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Edited Transcript of CALX earnings conference call or presentation 7-Aug-18 9:00pm GMT

Q2 2018 Calix Inc Earnings Call

PETALUMA Aug 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Calix Inc earnings conference call or presentation Tuesday, August 7, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl E. Russo

Calix, Inc. - CEO, President & Director

* Christopher J. Bowick

Calix, Inc. - Independent Director

* Cory J. Sindelar

Calix, Inc. - CFO & CAO

* Thomas J. Dinges

Calix, Inc. - Director of IR

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Conference Call Participants

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* Christian David Schwab

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

* Meta A. Marshall

Morgan Stanley, Research Division - VP

* Timothy Paul Savageaux

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

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Presentation

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Operator [1]

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Greetings, and welcome to the Calix Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tom Dinges, Director of Investor Relations. Thank you, sir. 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 afternoon, everyone. Thank you for joining our Q2 2018 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 afternoon, we released our Letter to Stockholders in an 8-K filing as well as on the Investor Relations section of the Calix website. This letter to stockholders is in lieu of any prepared remarks and this call will consist of question-and-answer only. The conference call will be available for audio replay in the Investors Relations section of the Calix website.

Before we turn the call over to the operator to start the question-and-answer session, we 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.

With that, operator, please open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Christian Schwab with Craig-Hallum Capital Group.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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When would -- as we look into the reiteration of the $600 million revenue target. At what point are we going to start a quarterly revenue march towards that? We've kind of been at the same level for a while. Can you walk us through the puts and takes? And a little bit more clarity, if you have any, on when you would expect to be on that trajectory?

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

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Christian, so -- let me start by just asking you to pause for a moment and I'd like to go back over and frame up your question by going back over what we just achieved in the last quarter.

So last quarter at this time, I said, "Look, if we work really hard, we might have a shot at making it to breakeven." And I'm pleased to say that the team, with excellent execution, actually we made $0.01. So we're back to making a profit. This was driven by disciplined OpEx investment, gross margin expansion and delivered revenue growth.

That delivered revenue growth, by the way, came while we also worked through what are now industry-wide component shortages. And all of this came with an expanding TAM that allowed us to go and close record numbers of new customers, and we continue to do so. So the reason I frame up your question that way with that start, is to say that coming off of last year with some of the changes and challenges that happened in the industry, along with our largest customers, I think you're starting to see this march begin right now. And so sequentially, Q2 over Q1, you saw a revenue step up, significant gross profit expansion. Q3 over Q2, we expect to step up modestly. And then, in my view, I think, you're going to see a larger step up in Q4 over Q3. By the way that pattern is the historical pattern that we've seen as a company in our space. So Q2 takes a big step over Q1, Q3 takes a smaller step and then Q4 takes another large step, then seasonality takes you down in Q1, and we continue up from there. So the direct answer to your question is, I believe you're seeing it right now as we go forward.

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Operator [4]

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(Operator Instructions) Our next question is from Meta Marshall with Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [5]

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I wanted to dive a little bit into, kind of, any traction that you're seeing on the new Infosys partnership. And then second, if you could just, kind of, talk about what you're seeing in the market as far as CAF II build outs? And just are there any building going on towards the end of this year that you think could help the second half? Or milestones that you think might drive kind of a pop back up in service revenue in 2019?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [6]

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So let me start with the last one, first. From a services revenue, as you remember from last quarter, we continue to hung and align our services offerings with our all-platform model. There's obviously been significant improvement in the gross margin performance of the services organization quarter-over-quarter and continuously over the last 3 quarters. And so all of that added together is that's going to be a controlled part of our services revenues and I don't expect there to be any pop back up, so to speak. Secondly, as people have asked questions around the general industry and some slowness in the first half versus picking up in the second half. I think we've been clear about the second half, we expect to continue to improve across our customer base, including our largest customers. But in addition to that, we've also said that we don't expect the second half to improve so much that it makes up for what was a depressed first quarter. So we expect it to continue to improve but quite linearly in that fashion, so I trust that answers your second question. As far as Infosys' traction, to take you back to that announcement, obviously, we're very excited by the co-creation partnership and to the extent that there's traction, it's actually traction in building the offerings. The offerings are not yet in the market. So there's certainly no traction from a revenue standpoint, unless there was something that you were asking differently from that. So Meta, does that answer your question?

