Zhone Technologies (DZSI) Q3 2021 Earnings Call Transcript

Zhone Technologies (DZSI -5.83%)
Q3 2021 Earnings Call
Nov 02, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the DZS Quarter 3 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to turn the call over to our speaker today, Ted Moreau, vice president of investor relations. You may begin.

Ted Moreau -- Vice President of Investor Relations

Thank you, Margerie, and welcome to the DZS third quarter 2021 earnings conference call. Joining us today are DZS president and CEO, Charlie Vogt; and CFO, Misty Kawecki. Yesterday, after market closed, we published to the Investor Relations section of the DZS website, a shareholder report for the third quarter of 2021 to provide shareholders, prospective shareholders, and analysts with market insights, product, business, and financial updates, as well as forward-looking statements. On this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the company.

The company cautions you that such statements are only current expectations and actual events or results may differ materially. Please refer to documents that the company files with the SEC, including its most recent 10-Q and 10-K reports and the forward-looking statements section of the shareholder report that was filed on a Form 8-K, as well as being available on the Investor Relations section of our website. These documents identify important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Please note that unless otherwise indicated, the financial metrics being provided to you on this call are determined on a non-GAAP basis.

These items, together with corresponding GAAP numbers and the reconciliations to GAAP, are contained in the shareholder report referenced earlier. I'd also like to remind you that during the fourth quarter, we will plan to participate in investor conferences hosted by Stifel, Needham, Craig Hallum, and Oppenheimer. I will now turn the call over to Charlie.

Charlie Vogt -- President and Chief Executive Officer

Thank you, Ted, and welcome, investors, analysts, and guests. I'm pleased to share that for the fifth consecutive quarter, we delivered strong sales momentum with quarterly revenue above the midpoint of our guidance and gross margin, and adjusted EBITDA that exceeded the high end of our guidance. Q3 2021 marked our third consecutive quarter with orders exceeding $100 million, resulting in backlog of approximately $200 million, nearly three times higher than a year ago. Even though we were challenged by supply chain availability, price increases, and foreign exchange variations, we have delivered the revenue of $88.4 million, which was above the midpoint of our guidance, and our 36.8% adjusted gross margin and $5.1 million of adjusted EBITDA were well above this high end of our guidance.

With the current supply chain challenges during the third quarter, without -- I'm sorry, without the third -- without the current supply chain challenges during the third quarter, and we estimate that our gross margin performance would have been approximately 39%, illustrating the effectiveness of our product rationalization, alignment with the component and the contract of manufacturing partners, and a more balanced North America, EMEA, and the Asia geographic mix. During the first half of 2021, we outlined to industry and financial analysts, and shareholders, the market opportunity and company-related transformational teams that we anticipated would lead to our long-term sustainable growth and profitability. As we expand, we have been very laser-focused on the following four themes: first, market share gains and growth within North America and European regions. And so while we are in the early stages of an aggressive playbook, early results have led to a North America order increase of 125% year to date compared to the same period in 2020.

Second is the technology that shifts and this investment cycle of -- is underway evolving from legacy copper and sub-1 gigabit technology to next-generation multi-gigabit broadband connectivity solutions, which are delivering growth across North America and EMEA, and with higher margins. This shift then to the multi-gigabit architecture has also enabled DZS to introduce high-value network and the subscriber-based software platforms. Third is the transformational wireless technology shift and industry momentum toward the next-generation of 5G architecture, fueled by emerging service providers such as our leading Open-RAN customer Rakuten, which surpassed 5 million subscribers during the third quarter. And Rakuten has successfully launched Rakuten Symphony, which is designed to accelerate the deployment of Open RAN networks around the world and with our mobile xHaul solutions playing a key part of their reference design.

And finally, our strategic pursuit to cap and eventually then replace Chinese equipment suppliers that are being deemphasized in the United States and many European and Pan-Asian countries, including India. Our sales pipeline, RFP, and trial activity during the first nine months of 2021 has been encouraging. And during the third quarter, we secured a large-scale broadband connectivity of project with a Tier 1 service provider in India. Our product rationalization, next-generation 10-gigabit class PON technology and strategic investments in software orchestration, automation, service assurance, and subscriber experience solutions are designed to then differentiate and enhance our more than 20 million platforms deployed around the world.

