Investor Presentation - January 2021 - DZS
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Investor Presentation
January 2021
© 2021 DZS © 2021 DZS 1
Forward-Looking Statements
This presentation contains forward-looking statements regarding future events and our future results
that are subject to the safe harbors created under the Private Securities Litigation Reform Act of
1995. These statements 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 profit,
costs or other financial items (including non-GAAP measures) in future periods 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. In addition to factors discussed herein, factors that could cause actual results to
differ include, but are not limited to, those 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 subsequent filings. In addition, additional or unforeseen affects
from the COVID-19 pandemic and the global economic climate may give rise to or amplify many of
these risks. 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.
© 2021 DZS 2
Introducing DZS
▪ Management with Disruptive Technology Heritage and Global Customer Relationships
▪ Broadband and 5G Innovation validated in Asia competing against Huawei and Nokia
- Aggressively Expanding into North America, Latin America, Europe, Middle East and Africa
▪ Favorably positioned for 5G and Work-From-Home Broadband Access Trends
- First to market with 5G Open-RAN Mobile Transport – Rakuten Mobile Network
- First to market with 10 Gigabit PON – Many Networks around the world
▪ Aggressively pursuing ~$22B+ U.S. Rural Digital Opportunity Fund and Secured &
Trusted Communications Networks Act Programs
▪ Favorably positioned for Enterprise, MDU and Government Fiber upgrade cycle
▪ Streamlining Operations to capture Cost Synergies and Margin Expansion
$25B Fixed, Mobile and Enterprise Addressable Market – 10 Year Upgrade Cycle
© 2021 DZS 3
DZS (NASDAQ: DZSI) at a Glance Headquarters • Dallas, Texas Research & Development • Dallas, Texas • Seoul, South Korea • Hanoi, Vietnam ~20M Products In-Service ~800 Employees ~1,000 Customers ~100 Countries © 2021 DZS 4
World Class Leadership Team
Charlie Vogt new additions
President and CEO
since Vogt’s arrival
Tom Cancro Laura Larsen-Misunas
Miguel Alonso Jay Hilbert
Chief People Officer
Chief Financial Officer VP of Product Line EVP AEMEA Sales
Management
Andrew Bender Doron Paz Bill Ko Justin Ferguson
Chief Technology Officer VP of Research & EVP Asia Sales Chief Legal Officer
Development
Daniel Won Michael Martin Darrin Whitney
Geoff Burke Chief Information Officer
Chief Product Officer Global Operations Officer
Chief Marketing Officer
© 2021 DZS 5
Supplier to many of the World’s Most Admired Service Providers
#1 U.S. based Fiber
Access vendor*
#1 Mobile Supplier in
S. Korea and Japan*
#2 10G PON vendor
outside of China*
5G O-RAN Market Mover
Mobile AnyHaul Transport
*Omdia (2Q 20 Broadband Aggregation Market Share) 6
© 2021 DZS
Why DZS Wins
Portfolio 5G Ready
Marquee ▪ Innovation / Market First
Differentiation
References ▪ Global Scale
▪ Global Experience
▪ Agile and Adaptable
▪ Standards-Focused
▪ Future Ready - Software-
Defined Networking
© 2021 DZS 7
Where We Play in the Network
xPON Wi-Fi 6
Neighborhood
Pedestals Wi-Fi6 & Mesh CPE
G.fast
Ethernet / Optical (>100M)
Transport
Transport Aggregation
10-400G Access Ring(s)
Building 10-400G xPON (1–10G+)
Aggregation
BackHaul MidHaul FrontHaul
BBU / O-RAN CU 5G
Internet Core Network Transport Aggregation
Mobile Cell Site Fixed Wireless
Wi-Fi6 /
10G PON Backhaul Small Cell
© 2021 DZS 8
Leading the Hyper-Connected Evolution
SDN/
Automation, Data Analytics, Artificial Intelligence, Managed Services
Today Future
Mobile Anyhaul 5G Open RAN
Access Nodes Cloud
Switching/Routing Disaggregation
Wi-Fi 6 WiFix, mmWave,
ONT / ONU Fixed Wireless
© 2021 DZS 9
Aligned with Mega-Trends
Open Standards
Mobility and 5G
Fiber Deep
Cloud / Connected
Data Center Everything
© 2021 DZS 10Pursuing ~$35B TAM – Year 3 of 10-Year Investment Cycle
$12,000 $25,000 $5,000
Fiber Switching 5G FWA
FrontHaul $4,500
$10,000 Access Wi-Fi
$20,000 $4,000
BackHaul
$3,500
(Millions)
(Millions)
(Millions)
$8,000
$15,000 $3,000
$6,000 $2,500
$10,000 $2,000
$4,000
$1,500
$2,000 $5,000 $1,000
$500
$0 $0
$0
2018 2019 2020 2021 2022 2018 2019 2020 2021 2022
2018 2019 2020 2021 2022
5G AnyHaul Transport Fiber Access/Switching Connected Premises
Sources: Omdia (2Q 20 Mobile Backhaul/Fronthaul Forecast)
Omdia (2Q 20 Wireline Broadband Access Equipment Forecast)
360 Markets (2020 5G FIxed Wireless Access Forecast)
© 2021 DZS 11Generational Growth Opportunity
