DZS Inc. (OTC: DZSI) is a global leader in developing Networking, Connectivity, and Cloud Edge software solutions that enable broadband connectivity everywhere. The company has undergone a significant transformation in recent years, divesting its lower-margin Asia business, acquiring the subscriber access technology leader NetComm, and refocusing its efforts on its core broadband networking and cloud software portfolio.
Business Overview and History DZS was incorporated in June 1999 under the laws of the state of Delaware. Originally founded as DASAN Zhone Solutions, the company focused on developing networking and connectivity systems and cloud software solutions to enable broadband access globally. Over the early years, DZS grew through a series of acquisitions, expanding its product portfolio and geographic reach. In 2017, the company changed its name from DASAN Zhone Solutions to DZS Inc. to better reflect its evolving business strategy and solutions.
During the 2020-2022 timeframe, DZS faced several operational and financial challenges, including supply chain disruptions, component shortages, and increasing costs that impacted its financial performance. These issues led to the need for a major restatement of its financial results from 2022 through the first quarter of 2023. To address these challenges, DZS underwent significant restructuring efforts, including outsourcing manufacturing, reducing its global footprint, and streamlining operations.
Despite the operational and financial hurdles, DZS maintained its commitment to innovation, investing over $100 million in technology development over the past several years. This has resulted in the introduction of several new product lines, including its DZS Velocity portfolio for broadband access, DZS Saber portfolio for mobile xHaul and edge transport, and DZS Helix connected premises solutions.
In 2024, DZS made a strategic decision to divest its Asia-based operations, including subsidiaries in Korea, Taiwan, Vietnam, India, and Japan. This divestiture allowed the company to streamline its focus and resources on its core markets in the Americas, Europe, Middle East, Africa (EMEA), and Australia/New Zealand (ANZ). The Asia sale, which closed in April 2024, generated $3.8 million in cash and eliminated $34.3 million in debt owed to the acquirer, DASAN Networks, Inc.
Following the Asia divestiture, DZS further bolstered its broadband networking and connectivity capabilities through the acquisition of NetComm Wireless Pty Ltd. in June 2024. NetComm is a leading provider of innovative broadband networking solutions, including fiber extension, fixed wireless access (FWA), home broadband, and industrial IoT (IIoT) products. The $8.1 million acquisition, which included a contingent consideration component, enabled DZS to expand its product portfolio and accelerate growth opportunities in key international markets.
Financial Overview DZS has faced some financial challenges in recent years, including the need to restate its financial results for 2022 and the first quarter of 2023. This restatement process was completed in 2024, and the company is now current with its SEC filings. Despite these headwinds, DZS has demonstrated a commitment to improving its financial performance and strengthening its balance sheet.
For the full year 2023, DZS reported total revenue of $244.54 million and a net loss of $135.22 million. The company's gross profit margin for the year was 16.5%, and its operating expenses totaled $149.27 million. DZS ended 2023 with $38.58 million in net debt and $22.56 million in stockholders' equity.
In the first nine months of 2024, DZS generated $96.88 million in revenue, representing a slight year-over-year decrease of 0.9%. However, the company's adjusted gross margin improved to 35.4%, up from 26.8% in the same period of 2023. DZS has also made progress in reducing its operating expenses, which decreased by 11.3% year-over-year during the first nine months of 2024.
For the three months ended September 30, 2024, DZS reported net revenue of $38.15 million, a 67.8% increase compared to the same period in the prior year. This increase was primarily driven by the acquisition of NetComm, which contributed $12.9 million in net revenue for the quarter. Gross profit for the quarter was $11.22 million, a significant improvement from the $1.04 million gross profit in the prior year period. The company saw a 23% increase in revenue sequentially from Q2 2024, driven in part by the NetComm acquisition. However, net income remained negative at -$25.65 million due to various one-time costs and expenses. The company notes that margins would have been higher if not for inventory reserves taken in the quarter.
Operating cash flow (OCF) and free cash flow (FCF) turned positive in Q3 2024, with OCF at $8.38 million and FCF at $8.26 million, as the company focused on monetizing inventory and improving collections.
Liquidity One of DZS's key financial priorities has been to optimize its cost structure and improve its liquidity. The company has implemented various cost-saving initiatives, including the divestiture of its Asia business and the recent $34 million sale of its network assurance and in-home WiFi management software portfolio. These actions have strengthened DZS's balance sheet and provided additional financial flexibility.
As of September 30, 2024, DZS had $5.7 million in cash and cash equivalents, with $24.1 million in working capital. The company's contractual debt obligation under the EdgeCo Loan Agreements stood at $30 million as of the end of the third quarter, with the debt balance net of unamortized discounts and deferred issuance costs totaling $16.4 million. DZS has a $30 million credit facility, of which $24.6 million was drawn as of the most recent quarter.
The company's debt-to-equity ratio stands at 0.51, while its current ratio is 1.22 and quick ratio is 0.50.
