Hello, and welcome to the DZS acquisition of NetComm conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad, and to withdraw from the question queue, please press star, then two. As a reminder, this conference is being recorded. I would now like to hand the call to Ted Moreau, Vice President of Investor Relations. Please go ahead.
Thank you, MJ, and welcome to the DZS conference call to discuss the NetComm acquisition. Joining me today to provide a company update and discuss the NetComm acquisition announcement are DZS President and CEO, Charlie Vogt, CFO, Misty Kawecki, Chief Product Officer, Miguel Alonso, and newly hired Chief Customer Officer, Scott St. John. On our discussion today, we'll contain forward-looking statements based on our current expectations regarding future events or the future financial performance of the company. These statements are subject to risks and uncertainties, and actual events or results may differ materially. Please refer to documents that the company files with the SEC that are also available on the investor relations section of our website. Please note that unless otherwise indicated, any financial metrics being provided to you on this call are determined on a non-GAAP basis.
However, during our call today, we will only be discussing the DZS business and NetComm acquisition and will not be discussing DZS financial results or financials associated with the restatement, which remains ongoing. With that said, per our April 24th announcement, we are pleased the Nasdaq has granted us an extension to become compliant with the SEC filings by August 5th. During the second quarter, we will be attending investor conferences hosted by Needham in New York on May 14th and by Craig-Hallum in Minneapolis on May 29th. I will now turn the call over to Charlie.
Thank you, Ted, and thank you everyone for joining the conference call this afternoon, and for a few of us that are here in Sydney, Australia this week, good morning. Today, we will profile our proposed acquisition of NetComm and the investment thesis behind the acquisition, and as well as the progress that we're making on many fronts. Before getting into the transaction rationale, and for the benefit of current and prospective customers, partners, and shareholders, I will provide relevant background information pertaining to the company's journey that has advanced us to this point. Following Lucent Technologies' acquisition of Ascend Communications in 1999 for a record $20 billion, the founders of Ascend Communications established Zhone Technologies. The company operated as Zhone until the merger with DASAN Network Solutions in 2016, creating DZS, DASAN Zhone Solutions.
The merger brought together two broadband networking innovators who were pursuing their respective regional domains in North America and EMEA, and separately, Asia. The investment thesis behind the merger was designed to create global scale, leverage the investments both companies were making across broadband networking technologies, and for DASAN Network Solutions to become a U.S. public company. The merger was a non-cash transaction, which resulted in DASAN Networks Inc., the parent company to DASAN Network Solutions, owning a portion of DZS in common shares. Then, in 2019, DZS acquired KEYMILE, a regional European access networking company. I joined DZS in August of 2020, following 30 years in the telecom industry, working for companies such as Ascend Communications, Lucent Technologies, Adtran, and Genband.
During my 12 year tenure as CEO of Genband, the leadership team successfully navigated through the post-dot com era, the financial crisis, and ultimately experienced hypergrowth, which included numerous acquisitions, including acquiring Nortel's voice-over IP business from bankruptcy in 2012. During my tenure, the company grew revenue to approximately $700 million, with gross margins of 50% and achieved double-digit EBITDA margins. Today, Genband is known as Ribbon Communications and trades on the Nasdaq under the ticker symbol RBBN. I have been fortunate to lead some of the industry's most forward-thinking and trendsetting technology companies for the past 22 years. My deep knowledge of the industry, valuable customer and partnership relationships, and extensive experience in M&A led me to DZS. I joined DZS with a long history and understanding of Zhone since its inception.
My focus in 2020 and the first half of 2021 was people, technology and customers. I have been fortunate to recruit exceptional leaders whom I have worked with over the past two decades across all functions of the company. One of my early appointments was Miguel Alonso, who today leads our research and development team. Miguel joined DZS soon after I did, nearly 20 years after spending with Calix. Today, and together, we laid out a technology vision and go-to-market playbook that led to the combined $90 million of working capital raised in January of 2021 and November of 2022, designed to eliminate our debt at the time and accelerate our innovation initiatives, including three strategic technology acquisitions.
Through the combined alignment with our customers and innovation and our acquisitions of Optelian, RIFT, and ASSIA Software Platforms, we've assembled an enviable portfolio of network edge, optical access, and cloud software solutions designed for middle and last mile access that we believe is unrivaled in today's market. As we begin to assess the value-added benefits of artificial intelligence across our optical edge, core access, and connected home and enterprise devices, we have the unique opportunity to further extend our technology differentiation. 2023 was a challenging year for our industry and especially for DZS, due to an unforeseen restatement, which we expect to have the required financial statements restated and the delinquent financial statements filed by early August.