Our multi-gigabit PON and subscriber-influenced software strategy is on display in our newly launched XCelerate and DZS Xperience solutions, both of which are complemented by DZS Cloud, which was launched in March of this year with TELUS as an anchor customer. Our cloud-native network and some subscriber software portfolio will provide communication service providers with the applications, automation, and intelligence to more effectively manage their residential and business subscribers, creating new revenue opportunities and operational savings. Our product rationalization of work streams that have yielded reductions in SKUs by nearly 60%. While there are many valuable sales, service, and resource alignment benefits, the reduction in SKUs is also reducing supply chain risk.

Furthermore, we improved our manufacturing and supply chain efficiency across our global infrastructure as we consolidated the manufacturing operations and enhanced our supply chain partnerships to continue to successfully navigate through a difficult supply chain environment. Looking ahead, we anticipate the trends experienced throughout 2021 will now continue in Q4 and into Q -- and into 2022, specifically demand for next-generation, fiber-based broadband connectivity solutions, fueled by consumer demand and accelerated by an estimated $100 billion in government stimulus; demand for network and subscriber influence software solutions that will be able to provide operators with differentiated service offerings; the emergence and adoption of Open RAN 5G networks; Chinese equipment supplier cap and replacement opportunities; and persistent supply chain challenges. And as it relates to the fourth quarter, we are guiding to a wider-than-usual revenue range of $80 million to $100 million due to the current supply chain environment. We have the backlog to deliver to the high end of the range, assuming our component and contract manufacturing partners are not hindered during the quarter.

We anticipate a gross margin range of 32% to 34%, reflecting near-term supply chain cost increases, expedite fees, and foreign exchange variations, specifically with the Japanese yen. As we overcome this current supply chain headwinds, we believe the operational efficiencies underway and our new commercial strategies will deliver the long-term growth and margin expansion outlined in our Q2 shareholder report. I would now like to turn the call back over to the operator to begin our Q&A session. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Ryan Koontz from Needham & Company.

Ryan Koontz -- Needham and Company -- Analyst

Hey, good morning, Charlie. Wondering if you could walk us through this -- the price increase opportunity here and kind of is there a shot clock here that you have to give them time to place orders to the old price? Is this a this is a temporary change related to freight or are you implementing it on a permanent basis? Any little clarity like that would be helpful. Thank you.

Charlie Vogt -- President and Chief Executive Officer

Well, the price increases that we've received from many of our components supplier ecosystem group has not been something that has been deemed to be permanent although I think we are assuming that the price increases that our entire industry is seeing is likely to be elongated. Those those price increases really began in the May, June, July timeframe. Some of them came as late as September, some of which were already experiencing price increases, some of which we won't see the price increase until the first part of next year. I think what's important for everybody to appreciate and I think it's, frankly, consistent across everyone in the entire sector is some of the price increases affect current backlog depending on when raw materials were pulled in either to one of our contract manufacturers, or in our case, to our Florida manufacturing facility.

And other components and raw material are scheduled to be delivered in` 2022. What we decided to do, and we've put a lot of time and energy into this, we spent a lot of time with a lot of our Tier 1 customers and channel partners, was we began increasing prices October 1st. And we're using this term commercial strategies because that's really what it is. I mean we're being very thoughtful about the various price increases across the various portfolios but we believe that the price increases that we've implemented will more than offset the price increases that we've been navigating and will navigate over the course of next year.

Ryan Koontz -- Needham and Company -- Analyst

So it sounds like it's a multi-quarter implementation? Is that how we think about it? I mean --

Charlie Vogt -- President and Chief Executive Officer

Well, I mean if you look at the if you look at the margins that we were able deliver in Q3, I think that's -- I think from our perspective, if you pull out some of the expedited fees -- and that's a new term for our industry. I mean we've really never seen this category that we're referring to as expedite fees. But normal lead times are depending on the component the supplier could be as long as 52 weeks. Now we got ahead of things, I think, better than most.

And I talked about this over the last two quarters. Late last year in the September October timeframe, we -- just because we had a lot of visibility with a lot of our tier ones, we were able to get ahead of a lot of the forecasting requirements of the raw and systems level and I think that has really helped us, especially with our Q3 margins. But I think that what we're expecting to see in the very near term, and I'm saying Q4 maybe Q1, is some expedite fees that will have some margin impact. But I think that investors and shareholders should think about the longer term aspects of new orders that we're booking at the margin profile that I think aligns with our long-term margin expansion profile.

