Calix Q1 2024 Earnings Report

Calix EPS Results

• Actual EPS: $0.02
• Consensus EPS: $0.01
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: N/A

Calix Revenue Results

• Actual Revenue: $226.31 million
• Expected Revenue: $228.01 million
• Beat/Miss: Missed by -$1.70 million
• YoY Revenue Growth: N/A

Calix Announcement Details

• Quarter: Q1 2024
• Date: 4/22/2024
• Time: N/A
• Conference Call Date: Tuesday, April 23, 2024
• Conference Call Time: 8:30AM ET

Calix (NYSE:CALX). is a provider of cloud and software platforms, systems, and services that enable broadband service providers to transform their networks and subscriber experiences. The company’s flagship Calix Cloud platform delivers real-time analytics, automation and intelligence designed to simplify network operations, improve service agility and drive revenue growth. Calix also offers a comprehensive suite of premises and access systems, including broadband access nodes, fiber-to-the-home optics and residential gateways under the GigaSpire brand.

Through its software-defined network architecture, Calix helps service providers virtualize key network functions and introduce new services with minimal capital expenditure. Its solutions support a wide range of access technologies, from GPON and XGS-PON to DOCSIS, enabling providers to tailor deployments for both fiber-rich and hybrid fiber-coax environments. The company’s Customer Engagement and Marketing Cloud solutions further allow operators to personalize subscriber offerings and drive upsell opportunities.

Founded in 1999 and headquartered in San Jose, California, Calix serves more than 1,600 communications service providers across North America, Europe, Asia and Australia. Its global customer base ranges from rural broadband co-ops and municipal networks to large national carriers, all seeking to enhance operational efficiency and deliver next-generation services. Calix maintains research and development centers and strategic partnerships to stay at the forefront of broadband innovation.

Calix’s leadership team combines telecom industry veterans and software experts focused on a vision of simplified broadband transformation. By uniting cloud-native software, modular hardware systems and professional services, the company aims to accelerate the adoption of fiber-based networks and foster more compelling subscriber experiences. Its ongoing product roadmap is driven by machine learning, open APIs and an emphasis on rapid service delivery.

Calix Q1 2024 Earnings Call Transcript

Key Takeaways

• Calix delivered Q1 revenue of $226.3 million, within guidance, and achieved a record non-GAAP gross margin of 54.9%, driven by 18 new platform and 27 new managed-services customer deployments.
• Hardware (“appliance”) sales declined as medium and large BSPs delayed CapEx, leading to Q2 revenue guidance of $197 million–$203 million, but smaller service providers continued robust network builds and subscriber growth.
• The company expects Q2 to mark the bottom for appliance revenue and forecasts a rebound in H2 2024, bolstered by green shoots in new network builds and the rollout of BEAD funding beginning in early 2025.
• Calix’s debt-free balance sheet remains strong with nearly $240 million in cash and investments, four consecutive quarters of double-digit free cash flow, and $89 million of stock repurchases over the past year.
• Strategic wins — including a partnership with Ready.net to streamline grant funding, 74% of federally funded VSPs using Calix speed tests, and signing the company’s largest cloud deal — signal growing traction with larger service providers.

Presentation

[Operator]

Greetings, everyone, and welcome to the Calix First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the brief prepared remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations. Sir, please go ahead.

[Jim Fanucchi, VP of Investor Relations at Calix]

Thank you, Melissa, and good morning, everyone. Thank you for joining our first quarter 2024 earnings call. Today on the call, we have President and CEO Michael Weening and Chief Financial Officer Cory Sindelar. As a reminder, yesterday after the market closed, Calix issued a news release which was furnished on a Form 8-K along with our stockholder letter and was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. Before I turn the call over to Michael for his opening remarks, I want to remind everyone on this call we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy, and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements.

[Jim Fanucchi, VP of Investor Relations at Calix]

Factors that could cause actual results and trends to differ materially are set forth in the first quarter 2024 letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements which speak only as of their respective dates. Also, in this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the first quarter 2024 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead.

[Michael Weening, President and CEO at Calix]

Thank you, Jim. Our results in the first quarter demonstrated the continued execution and strength of our strategy. Our platform, cloud, and managed services are enabling our broadband customers to succeed against their competitors every day. Their success delivers value to their stakeholders and, in turn, to Calix. Our unique broadband business model delivered record gross margins as BSP's deployment of the Calix platform, cloud, and managed services continued unabated. However, our appliance business remains challenged in the same way the market is, with larger customers reevaluating their CapEx plans. This trend continued into the second quarter, which we did not forecast. Now that we understand this larger customer dynamic, we have adjusted our expectations accordingly. At the same time, however, it highlighted the ongoing strength of our smaller BSP customers.