Operational Highlights and Outlook DZS has made significant progress in aligning its operations with market dynamics and customer demands. The company's four key performance initiatives include:
1. Strengthening its balance sheet, improving profitability, and converting inventory to cash. The recent $34 million sale of the network assurance and WiFi management portfolio has reduced DZS's debt by $15 million and added $15 million in cash to the balance sheet.
2. Completing its cost-saving initiatives, including synergies from the NetComm acquisition. DZS expects these initiatives to be fully implemented by the end of 2024, with the savings reflected in its financial results starting in the first quarter of 2025.
3. Executing on the sales synergies from the NetComm acquisition, which has already contributed to a growing sales pipeline and backlog. The company is encouraged by the cross-selling opportunities between its existing customers and the former NetComm customer base.
4. Monetizing its $79 million in inventory, which is aligned with the company's sales pipeline, scheduled backlog, and ongoing projects. DZS anticipates converting this inventory to cash over the next 4-5 quarters.
Looking ahead, DZS is cautiously optimistic about the recovery in its core markets, particularly in the Americas, EMEA, and ANZ regions. The company expects service providers to return to pre-COVID spending levels and normalized deployment patterns in 2025, and it anticipates that various government stimulus programs, such as the $42 billion Broadband Equity, Access, and Deployment (BEAD) program in the United States, will begin to accelerate funding during the second half of 2025.
DZS has also taken steps to position itself as a leader in the BEAD program, with its broadband access portfolio recently certified as Build America, Buy America compliant. This certification aligns the company's solutions with the program's requirements and strengthens its competitiveness in this important market.
For Q4 2024, DZS anticipates revenue and profitability to improve compared to Q3 2024, based on its growing sales pipeline, scheduled backlog, and customer/partner interactions.
Product Portfolio DZS's product portfolio is divided into four main segments:
1. Network Edge Access: The DZS Velocity portfolio offers a variety of solutions for carriers and service providers to connect residential and enterprise customers. These products enable high-speed internet access, voice, and video services. The portfolio's system-on-a-card technology allows for rapid transition between different network technologies, including GPON, XGS-PON, and 50G PON. Many of the Velocity OLT chassis and line cards are certified compliant with the Build America Buy America requirements.
2. Network Edge Optical: The DZS Saber portfolio provides solutions for mobile operators and service providers to upgrade their edge transport to 400 Gbps speeds and support 5G xHaul systems. These solutions are open, software-defined, and field-proven, supporting Ethernet switching, layer 3 IP, and MPLS.
3. Connectivity: The DZS Helix connected premises product portfolio, Aurus fixed wireless access products, fiber extension portfolio, and industrial IoT products offer solutions at or near the customer premises. These products enable broadband connectivity via Wi-Fi, 4G/5G, and Gfast technologies, catering to various deployment scenarios including FTTx, multi-unit dwellings, and industrial environments.
4. Cloud Software: DZS's Cloud Software platform provides capabilities in network orchestration, application slicing, and automation. The DZS Xtreme solutions offer a carrier-grade network-slicing enabled orchestration platform, while the Expresse software provides multi-vendor, multi-technology network assurance. The CloudCheck software offers advanced WiFi experience management and analytics.
Geographic Performance Following the divestiture of its Asia business in 2024, DZS's geographic focus is now primarily on the Americas, Europe, Middle East, Africa, and the newly added Australia/New Zealand markets through the NetComm acquisition. The majority of DZS's revenue comes from the Americas and EMEA regions, with the Asia Pacific region contributing a smaller portion.
Risks and Challenges Despite the progress DZS has made, the company still faces several risks and challenges. The ongoing global macroeconomic pressures, including concerns about energy costs, inflation, and the availability of credit, could impact the company's customers and their willingness to invest in new broadband deployments.
Additionally, DZS continues to operate in a highly competitive industry, with established players and emerging challengers vying for market share. The company's ability to execute on its sales synergies from the NetComm acquisition and maintain its technological edge will be critical to its long-term success.
The company's recent restatement of its financial results also highlights the importance of strong internal controls and corporate governance. DZS has taken steps to address the underlying issues that led to the restatement, but the company will need to demonstrate its ability to maintain accurate financial reporting and compliance going forward.
Conclusion DZS Inc. has undergone a significant transformation in recent years, refocusing its business on its core broadband networking and cloud software solutions. The company's divestiture of its Asia operations and acquisition of NetComm have streamlined its portfolio and positioned it for growth in key markets. While DZS faces some ongoing challenges, its focus on cost optimization, balance sheet improvement, and execution on strategic initiatives suggest that the company is well-positioned to navigate the evolving industry landscape and capitalize on emerging opportunities, such as the BEAD program in the United States. The company's improved financial performance in recent quarters, coupled with its strategic initiatives, provide a foundation for potential growth as the broadband infrastructure market continues to evolve.