During the COVID years of 2020 through 2022, service providers around the world were challenged to meet the increased demands of high-speed broadband, as nearly eight billion people were working, learning, and socializing from home. Additionally, private equity-backed fiber overbuilders, wireless internet service providers, and utility cooperatives began to invest in fiber-based broadband networks to challenge incumbent operators. The combination of incumbent service providers accelerating investments in their broadband networks to respond to customer demand, new entrants, and the ramp-up of more than $100 billion of global broadband stimulus funds created unprecedented supply chain challenges impaired by an inconsistent workforce, which was impacted by the pandemic.
As such, and through at least the first half of 2023, many service providers accelerated broadband networking purchases to ensure that they were able to control their deployment schedules without supply chain interruptions, ultimately pulling forward purchases that would have likely been purchased in 2024 on a more normalized basis. During 2023 and up to today, we have embarked on many strategic initiatives that we anticipate will improve our competitive technology position, as well as our financial performance over the long term. From a technology perspective, during the second half of 2023, we launched our next-generation optical edge Saber 4400, our next-generation access edge Velocity V6 optical line termination platform, designed to support 50 GB, as well as our next-generation multi-vendor, multi-domain software automation and orchestration platform, Xtreme.
During this period, and aligned with our internal controls, governance, and a focus on recurring business and profitability, we have taken a prudent approach to our customer selection process with an emphasis on quality versus quantity. We've accepted the risk of top-line revenue impacts in the short term in lieu of a higher quality customer, resulting in better technology alignment, improved financial terms and conditions, and with higher gross margins aligned with our long-term financial model. It's hockey playoff season in the United States, and one of the most famous hockey stars, Wayne Gretzky, once said, "Skate where the puck is going, not where it's been." We continue to build our technology playbook and our go-to-market strategy aligned with where the industry is going, not where it's been.
Finally, in April of 2024, we closed on the divestiture of our Asia business, which included DASAN Network Solutions, based on several factors, including the current competitive landscape across many Asia countries, the strong U.S. dollar, which continues to impact the yen and yuan, unfavorable gross margins, three technology acquisitions and innovation advancements that were primarily aligned with our Americas, EMEA, and ANZ regions, and finally, our focus on open, standards-based, software-enabled solutions. The decision to divest our Asia business has refined our go-to-market focus, aligning our strategy and playbook with the Americas, EMEA, and ANZ regions. With our exposure to foreign exchange minimized, supply chain normalized, software and services representing a higher percentage of our overall revenue, and our go-to-market focus shifting away from the competitive landscape in Asia, our gross margins have improved significantly, and our technology roadmap and deliverables have been simplified and unified.
Divesting Asia also eliminated $43 million of debt. Today, and prior to the proposed acquisition of NetComm, DZS only has $15 million of long-term debt with no financial performance covenants. This brings us to our announcement yesterday regarding our binding agreement to acquire NetComm. Our vision and strategy for the past several years has been centered around broadband network and cloud software innovation, enabling service providers to become more agile, more secure, more experience-focused, and more ESG compliant. The acquisition of NetComm underscores our commitment to innovation at the network edge and further aligns with our mission of becoming the premier technology leader in broadband networking and cloud software management solutions. NetComm, as a standalone company, was limited by its sales reach, and with a portfolio comprised of only subscriber access technology.
Combined with DZS, NetComm's fiber extension, home broadband, fixed wireless, and industrial IoT solutions will represent one of the most complete, technologically advanced, open and standards-based broadband networking and cloud management software portfolios in the world. Furthermore, the NetComm acquisition expands our customer footprint across North America, Latin America, Europe, Australia, and New Zealand, and with some of the most forward-thinking and admired service providers. The key benefits to our investment thesis are as follows, and in no particular order. Scale. The acquisition of NetComm provides us with meaningful revenue contribution, increasing the scale of our business and providing new growth opportunities across our combined customers and regional landscape.... Scope. NetComm's customers will provide DZS with numerous flagship service providers across the United States, Canada, Europe, Australia, and New Zealand.
Across our combined 300 active customers, there is minimal customer overlap, creating a significant opportunity for cross-selling and becoming a more relevant and valuable technology partner to our combined customers. Technology. NetComm adds an extensive and market-leading subscriber access portfolio, complementing our broadband access portfolio. Software expansion. NetComm's subscriber access portfolio is widely deployed, creating an opportunity to integrate and synergize our network assurance and in-home Wi-Fi software management solutions. And finally, people. NetComm brings to DZS an extremely talented team of more than 100 employees, including approximately 60 research and development and customer support team members. As service providers shift their fiber everywhere focus and strategy from homes passed to homes connected, a broader range of subscriber access solutions will be required. NetComm's subscriber access portfolio will accelerate the completeness of our broadband networking and cloud software portfolio.