[Michael Weening, President and CEO at Calix]

While growth in this set of customers is muted by new build indecision around BEAD, the business-as-usual part of their operations, completing existing network builds and filling those networks by winning new subscribers, remains robust. Leading indicators from infrastructure vendors that deploy fiber, combined with green shoots in our customer base, lead us to forecast that the second quarter will be the bottom of our appliance revenue. Regarding BEAD, and as we have said, we believe revenue will begin in early 2025, and we will lead. Working with customers to help them win government funds is something that we have done for 15 years. Recently, you saw us create a partnership with industry-leading funding solution provider Ready.net.

[Michael Weening, President and CEO at Calix]

This partnership enables us to leverage Ready.net's tools as part of our existing funding consult program, connecting our more than 1,600 Calix customers with a streamlined portal to apply for and win grant funds, secure capital, and adhere to public funding requirements. Earlier this month, we announced that 74% of federally funded BSPs use Calix for their broadband speed test. This is a significant indicator of future success, as any BSP who receives government stimulus must routinely report back on the speeds they are delivering to their customers. This is a complicated undertaking that we've made simple via our platform, cloud, and managed solutions. We expect that 74% figure to grow.

[Michael Weening, President and CEO at Calix]

While the largest government stimulus program is soon to be here, we've been actively landing new footprint as our consolidated network delivers the lowest cost per bit per mile infrastructure and up to 80% reduction in operating expense, as demonstrated at Verizon. Unlike in times past when many new accounts were startups, the 10 new accounts recorded in the first quarter all came from existing service providers. We intend to maintain our aggressive stance in the market at this critical time. Finally, and most importantly, the wave of disruption is speeding up. Larger service providers are engaging in conversations with Calix to help them build a more valuable business by avoiding commoditization. Two examples from the first weeks of Q2 include signing the largest cloud deal in our history and a larger service provider selecting SmartBiz. Both are indicators that we are crossing the chasm in this disruption.

[Michael Weening, President and CEO at Calix]

With that, I'd like to turn it over to Cory to review our financial results for the quarter.

[Cory Sindelar, CFO at Calix]

Thank you, Michael. The first quarter represented another quarter of deliberate and disciplined execution. We delivered revenue of $226.3 million, which was within the guidance range we provided in January. Against the crosswinds prevalent in our industry, the continued growth in our platform, cloud, and managed services drove record non-GAAP gross margin of 54.9%. In the first quarter, we saw platform adoption with 18 customers beginning their platform journey with us and 27 customers deploying a managed service for the first time. In the first quarter of 2024, non-GAAP operating expenses were $108.4 million, down $1.6 million from the prior quarter. The decrease is attributed to our ConneXions Event, which occurs each year in the fourth quarter.

[Cory Sindelar, CFO at Calix]

As we talked about in our last call, our plan is to keep 2024 operating expense investments relatively consistent with 2023, as we continue to believe that this level of investment represents a great opportunity for us to grow our footprint ahead of the U.S. government broadband investment. Our debt-free balance sheet remains strong. At the end of the first quarter, cash and investments were nearly $240 million, representing a sequential increase of $19 million. This was our fourth consecutive quarter of double-digit free cash flow. During the first quarter, our supply chain continued to normalize. We exited Q1 with purchase commitments falling another $29 million from year-end to $147 million, inventory deposits declined by $2 million, and our inventory turns were 3.1, down from 3.3 last quarter as our component inventory increased. Excluding component inventory, our inventory turns would have been greater than 4.

[Cory Sindelar, CFO at Calix]

Furthermore, we expect these reductions in working capital requirements, combined with continued profitability, will result in consistent quarterly double-digit operating and free cash flow. During the first quarter, we repurchased $4 million of our common stock, bringing our total common stock purchases over the last year to $89 million. Our repurchase program remains in place, with approximately $110 million available at the end of the first quarter. Now let's discuss our revenue guidance for the second quarter. As Michael has discussed, there currently are several crosswinds in our industry. As a result of these factors, our second quarter of 2024 outlook is for revenue to be between $197 million and $203 million. The forecasted decline in revenue from the first quarter is mostly due to the continued delay of purchasing decisions at a few of our medium and large customers.

