Oakland, Calif., November 12, 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 third quarter results for the period ended September 30, 2019.

Third Quarter 2019 Financial and Operational Highlights

  • GAAP revenue $71.5 million
  • Recognized as the leading US-based supplier of Ultra high-speed FTTx access solutions by revenue and shipments
  • Selected by Korea Telecom to deploy carrier-grade, ultra-low latency mobile transport switches in its 5G networks
  • Used $6.1 million in cash from operations, ended quarter with $47.9 million cash and cash equivalents, up from $20 million from the same period a year ago

Selected Financial Information

GAAP     Non-GAAP  
Key Financial Results Q3 2019 Q3 2018 Q3 2019 Q3 2018
(in millions)
Net revenue $ 71.5 $ 71.9 $ 71.5 $ 71.9
Adjusted EBITDA (0.3) 4.4
Net income (loss) – (attributable to DZSI) (4.0) 1.8 (1.3) 3.2
Diluted common shares outstanding 21.4 16.9 21.4 16.9
Cash and cash equivalents

as of quarter end

47.9 20.0 47.9 20.0

 

Management Commentary

“In the third quarter of 2019, we faced certain headwinds which impacted our financial performance, as well as our near-term outlook,” said Yung Kim, Chief Executive Officer of DZS. “Several market factors continue to affect our business, including recent trends in reduced carrier spend throughout the industry and temporary postponements in capital spending for 5G and Fiber-to-the-Home projects.  Although we anticipate some of these dynamics to extend into the fourth quarter of 2019, our business opportunity pipeline for new deployments of mobile transport switches and fiber based access solutions is growing faster than expected. Overall, our value proposition with both new and existing customers is well understood, our leadership position in the markets is intact, and we remain confident in the mid-to-long term strategic direction of the Company.”

Third Quarter 2019 Financial Results

Net revenue for the third quarter of 2019 was $71.5 million, a decrease of less than 1% year-over-year from the prior year period. The relatively flat revenues were primarily due to decreases in revenues from Asia-Pacific (APAC), which were offset by increases in revenues from Europe, the Middle East, and Africa in the third quarter of 2019.

Gross margin for the third quarter of 2019 was 31.0% which compares to 32.6% in the third quarter of 2018.

Net loss attributable to DZS for the third quarter of 2019 totaled $(4.0) million, or $(0.19), per diluted share compared to net income attributable to DZS of $1.8 million, or $0.11 per diluted share, in the same period last year.

Operating expenses for the third quarter of 2019 were $26.1 million compared to $19.9 million in the same quarter last year.

Adjusted EBITDA for the third quarter of 2019 totaled negative $257,000 and Adjusted EBITDA margin was (0.4)%. This compares to Adjusted EBITDA of $4.4 million, and Adjusted EBITDA margin of 6.1% in the same period a year ago.

Total cash and cash equivalents (excluding restricted cash) as of September 30, 2019 were $47.9 million, compared to $27.7 million as of December 31, 2018.

Business Outlook

DZS’s business outlook is based on current expectations.  The following statements are forward-looking, and actual results can differ materially and adversely from those expressed below. Actual results will be impacted by market conditions and those factors described below under “Forward-Looking Statements” and in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, our Quarterly Report on Form 10-Q for the quarters ended June 30, 2019 and September 30, 2019 and subsequent filings with the U.S. Securities and Exchange Commission. Accordingly, undue reliance should not be placed on these projections.


Fourth Quarter 2019 Guidance

Q4 2019     Full Year 2019  
  Low High Low High
(in millions)
Net revenue $ 80.0 $ 86.0 $ 309.3 $ 315.3
Gross margin % 31.0 % 32.0 % 32.2 % 32.5 %
Adjusted Operating expenses 21.9 20.9 92.9 91.9
Adjusted EBITDA 3.4 7.2 11.7 15.5
Adjusted EBITDA margin % 4.3 % 8.4 % 3.8 % 4.9 %

See “Non-GAAP Financial Measures” and “GAAP to Non-GAAP Financial Guidance Reconciliation” below.

Non-GAAP Financial Measures

To supplement DZS’s consolidated financial statements presented in accordance with GAAP, DZS uses EBITDA, Adjusted EBITDA, Adjusted Operating Expenses and Adjusted EBITDA Margin, 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.