That and we certainly expect our DZS Cloud and our new DZS Xperience software portfolio to begin to deliver higher margin in the second half of next year.

Ryan Koontz -- Needham and Company -- Analyst

OK. And on the timing on the mobile side, it sounds like mobile was a little weak in the quarter, some like timing of some of deployments. Is that mix change going to shift in Q4 a bit there? And that's another headwind in Q4 on margins, I assume.

Charlie Vogt -- President and Chief Executive Officer

Look, I mean on the wireless side, and I think we're not the only ones but I certainly think that the catalyst for DZS and others in our ecosystem is really the adoption and the acceleration of Open RAN, which you don't always see it in the numbers but we certainly see it in the activity in -- specifically in what's going on from an RFP and from a trial perspective. Obviously, with our relationship with Rakuten and what they've done in launching Rakuten Symphony, which is leveraging a lot of their own intellectual property that they've garnered, and DZS being part of that reference design, as they have success with their own Open RAN network architecture, we aim to to be able to participate in that. But it's -- I think it's a factor of the adoption to Open RAN, and we certainly see that accelerating in 2022.

Ryan Koontz -- Needham and Company -- Analyst

OK. Great. And just one last one, if I could. On the Huawei replacement opportunity timing, are you starting to see some decisions now there and when should we think about that starting to impact revenues for you?

Charlie Vogt -- President and Chief Executive Officer

Well the large-scale projects that I just referred to during my opening remarks was a Huawei replacement project in India. I mean -- and I know the general market gets nervous about large-scale projects in India from a margin perspective but I do think that India, as a country and at least the for large-scale service providers there realized that in order for them to adopt technology from North America and European-based companies, the pricing and margin is going to change. So that's an exciting win for us. There are several large Tier 1s that we are aggressively pursuing in Western Europe, and a lot of those decisions we expect to be made between now and the end of the year.

And I think there's certainly a great opportunity for DZS, especially with most of those companies already having Nokia in their network and they're looking to to replace Huawei with at least one or maybe even two additional technology suppliers.

Ryan Koontz -- Needham and Company -- Analyst

Great. Super helpful, Charlie. Thank you.

Charlie Vogt -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Dave King from B. Riley.

Dave King -- B. Riley Financial -- Analyst

Yeah, good morning. My first question is maybe if I could get a mix between broadband and mobile for your backlog of $200 million?

Charlie Vogt -- President and Chief Executive Officer

I don't have that off top my head, Dave. I can I can research that before the end of the call to make sure I give you an accurate mix. I don't know that we've ever given that number, so I don't know that we want to start issuing a percentage of our backlog as it relates to fixed and mobile. But I would say that there's a healthy mix of both.

And I think we could assume that it's consistent with the blend of what you've seen throughout this year from a percentage of fixed and mobile. I mean there is some softening in Rakuten backlog in there.

Dave King -- B. Riley Financial -- Analyst

Sure. Got it. And then regarding that major Tier 1 Indian contract that you replaced, the Huawei, how big can it get? I mean India was fairly big a few years ago. Can it get back to that level? And how long -- I mean can you talk about sustainability?

Charlie Vogt -- President and Chief Executive Officer

Well, we're certainly encouraged. I mean it's not just with the operator that we're participating in here initially. I mean all four of the operators have pretty significant work streams underway. Look, I mean I've always been cautious about India but I would tell you that we're more positive on India today, I think, than I've ever been just because of the dynamics.

You don't have the Chinese suppliers that are putting a lot of margin pressure and pricing pressure on the competitive nature of it. And frankly, we're able to pick and choose. I mean I think we've tried to make it very clear to the analysts and shareholders that where things are strategic, we may be a little bit more aggressive from a pricing and margin perspective but we're committed to getting to that 40% gross margin level. And I think that we're going to make sure that all the projects that we participate in, including the large tier ones, will enable us to get to the margin profile that we've laid out for ourselves and shareholders.

So we're encouraged, frankly, with the opportunity in India. We're very encouraged with the opportunities we're seeing in Western Europe. And look, I mean North America has been just -- I mean it's exceeded all of our expectations this year. I mean we were obviously very focused on North America.

We've got a lot of great relationships that go back 20 years but the fact of the matter is year-to-date orders are up 125% compared the same period last year. And the momentum that we're seeing in North America, which obviously garners the highest margins, is pretty exciting and encouraging for us.

