Oakland, Calif., May 9, 2019 – DASAN Zhone Solutions, Inc. (NASDAQ: DZSI or the “Company” or “DZS”), a global provider of ultra-broadband network access solutions and communications platforms deployed by advanced Tier 1, 2 and 3 service providers and enterprise customers, today reported first quarter results for the period ended March 31, 2019.  The Company also provided its outlook for the three months ending June 30, 2019 and reaffirmed its guidance for the full year ending December 31, 2019.

First Quarter 2019 Financial Performance:

Non-GAAP financial measures are reconciled to the most comparable GAAP measures in the tables set forth at the end of this press release.

($ in mms) Q1 2019 Guidance

(provided on March 18, 2019)

Net Revenue (Organic) $64.5 million $63-$66 million
% vs. Prior Year (Q1 2018) 8.4%   6%-11%
Net Revenue (including KEYMILE) $74.1 million $70-$74 million
% vs. Prior Year (Q1 2018) 24.5%   18%-24%
GAAP Gross Margin % 33.6%   31% to 33%
GAAP Operating Expenses $25.7 million Not applicable
Non-GAAP Adjusted Operating Expenses (excl. SBC, D&A, and acquisition related expenses) $23.6 million $25.5-$27.0 million
GAAP Net Income (loss) (attributable to DZSI) $(1.6) million Not applicable
Diluted EPS (GAAP) ($0.10)   Not applicable
Non-GAAP Net Income (loss) (attributable to DZSI) $0.8 million Not applicable
Diluted EPS (non-GAAP) $0.05   Not applicable
Adjusted EBITDA $1.8 million $(3.8)-$(2.6) million
  • Net revenue for the first quarter of 2019 was $74.1 million, which was above the Company’s guidance of $70 million to $74 million and reflected an increase of 24.5% year-over-year.
  • GAAP gross margin for the first quarter of 2019 was 33.6%, which was above the Company’s gross margin guidance of 31% to 33% and reflected the immediate and accretive contribution of KEYMILE, an acquisition which closed on January 3, 2019.
  • GAAP net income attributable to DZSI for the first quarter of 2019 totaled a loss of $(1.6) million, or $(0.10) per diluted share. Non-GAAP net income attributable to DZSI for the first quarter of 2019 totaled $0.8 million, or $0.05 per diluted share.
  • GAAP operating expenses for the first quarter of 2019 were $25.7 million. Non-GAAP adjusted operating expenses for the first quarter of 2019 were $23.6 million, which was better than the Company’s guidance of $25.5 million to $27.0 million.
  • Non-GAAP adjusted EBITDA for the first quarter of 2019 totaled $1.8 million and non-GAAP adjusted EBITDA margin was 2.5%, which exceeded the Company’s guidance of $(3.8) million to $(2.6) million. On a year-over-year basis, non-GAAP adjusted EBITDA for the first quarter of 2019 increased 28.9% from $1.4 million, or 2.4% non-GAAP adjusted EBITDA margin, in the same year-ago period.
  • Total cash and cash equivalents (excluding restricted cash) as of March 31, 2019 were $20.9 million, compared to $27.7 million as of December 31, 2018.

 

Management Commentary:

“We are encouraged by our first quarter 2019 results, and our outperformance against guidance,” said Yung Kim, CEO of DZS. “Our strong results for the period demonstrate that we are capitalizing on broad-based growth opportunities across multiple markets, product lines, technologies, and customer groups.  In Broadband Access, we are benefitting from emerging markets investing directly into fiber as well as the start of the next generation fiber-based upgrade cycle in fiber-rich countries.  We are also strategically focused in other growth areas, including around 5G, where we have a robust product portfolio and the distinguished reputation of being one of the very first to market with a 5G mobile backhaul solution, as well as fiber in the Enterprise, both of which represent significant growth opportunities for DZS to execute on going forward.”

Michael Golomb, CFO of DZS, said:” We delivered better than expected results in the first quarter, with revenue growing 24.5% year-over-year, reflecting continued strength in Asia Pacific and EMEA regions with KEYMILE contributing to the outperformance.  Strong gross margins, which saw an accretive contribution from KEYMILE, as well as tight cost controls drove a significant outperformance in adjusted EBITDA.  In the quarter, we also made progress in addressing our capital structure by closing on a new long term debt facility, with the proceeds used to strengthen our cash position to support continued growth in our business.”