DZS defines EBITDA as net income (loss) plus (i) interest expense, net, (ii) provision (benefit) for taxes, (iii) depreciation and amortization expense. DZS defines “Adjusted EBITDA” as EBITDA plus (i) stock-based compensation expenses, and (ii) the impact of material transactions or events that we believe are not indicative of our core operating performance, such as merger and acquisition transaction costs, restructuring costs, inventory step-up valuation amortization, bargain purchase gain, gain or (loss) on sale of assets or impairment of long-lived assets, any of which may or may not be recurring in nature. DZS defines Adjusted Operating expenses as total operating expenses less (i) depreciation and amortization, (ii) stock-based compensation, and (iii) expenses incurred in connection with material transactions or events that we believe are not indicative of our core operating performance, such as merger and acquisition transaction costs and restructuring costs, or impairment of long-lived assets, any of which may or may not be recurring in nature.

DZS defines Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.

A reconciliation of EBITDA and Adjusted EBITDA to each of their respective GAAP counterparts for the three and nine months ended September 30, 2019 and 2018 is included at the end of the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) below.


GAAP to Non-GAAP Financial Guidance Reconciliation

A reconciliation of the non-GAAP measures included in our fourth quarter and full year 2019 guidance above is as follows:

 

Q4 2019     Full Year 2019  
Low High Low High
Reconciliation of net loss to Adjusted EBITDA: (in millions)
Net loss $ (5.2) $ (1.4) $ (8.3) $ (4.5)
Interest expense, net 0.8 0.8 3.5 3.5
Income tax expense 0.7 0.7 1.8 1.8
Depreciation and amortization 1.3 1.3 5.5 5.5
EBITDA (2.4) 1.4 2.5 6.3
Stock-based compensation 0.8 0.8 3.6 3.6
Merger and acquisition costs 0.3 0.3
Inventory step-up amortization 0.6 0.6
Restructuring costs 5.0 5.0 5.0 5.0
Bargain purchase gain on acquisition (0.3) (0.3)
Adjusted EBITDA $ 3.4 $ 7.2 $ 11.7 $ 15.5

 

 

Q4 2019     Full Year 2019  
Low High Low High
Reconciliation of Operating Expenses to Adjusted Operating Expenses: (in millions)
Operating Expenses $ 28.5 $ 27.5 $ 105.1 $ 104.1
Depreciation and amortization (0.8) (0.8) (3.3) (3.3)
Stock-based compensation (0.8) (0.8) (3.6) (3.6)
Merger and acquisition costs (0.3) (0.3)
Restructuring costs (5.0) (5.0) (5.0) (5.0)
Adjusted Operating Expenses $ 21.9 $ 20.9 $ 92.9 $ 91.9

Conference Call

DZS management will hold a conference call today (November 12, 2019) at 5:00 p.m. Eastern time 2:00 p.m. Pacific time) to discuss these results. A question and answer session will follow management’s presentation

Date: Tuesday, November 12, 2019

Time: 5:00 p.m. Eastern time (2:00 p.m. Pacific time)

U.S. dial-in number: 888-306-9369

International number: 503-406-4059

Conference ID: 5887250

Please call the conference telephone number 5-10 minutes prior to the start time. An operator will register your name and organization. If you have any difficulty connecting with the conference call, please contact Gateway Investor Relations at 949-574-3860.

The conference call will be broadcast live and available for replay here and via the investor relations section of the company’s website.

A replay of the conference call will be available after 8:00 p.m. Eastern time on the same day through November 20, 2019.

Toll-free replay number: 855-859-2056

International replay number: 404-537-3406

Replay ID: 5887250

Forward-Looking Statements

This press release 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 and the Securities Exchange Act of 1934.  These statements are based on current expectations, estimates, forecasts and projections about the industries in which the Company operates and reflect the beliefs and assumptions of the Company’s management as of the date hereof.  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 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) in future periods and to anticipated growth and trends in our business or key markets are forward-looking statements.  Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict.  The Company’s actual results could differ materially and adversely 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 ability to generate sufficient revenue to achieve or sustain profitability; 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; the loss of any of our large customers, significant reductions or delays in their spending, or a material change in their networking or procurement strategies; commercial acceptance of the Company’s products; intense competition in the communications equipment market; higher than anticipated expenses that the Company may incur; any failure to comply with the periodic filing and other requirements of The Nasdaq Stock Market for continued listing; fluctuations in foreign currency exchange rates; the Company’s ability to enforce its intellectual property rights; the initiation of any civil litigation, regulatory proceedings, government enforcement actions or other adverse effects relating to the Audit Committee investigation or errors in the consolidated financial statements of Zhone Technologies, Inc.; 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 leader in network access solutions for service providers and enterprise networks. The Company provides a wide array of reliable, value-add networking technologies—including broadband access, mobile backhaul, Ethernet switching, Passive Optical LAN, and software-defined networks—to a wide range of the world’s most innovative network operators. DASAN Zhone Solutions is headquartered in Oakland, California, USA, with solutions deployed by over 900 customers in more than 80 countries worldwide.

