Welcome to the 26th annual Needham Growth Conference. I'm Ryan Koontz. I cover the broadband access segment, among others, here at Needham. We're really pleased to be joined by DZS and Ted Moreau, Head of IR with DZS.
Yeah.
Welcome, Ted.
Well, thank you for having us, and really appreciate it. Good to see you again.
Yeah, you too.
Happy New Year, everybody.
Yeah. So, yeah, maybe you can give us a little background on the company, kind of how we got here, just set the, set the table for the context of what we're gonna talk about-
Sure
the company's current-
Yeah
- state.
Yeah.
And, and-
For those that don't know, the company was founded a little over, you know, 20 years ago. I don't know if anybody remembers the company Paradyne. It eventually became... Or that was eventually acquired by Zhone Technologies. Then in 2016, Zhone merged with the DASAN Network Solutions based in Korea, to create DASAN Zhone, right?
Right.
And then in 2019, the combined company went out and acquired KEYMILE. And so-
Mm-hmm
... you really had a very global organization now. In 2020, summer of 2020, Charlie Vogt comes on board, and really drove a very significant transformation of the company. You know, started focusing the engineering department. We've acquired three companies,
Mm-hmm
... two of them were shortly after he arrived, in the form of a software company named, called RIFT-
Yeah
... which does network orchestration software, and then an optical transport company called Optelian. And so those efforts have formed some of the instrumental engineering developments we've seen over the years, so a very significant engineering investment. We've consolidated, well, we had originally consolidated two manufacturing facilities, one in Germany, to our facility in Florida.
Mm-hmm.
And then last year announced we had outsourced that to Fabrinet.
Right.
An excellent partner to have, and very thankful to work with them. It's been a-
Yeah
... very strong success for us. And so that kind of sets the stage for, you know, everything that has transpired more recently. You know, I don't know if everybody's aware, but we had announced a couple of weeks ago that we are actually divesting our Asia business, and we can go into that. But so that kind of lays the picture of the company's history-
Yeah
... and where we are, and where we are today.
Which product markets do you focus on here? Primarily fiber access, broadband, optical?
Yes. Yeah, sorry. So we are a provider of broadband access, primarily in, you know, fiber access, fiber equipment. So if you think about a telecom service provider's central office delivering internet to the home, through optical line terminals, and then, you know, you terminate the fiber with your optical network terminal.
Mm-hmm.
Then you have your Wi-Fi signal in your house through wireless access points that we also design and develop. Then, you know, through some of the software capabilities that we've acquired, you know, you can have Wi-Fi management in the home, which helps, you know. For example, if you were to walk around your home, you'd have an app on your phone, and that could give you a sense for how strong the Wi-Fi signal is.
Mm-hmm
... at various points within the home, right?
Yeah.
That can help you diagnose where you wanna position some of your connected devices.
Yeah.
It also provides some feedback back to the service provider on some of the traffic that you know is running from your devices back you know into the network.
Sure.
It gives them a lot of information as to how to configure their networks, how to diagnose, you know-
Right
... and anticipate any troubleshooting.
Yeah. Excellent. So let's unpack the divestiture of the DASAN element, and that was just announced a little over a week ago.
Yeah, I mean, we're really excited-
It's a big move.
... about it. You know, when Charlie came on board, we really started focusing on, you know, several growth pillars, one of them being, you know, the fiber upgrade cycle that we still see as, you know-
Mm-hmm
... a five- to seven-year cycle that-
Yeah
... that's still in front of us, right? You know, we've started, you know, thinking about focusing on North America and EMEA. We believe that the margin profile in these two geographic regions is higher than what we were experiencing as a company. There's other, you know, certain, you know, vendor security risks at play, you know-
Mm-hmm
... on the geopolitical side-
Yeah
... that were very relevant, particularly in the European region.
Sure.
Right? And so as we started thinking about, you know, our business, and Charlie is constantly evaluating: What is the optimal structure of the business?
Yeah.
You know, what is the optimal product portfolio? Do we need to add, you know, something? Do we need to subtract? Is there subtraction by addition? That sort of thing, right?
Mm-hmm.
As we started thinking about, you know, our business overall, we were looking at, you know, our growth profile in the North American EMEA region, based off of, you know, the pipeline that we see, is really. It's actually in the double digits.
Mm-hmm
... you know, for a, for annual growth. Whereas, you know, in Asia, we weren't seeing that, that same, growth trajectory. Our margin profile-
It's more competitive over there.
It is more competitive. You know, and more receptive to some of the high-risk vendors that-
Sure
... you know, are prevalent in the industry. And so, because of that, the margin profile was a little bit more constrained, right?