Business Outlook:

DZS’s business outlook is based on current expectations.  The following statements are forward-looking, and actual results can differ materially based on market conditions and factors set forth under “Forward-Looking Statements” below in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.  Accordingly, undue reliance should not be placed on these projections.

Second Quarter 2019 Guidance:

($ in mms) Q2 2019

Guidance

Net Revenue (including KEYMILE) $82.5 – $86.0 million
% vs. Prior Year (Q2 2018) 8% – 13%
GAAP Gross Margin % 32.5% to 33.5%
Non-GAAP Adjusted Operating Expenses (excl. SBC and D&A expenses) $24.5 – $26.0 million
Adjusted EBITDA $2 – $3 million
  • Revenue of $82.5 million to $86.0 million (+8% to +13% year-over-year growth)
  • GAAP gross margin of 32.5% to 33.5%
  • Non-GAAP adjusted operating expenses of $24.5 million to $26.0 million
  • Adjusted EBITDA of $2 million and $3 million

Guidance for Full Year 2019:

($ in mms) Full Year 2019 Guidance Delta compared with Outlook

provided on 3/18/19

Net Revenue (Organic) $304-$310 million Unchanged
% vs. Prior Year (2018) 8%-10% Unchanged
Net Revenue (including KEYMILE) $350-$360 million Unchanged
% vs. Prior Year (2018) 24%-28% Unchanged
GAAP Gross Margin % 32.5% to 34% Unchanged
Non-GAAP Adj. Operating Expenses (excl. SBC and D&A expenses) $97-$102 million Unchanged
Adjusted EBITDA $17-$20 million Unchanged
Adjusted EBITDA Margin (%) 5% to 6% Unchanged
  • Organic revenue of $304 million to $310 million (+8% to +10% year-over-year growth); Inclusive of KEYMILE, revenue of $350 million to $360 million
  • GAAP gross margin of 32.5% to 34.0%
  • Non-GAAP adjusted operating expenses of $97 million to $102 million
  • Adjusted EBITDA of $17 million to $20 million, or margin of 5% and 6%

Non-GAAP Financial Measures

To supplement DZS’s consolidated financial statements presented in accordance with GAAP, DZS uses Adjusted EBITDA, Adjusted EBITDA margin, Non-GAAP net income attributable to DZS and Adjusted Operating Expenses, which are non-GAAP measures DZS believes are appropriate to provide meaningful comparison with, and to enhance an overall understanding of, DZS’s past financial performance and prospects for the future. DZS believes these non-GAAP financial measures provide useful information to both management and investors by excluding specific expenses and gains that DZS believes are not indicative of core operating results. Further, Adjusted EBITDA is a measure of operating performance used by management, as well as industry analysts, to evaluate operations and operating performance and is widely used in the telecommunications and manufacturing industries. Other companies in the telecommunications and manufacturing industries may calculate Adjusted EBITDA differently than DZS does.  The presentation of this additional information is not meant to be considered in isolation or as a substitute for measures of financial performance prepared in accordance with GAAP. Reconciliations of net income (loss) to Adjusted EBITDA, net income (loss) attributable to DZS to non-GAAP net income (loss) attributable to DZS and total operating expenses to Adjusted Operating Expenses are provided in tables immediately following the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) below.

DZS defines “Adjusted EBITDA” as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization, (iv) stock-based compensation, and (v) material non-recurring transactions or events, such as merger and acquisition transaction costs or a gain (loss) on sale of assets or impairment of fixed assets or bargain purchase gain. DZS defines non-GAAP net income attributable to DZS as net income (loss) plus (i) depreciation and amortization, (ii) stock-based compensation, and (iii) material non-recurring transactions or events, such as merger and acquisition transaction costs or a gain (loss) on sale of assets or impairment of fixed assets or bargain purchase gain.  DZS defines Adjusted Operating Expenses as total operating expenses less (i) depreciation and amortization, (ii) stock-based compensation, and (iii) material non-recurring transactions or events, such as merger and acquisition transaction costs or a gain (loss) on sale of assets or impairment of fixed assets.

No reconciliations of the forecasted ranges for Adjusted EBITDA and Adjusted Operating Expenses for the quarter ending June 30, 2019 or year ending December 31, 2019 are included because DZS is unable to quantify certain amounts that would be required to be included in the corresponding GAAP measures without unreasonable effort and DZS believes such reconciliations would imply a degree of precision that would be confusing or misleading to investors.

