DZS Inc. (DZSI): Navigating the Evolving Broadband Landscape

Published on March 12, 2025 | Ticker: DZSI

Introduction

DZS Inc. (DZSI) is a leading global provider of networking and connectivity solutions, enabling broadband everywhere. With a history spanning over two decades, the company has established itself as a pioneer in the telecommunications industry, continuously adapting to the ever-changing landscape of digital infrastructure.

Company Background

Founded in 1999 and incorporated under the laws of the state of Delaware in June of that year, DZS has grown to become a trusted partner for service providers, enterprises, and communities worldwide. The company initially developed networking and connectivity systems and cloud software solutions to enable broadband access for service providers and enterprises. Over the years, DZS has expanded its portfolio to include a wide array of reliable, cost-effective access and optical networking technologies as well as cloud software offerings.

In 2017, the company underwent a significant strategic shift with the acquisition of DASAN Network Solutions, a Korean networking equipment manufacturer. This move allowed DZS to broaden its global footprint and customer base, particularly in the Asia-Pacific region. However, the Asia business unit proved to be a challenge for the company, with lower profit margins compared to its other operations.

Recent Challenges and Strategic Initiatives

In recent years, DZS has navigated a number of challenges, including the COVID-19 pandemic, global supply chain disruptions, and a financial restatement process. However, the company has demonstrated its resilience, implementing strategic initiatives to strengthen its financial position, streamline operations, and solidify its market presence.

One of the key transformative events for DZS was the divestiture of its Asia business unit in 2024. This strategic move enabled the company to sharpen its focus on its core markets in the Americas, Europe, Middle East, Africa (EMEA), and Australia/New Zealand (ANZ). The acquisition of NetComm, a leading provider of fiber extension, home broadband, and fixed wireless access solutions, further bolstered DZS's product portfolio and expanded its presence in these priority regions.

Financials

For the fiscal year ended December 31, 2023, DZS reported annual revenue of $244.54 million and a net loss of $135.22 million, reflecting the impact of the pandemic, supply chain disruptions, and the financial restatement process. The company's annual operating cash flow was -$45.88 million, with annual free cash flow of -$47.45 million.

In the third quarter of 2024, DZS reported revenue of $38.15 million, representing a 23% increase from the previous quarter and a 67.8% year-over-year increase. The company's adjusted gross margin improved to 36.7%, up from 34.5% in the previous quarter and 17.4% in the same period a year ago. While operating expenses increased due to the NetComm acquisition and restatement-related costs, the company's adjusted EBITDA loss narrowed to $9.3 million, a significant improvement compared to the $17.5 million loss in the third quarter of 2023.

The net loss for the third quarter of 2024 was $25.65 million. For the nine months ended September 30, 2024, DZS generated net revenue of $96.88 million, a slight 0.9% decrease year-over-year. Gross profit improved to $34.28 million, up from $26.15 million in the first nine months of 2023. The company's operating loss narrowed from $68.89 million in the prior year period to $50.06 million in the current year.

Liquidity

As of September 30, 2024, DZS had a debt-to-equity ratio of 0.69. The company's cash position stood at $5.74 million, consisting of $4.30 million in cash and cash equivalents and $1.44 million in restricted cash. DZS also reported a current ratio of 1.22 and a quick ratio of 0.50, indicating its ability to meet short-term obligations.

The recent $34 million divestiture has significantly improved the company's financial position, reducing debt by $50 million and adding $15 million in cash. This move, along with other strategic initiatives, is expected to strengthen DZS's balance sheet and enhance its liquidity position.

Geographic Performance

DZS maintains a global presence, with sales distributed across key regions. In the third quarter of 2024, the Americas accounted for 44.4% of revenue, Europe/Middle East/Africa contributed 39.3%, and Asia/Australia/New Zealand represented 16.3% of total revenue. This diversified geographic footprint allows DZS to capitalize on growth opportunities in various markets while mitigating regional risks.