NetComm's fiber extension products will allow service providers to deliver fiber to the curb, fiber to the home, and fiber to the building, leveraging existing infrastructure to deliver gigabit speeds to residential homes, multi-dwelling units, and enterprise buildings. We anticipate that fiber extension solutions will represent more than $100 million annually for the next several years, especially as new broadband stimulus funds across the United States, U.K., and Germany begin to be deployed. NetComm's home broadband portfolio delivers the latest Wi-Fi technologies, including Wi-Fi 7, which will be delivered during the second half of 2024. NetComm has a long history of delivering disruptive innovation and partnering with marquee service providers across North America, Europe, Australia, and New Zealand.
With the addition of NetComm's R&D team, we will continue to enhance our ONTs, DPUs, and home broadband portfolio, leveraging many of the differentiated attributes NetComm has developed over the years. We intend to make available our Wi-Fi management software as an integrated agent with NetComm's home broadband solutions. We anticipate there will be additional subscriber access solutions. DZS will be better positioned to participate in the global home broadband market that Omdia Research and DZS anticipates will grow from $2 billion in 2024 to over $5 billion by 2027. NetComm's fixed wireless solutions deliver high-performance broadband services to homes and enterprises, leveraging 4G and 5G millimeter wave technology. In locations where it's deemed to be cost-prohibitive and time-sensitive, fixed wireless is an ideal solution to deliver fiber-equivalent gigabit broadband services.
We also intend to extend our network assurance software to differentiate NetComm's fixed, wireless, and IoT solutions. Recent studies by J.D. Power and Ericsson have shown that fixed wireless subscriber satisfaction, especially when deployed with 5G, is scoring higher than cable and DSL services, reflecting higher performance, reliability, and overall improved value. As such, we believe fixed wireless will have a meaningful role in the government programs, such as the $42 billion of BEAD programs in the United States. Market surveys indicate that 10% or more of BEAD funds will be allocated and invested leveraging fixed wireless solutions. Omdia and DZS research and analysis leads us to believe that the fixed wireless market will represent upwards of $3 billion annually over the next several years.
NetComm's industrial Internet of Things portfolio enables businesses and enterprises to remotely monitor and manage their assets, utilizing 4G and 5G millimeter wave technology, including Wi-Fi. Industrial IoT has become an extension of the fixed wireless market and will strengthen our existing FiberLAN enterprise portfolio. NetComm has shipped hundreds of thousands of industrial IoT devices spanning the United States, Europe, Australia, and New Zealand, giving us confidence that we can continue to expand this portfolio across the broader North America, Latin America, EMEA, Australia, and New Zealand markets. Additionally, the combination of fixed wireless, Wi-Fi, industrial, IoT, offers unique advantages and use cases for 5G private networks, further expanding our addressable market.
The NetComm industrial IoT portfolio creates an opportunity for us to participate in a connected everything market that is estimated by Omdia and DZS Research and Analysis to grow from approximately $2 billion in 2024 to nearly $3 billion by 2026. From a go-to-market perspective, and with our recent appointment of former ADVA global sales leader, Scott St. John, as our new Chief Customer Officer, our number one focus will be to meet and exceed expectations of NetComm's customers, and then expand our technology and selling strategies across our combined customers. In closing, we are creating what we believe to be the industry's most differentiated broadband networking and cloud software pure-play technology company.
We believe that 2024 will flush out most of the inventory over-rotation and forward purchasing that occurred in 2022 and 2023, representing a more normalized capital spending environment in the second half of 2024 and into 2025. The proposed NetComm acquisition has all the ingredients of being transformational from a technology, customer, people, working capital, and financial performance perspective. Our target is to close the transaction within the second quarter of 2024. I want to thank our customers, suppliers, partners, employees, and investors for their loyalty and support over the past year. While 2023 was a challenging year, we persevered, and as a result, we are a stronger and more resilient company than ever. As released the week of April 22nd, the Nasdaq granted us the full filing extension period to complete our restatement and file the delinquent financial periods.
As Misty will share, we expect to be current with our financial filings in all outstanding periods on or before August fifth. With that, I'll now turn the call over to Misty.
Thank you, Charlie, and thank you for joining us today. As you are aware, we are currently in a restatement process, limiting our ability to comment on financial results. Before discussing the NetComm transaction, I would like to provide an update on our restatement progress. In late May 2023, DZS management raised questions regarding the recognition of revenue, specifically relating to two customers in our Asia Pacific region. Following preliminary confirmation of the two revenue recognition accounting matters in question, on June 1st, 2023, we communicated that our Q1 2023 financial statements could no longer be relied upon. Company's Audit Committee then engaged with an independent legal counsel and forensic accounting team to investigate further.
