DZS INC. As used in this Quarterly Report on Form 10-Q, unless the context suggests
otherwise, the terms "DZS," the "Company" "we," "our" and "us" refer to
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate, and reflect the beliefs and assumptions of our management as of the date hereof.
We use words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would," variations of such words, and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items in future periods; anticipated growth and trends in our business, industry or key markets; cost synergies, growth opportunities and other potential financial and operating benefits of our acquisitions; future growth and revenues from our products; our ability to access capital to fund our future operations; future economic conditions and performance; the impact of the global outbreak of COVID-19, also known as the coronavirus; the impact of interest rate and foreign currency fluctuations; anticipated performance of products or services; competition; plans, objectives and strategies for future operations, including our pursuit or strategic acquisitions and our continued investment in research and development; other characterizations of future events or circumstances; and all other statements that are not statements of historical fact, are forward-looking statements within the meaning of the Securities Act and the Exchange Act. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Readers are cautioned not to place undue reliance on such forward-looking statements, which are being made as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors which could have a material adverse effect on our operations and future
prospects or which could cause actual results to differ materially from our
expectations include factors discussed in Part I, Item 1A "Risk Factors" of our
Annual Report on Form 10-K, as well as factors described from time to time in
our future reports filed with the
OVERVIEW
We are a global provider of leading-edge access, 5G transport, and enterprise communications platforms that enable the emerging hyper-connected, hyper-broadband world. We provide a wide array of reliable, cost-effective networking technologies, including broadband access, Ethernet switching, mobile backhaul, Passive Optical LAN and software-defined networks, to a diverse customer base.
We research, develop, test, sell, manufacture and support platforms in the areas of mobile transport and fixed broadband access, as discussed below. We have extensive regional development and support centers around the world to support our customer needs.
Our solutions and platforms portfolio include products in Broadband
Connectivity, Connected Home & Business, Mobile & Optical Edge, and
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Broadband Connectivity. Our DZS Velocity portfolio offers a variety of solutions for carriers and service providers to connect residential and business customers, either using high-speed fiber or leveraging their existing deployed copper networks to offer broadband services to customer premises. Once our broadband access products are deployed, the service provider can offer voice, high-definition and ultra-high-definition video, highspeed internet access and business class services to their customers. In addition, the switching and routing products we provide in this space offer a high-performance and manageable solution that bridges the gap from carrier access technologies to the core network. XCelerate by DZS increases the velocity with which service providers can leap to multi-gigabit services at scale by enabling rapid transition from Gigabit Ethernet Passive Optical Network ("GPON") to 10 Gigabit Symmetrical Passive Optical Network ("XGS-PON") and Gigabit Ethernet to 10 Gigabit Ethernet via any service port across a range of existing DZS Velocity chassis and 10 gig optimized stackable fixed form factor units.
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Connected Home & Business. Our DZS Helix connected premises product portfolio offer a large collection of smart gateway platforms for any fiber to the "x" ("FTTx") deployment. DZS Smart Gateway platforms are designed for high bandwidth services being deployed to the home or business. Our connected premises portfolio
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consists of indoor/outdoor optical network terminal ("ONT") gateways delivering best-in-class data throughout to support the most demanding FTTx applications. The product feature set gives service providers an elegant migration path from legacy to soft switch architectures without replacing ONTs.
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Mobile & Optical Edge. Our DZS Chronos portfolio provides a robust, manageable and scalable solution for mobile operators that enable them to upgrade their mobile fronthaul/midhaul/backhaul ("xHaul") systems and migrate to fifth generation wireless technologies ("5G") and beyond. DZS Chronos provides a full range of 5G-ready xHaul solutions that are open, software-defined, and field proven. Our mobile xHaul products may be collocated at the radio access node base station and can aggregate multiple radio access node base stations into a single backhaul for delivery of mobile traffic to the radio access node network controller. Our products support pure Ethernet switching as well as layer 3 IP and Multiprotocol Label Switching ("MPLS"), and we interoperate with other vendors in these networks.
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Our key financial objectives include the following:
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Increasing revenue while continuing to carefully control costs;
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Continuing investments in strategic research and product development activities that will provide the maximum potential return on investment; and
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Minimizing consumption of our cash and cash equivalents.
RESULTS OF OPERATIONS
The table below presents the unaudited condensed consolidated statement of (loss) income with year-over-year changes (in thousands except percent change).
Three months ended March 31,
2022 2021 % change
Net revenue $ 77,040 $ 81,031 -4.9 %
Cost of revenue 50,215 52,936 -5.1 %
Gross profit 26,825 28,095 -4.5 %
Operating expenses:
Research and product development 11,844 11,119 6.5 %
Selling, marketing, general and
administrative 17,742 31,824 -44.2 %
Restructuring and other charges 436 6,252 -93.0 %
Impairment of long-lived assets - 1,735 -100.0 %
Amortization of intangible assets 294 262 12.2 %
Total operating expenses 30,316 51,192 -40.8 %
Operating loss (3,491 ) (23,097 ) -84.9 %
Interest income 37 42 -11.9 %
Interest expense (127 ) (249 ) -49.0 %
Other income (expense), net (800 ) 972 -182.3 %
Loss before income taxes (4,381 ) (22,332 ) -80.4 %
Income tax provision (benefit) (1,333 ) 893 -249.3 %
Net loss $ (3,048 ) $ (23,225 ) -86.9 %
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The table below presents the unaudited condensed consolidated statement of (loss) income as a percentage of total net revenue for the periods indicated.