Yeah. In APAC.
In the APAC region.
Mm-hmm.
And so we really felt as though, okay, well, if we can focus our resources and focus our energy on the North American EMEA region-
Mm-hmm
... then maybe that's, you know, where we generate higher gross margins and ultimately, you know, can drive and improve profitability profile, while narrowing our focus and keeping and maintaining our growth pillars, we felt as though that was-
Yeah
... probably a pretty good strategy to follow. And so, yeah, a couple of weeks ago, we announced that we're gonna divest the Asia business back to-
Mm
... the parent company of DASAN Network Solutions, which is the company that merged with Zhone in 2016.
Right.
Back to the parent company. You know, a great partner to have, and they've been very supportive along the way, and we continue to believe that they'll be a strong-
Yeah
... supporter.
So they financially took responsibility for some debt, I think, as part of the deal, and really cleaned up your balance sheet in the same process, and you raised some additional money as well.
Right. So if we step back and think about, you know, our balance sheet, in May of 2022, we had acquired a company called ASSIA, which is a software business that I was talking to you about, you know, the Wi-Fi management in the home-
Right
... and the service assurance. When we acquired that company for 1x revenue, so $25 million, we took on, you know, $25 million of debt-
Mm-hmm
... to fund that. As 2022, and then into 2023 progressed, we were having conversations with our lenders, and ultimately, we decided that, you know, we wanted to... You know, we were thinking about moving on, and refinancing some of the debt.
Right.
We entered into some loan agreements with DNI and some Korean banks in September of 2023, so that we could retire the existing debt.
Got it. That was kind of a bridge.
That was a bridge.
Mm-hmm.
And so with this deal that we've announced, we're selling the DNS business or our Asia business for $48 million. We had, through the debt from September, we had $43 million of debt on the balance sheet. So, you know, that cleans up the $43 million.
Right.
Then we have the incremental, you know, net of $5 million of cash that comes in. So then in addition to that announcement, we also announced the, you know, a $15 million, three-year term loan.
Yep.
And then we also announced a $10 million private equity placement-
Yep
... you know, that, that'll come in. So net of it is, you know, on the go-forward business is $30 million once we close on the transaction, which we expect to close in February timeframe.
Yeah.
That $5 million combines with the $10 million and the $15 million, so that's $30 million of net cash.
Yeah
... coming into the business.
Yep.
And then we'll have about $15 million of three-year term debt.
Great. You feel like that's sufficient working capital to power through here?
Yeah, I mean, we feel as though... We feel we're in a, you know, good spot on the working capital side. Certainly, you know, we're gonna continue to evaluate, you know, all of our spending and really, you know, make sure that we are very diligent with the cash.
Mm-hmm.
Very blessed, you know, and thankful for the funding and the financing that's come in.
Yeah.
You know, and we feel as though, you know, with a business environment that, you know, we can talk about in a little bit, but, you know, as you get into the second half of the year, we're a little bit more optimistic on things.
Mm-hmm.
And so-
Yeah
... you know, we feel as though this provides us the runway that we need to get there.
Great. Well, let's talk about the remaining product portfolio, the new DZS and what's the spectrum of that product portfolio there that remains?
Sure. And if we think about the Asia market, many of the products designed by the engineering team have been custom-designed for specific networks in Asia or specific customers in Asia.
Mm-hmm.
You're having a difficult time, or we were having a difficult time as DZS, leveraging each of the products that we were developing, you know, for those specific customers. As we, you know, thought about, okay, well, at the same time, we have been designing and developing more standards-based products.
Yeah.
We introduced the Velocity V6, optical line terminal-
Mm-hmm
... you know, that sits in the central office, which, you know, we're really excited about, and the pipeline for that, we're really excited about. You know, we announced the Saber 4400 , which is an optical transport box that sits at the edge of the network. You know, it's a new category of product, you know, that we've termed the middle mile. That's more of a standards-based-
Yeah
... sort of product.
Mm-hmm.
And so, you know, so those two on the equipment side, the Velocity portfolio and then the Saber 4400 , combined with the access devices that we have, the customer premise devices that we have-
Right
... which is the, the Xenia portfolio, or I'm sorry, the Helix portfolio.
Right.
So that forms the basis of the equipment portfolio-
The hardware footprint
... the hardware or equipment footprint.
Mm-hmm.
So you've got, you know, central office-based, you've got, you know, customer premise-based, and then you've got, you know, kind of out in the network-
Transport
... transport.