 

Forward-Looking Statements

This press release contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934.  Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words, and similar expressions are intended to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, operating expenses, gross margin, costs or other financial items (including Adjusted EBITDA and Adjusted Operating Expenses) in future periods and to anticipated growth and trends in our business or key markets are forward-looking statements.  Readers are cautioned that actual results could differ materially from those expressed in or contemplated by the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, the Company’s ability to realize the anticipated cost savings, synergies and other benefits of its acquisitions, including the KEYMILE acquisition and any integration risks relating thereto; the Company’s ability to raise additional capital to fund existing and future operations or to refinance or repay its existing indebtedness; defects or other performance problems in the Company’s products; any economic slowdown in the telecommunications industry that restricts or delays the purchase of the Company’s products by its customers; commercial acceptance of the Company’s products; intense competition in the communications equipment market; higher than anticipated expenses that the Company may incur; the Company’s ability to execute on its strategy and operating plans; and economic conditions. In addition, please refer to the risk factors contained in the Company’s SEC filings available at www.sec.gov, including without limitation, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update or revise any forward-looking statements for any reason.

About DASAN Zhone Solutions, Inc.

DASAN Zhone Solutions, Inc. (NASDAQ: DZSI) is a global provider of ultra-broadband network access solutions and communications platforms deployed by advanced Tier 1, 2 and 3 service providers and enterprise customers.  Our solutions are deployed by over 900 customers in more than 80 countries worldwide. Our ultra-broadband solutions are focused on creating significant value for our customers by delivering innovative solutions that empower global communication advancement by shaping the internet connection experience.  Every connection matters, and the first connection to the internet and cloud services applications matters the most. Our principal focus is centered around enabling our customers to connect everything and everyone to the internet-cloud economy via ultra-broadband connectivity solutions.  The Company provides a wide array of reliable, cost-effective networking technologies, including: broadband access, mobile backhaul, Ethernet switching with Software Defined Networking (“SDN”) capabilities, new enterprise solutions based on Passive Optical LAN (“POL”), and new generation of SDN/ Network Function Virtualization (“NFV”) solutions for unified wired and wireless networks.

DASAN Zhone Solutions, the DASAN Zhone Solutions logo, and DASAN Zhone Solutions product names are trademarks of DASAN Zhone Solutions, Inc. Other brand and product names are trademarks of their respective holders.  Specifications, products, and/or products names are all subject to change without notice.

DASAN ZHONE SOLUTIONS INC. AND SUBSIDIARIES  
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)  
(In thousands, except per share data)  
Three Months Ended  
March 31, 2019   December 31, 2018   March 31, 2018  
Net revenue $ 74,089 $ 74,673 $ 59,504
Cost of revenue 49,219 51,673 37,769
Gross profit 24,870 23,000 21,735
Operating expenses:
Research and product development 10,184 8,960 8,977
Selling, general and administrative 15,039 13,109 12,394
Amortization of intangible assets 472 131 131
Total operating expenses 25,695 22,200 21,502
Operating income (loss) (825) 800 233
Interest income 88 61 86
Interest expense (871) (408) (323)
Other income (expenses), net 228 (287) 140
Income (loss) before income taxes (1,380) 166 136
Income tax (benefit) provision 77 653 (5)
Net income (loss) (1,457) (487) 141
Net income attributable to non-controlling interest 181 67 34
Net income (loss) attributable to DASAN Zhone

Solutions, Inc.

$ (1,638) $ (554) $ 107
Earnings (loss) per share attributable to DASAN Zhone Solutions, Inc.:
Basic $ (0.10) $ (0.03) $ 0.01
Diluted $ (0.10) $ (0.03) $ 0.01
Weighted average shares outstanding:
Basic 16,593 16,575 16,416
Diluted 16,593 16,575 16,626
Reconciliation of Net income (loss) to Adjusted EBITDA:
Net income (loss) $ (1,457) $ (487) $ 141
Stock-based compensation 825 723 363
Interest expense, net 783 347 237
Income tax provision (benefit) 77 653 (5)
Depreciation and amortization 1,417 669 699
Non-recurring merger and acquisition costs 337 1,265
Inventory step-up amortization 201
Bargain purchase gain on acquisition (334)
Adjusted EBITDA $ 1,849 $ 3,170 $ 1,435

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES  
Unaudited Condensed Consolidated Balance Sheets  
(In thousands)  
   