[Cory Sindelar, CFO at Calix]

Looking out a bit further, we believe the June quarter will set the bottom for revenue, as revenue from the few significant customers will have diminished to a point where there is limited downside risk. When you combine the green shoots from our smaller customer base with footprint expansion, we believe we will return to revenue growth. In summary, while crosswinds affect our top line in the near term, our platform, cloud, and managed services will continue to grow unabated and drive gross margin expansion. With the industry's strongest balance sheet, we have the financial resources to invest in our operations and grow our footprint in advance of the U.S. government broadband investments. Michael, back to you.

[Michael Weening, President and CEO at Calix]

Thank you, Cory. As I have shared, I meet with broadband customers and their investors constantly. It is clear they are understanding the disruption that faces legacy network operators, which is critical to our crossing the chasm from early adopters to winning an early majority. With more than 1,000 customers deploying our platform, it is no surprise that we are engaging with ever larger prospects who are interested in how our BSP customers are achieving their incredible revenue, margin, cash flow, and customer satisfaction results. The entire Calix team remains energized by the opportunity to expand our platform, cloud, and managed services business.

[Michael Weening, President and CEO at Calix]

At the same time, with more than 60 million new fiber connections forecasted in the next five years, we have a once-in-a-generation opportunity to land new network footprint and enable our BSP customers to win new subscribers, thereby filling those networks with an expanding portfolio of managed services. This will be supercharged by the BEAD funds that begin in 2025. While only one state has completed all 10 steps in the BEAD process, 42 other states have completed 9 of the 10 steps to begin funding. In closing, I want to reiterate that we are confident in our long-term outlook. We have a talented and motivated team executing our strategy every day. We have unique technology that positions us to surf this wave and take advantage of new network builds. We have the financial strength and balance sheet that allows us to avoid any distractions.

[Michael Weening, President and CEO at Calix]

Therefore, we intend to keep a steady and disciplined hand on our operating expense investments as we maximize this opportunity and help our customers win. Jim, let's open the call for questions.

[Cory Sindelar, CFO at Calix]

Thank you, Michael. Melissa, please open the call for questions at this time.

[Operator]

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Ryan Koontz with Needham & Company. Please proceed with your question.

[Ryan Koontz, Managing Director and Research Analyst at Needham & Company]

Great. Thanks for the question. Just unpacking your customer segments there a bit. Looks like your Tier 3s or the smaller customers are relatively stable here, but the medium and large are really hurting. How should we think about the trajectory of those segments going forward here into Q2? And then how do you think about them in the second half at this kind of early stage from a high level? Thanks.

[Cory Sindelar, CFO at Calix]

Yeah. Thanks, Ryan. Thanks for the question. Kind of as we outlined in our letter, we're continuing to see green shoots coming out of that smaller customer base, and the decline from Q1 to Q2 is really focused on those medium and large customers. Kind of to put a point on it, that segment, those segments in the fourth quarter were $77 million of revenue, and in the first quarter, they turned out to be about $43 million. We didn't expect continued deterioration a quarter ago, but clearly, they are still stuck in their capital planning processes, and we're now forecasting them to be halved again from that $43 million level. So those segments really have not much more further to go. And so we think at this point, why Q2 has bottomed, and we're confident that from here on out, we ought to be able to grow.

[Ryan Koontz, Managing Director and Research Analyst at Needham & Company]

Got it. Thanks, Cory. A quick follow-up, if I could, please, on your product mix here in terms of Revenue EDGE, Intelligent Access EDGE. Should we think of that Intelligent Access EDGE as the trajectory for your new footprint gain? I actually thought it might be a little worse than that and might see it kind of more of a mix toward sell-in and Revenue EDGE. But how should we interpret those two product segments?

[Michael Weening, President and CEO at Calix]

Well, so on the Intelligent Access EDGE, that's a mix of new network gains but also our existing customers filling out the network builds that they currently have. And so as we said, we saw some real, you see, the continued strength in our rural customers who are in the smaller segment who continue to build out those networks successfully. And that's why you see that underpinned strength. And I would say that as we go forward and you start to see those 60 million fiber lines start to get built out, that you're definitely going to see the Intelligent Access EDGE surge. On the Revenue EDGE side, that is the business-as-usual part of our business, where that's what they use to acquire new subscribers. And so you're going to see that continue on.

[Michael Weening, President and CEO at Calix]

In fact, as we took 10 customers last quarter, and therefore, those ones are generally CapEx and grows, where they're saying, "I have an existing fiber network. I'm worried about commoditization. I need to differentiate my business in my markets, and Calix is the best position to do that," so.