Dave King -- B. Riley Financial -- Analyst

Got it. And speaking of Americas, it was 31%, trending up nicely. At this rate, I mean can we expect maybe 40% by maybe second half next year? Is that a realistic goal?

Charlie Vogt -- President and Chief Executive Officer

I won't comment. I won't comment on it. It certainly is in line with with a lot of our expectations.

Dave King -- B. Riley Financial -- Analyst

Got it. And my last question is just wanted to get clarification on, of course, margins. So it's going to be approximately, what, 33% fourth quarter, I assume. It sounds like this is going to be a bottom maybe first quarter kind of a maybe a flat to up a little bit, but then going back to your target of 40%, I mean with 33% as a starting point, I mean is 40% maybe by late next year, is this still achievable? And if so, can you kind of walk us through the steps of how you're going to get there?

Charlie Vogt -- President and Chief Executive Officer

Again, I think what shareholders and analysts ought to be looking at across our entire sector, especially where there's a lot of systems and hardware content, even with some of the software elements, everyone's backlog is being impacted by the price increases. The way most of the price increases have been implemented by the broader ecosystem is such that regardless of whether or not there were orders in the system or not when they began shipping to you based on whatever active date it is, that was the effective price increase. So that's why I think we're going to see a slightly lower margin profile in Q4 and probably Q1. As we flush out the backlog, all the new orders that we're bringing in that began in Q1 will be at a new margin profile, which aligns with our target margin for for 2022.

And I think we had sort of outlined in our Q2 shareholder letter that we thought we could get to a margin profile in that 37% range next year and 40% in 2023, and that still holds true for the model that we have internally.

Dave King -- B. Riley Financial -- Analyst

Have -- I guess the expedite fees, I guess that's a big component of elevated supply chain cost. Has that kind of stabilized? And is that why we're thinking you know right now we're kind of bottoming here?

Charlie Vogt -- President and Chief Executive Officer

I know a lot of people keep saying we're bottoming. I think that I think that the expedited fees, like I said, it's sort of a new phenomena. I don't -- from our perspective, we're not modeling in a lot of expedite fees in 2022. There certainly has been expedite fees that we've navigated in Q2, Q3, and we will see some in Q4 with a couple of large projects that we need to deliver on.

And I think that's really the way everyone should look at it. I mean if in a perfect world, you're forecasting perfectly and you're receiving orders aligned with that forecast, there's no expedite fee. It's when you have an unexpected project or you're pulling in a project that you need for a customer that you're trying to pull forward the delivery dates from some of the component suppliers, that's when they're charging you a "expedite fee." We -- as I said, we saw some in Q2 and Q3, I think we did a great job navigating the expedite fees in Q3. We haven't really talked about the the foreign exchange impacts that we saw this year, especially with the large amount of business we do in Japan.

But when you looked at dollar against the yen, it's certainly been something that surprised us this year. I think we'll do a much better job managing that next year. But I think to your question, Dave, we don't expect to see the same amount of expedite fees next year just based on the alignment of our backlog and the alignment with the forecast plan that we have next year. So I think the price increases that and the commercial strategies that we'll be implementing will certainly offset the price increases that we're seeing at least in the near term from our ecosystem.

Dave King -- B. Riley Financial -- Analyst

Got it. Thank you.

Operator

[Operator instructions] Our next question comes from the line of Tim Savageaux.

Tim Savageaux -- Northland Securities -- Analyst

Hi. Good morning. A more around the kind of top line outlook, and I know you've been targeting kind of an 8% to 10% sort of growth range. I'm not sure whether you quantify the impact on revenue from supply issues this year but obviously your building backlog significantly.

You've mentioned this order in India, which I guess is looking to ramp sometime in calendar '22. I mean given the combination of maybe backlog increase and supply issues pushed into '22, overall kind of market growth in the U.S. and some of these new projects, is it fair to expect above trend growth in calendar '22 driven by all those factors? Thanks.

Charlie Vogt -- President and Chief Executive Officer

Thanks, Tim. Look, we haven't. We've spent, as most companies do this time of the year, we spent a lot of time analyzing 2022 already. We're not prepared to talk about 2022 on this call but I would say that the 8% to 10% that we had profiled last quarter, we still feel very confident that that's achievable.