Assets March 31, 2019     December 31, 2018  
Current Assets
Cash and cash equivalents   $ 20,872 $ 27,709
Restricted cash 9,165 7,003
Accounts receivable, net 69,645 71,617
Other receivables 13,057 12,988
Contract assets 17,160 11,381
Inventories 39,718 33,868
Prepaid expenses and other current assets 4,706 4,185
Total current assets 174,323 168,751
Property, plant and equipment, net 6,124 5,518
Right-of-use assets from operating leases 21,193
Goodwill 3,977 3,977
Intangible assets, net 16,530 5,649
Non-current deferred tax assets 2,685 2,752
Long-term restricted cash 611 936
Other assets 3,883 2,424
Total assets $ 229,326 $ 190,007
Liabilities, Stockholders’ Equity and Non-controlling Interest  
Current liabilities:
Accounts payable $ 37,791 $ 38,608
Short-term debt 25,081 31,762
Other payables 4,024 3,073
Contract liabilities – current 3,563 8,511
Operating lease liabilities – current 4,261
Accrued and other liabilities 13,056 11,517
Total current liabilities 87,776 93,471
Long-term debt 30,319 14,142
Contract liabilities – non-current 1,875 1,801
Deferred tax liabilities 1,041
Operating lease liabilities – non-current 18,103
Pension liabilities 12,394
Other long-term liabilities 1,721 2,739
Total liabilities 153,229 112,153
Stockholders’ equity and non-controlling interest:
Common stock 16 16
Additional paid-in capital 94,017 93,192
Accumulated other comprehensive income (1,316) (192)
Accumulated deficit (17,415) (15,777)
Total stockholders’ equity 75,302 77,239
Non-controlling interest 795 615
Total stockholders’ equity and non-controlling interest 76,097 77,854
Total liabilities, stockholders’ equity and non-controlling

interest

$ 229,326 $ 190,007

DASAN ZHONE SOLUTIONS INC. AND SUBSIDIARIES  
Reconciliation of GAAP to Non-GAAP Results  
(Unaudited, in thousands, except per share data)  
 
Three Months Ended March 31, 2019  
Cost of Revenue   Gross Profit   Operating Expenses   Operating Income (Loss)   Net Income (Loss) Attributable to DZSI     Net Income (Loss) per Diluted Share Attributable to DZSI  
GAAP amount $ 49,219 $ 24,870 $ 25,695 $ (825) $ (1,638) $ (0.10)
Adjustments to GAAP amounts:
Depreciation and amortization (517) 517 (900) 1,417 1,417 0.08
Stock-based compensation (10) 10 (815) 825 825 0.05
Non-recurring merger and acquisition costs (337) 337 337 0.02
Inventory step-up amortization (201) 201 201 0.01
Bargain purchase gain on acquisition (334) (0.01)
 Non-GAAP amount $ 48,491 $ 25,598 $ 23,643 $ 1,754 $ 808 $ 0.05
Three Months Ended December 31, 2018  
Cost of Revenue   Gross Profit   Operating Expenses   Operating Income   Net Income (Loss) Attributable to DZSI     Net Income (Loss) per Diluted Share Attributable to DZSI  
GAAP amount $ 51,673 $ 23,000 $ 22,200 $ 800 $ (554) $ (0.03)
Adjustments to GAAP amounts:
Depreciation and amortization (237) 237 (432) 669 669 0.04
Stock-based compensation (9) 9 (714) 723 723 0.04
Non-recurring merger and acquisition costs (1,265) 1,265 1,265 0.07
 Non-GAAP amount $ 51,427 $ 23,246 $ 19,789 $ 3,457 $ 2,103 $ 0.12
Three Months Ended March 31, 2018  
Cost of Revenue   Gross Profit   Operating Expenses   Operating Income   Net Income Attributable to DZSI     Net Income per Diluted Share Attributable to DZSI  
GAAP amount $ 37,769 $ 21,735 $ 21,502 $ 233 $ 107 $ 0.01
Adjustments to GAAP amounts:
Depreciation and amortization (257) 257 (442) 699 699 0.04
Stock-based compensation (363) 363 363 0.02
 Non-GAAP amount $ 37,512 $ 21,992 $ 20,697 $ 1,295 $ 1,169 $ 0.07

Contacts
Pei Hung, DASAN Zhone Investor Relations DZS Strategic Communications:
Tel: +1 510.777.7386 Matt Glover or Najim Mostamand, CFA
Fax: +1 510.777.7001 Tel: +1 949.574.3860
E: phung@dasanzhone.com E: dzsi@liolios.com