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DZS INC. (DZSI)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 2024 revenue was $38.1M, up 22.8% QoQ and 67.8% YoY; non-GAAP gross margin expanded to 36.7% (vs. 34.5% in Q2), but adjusted EBITDA remained negative at $(9.3)M, largely due to backlog conversion timing and inventory reserves impacting margins .
  • Management guided to improved revenue and profitability in Q4 2024 and set a goal of breakeven adjusted EBITDA in 2025, citing a ~$90M backlog, $79M inventory to monetize over 4–5 quarters, and NetComm integration synergies .
  • DZS sold its Service Assurance and WiFi Management software portfolio to AXON Networks for $34M cash; management commentary indicates debt reduction and cash build from the transaction, though disclosures differ on amounts ($50M debt reduction claimed by CEO vs. $15M by CFO) and timing (cash proceeds cited as $30M by CFO vs. $34M in the press release), which investors should note as a discrepancy to monitor .
  • Operational KPIs improved: DSO fell to 83 days (from 120), while DPO remains elevated at 242 days; working capital was $24M at quarter-end—key near-term catalysts are backlog execution, inventory monetization, and BABA-aligned deployments (BEAD funding acceleration expected in 2H 2025) .

What Went Well and What Went Wrong

What Went Well

  • Fourth consecutive quarter of topline growth; Q3 revenue $38.1M (+22.8% QoQ) and non-GAAP gross margin 36.7% (+6.5pts QoQ), reflecting mix improvements and cost optimization progress: “third quarter… delivered a fourth sequential quarter of topline growth” .
  • NetComm integration gaining traction: management highlighted cross-selling synergies and a growing pipeline; “we are encouraged with the growing sales pipeline and the revenue conversion… since acquiring NetComm” .
  • Working capital and collections improved: DSO improved to 83 days; post-divestiture, cash increased and debt was reduced, supporting 2025 breakeven adjusted EBITDA aspirations .

What Went Wrong

  • Adjusted EBITDA remained negative at $(9.3)M; CFO cited inability to convert backlog shipments by quarter end and timing issues, while GAAP net loss was $(25.6)M with cash down to $5.7M at quarter end .
  • Inventory reserves weighed on margin; management said margins “would have been in the 40s” absent reserves, indicating ongoing margin sensitivity to mix and inventory policies .
  • Orders were soft YoY (-5.8% vs. Q3 2023), indicating lingering demand normalization; backlog decreased to ~$90M from ~$150M reported in Q2 commentary, highlighting conversion dependency and timing risk .

Financial Results

MetricQ3 2023Q2 2024Q3 2024
Net revenue ($USD Millions)$22.737 $31.066 $38.149
GAAP Gross Margin %-4.6% 33.6% 29.4%
Non-GAAP Gross Margin %17.4% 34.5% 36.7%
GAAP EPS (Diluted) ($)$(0.92) $0.61 $(0.67)
Non-GAAP EPS (Diluted) ($)$(0.48) $(0.28) $(0.31)
Adjusted EBITDA ($USD Millions)$(17.451) $(7.267) $(9.323)
GAAP Operating Expenses ($USD Millions)$29.345 $27.605 $33.227
Operating Loss ($USD Millions)$(30.382) $(17.166) $(22.002)

KPIs and Balance Sheet

KPIQ3 2023Q2 2024Q3 2024
Orders ($USD Millions)$28.9 $38.0 $27.2
Backlog ($USD Millions)N/A~$150 ~$90
Cash and Equivalents ($USD Millions)N/A$8.137 $5.736
Inventory ($USD Millions)N/A$80.149 $79.087
DSO (days)N/AN/A83
DPO (days)N/AN/A242
Working Capital ($USD Millions)N/AN/A$24

Consensus vs Actual (S&P Global)

MetricQ3 2024 ConsensusQ3 2024 Actual
Revenue ($USD Millions)N/A (S&P Global consensus unavailable)$38.149
Primary EPS ($)N/A (S&P Global consensus unavailable)$(0.67) GAAP; $(0.31) non-GAAP

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue2H 2024“Improved performance in the form of higher orders and revenue compared with 1H” “Anticipate Q4 revenue… to improve compared to Q3 2024” Maintained improvement trajectory
Gross Margin2H 2024“Gross margins… expected to improve vs 2023 but slightly lower than 1H 2024” “Margins would have been in the 40s absent inventory reserves; path to sustaining ~40%” Tone more constructive on medium-term profile
Adjusted Operating ExpensesExit 2024$15–$17M range Cost savings and NetComm synergies “completed by year-end 2024” (no quantified update) Direction maintained; no numeric update in Q3
Adjusted EBITDAFY 2024 / FY 2025“No reason why we can’t exit 2024 as breakeven” (management commentary) “Goal: breakeven Adjusted EBITDA in 2025” Timing clarified to 2025
Non-GAAP Tax RateOngoing~21% going forward No update in Q3 callMaintained
Interest ExpenseOngoing~$4M annualized term debt interest Q3 quarterly interest expense $2.2M Actual disclosed; consistent with run-rate
Inventory MonetizationNext 12–18 monthsConvert ~$75M paid inventory Monetize $79M over next 4–5 quarters Scope increased; timeline specified