Mm-hmm.
and so we feel as though we have a, you know, a very strong portfolio with these new products. And then layering on the, on top, we have the software from the acquisitions that we did, you know, RIFT in March of 2021-
Right
... which was the network orchestration software that really, you know, we feel as though, you know, helps. That software expertise and the engineering talent has really been instrumental in helping us to drive a pipeline for the Velocity V6.
Yeah.
So we're really excited about that. And then...
There's a very limited set of competitors, really, in that space, in fiber access.
Yeah, well, I mean, if you think about, you know, the software portfolio that we have, you know, the CloudCheck software, you know, and the Expresse software from ASSIA, and then the Xtreme portfolio, the network orchestration from RIFT.
Yep.
You know, we have become the only provider of a very end-to-end suite of software from, you know, the network all the way to the customer premise.
Yeah.
And so, you know, being able to bundle that, you know, the software from the CloudCheck portfolio and the Expresse portfolio onto our equipment is something that, you know, is a high priority for us and a strategy, you know-
Yeah
... to sell more software in the future.
Sure.
Just so you know, people are aware, on the software side, for the most part, it is a subscription-based model. So we will go to the telecom service provider, and they would select, you know, say, the CloudCheck software or the Expresse software. We would sell them, basically, you know, subscriptions, so it would, you know, the dollar value would be determined based on a per subscriber basis.
Mm-hmm. Mm-hmm. That's great. I know you can't talk specific about the financials, you know, given the pending restatement, but can you give some context around demand right now? What the general commentary—qualitative commentary that you're seeing around the product side these days?
Yeah. I mean, I think it's, you know, it's probably, you know, not surprising to anybody that, you know, the industry, you know, if you think back to what happened in 2020 with COVID, right? And all of a sudden everybody was working from home, you know, school was. All the education classes were occurring from home, and so everybody was going onto Zoom and Microsoft Teams and whatnot, right?
Mm-hmm.
And so the amount of video traffic that was being consumed and you know over the access part of the network was quite significant. And so you saw a fairly significant shift in network traffic from the enterprise to the customer premise or the-
Yeah
... to the residential, right?
Right.
So, the demand started to accelerate, while at the same time, the supply chain teams, you know, weren't able to handle that acceleration of demand.
Yeah, 'cause the chip shortages and everything we saw.
Right. Exactly, right. And so our lead times went from, like, roughly 12 weeks, give or take, up to 52 weeks or even longer.
Yeah.
And so, you know, trying to manage through that from a, you know, from a business perspective was very difficult, and it was very taxing for the service provider as well.
Mm-hmm.
You know, realizing that: How am I gonna place an order, you know, for delivery in a year, right? So that was... It was a very difficult time, timeframe. Ultimately, you know, the supply chains, you know, caught up with, you know, kind of rightsized themselves and caught up. And all of a sudden, you know, many service providers were starting to receive products that they were expecting in, you know, six, 12 months down the road.
Yeah
... all of a sudden hit their shelves.
Arrived.
All of a sudden arrived, right?
Yeah.
And so you had this acceleration of shipments within the industry.
At the tail end of the supply chain crisis, as it corrected.
Right. So that started occurring in, you know, the tail end of 2022-
That's right
... and a little bit into 2023.
Mm-hmm.
It's no surprise that, you know, the industry is going through, you know, an inventory correction.
Yeah.
And, you know, I mean, certainly, you know, we've, you know, we're just like out, you know, all the other companies.
Sure.
I'm not gonna get into, you know, specifics on it, but we're like all the other companies. And you know, what does it feel like? You know, it... You know, there's a lot of chatter about, well, later in the first half of the year-
Yeah
... you kind of get through the bulk of it, and you know, you get into a you know, a better demand environment for the second half. And so we kind of feel as though, you know, for DZS specifically, all right, well, if what that, you know, those predictions come true-
Mm-hmm
... and, you know, maybe sometime in mid-Q2, the demand-supply relationship normalizes.
Comes back into equilibrium.
Yeah. Right. And then, you know, for DZS specifically, you know, Charlie talked about this on the call we had, a week ago, where he said: "Yeah, we've got several customers that we feel as though will ramp in the second half of the year.
Mm-hmm.
Okay, well, you know, and then at, you know, very tail end of the year, you have some of the BEAD funding that, you know, potentially comes into play. So, you know, we feel as though, okay, it... You know, to start 2024, you're still dealing with some of the inventory overhang. You may have a little seasonality aspect to it that creates a little bit more-
Mm-hmm
... you know, uncertainty. But as you get through Q2, you know, you start to think about the second half of the year.