Three months ended March 31,
2022 2021
Net revenue 100 % 100 %
Cost of revenue 65 % 65 %
Gross profit 35 % 35 %
Operating expenses:
Research and product development 15 % 14 %
Selling, marketing, general and administrative 23 % 39 %
Restructuring and other charges 1 % 8 %
Impairment of long-lived assets - 2 %
Amortization of intangible assets 1 % 1 %
Total operating expenses 40 % 64 %
Operating income (loss) (5 )% (29 )%
Interest income - -
Interest expense - -
Other income (expense), net (1 )% 1 %
Income (loss) before income taxes (6 )% (28 )%
Income tax provision (benefit) (2 )% 1 %
Net income (loss) (4 )% (29 )%
Net Revenue
The following table presents our revenues by source (in millions):
Three months ended March 31,
2022 2021 % change
Products $ 72.4 $ 76.2 (5.0 )%
Services and other 4.6 4.8 (4.2 )%
Total $ 77.0 $ 81.0 (4.9 )%
For the three months ended
The following table presents our revenues by geographical concentration (in
millions):
Three months ended March 31,
2022 2021 % change
Americas $ 23.1 $ 20.2 14.4 %
Europe, Middle East, Africa 18.6 17.9 3.9 %
Asia 35.3 42.9 (17.7 )%
Total $ 77.0 $ 81.0 (4.9 )%
Our geographic diversification reflects the combination of market demand, a strategic focus on capturing market share through new customer wins and new product introductions.
From a geographical perspective, the decrease in net revenue for the three
months ended
For the three months ended
We anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large customers. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders from one or a small number of key customers.
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Cost of Revenue and Gross Profit
Total cost of revenue decreased 5.1% to
Operating Expenses
Research and Product Development Expenses: Research and product development expenses include personnel costs, outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations.
Research and product development expenses increased by 6.5% to
We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage the associated costs through expense controls.
Selling, Marketing, General and Administrative Expenses: Selling, marketing, general and administrative expenses include personnel costs for sales, marketing, administration, finance, information technology, human resources and general management as well as legal and accounting expenses, rent, utilities, trade show expenses and related travel costs.
Selling, marketing, general and administrative expenses decreased by 44.2% to
Restructuring and Other Charges: Restructuring and other charges for the three
months ended
Impairment of Long-lived Assets: Impairment of long-lived assets for the three
months ended
Other Income (Expense), net: Other income (expense) relates mainly to realized
and unrealized foreign exchange gains and losses. Other expense, net was
Income Tax Provision: Income tax benefit for the three months ended
NON-GAAP FINANCIAL MEASURES
In managing our business and assessing our financial performance, we supplement
the information provided by our
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including termination related benefits, headquarters and facilities relocation,
executive transition, and bad debt expense primarily related to a large customer
in
Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are:
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Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual requirements;
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Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
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Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
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Although depreciation and amortization are non-cash expenses, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
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Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; and
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Other companies in our industry may calculate Adjusted EBITDA and similar measures differently than we do, limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered in
isolation or as a substitute for net income (loss) or any other performance
measures calculated in accordance with
Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA,
which we consider to be the most directly comparable
Three months ended March 31,
2022 2021
Net income (loss) $ (3,048 ) $ (23,225 )
Add (deduct):
Interest expense, net 90 207
Income tax provision (benefit) (1,333 ) 893
Depreciation and amortization 1,081 1,265
Stock-based compensation 2,671 1,352
Headquarters and facilities relocation - 1,920
Restructuring and other charges 436 6,252
Acquisition costs 51 643
Executive transition 247 71
Bad debt expense, net of recoveries* (1,227 ) 14,206
Adjusted EBITDA $ (1,032 ) $ 3,584
* See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for further information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a complete description of what we believe to be the critical accounting
policies and estimates used in the preparation of our unaudited condensed
consolidated financial statements, refer to Note 1 Organization and Summary of
Significant Accounting Policies in the Notes to our Audited Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended
LIQUIDITY AND CAPITAL RESOURCES
Our operations are financed through a combination of our existing cash, cash equivalents, available credit facilities, and sales of equity and debt instruments, based on our operating requirements and market conditions.
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The following table summarizes the information regarding our cash and cash equivalents and working capital (in thousands):
March 31, 2022 December 31, 2021
Cash and cash equivalents $ 34,160 $ 46,666
Working capital 121,772 124,498
The Company had a net loss of
As of
We continue to focus on cost management, operating efficiency and efficient discretionary spending. In addition, if necessary, we may sell assets or issue debt or equity securities. We may also rationalize the number of products we sell, adjust our manufacturing footprint, and reduce our operations in low margin regions, including reductions in headcount. Based on our current plans and current business conditions, we believe that these measures along with our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.
The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
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