As with almost every year I've participated in over the last 25, 30 years, there's the known and the unknown. And when we entered 2022, we're excited about the known but there's always no upside and there's also risk that you've got a balance. But if I look at the amount of RFP and trial activity that at least we're involved with today, we certainly are entering 2022 with a lot more enthusiasm and a lot more excitement than I think we did in 2021. And we entered 2021 not seeing the supply chain challenges hitting this entire segment as it has.

And I think we've actually done an extremely good job navigating the supply chain challenges. I mean we've got a very unique sales and -- sales finance and supply chain interlock process that we have implemented when I got here. I think that has really helped us. But to answer your question, I think we feel very optimistic about 2022 despite the supply chain headwinds and I think as you think about revenue, if we're successful with our commercial strategies and price increases, that certainly is going to have a positive impact on top-line revenue.

Tim Savageaux -- Northland Securities -- Analyst

Great. Thanks very much.

Operator

Our next question comes from the line of Christian Schwab from Craig-Hallum.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Great. Thanks guys for taking my question. I just have a quick question and clarity on backlog. With the price increases taking effect on October 1st and the significant backlog increase in September, was that telegraphed and was some of that business pulled in? Or should we think about that as true backlog strength that was going to occur just due to end market demand and the four big growth drivers that you outlined earlier in the call? I'm just wondering if you could clarify that for me, please.

Charlie Vogt -- President and Chief Executive Officer

It's a great question and I'll give you a straight answer. We haven't pulled forward anything. I mean everything -- I'd like to think that we could pull forward more than what we have. We're certainly rolling up our sleeves with our large Tier 1 customers to make sure that they're well educated about the supply chain environment and making sure that we're not hindering their deployment strategy.

But the backlog that we've created in '21 has really been all demand related. In fact, for the most part, I would say 75% to 80% of our $200 million backlog, if we have all of the components, we could ship it tomorrow. So we don't have any backlog that's sort of -- we're not piling up backlog for '23. We're facilitating a backlog for immediate projects today, and that's why we've got a wide range for Q4 revenue.

I mean if we're successful in aligning the components to the requested ship dates, we've got an opportunity to have a really strong Q4. But I think we're still in this sort of period, Christian, where all it takes is one component to cause us to not build a lot of systems. And so we're being, I think, fairly conservative and relatively cautious just because we don't want to mislead and misguide.But the backlog that we have today is backlog that we can ship as soon as we have the parts, which by the way, we're trying to balance. I mean if we pull everything forward from an expedite fee, you're gonna have a margin impact.

And so we're trying to balance at the best we possibly can. And I think for the most part, you should look at the $200 million with a backlog as backlog that will likely flush out in Q4 and mostly in Q1.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for that clarity. That was my only question. Thank you.

Operator

Our next question comes from the line of Paul Essi.

Unknown speaker

Thanks for taking my question. I wanted to get a little bit more color on this Plume partnership. How does it work? What are the service providers -- what are their benefits from this? What do you guys benefit? And how quickly can you expect you to penetrate the 20 million subscribers you've got out there that are in place?

Charlie Vogt -- President and Chief Executive Officer

I appreciate the question. Yeah. As I think most people know, we announced a strategic partnership with Plume during the quarter. It's a relationship that we've been fostering throughout 2021 and I think as we successfully rolled out DZS cloud, which is really a Network as a Service software platform.

So DZS Cloud is really designed to deliver orchestration, automation, service assurance, application management type services that will come in the form of either enterprise licenses or subscriber base licenses -- or I'm sorry, application licenses. What Plume does is it really complements what we're doing with DZS Cloud and it allows us to participate inside the home. It allows us to differentiate our next generation Wi-Fi 6CPE portfolio with embedded on-sync software from Plume that allows service providers to have a much different experience as it relates to Wi-Fi performance enhancement capabilities, more data analytics capabilities that ultimately are going to allow service providers to think about new revenue opportunities. It's going to allow them to reduce the amount of truck rolls.

And when you combine DZS cloud and Plume, I think we're the only company in the broadband industry that has a complete end-to-end software portfolio from what's going on at the core all the way inside the home or small business.

