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Edited Transcript of CALX earnings conference call or presentation 1-May-19 12:30pm GMT

Q1 2019 Calix Inc Earnings Call

PETALUMA May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Calix Inc earnings conference call or presentation Wednesday, May 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl E. Russo

Calix, Inc. - CEO, President & Director

* Thomas J. Dinges

Calix, Inc. - Director of IR

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Conference Call Participants

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* George Charles Notter

Jefferies LLC, Research Division - MD & Equity Research Analyst

* Timothy Paul Savageaux

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Tyler Leroy Burmeister

Craig-Hallum Capital Group LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the Calix Q1 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Tom Dinges, Director of Investor Relations. Mr. Dinges, you may begin.

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Thomas J. Dinges, Calix, Inc. - Director of IR [2]

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Thank you, operator, and good morning, everyone. Thank you for joining our Q1 2019 earnings conference call. Today on the call, we have President and CEO, Carl Russo; as well as Chief Financial Officer, Cory Sindelar. As a reminder, this morning, we released our letter to stockholders in an 8-K filing as well as on the Investor Relations section of the Calix website. This conference call will be available for audio replay in the Investor Relations section of the Calix website. Before we continue, I want to remind you that in this call, we refer to forward-looking statements, which include all statements we make about our future financial and operating performance, growth strategy and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in today's letter to stockholders and in our 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 on this conference call, we will discuss both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in our letter to stockholders. Unless otherwise stated on this call, we will reference non-GAAP measures.

With that, let me turn the call over to Carl. Carl?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [3]

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Thank you, Tom. Our pursuit of an all-platform model to ride the wave of disruption moving through our industry continues in 2019. Our first quarter was a good one in every respect except one. Bookings were in line with our plan, delivering solid 7% year-over-year growth. Gross margin expanded by 380 basis points year-over-year. And now our pace of innovation continued unabated, even as our investments were tightly controlled with OpEx declining more than 10% year-over-year. The one aspect that did not go well is that one of our supply chain partners did not meet our needs, nor did they meet their commitment. While they are improving, they are not yet at their committed production rate, and we expect some dampening of revenue in the second quarter as a result. I am disappointed, and I am sorry for the impact this has had on our customers, our employees and our stockholders. What isn't dampening is the enthusiasm for our platforms. As of today, bookings are ahead of plan for the second quarter. This is exciting and a direct result of our customers seeing the value of our platforms.

Some examples of the value derived by our customers are: marketing campaigns that are yielding ROIs greater than 50x; increased take rates on marketing campaigns to 80%; increased service revenue by over 30% in the first year; reducing truck rolls by 30% within the first 3 months of deployment; reduced service technician interventions by 83%; reduced support call times by 50%; and reduced OSS/BSS integration from 18 months to 10 weeks. And these were just some of the benefits we have already announced. Given these benefits, it is no surprise that in the first quarter another 25 new customers chose Calix to build their next generation service offerings. And we're just getting started. Stay tuned to hear more outstanding outcomes like these in the coming months.

In conclusion, we have it right. We have the right platforms and the right services at the right time. And a temporary supply chain issue will not slow us down. With that, I strongly encourage each of you to download our stockholder letter and get all the details on the first quarter and a view into the future for Calix.

Let's open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from George Notter, Jefferies.

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George Charles Notter, Jefferies LLC, Research Division - MD & Equity Research Analyst [2]

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I guess, I wanted to sort of go back to the supply chain issues, and I read the letter certainly. But I guess I'm wondering what the outlook is right now in terms of that manufacturing partner, coming up to speed, any more you could tell us about the nature of supply chain problem would be great as well. I'm just trying to handicap, kind of, how and when we get past this?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [3]

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So first of all, thanks for getting up early, George. I know this is probably not early for you, but I do appreciate it. We believe it'll be largely in balance by the end of the quarter. That being said, we have clearly dampened our revenue guidance for the quarter based upon what we perceived to be, as these issues will not be complete. So I mean, if you're asking me for a ballpark, we think greater, with this manufacturer, greater than 80% of it will sort of be there. But they still have quite a bit of work to do. Production is flowing, so let me give you at least a present tense statement. There are production units flowing, and we are, in essence, rationing them out to our customers to make sure that we keep them in deployment mode. But we're being very sensitive about shipping our inventory to, if you will, their inventory because if we do that, we're not helping our other customers. What else I can tell you? Does that give you enough color at least to start, and maybe I could follow on...

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George Charles Notter, Jefferies LLC, Research Division - MD & Equity Research Analyst [4]

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I guess -- yes, sure. My assumption is that this is a new manufacturing partner that's outside of China that we're ramping for the first time. Was there something different or unusual about this program that surprised you in terms of the ability to ramp and get the volume? I guess I'm just trying to understand exactly what the precise issue was? And then why we're going to get past that this quarter?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [5]

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So let's put -- so let me paint the picture back to where we started. As you know, we've been slowly and deliberately reengineering our supply chain to fit our all-platform model. And we had plans to continue that over the next couple of years. When the U.S. tariffs were imposed, we're now in a situation where you're dealing with 10% threatening a 25% tariff. And so we made the decision to accelerate that reengineering. We moved to, in essence, 2 new vendors. We have 3 major vendors in our supply chain. We moved to 2 new ones in that process. There is no magic here. So these are not new products being manufactured per se. These are existing products that were simply being moved. They were being moved to a world-class manufacturer. And they, I mean, to be blunt, they simply did not execute. If I compare the risk of this versus the risk of eating the tariffs, that's a no-brainer. This is the correct risk to take. We went ahead and bought ahead on inventory, and we're counting on them to ramp late in the quarter. And they got off to a late start. There's not much more to it, they are ramping now. And to be blunt, they are paying all of the expedite fees and overages. So they understand what occurred, and they'll remedy it accordingly. But there's no magic here.