DASAN Zhone Solutions, the DASAN Zhone Solutions logo, and all 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 product names are all subject to change without notice.

Contacts

DASAN Zhone Solutions
Blair King, Vice President Finance
Tel: 510-777-7386
Fax: 510-777-7001
E: ir@dasanzhone.com

DZSI Strategic Communications
Matt Glover or Charlie Schumacher
Tel: 949-574-3860
E: dzsi@gatewayir.com

 


DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES  
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)  
(In thousands, except per share data)  
Three Months Ended     Nine Months Ended  
September 30, 2019   June 30, 2019   September 30, 2018     September 30, 2019     September 30, 2018  
Net revenue $ 71,524 $ 83,664 $ 71,914 $ 229,277 $ 207,675
Cost of revenue 49,347 55,882 48,483 154,448 139,344
Gross profit 22,177 27,782 23,431 74,829 68,331
Operating expenses:
Research and product development 9,898 9,430 8,655 29,512 26,346
Selling, general and administrative 15,716 14,929 11,106 45,684 35,212
Amortization of intangible assets 464 470 131 1,406 393
Total operating expenses 26,078 24,829 19,892 76,602 61,951
Operating income (loss) (3,901) 2,953 3,539 (1,773) 6,380
Interest income 374 62 42 524 203
Interest expense (1,124) (1,244) (447) (3,239) (1,330)
Other income (expenses), net 944 1,345 (572) 2,517 (859)
Income (loss) before income taxes (3,707) 3,116 2,562 (1,971) 4,394
Income tax provision 289 732 735 1,098 1,071
Net income (loss) (3,996) 2,384 1,827 (3,069) 3,323
Net income (loss) attributable to non-controlling interest 37 (24) 29 194 2
Net income (loss) attributable to DASAN Zhone Solutions, Inc. $ (4,033) $ 2,408 $ 1,798 $ (3,263) $ 3,321
Earnings (loss) per share attributable to DASAN Zhone Solutions, Inc.:
Basic $ (0.19) $ 0.13 $ 0.11 $ (0.17) $ 0.20
Diluted $ (0.19) $ 0.13 $ 0.11 $ (0.17) $ 0.20
Weighted average shares outstanding:
Basic 21,384 18,166 16,683 18,732 16,425
Diluted 21,384 18,482 16,891 18,732 16,640
Reconciliation of net income (loss) to Adjusted EBITDA:
Net income (loss) $ (3,996) $ 2,384 $ 1,827 $ (3,069) $ 3,323
Interest expense, net 750 1,182 405 2,715 1,127
Income tax expense 289 732 735 1,098 1,071
Depreciation and amortization 1,343 1,350 652 4,110 2,033
EBITDA (1,614) 5,648 3,619 4,854 7,554
Stock-based compensation 1,182 811 617 2,818 1,357
Merger and acquisition costs 139 337 139
Inventory step-up amortization 175 201 577
Bargain purchase gain on acquisition (334)
Adjusted EBITDA $ (257) $ 6,660 $ 4,375 $ 8,252 $ 9,050

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES  
Unaudited Condensed Consolidated Balance Sheets  
(In thousands)  
   
September 30,

2019

    December 31,

2018

 
Assets              
Current Assets
Cash and cash equivalents   $ 47,851 $ 27,709
Restricted cash 4,448 7,003
Accounts receivable, net 100,865 71,617
Other receivables 8,003 12,988
Contract assets 9,351 11,381
Inventories 43,046 33,868
Prepaid expenses and other current assets 6,253 4,185
Total current assets 219,817 168,751
Property, plant and equipment, net 6,575 5,518
Right-of-use assets from operating leases 18,349
Goodwill 3,977 3,977
Intangible assets, net 14,539 5,649
Non-current deferred tax assets 1,691 2,752
Long-term restricted cash 501 936
Other assets 2,784 2,424
Total assets $ 268,233 $ 190,007
Liabilities, Stockholders’ Equity and Non-controlling Interest  
Current liabilities
Accounts payable $ 43,416 $ 38,608
Short-term debt 34,606 31,762
Other payables 4,363 3,073
Contract liabilities – current 3,609 8,511
Operating lease liabilities – current 3,496
Accrued and other liabilities 10,389 11,517
Total current liabilities 99,879 93,471
Long-term debt 19,456 14,142
Contract liabilities – non-current 2,597 1,801
Deferred tax liabilities 1,021
Operating lease liabilities – non-current 15,957
Pension liabilities 13,269
Other long-term liabilities 1,658 2,739
Total liabilities 153,837 112,153
Stockholders’ equity and non-controlling interest:
Common stock 21 16
Additional paid-in capital 138,860 93,192
Accumulated other comprehensive loss (5,445) (192)
Accumulated deficit (19,040) (15,777)
Total stockholders’ equity 114,396 77,239
Non-controlling interest 615
Total stockholders’ equity and non-controlling interest 114,396 77,854
Total liabilities, stockholders’ equity and non-controlling