Wireless Broadband
- 10x capacity increases - 1-10 Gigabit upgrade cycle
driving Front-Mid-Backhaul underway
- O-RAN First Market Mover - Year 3 of 10 year cycle
Geopolitical Enterprise
- China security concerns - Copper to Fiber (PON)
enabling Cap & Grow Upgrade Cycle underway
- DZS experienced with - Year 3 of 10 Year Cycle
Huawei/ZTE interoperability
© 2021 DZS 125G Opportunity
▪ Densification and new band plans / spectrum require ~10x
increase in mobile transport (Front-Mid-Backhaul)
capacity vs 4G
▪ 5G initiatives such as Open RAN and Virtualized RAN will
disrupt traditional proprietary and capital-intensive
architectures
▪ DZS is favorably aligned in the 5G upgrade cycle with many
of the world’s most admired mobile operators
▪ DZS is aligning with the Open RAN technology ecosystem
▪ DZS is expanding its 5G Mobile Transport portfolio
© 2021 DZS 13Broadband Growth
Digital Broadband Demands
are moving towards 10 Gigabit 10 Gigabit
1 Gigabit
Fiber Replacement of Copper Work from Home & Digital
continues to accelerate Connectivity demands are fueling
the pace towards 10+ Gigabit
services
Copper
© 2021 DZS 14Geopolitical and China Security Bans
China Security Bans ▪ China Security Risk creating global
▪ U.S, Japan, Australia, UK, India, Finland opportunity for Cap & Growth and Rip &
have officially banned China suppliers Replace
with many other countries evaluating - Countries represented as “Banned”, “Weighing”, or
“Cancelled” represent ~40% of global carrier CAPEX
▪ U.S. Secured and Trusted Communications
Networks Act (STCNA) enabling $1.9B of
Huawei and ZTE Rip & Replace
▪ U.S. Rural Digital Opportunity Fund (RDOF)
enabling $20.4B of 5G and Broadband Access
capital spend acceleration
© 2021 DZS 15Enterprise Transformation
▪ Space and Power Reduction ▪ Increased Life Span and Density
▪ Improved Security versus Copper ▪ Future Proof
Before Before After
Air Conditioning
on each floor
HVAC Power Passive Optical
on each floor Mux on each floor
Copper Switches
on each floor
Wiring Closet
on each floor Active components
in the basement only
Central
Computer
Room
© 2021 DZS
After 16Software Defined Networking and Orchestration Roadmap
NextGen SDN Control & Management
SDN
▪ SDN Control Plane functions Control &
▪ NE Management Plane functions Management
▪ In-portfolio and partner companion applications
Next Gen Software Platform Data Plane
Spine Switches
▪ State-of-the-Art Portable Linux based OS
▪ Fully SDN-enabled and future-ready architecture
▪ Modular, virtualized/containerized software
Disaggregated / Distributed Networking . Data Plane
. Leaf Switches
.
▪ NOS-based Data Plane Functions
▪ Comprehensive and extensible L2 and L3 features
Leads to Higher Margins, Re-Occurring Revenue and Customer Dependency
© 2021 DZS 17Third Quarter 2020
Financial Results
© 2021
2021 DZS
DZS 19Key Highlights
Integrating Into One DZS Favorable Market Dynamics Strong Quarter of Execution
▪ Strengthened management by ▪ Increasing demand for ▪ Q3 revenue of $94M exceeded
hiring 30 leaders across the equipment at the network edge $74-79M guidance
organization
▪ Geopolitical movement towards ▪ APAC revenue strength driven
▪ Expansion plans targeting N. secure networks by recent Mobile Transport
America, Latin America, and the wins while orders improved in
▪ Addressable market expanding
EMEA regions North America
with recent entrance into Mobile
▪ Streamlining operations to Transport (4G/5G) and the ▪ Financial performance includes
improve margin profile Enterprise market share gains vs Huawei
▪ Government Rural Broadband
Initiatives (i.e. RDOF, 5G Fund
for Rural America)
© 2021 DZS 20Q3 2020 Y/Y Comparisons
Revenue Adj. Gross Margin(1) Adj. Operating Expenses(1)
(in millions)
(in millions)
$100.0 $93.9 32.5% $24.5
$24.1
32.0%
32.0% $24.0
$80.0 $71.5
$23.5
31.5%
$60.0 $23.0
31.0%
30.6% $22.5 $22.3
$40.0
30.5%
$22.0
$20.0 30.0% $21.5
$0.0 29.5% $21.0
Q3'19 Q3'20 Q3'19 Q3'20 Q3'19 Q3'20
Adj. EBITDA(1) Adj. EBITDA Margin(2) Adjusted EPS(1)
(in millions)
$7.0 $6.4 8.0% 6.8%
$6.0 7.0%
6.0% $0.25 $0.20
$5.0
5.0% $0.20
$4.0
4.0% $0.15
$3.0 3.0%
$2.0 $0.10
2.0%
$1.0 1.0% $0.05 ($0.06)
($0.3) -0.4%
$0.0 0.0% $0.00
($1.0) Q3'19 Q3'20 -1.0% Q3'19 Q3'20 ($0.05) Q3'19 Q3'20
($0.10)
Q3’19 Q3’20
(1) Refer to the Stockholder Letter filed as an exhibit to the 8-K filed with the SEC on October 29, 2020 for a detailed reconciliation of Q3’20 actual gross margin to Adjusted gross
margin, actual operating expense to Adjusted operating expense, net income (loss) to Adjusted EBITDA and net income (loss) per share to Adjusted net income (loss) per share,
or Adjusted EPS.