[Ryan Koontz, Managing Director and Research Analyst at Needham & Company]

Got it, Michael. So it's fair to say that that Intelligent Access EDGE number includes a healthy component of sell-in, fill-in, edge-out from existing networks, but entirely new footprint is down much more than that.

[Michael Weening, President and CEO at Calix]

For sure. And that's back to the indecision with regards to decision-making as they work through, "Do I invest my dry powder and the capital that I have in a new network build, or do I use the funding that's now almost 6 months out, 8 months out, and the BEAD funding and go after that instead of using my existing capital?" So in the future, you will definitely see a swing up on the network side as they begin to deploy those BEAD funds and retake footprint.

[Ryan Koontz, Managing Director and Research Analyst at Needham & Company]

Got it. Great. I'll pass it on from here. Thank you.

[Cory Sindelar, CFO at Calix]

Thanks, Ryan.

[Operator]

Thank you. Our next question comes from the line of George Notter with Jefferies. Please proceed with your question.

[George Notter, Managing Director of Equity Research at Jefferies]

Hi, guys. Thanks so much. I wanted to ask the BEAD question. I think you said 6-8 months out. Look, I know the BEAD Program is a little bit controversial in terms of the process and the potential for delays. Can you handicap the BEAD process? Do you really think that the monies are flowing by year-end then, the 6-8 months out, or do you think it's a program that has the potential to slip?

[Michael Weening, President and CEO at Calix]

It's a good question. Everybody's asking that question. And so over the last three years, others have been asserting that it would be coming earlier. We've been very consistent with regards to our views that it would take significantly longer to arrive. And then when it does arrive, it's going to be a lot larger than people anticipate. So what's our view on it is we see it as 2025. In early 2025, we think that you'll start to see some trickles, and then it'll go from there. 2025 is the year.

[Cory Sindelar, CFO at Calix]

Yeah, Ryan, you could see from the NTIA website that they made some good progress in terms of getting states approved through the Volume I or the challenge process. If you include the territories, they went from 29 last quarter to 47. I would expect that the NTIA will start working more on the Volume II and getting more states approved. But you're right. Until you start seeing those states get approved, this can continue to slip. So with any government funds, that's where I'm continuing to watch that. I'm encouraged by what I saw happen in the last 90 days, and we'll see what the next 91 days brings.

[George Notter, Managing Director of Equity Research at Jefferies]

Got it. And then just as a follow-up, I think you guys were talking about the overhang associated with BEAD. We talked about kind of network planners kind of going offline as a result of the wait-for effect associated with BEAD. You talked about the strength in your smaller customers. Is that something that you're seeing right now in the smaller customer base, or is that something you're looking at more prospectively as the year goes on? Or how do you think about that effect and how it layers into your business timing-wise? Thanks.

[Michael Weening, President and CEO at Calix]

Well, we identified that in January of this year. We stated that it would be this is going to be an impact through first half, right? And so we saw that in Q1, and we see that in Q2. You see a profound impact on some of the larger customers as they're working through this. With our existing customer base, they still are going through that decision-making process. So a portion of them have made the decision to not apply for BEAD, but there are a portion of them that are continuing on or pursuing BEAD. Therefore, that indecision continues, and you see it lesser in the smaller customers and more profound in the medium and large.

[George Notter, Managing Director of Equity Research at Jefferies]

Great. Thank you.

[Operator]

Thank you. Our next question comes from the line of Samik Chatterjee with JP Morgan. Please proceed with your question.

[Samik Chatterjee, Senior Equity Research Analyst and Managing Director at JP Morgan]

Hi. Good morning, and thanks for taking my questions. I did jump on a bit late, so if you've answered this, please excuse me. But you did call out in one queue as well certain significant customers that were pausing spend. You are calling that out as a headwind in this release as well. I'm just wondering, when you look at the breadth of the customers that are pausing, is that just expanding in terms of the breadth as you go into sort of the back end of the year? Is that really becoming sort of a more evident trend, or it is typically sort of remaining constrained to a few? I think you had called out three significant customers last quarter that had paused. Is it remaining constrained to those? I'll have a follow-up. Thank you.

[Michael Weening, President and CEO at Calix]

Cory, that's a great question for you to answer and identify the shift from Q4 to Q2 and how we did not anticipate it continuing into second quarter.