interest

$ 268,233 $ 190,007

DASAN ZHONE SOLUTIONS, INC. AND SUBSIDIARIES  
Reconciliation of GAAP to Non-GAAP Results  
(Unaudited, in thousands, except per share data)  
The reconciliation of Adjusted EBITDA to net income is included above in the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss).  Set forth below are reconciliations of Non-GAAP Gross Profit, Non-GAAP Operating Expenses, and Non-GAAP Net Income Attributable to DZS to gross profit, total operating expenses and net income attributable to DZS, respectively, which the Company considers to be the most directly comparable U.S. GAAP financial measures to Non-GAAP Gross Profit, Non-GAAP Operating Expenses, and Non-GAAP Net Income Attributable to DZS:
Three Months Ended September 30, 2019  
Cost of Revenue   Gross Profit   Operating Expenses   Operating Income   Net Income Attributable to DZSI     Net Income per Diluted Share Attributable to DZSI  
GAAP amount $ 49,347 $ 22,177 $ 26,078 $ (3,901) $ (4,033) $ (0.19)
Adjustments to GAAP amounts:
Depreciation and amortization (502) 502 (841) 1,343 1,343 0.06
Stock-based compensation (11) 11 (1,171) 1,182 1,182 0.06
Merger and acquisition costs
Inventory step-up amortization (175) 175 175 175 0.01
Bargain purchase gain on acquisition
 Non-GAAP amount $ 48,659 $ 22,865 $ 24,066 $ (1,201) $ (1,333) $ (0.06)
Three Months Ended June 30, 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 $ 55,882 $ 27,782 $ 24,829 $ 2,953 $ 2,408 $ 0.13
Adjustments to GAAP amounts:
Depreciation and amortization (594) 594 (756) 1,350 1,350 0.07
Stock-based compensation (10) 10 (801) 811 811 0.05
Merger and acquisition costs
Inventory step-up amortization (201) 201 201 201 0.01
Bargain purchase gain on acquisition
 Non-GAAP amount $ 55,077 $ 28,587 $ 23,272 $ 5,315 $ 4,770 $ 0.26
Three Months Ended September 30, 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 $ 48,483 $ 23,431 $ 19,892 $ 3,539 $ 1,798 $ 0.11
Adjustments to GAAP amounts:
Depreciation and amortization (236) 236 (416) 652 652 0.04
Stock-based compensation (7) 7 (610) 617 617 0.03
Merger and acquisition costs (139) 139 139 0.01
 Non-GAAP amount $ 48,240 $ 23,674 $ 18,727 $ 4,947 $ 3,206 $ 0.19
Nine Months Ended September 30, 2019  
Cost of Revenue   Gross Profit   Operating Expenses   Operating Income   Net Income Attributable to DZSI     Net Income per Diluted Share Attributable to DZSI  
GAAP amount $ 154,448 $ 74,829 $ 76,602 $ (1,773) $ (3,263) $ (0.17)
Adjustments to GAAP amounts:
Depreciation and amortization (1,613) 1,613 (2,497) 4,110 4,110 0.22
Stock-based compensation (31) 31 (2,787) 2,818 2,818 0.15
Merger and acquisition costs (337) 337 337 0.02
Inventory step-up amortization (577) 577 577 577 0.03
Bargain purchase gain on acquisition (334) (0.02)
 Non-GAAP amount $ 152,227 $ 77,050 $ 70,981 $ 6,069 $ 4,245 $ 0.23
Nine Months Ended September 30, 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 $ 139,344 $ 68,331 $ 61,951 $ 6,380 $ 3,321 $ 0.20
Adjustments to GAAP amounts:
Depreciation and amortization (749) 749 (1,284) 2,033 2,033 0.12
Stock-based compensation (7) 7 (1,350) 1,357 1,357 0.08
Merger and acquisition costs (139) 139 139 0.01
 Non-GAAP amount $ 138,588 $ 69,087 $ 59,178 $ 9,909 $ 6,850 $ 0.41