© 2021 DZS (2) Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by revenue. 21Market Dynamics and Execution Delivering Growth
Record Quarterly Revenue in Q3 Revenue by Geography
$100
$90 $100 Americas EMEA Asia
$80 $90
$70 $80
$60 $70
$60
61%
$50 57%
$50 54%
$40 55%
$40
$30 52%
$30
$20 22% 25% 21%
$20 23%
24%
$10
$10 24% 22% 18%
18% 24%
$0 $0
Q3'19 Q4'19 Q1'20 Q2'20 Q3'20
*Q4 2020 reflects mid-point of $75-80M revenue guidance range.
© 2021 DZS 22Streamlining Operations to Deliver Margin Expansion
Innovation
Product
30.6%* Service NPI
Manufacturing Optimization
China Consolidation Expansion
Purchasing
Product Tariff
Merger Rationalization Power
Synergies
Q3/20
© 2021 DZS *Adjusted Gross Profit Margin 23Q3 2020 Balance Sheet Highlights Financial Metric ($ millions) Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Cash, cash equivalents and restricted cash $52.3 $33.4 $35.7 $47.2 $40.4 Debt $54.1 $36.5 $39.7 $56.8 $51.5 DSO 139 132 169 129 105 Inventory $43.0 $35.4 $39.9 $48.2 $43.9 Inventory Turns 4.4x 5.2x 3.2x 4.2x 5.6x © 2021 DZS 24
Financial Outlook
Financial Category Q4 2020(1)
Revenue $75M to $80M
Adjusted Gross Margin(2) 29.3% to 30.8%
Adjusted Operating Expense(2) $23.2M to $22.2M
Adjusted EBITDA(2) $(1.2)M to $2.5M
(1) projections or outlook with respect to future operating results are only as of October 30, 2020, the date presented on the related earnings conference call. Actual results may differ
materially from these forward-looking statements. DZS assumes no obligation to update this information, whether as a result of new information, future events or otherwise.
(2) Refer to the Stockholder Letter filed as an exhibit to the 8-K filed with the SEC on October 29, 2020 for a complete GAAP to Non-GAAP reconciliation of our Q4’20 guidance
© 2021 DZS 25Reconciliation of GAAP to Non-GAAP Results(1)
Three Months Ended September 30, 2020
Net Income
Net Income (Loss) per
(Loss) Diluted Share
Operating Operating Attributable to Attributable to
Cost of Revenue Gross Profit Expenses Income (Loss) DZS DZS
GAAP amount $ 65,755 $ 28,192 $ 26,215 $ 1,977 $ (115) $ (0.01)
Adjustments to GAAP amounts:
Depreciation and amortization (503) 503 (883) 1,386 1,386 0.06
Stock-based compensation (16) 16 (1,644) 1,660 1,660 0.08
Loss on debt extinguishment - - - - - -
Headquarters Relocation - - (35) 35 35 0
Executive transition - - (1,383) 1,383 1,383 0.06
Adjusted (Non-GAAP) amount $ 65,236 $ 28,711 $ 22,270 $ 6,441 $ 4,349 $ 0.20
Three Months Ended September 30, 2019
Net Income
Net Income (Loss) per
(Loss) Diluted Share
Operating Operating Attributable to Attributable to
Cost of Revenue Gross Profit Expenses Income (Loss) DZS DZS
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
Inventory step-up amortization (175) 175 - 175 175 0.01
Adjusted (Non-GAAP) amount $ 48,659 $ 22,865 $ 24,066 $ (1,201) $ (1,333) $ (0.06)
6
© 2021 DZS 26
1) The following table shows the reconciliation of Net Income to Adjusted EBITDA as reported in the Company’s Third Quarter 2020 Stockholder Letter.Thank You
www.DZSi.com
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