[Cory Sindelar, CFO at Calix]

Yeah. It is largely two customers that have continued to have delays in their capital decision. And so it's not a broadening. It's really more focused on those couple. And when you take a look at what they did, we were at $77 million in Q4 of last year. It's $43 million in the current and anticipated to be about half that in Q2. So no, it's not broadening out. It's still tied to largely, predominantly, those two customers in particular.

[Michael Weening, President and CEO at Calix]

That's why we feel confident in calling the bottom. The small segment remains very robust. We've demonstrated that. While they may have some pause in their decision-making, they continue to expand out with their initial or with their existing network builds and winning subscribers. We've seen green shoots in everything that we're doing. If you actually look at last year as inventory turns declined, we saw, obviously, our funnel decline in the same way. We've also seen that turnaround. Our funnel is now expanding. You also see lead indicators from fiber builders like Dycom who called out that they're starting to see those green shoots, and they're also expanding. So that's why we feel comfortable calling the bottom. Then in the second half, we'll start seeing the expansion.

[Samik Chatterjee, Senior Equity Research Analyst and Managing Director at JP Morgan]

Got it. Got it. And for my follow-up, one of the interesting things you highlighted in the shareholder letter is even as customers are pausing some of the new network builds, they're focusing more on subscriber trends and monetization of those subscribers, I assume, which leads me to think there should be more interest for your cloud platforms overall. But I know you outlined that in Q2, you will continue to grow them. But what are you seeing in terms of trends? Are you seeing any accelerating trends just on account of then customers relying more on you for those services in the meantime as network builds get paused? I mean, any insights on that because I would think that you would have a counterbalancing effect on the cloud platforms there. Thank you.

[Michael Weening, President and CEO at Calix]

That's a great question, Samik, and a good insight. In fact, it's exactly like that. I actually had a prospect who's never done business with us last week use the following term. He stated, "We did not have the time over the last three years through the pandemic to pour a cup of coffee, let alone consider a different business strategy. But through this pause and some of the challenges that are going on in the industry, we actually took a step back, and we started to look at you as an alternative. And through our conversation, we realized that you're not an alternative, that you're the choice that we should be making because you're not coming to us talking about building a dumb fiber network.

[Michael Weening, President and CEO at Calix]

What you're actually talking about is building out a diversified business strategy that is very comprehensive for the consumer, expands into small business and has a vision to go into medium, and then at the same time, differentiates the local brand with the community through assets like SmartTown. And so in this type of scenario where they did not have that breathing room to even consider it, they now do. And this represents what we've been stating in Q2, Q4, and now in Q2 again, that this represents a massive opportunity to surge through that, demonstrate the value that we can have to their business, and set ourselves up for a decade to come. And so that's why we're so enthusiastic about the pause that's happening in the market right now.

[Michael Weening, President and CEO at Calix]

It creates an opportunity with those customers to actually take the time to think and recognize that there's a big shift happening, and they have an opportunity to partner with Calix.

[Samik Chatterjee, Senior Equity Research Analyst and Managing Director at JP Morgan]

Thank you. Thanks for taking my questions.

[Operator]

Thank you. Our next question comes from the line of Scott Searle with Roth MKM. Please proceed with your question.

[Scott Searle, Managing Director and Senior Research Analyst at Roth MKM]

Hey, good morning. Thanks for taking my questions. Hey, Mike, maybe just to quickly clarify a couple of items. Looking at the down quarter into June and the weakness in the medium and large customers, are they entirely the cause of the downward sequential move from the first quarter to the second quarter? It would imply another 40%-50% sequential decline similar to what we saw in the current March quarter. Or are you seeing some softening as well on the small business front? And as we look into the second half of this year, I wanted to clarify that recovery. Is it all small business-driven? And when you say BEAD in early 2025, I'm assuming that's the initial spending that you're talking about as opposed to words. Just want to clarify that, and then I had a follow-up.

[Michael Weening, President and CEO at Calix]

Cory clearly stated that when revenue has declined from $77-$43 in the medium and large, and then we're anticipating it happening again in second quarter, that we fully attribute what's happening to that segment. As we stated in the investor letter, our small segment continues to be strong.

[Michael Weening, President and CEO at Calix]

And then we look at, as they're going through this decision-making process, as I just stated, as a significant opportunity for us to actually surge in where they have the mindshare and the time to think, where they can consider us as an alternative and our business model, which in the end is crafting the cause of chasm from us, moving from the really innovative folks like ALLO and others who really get it and have already deployed and recognize that they want to build a different business to differentiate in their markets to the network operators who are now starting to see the challenges and looking to fill that network. So yes, it's attributed to medium and large. No, we do not see a shortfall in the small. In fact, we see them continuing to invest and grow, and that will lead to strength in the second half.

