DZS Inc. (NASDAQ:DZSI) is a global provider of access and optical networking infrastructure and cloud software solutions that enable the emerging hyper-connected, hyper-broadband world and broadband experiences. The company's comprehensive portfolio of products and services caters to the evolving needs of service providers, enterprises, and consumers in the rapidly evolving telecommunications landscape.
Business Overview
DZS operates in two key product technology segments: Access Networking Infrastructure and Cloud Software & Services. The Access Networking Infrastructure segment includes solutions for connecting residential and business customers, leveraging both fiber and existing copper networks to deliver high-speed broadband services. The Cloud Software & Services segment offers a suite of software capabilities in network orchestration, application slicing, automation, analytics, service assurance, and consumer broadband experience management.DZS has a global footprint, with a presence in the Americas, Europe, Middle East, Africa (EMEA), and Asia regions. The company's diverse customer base includes competitive and incumbent local exchange carriers, competitive access providers, internet service providers, wireless carriers, and resellers serving these markets.
Financial Performance
In the fiscal year 2022, DZS reported annual revenue of $375,691,000, a decrease from the previous year's revenue of $395,524,000. The company's annual net income for 2022 was -$37,431,000, compared to -$10,832,000 in the prior year. DZS generated annual operating cash flow of -$50,898,000 and annual free cash flow of -$55,430,000 in 2022.For the first quarter of 2023, DZS reported net revenue of $90,812,000, up 17.9% from $77,040,000 in the same period of 2022. The increase in revenue was primarily attributable to higher spending levels from the company's major customers in Asia, as well as revenue related to the ASSIA acquisition. Gross profit for the quarter was $29,827,000, or 32.8% of net revenue, compared to $26,825,000, or 34.8% of net revenue, in the prior-year period. The decrease in gross profit margin was due to a change in the number and mix of products sold, as certain lower-margin projects were accelerated into the first quarter, partially offset by higher margins on software sales related to the ASSIA acquisition.
Operating expenses for the first quarter of 2023 were $45,055,000, up 48.6% from $30,316,000 in the same period of 2022. The increase was primarily due to higher stock-based compensation, strategic hiring decisions across sales and administration, and restructuring charges related to the outsourcing of manufacturing from the company's Seminole, Florida facility. The company reported a net loss of $17,135,000 for the first quarter of 2023, compared to a net loss of $3,048,000 in the prior-year period.
Liquidity and Capital Resources
As of March 31, 2023, DZS had $28,892,000 in unrestricted cash and cash equivalents and $72,170,000 in working capital. The company's debt obligations consisted of $23,660,000 under the JPMorgan Term Loan, $12,000,000 outstanding under the JPMorgan Revolving Credit Facility, $919,000 under the Industrial Bank of Korea Loan, and $3,827,000 under the DNI Related Party Loan.Due to the ongoing risk of non-compliance with certain financial covenants in the next 12 months, the company's long-term debt obligation of $22,800,000 was classified as a current liability as of March 31, 2023. DZS is currently in discussions with its lenders to amend the debt agreement and mitigate the risk of non-compliance.
Geographical Breakdown
DZS generates revenue from three main geographical regions: Americas, EMEA, and Asia. In the first quarter of 2023, the company's revenue from the Americas was $24,855,000, or 27.4% of total revenue, compared to $23,061,000, or 29.9%, in the same period of 2022. Revenue from EMEA was $19,182,000, or 21.1% of total revenue, compared to $18,649,000, or 24.2%, in the prior-year period. Asia accounted for $46,775,000, or 51.5% of total revenue, up from $35,330,000, or 45.9%, in the first quarter of 2022.The increase in revenue from Asia was primarily driven by higher spending levels from the company's major customers in the region. The revenue growth in the Americas and EMEA was more modest, reflecting a combination of market demand and the company's strategic focus on capturing market share through new customer wins and new product introductions.
Segment Performance
DZS reports revenue across two main product technology segments: Access Networking Infrastructure and Cloud Software & Services.Access Networking Infrastructure revenue was $79,459,000 in the first quarter of 2023, up 9.7% from $72,462,000 in the same period of 2022. This increase was primarily attributable to higher spending levels from the company's major customers in Asia.
Cloud Software & Services revenue was $11,353,000 in the first quarter of 2023, up 148.0% from $4,578,000 in the prior-year period. The significant increase was due to the revenue related to the ASSIA acquisition, as well as increased product and software sales.
Risks and Challenges
DZS operates in a highly competitive and rapidly evolving telecommunications industry, which presents several risks and challenges. The company faces competition from larger, well-established players, as well as emerging competitors, which could impact its market share and pricing power. Additionally, the company's business is subject to macroeconomic pressures, including concerns about energy costs, geopolitical issues, inflation, and supply chain disruptions.The company's debt obligations and the risk of non-compliance with financial covenants also pose a significant challenge. DZS is actively working to mitigate this risk through negotiations with its lenders and by implementing cost-saving measures, such as reducing its cost structure and cash outflows, managing receivable balances, and outsourcing manufacturing.
Outlook and Growth Opportunities
Despite the challenges, DZS sees significant growth opportunities in the hyper-connected, hyper-broadband world. The company's comprehensive portfolio of access, optical, and cloud software solutions positions it well to capitalize on the increasing demand for high-speed broadband, 5G, and cloud-based network services.The company's recent acquisition of ASSIA has strengthened its cloud software capabilities, providing additional recurring revenue opportunities through the deployment of its CloudCheck and Expresse software solutions. DZS also continues to invest in research and development to drive innovation and maintain its competitive edge in the market.