Press release·11/16/2024 07:40:23

Financial Performance Overview

DZS, a leading provider of network infrastructure and cloud software solutions, has reported its financial results for the three and nine months ended September 30, 2024. The company’s performance during this period reflects a mix of successes and challenges as it navigates an evolving market landscape.

Revenue Trends

DZS’s total revenue for the three months ended September 30, 2024 was $38.1 million, a 67.8% increase from the same period in 2023. This was primarily driven by a 98.4% increase in access networking infrastructure revenue, which reached $29.1 million. This growth was largely attributable to the acquisition of NetComm, which contributed $12.9 million in revenue for the quarter.

However, for the nine-month period, total revenue declined slightly by 0.9% to $96.9 million compared to the same period in 2023. The decrease was mainly due to lower spending levels from major customers in EMEA and the Americas regions, partially offset by the contribution from the NetComm acquisition.

In terms of geographic diversification, the company saw strong growth in the Asia, Australia and New Zealand region, with revenue increasing by 1138.3% for the three-month period. This was driven by the NetComm acquisition, which expanded DZS’s presence in these markets. Revenue from the Americas and EMEA regions also increased, by 52.9% and 34.5% respectively, for the three-month period.

Profitability and Margins

DZS’s gross profit margin improved significantly, increasing from negative 4.6% in the third quarter of 2023 to 29.4% in the same period of 2024. This was primarily due to the completion of the transition to outsourcing manufacturing to Fabrinet, which had previously resulted in elevated inventory-related costs and expedite fees.

For the nine-month period, gross profit margin increased from 26.8% in 2023 to 35.4% in 2024, also reflecting the benefits of the Fabrinet transition. The company’s focus on cost management and operational efficiency has been a key driver of this margin improvement.

However, DZS continued to report operating losses, with an operating loss of $22.0 million for the three-month period and $50.1 million for the nine-month period. These losses were driven by ongoing investments in research and product development, as well as selling, marketing, and administrative expenses.

Acquisitions and Divestitures

During the reporting period, DZS made a strategic acquisition and several divestitures to streamline its business and focus on its core product offerings.

In May 2024, the company acquired NetComm Wireless Pty Ltd, a provider of connectivity solutions, for $8.1 million in cash. This acquisition expanded DZS’s presence in the Asia-Pacific region and added complementary product capabilities to its portfolio.

The company also divested several non-core business units, including its Network Assurance and WiFi Management software portfolio, which was sold to AXON Networks Inc. for $34.0 million, and its Industrial Internet of Things (IIoT) business, which was sold to Lantronix, Inc. for $6.5 million. These divestitures allowed DZS to focus on its core access networking infrastructure and cloud software solutions.

Additionally, in April 2024, DZS completed the sale of its Asia-based subsidiaries, including operations in Korea, China, Vietnam, India, and Japan, to DASAN Networks, Inc. for $3.8 million in cash and the elimination of $34.3 million in debt.

Liquidity and Financing

As of September 30, 2024, DZS had $4.3 million in unrestricted cash and cash equivalents, and $24.1 million in working capital. The company’s contractual debt obligation under the EdgeCo Loan Agreements stood at $30.0 million.

To support its operations and finance the NetComm acquisition, DZS entered into a new $15.0 million three-year term loan with EdgeCo, LLC in May 2024. The company also received $30.0 million in proceeds from the sale of its Network Assurance and WiFi Management software portfolio, a portion of which was used to prepay a portion of the EdgeCo loans.

Management is actively taking measures to enhance profitability and liquidity, including reducing the company’s cost structure, managing receivable balances, and exploring additional asset sales or financing options if necessary. The company believes its existing cash and working capital balances will be sufficient to fund its ongoing operations for at least the next 12 months.

Operational Highlights and Outlook

During the reporting period, DZS continued to invest in its core product offerings, including the DZS Saber portfolio of network edge solutions and the DZS Helix connected premises products. These solutions are designed to enable service providers to upgrade their networks to support the growing demand for high-bandwidth technologies like 5G and XGS-PON.

The company also made progress in its cloud software initiatives, with the DZS Xtreme orchestration platform and the Expresse and CloudCheck software solutions for network and WiFi management. These software capabilities are becoming increasingly important as service providers transition to software-defined networking and network functions virtualization architectures.

Looking ahead, DZS faces both opportunities and challenges. The continued growth in demand for high-bandwidth access technologies and the company’s expanded presence in the Asia-Pacific region through the NetComm acquisition provide potential avenues for future revenue growth. However, the company must also address the material weaknesses in its internal controls and financial reporting processes identified during the reporting period.

Overall, DZS’s financial performance in the third quarter and first nine months of 2024 reflects a mixed picture. While the company has made progress in improving its gross margins and expanding its product portfolio through strategic acquisitions, it continues to face operational and financial challenges that will require ongoing attention and management focus.