Earnings Call Themes & Trends

TopicQ1 2024 (Q-2) MentionsQ2 2024 (Q-1) MentionsQ3 2024 (Current)Trend
Restatement & filingsOngoing restatement; filings not current (context from Q2 call) Filings current; restatement complete Restatement behind; filings current Improving/resolved
BEAD/BABA complianceN/ANTIA Build/Buy America-ready OLTs/ONTs highlighted BABA compliant portfolio; BEAD funding expected to accelerate in 2H 2025 Positive pipeline visibility
NetComm acquisitionN/AAcquired for $8.2M; bargain purchase gain $41.5M; accretive expectations Sales/cost synergies in flight; growing pipeline; revenue conversion Integration progressing
Product performanceN/ASaber-4400 shipments; Velocity V6 OLT launch (high capacity) Mix drives margins; aim for ~40% margins as mix normalizes Expanding portfolio; margin mix watch
Regional trendsN/AEurope resilience; U.S. BEAD pipeline building Middle East incumbents active; large EU design win to deploy 1H 2025; Australia/NZ added with NetComm Demand normalizing across regions
Supply chain/inventoryN/A2023 excess inventory with ~$25M reserves; working through normalization Inventory reserves hit Q3 margins; $79M inventory to monetize over 4–5 quarters Normalizing; conversion is critical

Management Commentary

  • “The third quarter of 2024 delivered a fourth sequential quarter of topline growth for DZS.” — Charlie Vogt, President & CEO .
  • “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… not realized during the quarter.” — Charlie Vogt .
  • “Our in-home WiFi management network assurance divestiture closed on October 25, generating $30 million of cash, which reduced our debt by $15 million and increased our cash balance by $15 million.” — Brian Chesnut, Interim CFO (note discrepancy vs. press release $34M and CEO $50M debt reduction) .
  • “With an encouraging sales pipeline, $90 million of backlog, $79 million of inventory… we anticipate our financial performance will improve in Q4 and throughout 2025.” — Charlie Vogt .
  • “Margins would have been in the 40s… we did take some inventory reserves during the quarter… path to sustaining margins even… to get us close to 40%.” — Charlie Vogt .

Q&A Highlights

  • Visibility: Management is cautiously optimistic for 1H 2025 in the U.S., Europe, and Middle East, driven by backlog and NetComm synergies .
  • Europe/Middle East pipeline: Large EU design win expected to begin deployments in 1H 2025; all three Middle East incumbents engaged; Spain/France projects in focus .
  • Competitive landscape (fixed wireless): Competes more with traditional Tier-1 vendors (e.g., Nokia) than unlicensed-spectrum players; NetComm portfolio focused on licensed spectrum .
  • Margins: Absent inventory reserves, margins would have been in the 40s; medium-term aim toward ~40% given mix normalization and Asia divestiture .
  • 2024 exit: Management previously indicated breakeven exiting 2024 is possible; now formal goal is breakeven adjusted EBITDA in 2025, balancing prudence post-restatement .

Estimates Context

  • Wall Street consensus via S&P Global was unavailable for DZSI at the time of analysis due to missing mapping; therefore, estimate comparisons are omitted (investors should assume limited coverage given OTC listing transition and restatement history) [GetEstimates attempt error].

Key Takeaways for Investors

  • Backlog execution is the near-term catalyst: ~$90M backlog and $79M inventory provide line-of-sight to revenue and cash conversion over the next 4–5 quarters; watch quarterly conversion rates and DSO/DPO trends for confirmation .
  • Margin trajectory improving: Non-GAAP gross margin at 36.7% with management indicating potential ~40% absent reserves—monitor product mix (OLT/optical vs. connectivity) and any incremental reserves .
  • Balance sheet stabilization in progress: Post-divestiture debt and cash changes are positive, but disclosures differ—seek clarity on net debt reduction and proceeds application; quarter-end cash was $5.7M pre-divestiture .
  • NetComm integration is strategic: Early sales/cost synergies plus Tier-1 customers in U.S., Europe, and Australia/NZ expand addressable market; watch for cross-sell wins and revenue conversion in 2025 .
  • Policy tailwinds: BABA compliance positions DZS for BEAD-funded deployments; management expects funding to accelerate in 2H 2025—track state approvals and qualified product deployments .
  • 2025 profitability goal: Company targets breakeven adjusted EBITDA and positive cash results in 2025—key risks remain backlog timing, inventory monetization, and macro capex normalization .
  • Trading setup: Q4 guide implies sequential improvement; without consensus benchmarks, stock may trade on operational KPIs (orders, margin, inventory reduction) and any clarity on debt/cash post-AXON deal .