Unknown speaker

OK. How quickly do -- you're going to roll that out in the first quarter is --

Charlie Vogt -- President and Chief Executive Officer

Yeah. Well -- I mean we've been forecasting -- I mean we were very thoughtful about this because what we're doing with Plume really aligns with Wi-Fi 6, and our Wi-Fi 6 portfolio is launching from a product availability perspective in Q1. And so we wanted to make sure that you know we didn't launch something that customers didn't have access to. And so we'll have products available for shipment for end of Q1 and into Q2.

And so right now, we're focusing on booking orders for our cloud-based portfolio that we expect that the bundle of the software solution with our CPE products will ship toward the end of Q1 and Q2. So we certainly got a pretty ambitious appetite for the second half of 2022. And by the way, we've got a whole series of what we call DZS Xperience webinars that will launch this month in the month of November.

Unknown speaker

OK. A couple of questions on some of the subsidies the U.S. government's putting through, like RDOF. We're hearing it's just been kind of trickling in.

What's your assessment of that. And also in Europe, you said a lot of the money is poised to be let go soon. Can you update us on both of those situations?

Charlie Vogt -- President and Chief Executive Officer

Yeah. So I mean, if you go back 18 months, everyone's been talking about the infamous $20 billion RDOF funds, which is a I know everyone knows is a multi-year deployment. Up until really Q3, there was only about $300 million of that -- of the initial Phase 1 $9 billion that got deployed. As of right now, there's a billion dollars that's been released.

So that's that's good. So we're starting to finally see a lot of the RDOF dollars that are impacting some of our large customers like Consolidate Communications and others that are beginning to see some of those dollars go to work. We don't talk enough about what's going on in Europe but there is a number of countries that have significant multi-billion dollar stimulus funds that are coming out of their government institutions that are also fueling a lot of broadband initiatives across many countries around the world. And then assuming that the infrastructure bill gets passed and we're still assuming that that the broadband element of that is still about $42 billion, that certainly is going to have an impact, I think, more in the 2023 timeframe just because by the time it gets implemented in Q1 of this year, it'll be something that begins to rollout toward the very far end of 2022 and into 2023.

But U.K. has got their Freedom Fibre, Germany's got their utility -- utilities in [Inaudible]. And so I think that between just the U.K. and Germany, there's close to $20 billion of funding.

Unknown speaker

OK. One last question. You mentioned in your letter that there's a lot of Open RAN or more Open RAN opportunities in Asia. Can you discuss them? Outside of Rakuten, who else you're talking to, if you can, or what types of projects you're running into there?

Charlie Vogt -- President and Chief Executive Officer

I mean just from a competitive standpoint, I'm not going to share the projects and the companies that we're engaged with but I would tell you that there's a tremendous amount of momentum across the Europe, Middle East. There's a lot of activity across the Pan-Asian markets for O RAN. And I think even here in the U.S. and Canada, there's a significant amount of activity that's underway for O RAN.

So I think O RAN is here to stay. I think it's something that carriers that had already begun to roll out their 5G networks are sticking with that initial deployment but I think Phase 2 of their 5G deployment will lean in toward more Open RAN architectures, and I think that certainly opens the opportunity for companies like us to participate in a more meaningful way.

Unknown speaker

OK. Do you have a sense of timing when that could be?

Charlie Vogt -- President and Chief Executive Officer

We keep -- I mean what we're seeing on our -- I mean we've got -- I mean if you just look at Rakuten alone, which I think what they've done is pretty unique. I mean they've gone to market themselves going from zero to 5 million subscribers in Japan. We're -- today, we're exclusively providing their front hall gateway solution for their growth. They have, I think, 16 trials underway with customers that are leveraging their architecture.

Many of those will have a need to leverage their platform reference design which we're a big part of. There is some meaningful business there that we're not, unfortunately, in a position to disclose right now that we think closes in Q4 and begins to roll out in the first half of next year, which could be very exciting for us. And separate and apart from that, I mean we continue to be very pursuant with the Tier 1s both on the fixed Wireline side as well as on the mobile side

Unknown speaker

OK. Thank you very much.

Charlie Vogt -- President and Chief Executive Officer

Thanks for the questions.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Ted Moreau -- Vice President of Investor Relations

Charlie Vogt -- President and Chief Executive Officer

Ryan Koontz -- Needham and Company -- Analyst

Dave King -- B. Riley Financial -- Analyst

Tim Savageaux -- Northland Securities -- Analyst

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Unknown speaker

Charlie Vogt -- President and Chief Executive Officer

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