Product Portfolio and Market Position

DZS offers a comprehensive suite of products and solutions across four key segments:

1. Network Edge Access: The DZS Velocity portfolio provides a range of solutions for carriers and service providers to connect residential and enterprise customers. These products enable the delivery of voice, high-definition and ultra-high-definition video, high-speed internet access, and business-class services. The company's system-on-a-card technology facilitates smooth transitions from GPON to XGS-PON and 50G PON, as well as from Gigabit Ethernet to 10 Gigabit Ethernet.

2. Network Edge Optical: The DZS Saber portfolio offers robust, manageable, and scalable solutions for mobile operators and service providers. These products enable modular upgrades of edge transport to 400 Gbps speeds and provide mobile xHaul systems supporting 5G and beyond. The Saber solutions are 5G-ready, coherent optical capable, and designed to be open and software-defined.

3. Connectivity: DZS's connectivity solutions include the Helix connected premises product portfolio, Aurus fixed wireless access products, fiber extension portfolio, and industrial IoT products. These offerings cater to various deployment scenarios, from FTTx to multi-unit dwellings and harsh industrial environments.

4. Cloud Software: The DZS Cloud Software platform provides capabilities in network orchestration, application slicing, and automation. Key products include DZS Xtreme for network slicing and orchestration, Expresse for network and service assurance, and CloudCheck for WiFi experience management and analytics.

Strategic Achievements and Future Outlook

DZS has made significant progress in addressing past challenges and positioning itself for future growth. The certification of its U.S. manufactured electronic components as compliant with the "Build America, Buy America" requirements of the BEAD program is a notable achievement, positioning the company as a trusted partner for service providers leveraging government funding to expand broadband access.

The company has also resolved its financial restatement issues, filing restated results for 2022 and 2023, bringing it current with SEC filings. This milestone allows DZS to focus on executing its strategic priorities.

Looking ahead, DZS anticipates improved revenue and profitability in Q4 2024 compared to Q3 2024, driven by a growing sales pipeline and scheduled backlog. The company expects service provider spending to return to pre-COVID levels in 2025, with government stimulus programs accelerating funding in the second half of the year.

DZS has outlined four key performance initiatives for the coming period:

Improving growth, profitability, and balance sheet strength
Completing cost savings initiatives, including synergies from the NetComm acquisition
Executing on sales synergies from the NetComm acquisition
Monetizing $79 million in inventory over the next 4-5 quarters

The company aims to achieve breakeven on an adjusted EBITDA basis and positive cash results in 2025.

Industry Trends and Market Opportunity

The global broadband equipment market is projected to grow at a CAGR of approximately 10-12% from 2023 to 2028, driven by ongoing fiber and 5G network deployments worldwide. This trend presents significant opportunities for DZS to capitalize on its innovative product portfolio and strategic market positioning.

Challenges and Risks

While DZS has made substantial progress, it still faces certain challenges. The company is currently involved in three putative securities class action lawsuits related to its financial restatement, filed in June and August 2023. DZS is cooperating with an SEC investigation related to these events. Additionally, in October 2022, Plume Design, Inc. filed a lawsuit against DZS alleging breach of a reseller contract, seeking $24.75 million in damages.

Conclusion

As the telecommunications landscape continues to evolve, driven by the increasing demand for high-speed broadband, 5G deployments, and the growing importance of cloud-based technologies, DZS is well-positioned to capitalize on these trends. The company's diversified product portfolio, strategic partnerships, and commitment to customer success position it as a compelling investment opportunity for those seeking exposure to the dynamic and rapidly-changing world of digital infrastructure.

Overall, DZS has demonstrated its resilience and adaptability in the face of industry challenges. With a renewed focus on its core markets, a strengthened financial profile, and an innovative product roadmap, the company is poised to navigate the evolving broadband landscape and deliver long-term value for its shareholders.

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