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George Charles Notter, Jefferies LLC, Research Division - MD & Equity Research Analyst [6]

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Got it. Okay. And then just in terms of the allocation of products to customers, I guess I was surprised to hear you say that the commentary about 25 new customers in the quarter, does it makes sense to be marketing to new customers, given these supply chain constraints right now? I guess I'm just, kind of, wondering how you're allocating product across the customer base right now and fulfilling the demand.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [7]

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Well, remember, we have a set of products that don't have hardware associated with it. So yes, it absolutely makes sense for us to continue our marketing efforts and the demand for what we are offering is in the market. And so for sure we're going to continue to market and grow the business. If this was an unconstrained problem, then I think your -- the answer to your question would be probably no. But it's not an unconstrained problem. It's a matter of a number of weeks behind the initial ramp that they had committed to. And so, again, we believe we'll be largely through it in this quarter. So no, we would make no pause in that.

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Operator [8]

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(Operator Instructions) Our next question comes from Christian Schwab, Craig-Hallum.

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Tyler Leroy Burmeister, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [9]

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This is Tyler on for Christian. So you stated in the letter that you expected to reach supply/demand equilibrium in Q3. It looked like the shortfall to your demand was about $15 million in Q1. So I was wondering, I guess, first, what was the shortfall to demand revenue wise, in Q2? And then do you expect that revenue to be made up in the second half, or is this kind of loss revenue, and then we'll return to kind of a normal level in Q3, Q4?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [10]

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Yes. So I'm not sure I would characterize the shortfall in demand in Q2 much more than saying, that it was significant but not enormous. And look, we expect over time that demand to be fulfilled in the second half.

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Operator [11]

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(Operator Instructions) Our next question comes from Timothy Savageaux, Northland Capital.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [12]

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A couple of questions for me. There is a comment in the letter to the extent that larger customers were stronger for you in Q1, maybe medium-sized customers a bit weaker, I think there was probably some reference to Windstream there, kind of, being in that category. And I wonder if those -- that comment applies to bookings or revenue or both? And whether -- how you could characterize, kind of, your 10% customer situation? And whether you might have had any new ones in the quarter, having referenced strength to your, kind of, customers deploying next-gen access networks?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [13]

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Thanks, Tim. So let me see if I can address your question by segments. So let's go to the headwinds, first. So the headwinds in the [ROX], so those are the publicly traded wireline companies continued into the first quarter. And so we are planning the ROX to be down this year. Obviously, you had Windstream's bankruptcy announcements consolidated recently, eliminated their dividend. You hear themes of deleveraging from Consolidated and from CenturyLink. So we expect them as a group to be down. On the larger customers, we're continuing to see very positive momentum. We did not have a new 10% customer, but it is the significant customer to be sure. And I will stand on my earlier comment that they will be 10% customer in a given quarter this year. As you are probably aware following their earnings announcements, they are quite robustly committed to delivering their One Fiber network, an intelligent edge network, over these next couple of years. So they continue unabated. So does that sort of shape for you what's going on?

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [14]

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It does. And maybe I could add to that, whether you've seen any initial ramp with your UK customer? Or what your, sort of, expectations are for that project rolling out through the year? And I have one follow-up.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [15]

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Yes. That has started, but it's the early days. That's correct. Go ahead and have your follow-up, Tim.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [16]

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Great. Well, and this is kind of going back to your, well, to Verizon, really. I mean, obviously, in addition to One Fiber there. Clearly in Vanguard in terms of 5G rollout. And I wonder if you could discuss both their, and I'd say more generally, as you look at market opportunities, the extent to which some of the fiber access, fronthaul-, backhaul-type infrastructure opportunities for you are beginning to converge with carrier 5G plans in any way or not?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [17]

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I think you actually, in your question, phrased it correctly. I think you have the technology leader that's always been an engineering-oriented company, and Verizon that's out in front of what's going on in this market. So there's no question that technologies converge and will be deployed as such. But I think we are still in very, very early days of this next wave of deployments. So I think 99% of what's going to happen in 5G is in front of us, not obviously behind us. If your question is one of timing, I think this is another 5 to 10-year build. And I think you're seeing Verizon lead that pack. Does that help shape it for you?

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [18]

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It does.

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Operator [19]

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(Operator Instructions) There are no further questions at this time. And I will now turn the call back over to Tom Dinges for closing remarks.

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Thomas J. Dinges, Calix, Inc. - Director of IR [20]

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Thank you, operator. Calix management will be participating in a number of investor conferences during the second quarter of 2019. Information about these future investor events is posted on the events and presentations page of the Investor Relations section of calix.com. Once again, thank you to everyone on this call, and on the webcast for your interest in Calix, and thank you for joining us today. This concludes our conference call. Goodbye for now.

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Operator [21]

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