[Michael Weening, President and CEO at Calix]

I think I answered his.

[Cory Sindelar, CFO at Calix]

Then the last question, Scott, you asked about was around BEAD. Yes, we're talking about not just awards but revenue beginning in 2025.

[Scott Searle, Managing Director and Senior Research Analyst at Roth MKM]

Okay. Great. And if I could, just on the BEAD front, look, you're working with multiple customers right now in terms of facilitating their process and obviously engaging with them. Is there a number in terms of the amount of requests that your customers have put in or some sort of magnitude? Help us understand what that dollar amount could actually look like. And I was wondering if you would clarify trickle in 2025 and where you think this could peak out in terms of annual contribution from BEAD funding as we get into 2026, 2027, and beyond. Thanks.

[Michael Weening, President and CEO at Calix]

No, we don't have a number affiliated with that. The only number that we will provide is that we've had well over 500 consults that we've engaged with customers in helping them understand where the different funds are. That's not only BEAD, but it's also state level. That's tribal, all those different groups that we've been working with. I was at the tribal summit two weeks ago, and there were hundreds and hundreds of tribes there who are contemplating that government funding, which is directed at their markets. So I would just say that we are incredibly active, as I put or we put in the shareholder letter. We also have partnered with Ready.net, who is very active with our customers in helping them understand where the BEAD funding is, how to pursue it, what the maps are.

[Michael Weening, President and CEO at Calix]

Where we see incremental value in that is, as we've done with previous programs over the last 15 years, we see it as expanding beyond just the funding part of it, which is a great opportunity for us to partner with our customers, into how do they stay compliant over the long term through the testing. Currently, as I stated earlier in my remarks, 74% of federally funded customers in the U.S. today use us for speed tests. That should be a very good indicator with regards to the capabilities that we provide a broadband service provider who pursues government funding on how to make it simple and successful.

[Scott Searle, Managing Director and Senior Research Analyst at Roth MKM]

Great. Thanks.

[Operator]

Thank you. Our next question comes from the line of Michael Genovese with Rosenblatt Securities. Please proceed with your question.

[Michael Genovese, Managing Director at Rosenblatt Securities]

Great. Thanks. Thanks for the call. Thanks for all the points you're making, which are good. I just want to check first on a couple of more bare thesis points and just get your view on them. First of all, at OFC, Cisco was talking about basically going after the medium customer market with PON technology, with a PON card hanging off a router, similar to the Ciena solution. So just wanted to check if there's anything market share-wise going on in the Tier 2 market or if this is all just customer evaluation delays, as you spoke about.

[Michael Weening, President and CEO at Calix]

There is a competitive thing going on. We're taking footprint. So that's what's going on. And so that being said, our acquisition of that footprint, like the 10 customers that we won in Q1, it takes time for them to actually burn through their previous inventory, make the transitions, all those different elements. And so those are the green shoots that we've been referring to with regards to other people coming into our market, bringing on.

[Michael Genovese, Managing Director at Rosenblatt Securities]

Great. Okay. And good. And then on that, the kind of tier, well, large, medium, small customer question having to do with BEAD, there's just been some people talking about how and I don't know how they could predict this, but they are predicting that at the end of the day and I don't know if this is correct, but people are saying BEAD might go more towards the large and the medium customers and less towards the small customer base at the end of the day. So I don't know where that call is coming from or how people could say that. You're working with all these customers. What's your confidence that your small customers who make up 80% of your revenues are going to be winners in the BEAD process?

[Michael Genovese, Managing Director at Rosenblatt Securities]

Where does that just sort of detail where that confidence comes from, and any data points you can give us there? Thanks.

[Michael Weening, President and CEO at Calix]

Well, to be clear, though, we didn't say BEAD is going to go to small customers. We said, actually, BEAD is going to go to the market, small, medium, and large. We called out that our medium and large segment is down as they go through their decision-making process. But that should be an indicator that that should then swing back as they acquire that funding. With regards to who's going to win, all three segments are going to compete for that money aggressively. But to be clear, BEAD is focused on the really rural, underserved customers. And in fact, when I've engaged with the NTIA around this, they are aggressively trying to ensure that the small service providers do participate and that it just doesn't go to large because if the small teams do not actually participate in BEAD, that's going to be bad for America. Why?