As a result, we did not timely file Forms 10-Q for the periods ended June 30th and September 30th of 2023, or the Form 10-K for the fiscal year ended December 31st, 2023. That the fact-finding portion of the Audit Committee's investigation was substantially complete in December 2023. Importantly, the Audit Committee adopted all remediation recommendations, which the company is now in the process of implementing, including those relating to processes and controls regarding revenue recognition. Earlier this year, we engaged BDO as our new audit firm, who we are now working with to restate quarterly and year-end financial statements for 2022 and Q1 of 2023. Upon completion, we will also file the delayed reports with the SEC, which we anticipate will take place before the Nasdaq extension deadline of August 5th.
With potentially just one month of financials to report as part of our Q2 2024 10-Q filing, we do not anticipate any delay resulting from the NetComm acquisition. Now turning to the NetComm acquisition, we are paying $7 million to acquire NetComm, with the potential for an earn-out of up to $3 million if annual revenue in 2024 achieves up to $87.5 million. From a geographic revenue perspective, NetComm's regional markets align well with our existing go-to-market strategy, and we expect sales synergies to be realized over time, and especially when anticipated broadband government programs, such as BEAD, begin to benefit in 2025 and beyond. We anticipate the NetComm business will be slightly dilutive to our blended gross margins, which increased substantially following our Asia divestiture.
We anticipate NetComm's financial contribution to be accretive to EBITDA and cash flow by Q3 2024. We expect the acquisition to close before the end of the second quarter and expect to be closing an incremental three year, $15 million term loan to fund the acquired business and planned sales and technology synergies between both companies and growth opportunities. The new term loan will mirror that of our existing three year, $15 million term loan, including the issuance of warrants to the applicable lender to subscribe for shares of the company's common stock. This will bring our total long-term debt to $30 million with no traditional financial performance debt covenants, providing us with favorable financial flexibility. Thank you for your time this afternoon and your interest in DZS.
We are encouraged with the progress we are making across so many work streams, from our differentiated products to the completion of our restatement, to the complementary benefits of the acquisition of NetComm and its employees. With that, we will now open the line for questions. Thank you.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, you may press star, then two. We will now pause momentarily to assemble our roster. As a reminder, to ask a question, you may press star, then one. Today's first question comes from Tim Savageaux with Northland Capital Markets. Please go ahead.
Hi there. Good afternoon, and, congrats on the, transaction. I wanted to follow up with a question on gross margins. My impression historically that, NetComm might be running, you know, something in the, in the twenties. Maybe that's improved, but, you know, when you mention modest dilution to gross margins, I'm wondering if you could sort of frame it in that context, giving a pretty meaningful revenue contribution on the one. So that's one question. The other is, I also get the sense that, you know, I'm looking for the breakdown between wired and wireless solutions, I guess. I think it may be more of a majority on the wired side historically, but that may have changed, and, I wanted to see where that stands right now. Thanks.
So, Tim, I'll start out with the financial. Yeah. You want me to start with the financial commentary, Charlie?
Yeah, sure.
So as it relates to the historical performance of NetComm, we can't really speak to the financial performance previously provided by Casa, and unfortunately, won't be able to speak to any guidance at this time. We did note, of course, the top-line revenue incentive of the earn-out of $72 million-$87 million. From a gross margin perspective, you have to look at the, look at the total picture of DZS after the divestiture and then, the commentary of bringing in NetComm, and we'll be better, able to provide, clarity on that once we are current with our financial statements.
Yeah, I'd just layer in, Tim, that I think the margins on the acquired company is trending much higher than I think what you were referring to in the 20s. That's not what we're seeing right now and certainly not the performance that we expect. I mean, our expectation is that that business will perform in the 30%. And obviously, with the divestiture of Asia, our standalone DZS business from a margin perspective is performing much better.
Okay. I wanted to follow up on the kind of breakdown, kind of wired versus wireless.
Yeah, we certainly know the answer to all of that. You know, to your point, there's the fiber extension portfolio and the in-home broadband portfolio, and then you've got the fixed wireless and the IoT on the wireless side. You know, today, we're not gonna talk specifically about the blended breakdown, and I don't know that we will going forward, so I don't want to establish something today that we can't follow up with down the road. But I would say that all four of the segments are performing relatively well on a standalone basis.