Mm-hmm.
The business environment is better, and then DZS specifically has several projects that, you know, from new customer wins, that we-
Yeah
... have captured over the last, you know, year or so. Some of them we've publicly announced.
Yep.
You know, but those start to ship-
Which sort of markets are those in? The kind of exciting... Either, you know, important wins for the company. Are you seeing them in Europe, North America? What, which regions, countries do you think are most exciting for you?
Well, certainly, you know, some of the wins that we've announced so far, one is, you know, a major Tier 1 in Western Europe.
Mm-hmm.
One of them we announced via... You know, and we announced that one in, you know, about a year ago-
Yeah
... on our Q4 2022 earnings call. Then in October this past year, we announced Orange in-
Yeah
... in, also in Europe. So, you know, we have a couple of Tier 1s, where we are shipping our... Well, we will be shipping our Velocity V6-
Right
... with SD-NOS, network management software. Those projects are really exciting for us, you know, 'cause they really go at the heart of what our strategy is, and that's going after Tier 1s and Tier 2s-
Yeah
... in the United States and EMEA, and also going, you know, after opportunities.
I think those are both, those are both high-risk vendor displacements, I believe, as well.
Opportunities where it's high-risk vendor displacement.
Yeah.
And so, you know, we're really, you know, of the belief that these two wins, and certainly, you know, we have a couple others that, you know, that we're excited about, but these two in particular are, you know, where the, the market, you know, sees what we're doing, demonstrate that we are actually demonstrating success along the strategies that we've outlined.
Right.
And then, you know, we have, you know, some opportunities here in the United States, primarily, you know, more on the Tier 2 side.
Yeah.
But we're really excited about our Saber platform. You know, that does the middle-mile transport.
Yeah.
We feel as though that is a ripe product for the Tier 2s. Perfectly, you know, sized for their needs and their subscriber base. It's, you know, a product that doesn't have to sit in the central office. It can be outdoors-
Hardened.
It can be hardened.
Hardened ROADM and full ROADM capability, yeah.
And so we're really excited about, you know, the pipeline there. And certainly also with the V6 in the United States, the pipeline there is quite strong.
Mm-hmm.
Again, also largely at the Tier 1, or I'm sorry, Tier 2s. Though we're also, you know, pursuing some other opportunities out there as well. But, you know, from an equipment perspective, you know, we're really excited about the pipeline.
Yeah.
And then being able to bundle in the software really rounds out the portfolio.
Yeah. It's an exciting time, especially with the BEAD money coming. I think, you know, the general commentary from your peers is that, you know, we should start to see some bookings later this year from BEAD projects. You know, 2025 should be a nice year.
Yeah. Yeah. Well, it would be nice to have a normal year in this industry, because I don't think we've had a normal year since Charlie arrived in 2020, right?
Oh, man.
It seems like, you know, COVID acceleration, supply chain, you know, for us, foreign currency, which-
Inventory.
Yeah. Which now we've reduced our foreign currency risk. But-
Yeah.
You know, and you know, inventory correction, and so it'll be nice-
Yeah
... to just have a traditional year-
Yeah
... of just regular, you know-
Yeah
... economic growth, right?
Yeah. Let's talk about kind of some of the changes you guys have made on the operations side, too. I know you guys, you've you know, done some optimization of expense as well as, moved some of your manufacturing over to Fabrinet. Can you kind of walk us through some of the changes there you guys have made at the corporate structure?
Yeah, so, and as I had mentioned before, when the DASAN Network Solutions merged with Zhone Technologies, and then the company acquired KEYMILE, yeah, we wound up with a manufacturing facility in Germany.
Mm-hmm.
Another facility which we had, stemming back from the Paradyne days, so, you know, a facility in Florida. And so in 2021, the fall of 2021, we consolidated the German manufacturing facility into Florida.
Yeah.
And then, in the latter half of 2022, we announced that we would be shutting down our Florida facility and moving to a 100%, you know, outsource model.
Mm-hmm
... with Fabrinet.
Yeah.
And so, you know, Fabrinet's ability to scale was really attractive for us. You know, there was some investment that we had to undertake if we were gonna maintain internal manufacturing, but, you know, ultimately, we decided that it would be more cost-effective to outsource it. You know, in addition, you know, we consolidated ERP platforms-
Yeah
... uh-
Yeah
...which was a huge undertaking. You know, again, the consolidation of the group and then, you know, needing to fully integrate, you know, the companies together led to the consolidation of the ERP platforms, which, you know, we did that cut over about a year ago, a little under a year ago, and so that's, you know, that's going very well, and we're, you know, I mean, we're excited to be all on one platform now.