[Michael Weening, President and CEO at Calix]

Because they're the ones who actually have invested in nowhere USA because they live there. They love their community, and they've done those investments with or without government funding. And the NTIA is reliant on them continuing that community-centric mindset to make very rural situations successful. So anyone who says that it's just going to be one segment or another, I don't agree. We don't agree. It's going to be all three segments participating at different levels. And in all three segments, we have good relationships, and therefore, we'll be able to support them all.

[Michael Genovese, Managing Director at Rosenblatt Securities]

Okay. Great. And then finally, for me, just looking past this, as we get to 2025, I know it's early to give an outlook for beyond one quarter or one year. But do you think that we could get back to a 10%-15% type of growth rate in 2025, or do you think we'll be ramping towards that in sort of the first half of 2025 and maybe don't get there until 2026 on a full-year basis? Just the long-term kind of annual growth rate starting in 2025, how are you thinking about it?

[Michael Weening, President and CEO at Calix]

We did that consistently for four years, and we expect that once we get through this peculiar indecision phase, that we will get back to that. As I stated in my opening remarks, the first thing I stated is that the fundamental underlying underpinnings of this business, which is our Platform, Cloud and Managed Services, remain strong. That's best evidenced by the fact that we've got cash flow and margins continue to grow. Customers understand. This indecision period, as I stated, is an opportunity for them to take a deep breath, consider their future, and what do they want to do over the next 5-10 years as opposed to just what's in front of them.

[Michael Weening, President and CEO at Calix]

This creates the opportunity to have a very different conversation around how do you build a higher-value business for your stakeholders, which can be members if you're a cooperative or shareholders if you're for-profit. This represents an opportunity for us to take footprint, which will then yield in 2025.

[Michael Genovese, Managing Director at Rosenblatt Securities]

Great. Thanks very much.

[Operator]

Thank you. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question.

[Tim Savageaux, Senior Research Analyst at Northland Capital Markets]

Hi. Good morning. A couple of questions. Michael, you hit on this briefly, but I want to go back to your green shoots commentary and see whether you had any more color on that. When I had another question about revisiting kind of the share gain efforts that were discussed on the last call, you seem to conflate those two. Are there any other signs of positive activity throughout the customer base, small, medium, or large, that you would refer to as green shoots, or is it really your efforts to gain share?

[Michael Weening, President and CEO at Calix]

Well, so when you go back during the pandemic, our lead times were as high as 18 months. During that situation, we had deep insight into what a PSP was doing because they actually had to give us their orders. And therefore, the pipeline was affiliated with that. And over time, as we've gone through that over the last 2 years, you've seen basically lead times go down from 6 quarters down to, in essence, a single quarter. And therefore, logically, you would also see the pipeline affiliated with that also shift. And we're now at a place where things are stabilized, and we are back to actually seeing, from a green shoots point of view, significant pipeline growth, which gives us confidence in what's going to happen in second half.

[Michael Weening, President and CEO at Calix]

At the same time, we continue to take footprint, as evidenced by, I talked about a larger customer selecting us with SmartBiz. That's a significant win. That's a brand new business. And us closing not in Q1 but in Q2. In the first two weeks of the quarter, we closed our biggest cloud deal in the company's history. And so I go through those points, the pipeline growing, the strong closing the largest cloud deal, and then a larger customer selecting us to actually go after their small business market, which is, in essence, brand new business for us. This represents a significant opportunity and gives us confidence in the second half.

[Tim Savageaux, Senior Research Analyst at Northland Capital Markets]

Great. And kind of following along from that, even what's been maybe notable here in the last couple of quarters is that even with the rip lines, you've seen gross margins continue to tick up. I imagine there's a mixed aspect of that with the appliance business. And I guess a couple of questions. As that perhaps recovers into the second half, what sort of impact do you expect it to have on the gross margin side, which is that could it blunt that sequential growth with hardware coming back, or do you expect to see continued steady increases in gross margin throughout the year from greater software and service revenue?

[Michael Weening, President and CEO at Calix]

Yeah. Great question, Tim. As we said throughout, our platform cloud and managed services business is continuing to grow as our customers continue to take share and add new subscribers. And so you've seen that persist and will continue to do so. As the new network builds come back, what you'll ultimately see is a shift in product back to more access, which has higher gross margins. So you won't see necessarily a decline in gross margins. I think you'll see the progression continue. The rate at which it changes from quarter to quarter will vary depending on those mixes. So for example, in the second quarter, the margin expansion is less than what it was in the first quarter. And it has to do with a lot of the product swinging back to the premises side in the second quarter.