Okay. Well, if I could follow up there, and you've, you've given a range, and that's, I guess, for calendar 2024, I guess, you, or, well, I, I don't know whether it is or whether maybe it's a forward 12 months, I don't know. But, and of course, you know, historically, the, you know, company's done much higher revenue numbers. You've had some, you know, customers that have, that have gone away. But, you know, as you look at it now, whether it's a run rate or, for the year, I mean, what's the kind of growth profile of, of NetComm at this point? And, and looking forward, you know, what, what sort of growth do you think you can achieve?
Well, like I said, I mean, and I know it's hard. It's hard for us, it's hard for, you know, analysts following the company right now, that we're not, we're not in a position, nor are we prepared to provide any sort of guidance right now. I, I will say that I think the unique attribute of the combination of DZS with NetComm is the, is the overall technology and, and portfolio synergies. And so, you know, when, when I look at the NetComm business inside of Casa, it was a bit of an orphan in the sense that, you know, you had their 5G core business, you had your CMTS business, and then you had this telco subscriber access business. But inside of DZS, it's much different. I mean, the entire portfolio within DZS is all telco-focused.
So when I look at, you know, for example, the fiber extension portfolios, the in-home, Wi-Fi portfolio, and the complementary nature, with that of our own ONTs, our own Wi-Fi portfolio, and our, and our, OLT and, and optical transport products, there's a ton of synergies there. And, frankly speaking, as we spend more and more time, with fixed wireline operators, who have an affiliation with mobile, operators or in an MVNO, perspective, there's a lot of opportunity, I think, for us to fill a last-mile access gap with fixed wireless.
When we spent time with NetComm's fixed wireless customers and IoT customers through the final due diligence process, we were impressed with the favorability of where I think a lot of mobile operators who are trying to serve access customers that, you know, either it's too costly or it takes too much time to be able to get fiber to the home or to the building. And so, you know, we're actually encouraged with our ability to now be able to provide a complete last-mile access portfolio, regardless of how the service provider wants to deliver broadband services to the home.
Okay, maybe I'll try one more. And I think in the sale to DASAN, you kept your Australian, New Zealand stuff, which, you know, I think that makes sense in this context, if I'm remembering that properly... And, you know, you called out a number of carriers kind of bringing into the fold there. You know, I'm gonna assume, and, you know, you got Bell Canada and some other guys, but that this is gonna increase your revenue exposure in that region. And just as a one-off, I know NBN was historically a pretty big customer. I don't see them mentioned. Did something change there?
Yeah. So to answer your question, I mean, we are acquiring the legal entity. And, obviously, it will give us a pretty significant footprint in Australia and New Zealand, which today, as you point out, we don't have a footprint at all. So it will give us a substantial footprint to not only leverage the success that NetComm has had to this point, but it'll also give us an opportunity to better compete with Adtran and Nokia in the region, you know, with our broader broadband networking and software portfolio.
I mean, if you think about just the two decades of progress that NetComm has made with, you know, numerous customers spanning Australia and New Zealand, you know, just from a software complementary nature perspective with our in-home Wi-Fi software and our network assurance, there's a significant opportunity. I mean, we have been aggressively pursuing companies like NetComm and Telstra and Optus and others in the region with our OLT and optical transport. So this will certainly layer in a pretty substantial footprint of employees and support resources and R&D resources in the region.
The other thing I think, you know, you have to fully appreciate is, as it relates to what customers we could speak to, in the investor deck that we posted just shortly after the call, as well as, you know, what was noted, it was what customers would allow us to do. I mean, as you know, some customers, like NBN, who has been a large and significant customer of NetComm for many, many years, like others, you know, don't necessarily allow technology companies to be able to mention their name, so in any kind of formal press release. And that's indicative of how some companies are.
We were fortunate that UScellular and Lumen and More Telecom were able to provide us with a very thoughtful and a supportive quote in the press release that was issued today. But it's always something that we're trying to get just as a validation point, Tim, but I wouldn't take the fact that there are some logos missing on a presentation to have any kind of indication that they're either no longer a customer or they're not a customer. It has a lot to do with internal company policies that some companies have.
Got it. Thanks.
Thanks.
Thank you. As a reminder, to ask a question, please press star, then one.
Okay. Well, we certainly appreciate the opportunity to provide everyone with an update. We certainly expect to be much more active and a more fulsome communication once we provide our updated financials on or before August 5th. You know, we're expecting, as I said earlier in the call, to close the transaction in the second quarter. There'll certainly be an opportunity for us to communicate more formally once we have closed on the transaction. And with that, unless I'm missing anything, Ted and team, I think that's all that we have for today.
No. Yep, thank you, everybody, for joining the call.
The conference has now concluded. Thank you for your participation. You may now disconnect your lines.