Yeah.
So that's good. You know, just trying to think of, you know, what else. No, I mean, you know, and we've done a good job on. You know, one of the other things actually that I would like to touch on is the importance of the brand recognition of the company, right?
Mm-hmm.
DZS was not a well-known company.
Right
... three years ago.
Right.
and now we've got, you know, Tier 1s in Western Europe that are, you know-
Right
... that have selected DZS, right?
Yeah.
Those customers, you know, in some instances, are going to their peers-
Yeah
... throughout Western Europe.
They're great reference customers.
and using, you know... Right. Exactly.
Mm-hmm.
And you know, acting as an extension of the sales force in a way, right? And so-
Mm-hmm
... so the pipeline from that perspective has really been solidified.
Yeah. Yeah, that's great. Are there any questions from the audience anybody would toss any up at us?
I'll just ask one-
Yeah, fire away.
... the demand environment.
Yeah.
So I think, not at all gonna hold you to a specific timeline, you have a positive inflection on the inventory issue, but I'm just curious to hear, as you think about the approximate timeline for a rollover in kind of the middle of the year, you know, what is it that you guys are seeing and hearing that's giving you comfort in that timeline to an improvement?
Well, a lot of it is, you know, just the conversations that you have with your customer base, right? You know, you have to, you know, maintain a, you know, a close relationship with them. You have to understand, you know, how they are approach, you know, projecting their business, for 2024 and their needs, right? And so from a demand perspective, the indications are, you know, there's actually some, some excitement out there, about, you know, the second half of, or actually about 2024 and, and whatnot. So, you know, we're optimistic about, you know, how the year will play out as the year progresses. You know, it's just a matter of what's the starting point, you know, just, you know, at the beginning of the year.
Though I think, you know, as we get into the second half, you know, from a Velocity V6 perspective, from a Saber 4400 perspective, you know, some of these new wins, we're pretty optimistic about. And you know, with the existing customers, the commentary has been really constructive, I'll say. So-
Two quick follow-ups there.
Yeah.
On the inventory side, is that mostly customer prem gear, where you're seeing the most kind of resistance on stocking? Or is it-
Yeah, we haven't-
Or across the board?
I mean, we haven't... I mean, I know that some of that was certainly...
I think Adtran saw that.
... at play in the industry.
Mm-hmm.
You know, that was some of the commentary that we had heard.
Yeah.
We haven't been very specific about that.
Okay.
But I would say, you know, by and large, on the access side, it's, you know-
Mm-hmm
... it's OLTs and customer premise.
Yeah.
You know, from our perspective, the Saber 4400 just started shipping.
Right.
So, there's not an inventory challenge there.
Of course, yeah.
... 'cause it's all brand new, right? So, and then, you know, it, you know, people should also understand that the Velocity V6, which is the, you know, the new product in the Velocity portfolio, right? I mean, we have a V2, now a V6, and a V14. You know, it's the V6 that a lot of the high risk, you know, high security risk opportunities are more relevant for. And certainly in the United States, we're seeing, you know, some, you know-
Mm-hmm
... very significant interest with that product. But, but that product also is, you know, just became available as well.
I see.
We had introduced it on a previous version, and then, you know, we've had to introduce a you know, Actually, we've just rolled out an SD-NOS version of that, which is generating a lot of interest. You know, and we've also had to, you know, reconfigure the product a little bit to match some of what the customers, you know, have acquired.
Got it. Got it. And
But that, all that, all that activity and engineering development is, for the most part, behind us.
Yeah, yeah. And the Saber's just coming to market. Where's the 4400 in terms of its release cycle and qualification?
Well, we just started shipping.
Excuse me.
Bless you.
Thank you.
We just started shipping for it. And you know, the pipeline for that is, you know, as I was saying, it is-
There's a lot of interest.
There's a lot of interest in it.
Yeah.
You know, but here again, it feels like it's a ... you know, it's gonna be a slow ramp.
Oh, yeah.
You start to see, you know, an improved demand profile in the second half.
Sure, it takes months and quarters, those sales cycles.
Right, and-
Pretty likely.
Right. And so and then, as you get into 2025, you know, we feel pretty optimistic about that product. So, so we feel really good about, about-
The setup
... about the setup there.
That's great.
Yeah.
Well, super. I appreciate everybody joining today. And, Ted, thank you very much for making the event.
Thank you. Happy New Year, everybody, and look forward to, you know, a successful 2024.
Yes, sir.
Thank you, Ryan.
Thank you.