[Michael Weening, President and CEO at Calix]

Inevitably, we think the margin will continue to progress. I don't think you should think that'll pause because of new network builds being decided.

[Tim Savageaux, Senior Research Analyst at Northland Capital Markets]

Yeah. Thanks very much.

[Operator]

Thank you. Our next question comes from the line of Christian Schwab with Craig-Hallum Capital Group. Please proceed with your question.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

Great. Hey, Cory, how long before the two large customers get back to $70-some million from $20 million?

[Michael Weening, President and CEO at Calix]

That's a great question. I'm not going to call that one. Obviously, last quarter, I was surprised. I thought they would get to where they would make some decisions. Wasn't anticipating the decline that we saw. So I'm not going to dare to go out on a limb and say when that'll recover back. We know it'll recover at some point. Just don't know when.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

Okay. So I mean, we haven't done $200 million in revenue in over 2 years, right? And we're going to keep spending almost $110 million.

[Michael Weening, President and CEO at Calix]

Say that again.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

Us.

[Michael Weening, President and CEO at Calix]

Sorry. What?

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

You haven't done quarterly revenue approaching $200 million in two years?

[Michael Weening, President and CEO at Calix]

No. We did 265 in the fourth quarter. We did 225, 26 in Q1.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

Yeah. Q1 of 2022, you had $202 million. And this quarter, you're guiding the $200 million at the midpoint. It doesn't look like you've done that in multiple quarters. We did $226 million.

[Michael Weening, President and CEO at Calix]

We haven't done 200. Goes back 2 years.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

Yeah. Go back roughly two years.

[Michael Weening, President and CEO at Calix]

I understand what you're saying. Go ahead, Christian.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

You can look at it. The point is your OPEX is significantly higher, right? And I know we're going to invest for growth, but we talked about a trickle of BEAD starting in the beginning of 2025, and we have no idea when the large customers are coming back. How long do you hold this heavy OPEX on a quarterly basis?

[Michael Weening, President and CEO at Calix]

We understand that there's 60 million new fiber in that line coming. We also recognize, as we've identified for you, and you see that the fundamental business model is actually a growing margin, and therefore, it is strong. Customers are delaying for the very first time their decision-making, and they've got the time, as I stated, as it was so eloquently put to me last week, where I couldn't actually have the time to pour coffee, and now I'm willing to entertain these conversations. At this point in time, we will continue our OPEX investment because this is our opportunity to expand footprint as never before ahead of one of the largest investments from the government in history. To do anything but what we're doing would be wrong.

[Michael Weening, President and CEO at Calix]

With our board, our chairman, and our leadership team, we are confident in the opportunity to grow, and it's going to yield significant returns. We are investing to win.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

Understood. Thank you. My last question is, with recent expectations for 2024 and a once-in-a-generational lifetime of BEAD and large customers who are significantly underspending, shouldn't the target growth rate for fiscal year 2025 be 20% or substantially higher than that on the top line?

[Michael Weening, President and CEO at Calix]

Possibly. That's why we're quite comfortable in 2020. That's why we stated that we see this 2024 as this oddity. To your point, over the last four years, we've delivered four years of 20% growth, and we see a return to growth in 2025. We're working that right now. We see the green shoots and all those different elements. So we're not calling 2025 at this point. But we were just asked in the previous question, do we see the return to 10%-15%? Yes.

[Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group]

Okay. Great. No other questions. Thank you.

[Michael Weening, President and CEO at Calix]

Thank you, Christian.

[Operator]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Fanucchi for any final comments.

[Jim Fanucchi, VP of Investor Relations at Calix]

Thank you, Melissa. We will participate in several investor events during the second quarter. Information about these events, including the dates and times and publicly available webcast, will be posted on the events and presentations page of our investor relations section of Calix.com. Once again, we want to thank everyone on this call and webcast for your interest in Calix and for joining us. This concludes our conference call. Have a great day.

[Operator]

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Cory Sindelar, CFO
• Jim Fanucchi, VP of Investor Relations
• Michael Weening, President and CEO

Analysts

• Christian Schwab, Senior Research Analyst at Craig-Hallum Capital Group
• George Notter, Managing Director of Equity Research at Jefferies
• Michael Genovese, Managing Director at Rosenblatt Securities
• Ryan Koontz, Managing Director and Research Analyst at Needham & Company
• Samik Chatterjee, Senior Equity Research Analyst and Managing Director at JP Morgan
• Scott Searle, Managing Director and Senior Research Analyst at Roth MKM
• Tim Savageaux, Senior Research Analyst at Northland Capital Markets