metric	Period	Previous Guidance (Q1 2023)	Current Guidance (Q3 2023 status)	Change
Net Revenue	Q2 2023	$90–$95M	Not updated; 10‑Q delayed	Suspended
Adjusted Gross Margin %	Q2 2023	33%–35%	Not updated; 10‑Q delayed	Suspended
Adjusted OpEx ($M)	Q2 2023	$29–$31	Not updated; 10‑Q delayed	Suspended
Adjusted EBITDA ($M)	Q2 2023	$(1)–$4	Not updated; 10‑Q delayed	Suspended
Net Revenue	FY 2023	~$400M	No update; filings delayed	Suspended
Adjusted Gross Margin %	FY 2023	35%–37%	No update; filings delayed	Suspended
Adjusted OpEx ($M)	FY 2023	$115–$120	No update; filings delayed	Suspended
Adjusted EBITDA ($M)	FY 2023	$22–$27	No update; filings delayed	Suspended
Quarterly Operating Spend ($M)	Q1 2024 vs Q1 2023	Target ~$24 in Q1 2024 vs $34 in Q1 2023	Reiterated cost reduction trajectory	Maintained
Annualized Cost Savings ($M)	Calendar 2023→2024	~$30M actioned in 2023, fully realized in 2024	Emphasized realization in 2024	Maintained

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 2023)	Current Period (Q3 2023)	Trend
Supply chain normalization	Lead times moving toward 3–6 months by 2024; reduced expedite/sourcing pressure	No Q3 call; continued operational commentary via press releases	Improving operationally
Margin expansion drivers	Mix shift to North America/EMEA, software bundling (Xtreme), Fabrinet outsourcing; aim for sustainable ~40% GM	No Q3 call; reiterated cost savings and optimization	Positive long-term, near-term obscured by restatement
Government subsidies (BEAD/BABA)	Expect multi‑year tailwinds; trials converting to design wins	FiberWay BABA compliance positioning emphasized	Structurally supportive
Working capital discipline	DSOs elevated; plan to reduce <100 days by year‑end; better collections/milestone timing	No Q3 call; inventory optimization noted	Improving plan; reporting gap
Regulatory/legal	None in Q1 call	2022/Q1 2023 non‑reliance; delayed Q2/Q3 10‑Qs; anticipated material weaknesses; Nasdaq delinquency notices	Negative; governance remediation ongoing

Management Commentary

“The past several months resulting from our revenue recognition matters have been difficult for the Company but have enabled us to streamline and improve several operational processes… we look forward to implementing organizational and personnel improvements in our IT systems, controls and governance.” — Misty Kawecki, CFO (Nov 9, 2023) .
“The new financing from DNI will ease our financial covenants, lower our interest cost basis… 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.” — Charlie Vogt, President & CEO (Sept 13, 2023) .
“Q1 revenue of $91 million resulted in an 18% increase year‑over‑year… balancing our near‑term investments to deliver revenue growth, gross margin expansion and sustainable earnings is our number one priority.” — Charlie Vogt (May 8, 2023) .
“We believe Q1 gross margins will mark the low point for the year… benefits of the new Fabrinet manufacturing partnership, geographic mix shift towards North America and EMEA, and product mix shift towards software and higher margin products.” — Misty Kawecki (May 8, 2023) .

Q&A Highlights

Gross margin trajectory: Management outlined drivers to reach sustainably ~40% GM (regional mix, third‑party manufacturing, software pricing/bundling) over time .
Lead times: Service providers pushing for three‑month delivery; DZS expects 3–6 months in 2023, trending to 3–4 months by 2024, varying by product BOM .
DSOs: Elevated to 140 days in Q1 due to milestone timing (e.g., Vietnam contracts) and ERP billing timing; plan to revert below 100 days by year‑end .
FY 2023 outlook drivers: Timing of product launches (Saber 4400, Velocity V6) and trial conversions influenced the revenue outlook reset to ~$400M .

Estimates Context

DZS did not report Q3 2023 results; therefore, a beat/miss analysis versus Wall Street consensus is not applicable for Q3. The company’s restatement and delayed filings prevented a standard comparison of actuals to estimates for the quarter .

Key Takeaways for Investors

Reporting risk is central: The restatement and delayed Q2/Q3 filings, coupled with anticipated material weaknesses, are likely the primary stock narrative; watch for Amended 10‑K/10‑Qs and remediation plans to reduce governance risk .
Listing compliance: Nasdaq delinquency notices require timely compliance plans; extensions are possible but time‑bounded (potentially to Feb 5, 2024) .
Liquidity/OpEx path: Near‑term financing and cost reductions (target ~$10M lower quarterly OpEx by Q1 2024; ~$30M annualized savings) support cash burn reduction and liquidity stabilization .
Margin mix optionality: Strategic emphasis on higher‑margin hardware (Velocity/Saber) and software orchestration (Xtreme) plus Manufacturing outsourcing could reset gross margin structurally higher once reporting normalizes .
BEAD/BABA tailwinds: U.S. manufacturing and compliance positioning (FiberWay) present medium‑term demand catalysts in subsidized builds; monitor design wins and order conversion .
Working capital normalization: Elevated DSOs and inventory optimization are in focus; improvement would bolster cash and reduce risk of covenant pressure .
Action: Near‑term exposure hinges on resolution of restatement and listing compliance; consider position sizing accordingly and reassess on the first clean quarter with reported actuals and updated guidance .

DZS INC. (DZSI)·Q3 2023 Earnings Summary