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Meta A. Marshall, Morgan Stanley, Research Division - VP [7]

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Yes that answers the question. I guess I had thought, maybe sometimes a customer might use Infosys to kind of build out features and functionality that they were looking for, and so maybe that had started versus Infosys kind of going out into the market and being more promotional.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [8]

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Well, let me just -- let me make sure I'm doing a good job of repeating and refreshing for everyone, the emphasis co-creation partnership. So it's structured to build product offerings that we would take to the market. That's separate from Infosys' business that they already have with service providers where they could chose to help customers do further things with deployments or AXOS. So the co-creation partnership was focused on creating software components that go into AXOS that we would take to market.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [9]

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Okay, that's helpful. And then maybe just last question for me, and then I'll pass it on. On the services, it did kind of pop up in this last quarter and understanding that -- just getting a sense is that, were consulting services and that's why it kind of carried higher margins? Is it some of the cost corrections that were made? Or business evolutions that were made? Just kind of something that explains the better margins and revenue in the services business would be helpful.

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

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Well, so the better margins are driven by really 2 factors -- and I think we've been consistent on this. One is the continued improvement in execution by the services team on existing contracts and the range of our services. So that's the first thing that's driving it. And then the second thing that's driving it is, as we've also discussed, our Calix crowd, AXOS and now EXOS platforms, also have attendant maintenance stream that go...

(technical difficulty)

unfolding you're going to see services margins continue to move up, irrespective of other factors. Now I would just merely caution, you used the word popped up. That's probably not a bad word to use, because in any given quarter, services and permits might be flattish, but we've made it clear that inexorably, we believe those margins will head towards in the near term, the 30% to 40% gross margin model.

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Operator [11]

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(Operator Instructions) Our next question comes from Tim Savageaux with Northland Capital Markets.

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

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Couple of questions here. I guess the first one, you mentioned kind of revenue trends and the year-over-year comparisons. What's been pretty consistent here through the year, really within a point or 2 is despite declining revenue, increasing gross profit dollars, I think you're kind of right in the high teens for the first 3 quarters of the year depending on where you assume for Q4 -- sorry, for Q3 in terms of the guide. My question is, do you think that's a sustainable trend for the year? Something approaching 20% growth and gross profit dollars, understanding that the revenue comparison is impacted by the service revenue last year?

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

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I haven't done it in gross profit dollars. I'd have to noodle that. So let me think about that for a moment. What was our gross profit dollars on a non-GAAP basis last year?

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Cory J. Sindelar, Calix, Inc. - CFO & CAO [14]

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I've got $176 million.

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

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$176 million, is that...

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Cory J. Sindelar, Calix, Inc. - CFO & CAO [16]

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Chris, that's my model so that could be really tragically wrong.

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Christopher J. Bowick, Calix, Inc. - Independent Director [17]

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Yes, $172.9 million.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [18]

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So $173 million. And you're looking for, in essence, a $34 million to sort of $210 million on gross profit? Is that what you're asking?

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [19]

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Well, I'm observing that through the first 3 quarters, at least based on some of my math here, you've had around 20% increase in gross profit dollars. I guess my question -- maybe otherwise stated, do you expect gross margins to continue to trend upward in Q4 along with whatever magnitude of revenue increase, revenue step up that you're looking for.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [20]

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Yes, let me see if I can put these here, you're throwing a lot numbers at me. So let me see if I can put the numbers for you here. So directly stated, can we get to $210 million in gross profit? Yes.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [21]

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Right. We can move onto the next question then.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [22]

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No, I want to stay on the other pieces, for a moment. Because those 4 metrics that we will continually emphasize, I believe are going to be roughly continuous quarter in and quarter out, save seasonality. Now some quarters, they might be slightly down or up, but I expect gross margins to just continuously expand. And what drives that is the software value in our platforms, in Calix Cloud, in AXOS and now EXOS. And that software value is extraordinarily high differentiable value to our customers. And as we simply do more and more of that business, I don't know what stops the gross margin expansion in the long term. I want to be careful that in any given quarter, we got to be careful about that. But let's just take an example, Tim, so let me give you a direct example. We shipped a significant amount of revenue to Verizon in this quarter, as we have had in other quarters. And I think the old saw about the industry is, if you're shipping a significant amount of revenue to Tier 1, your margins must be going down. Well, they didn't. So there's significant value in what we are doing and as long as we stay focused on expanding our TAM and delivering our platforms, I think the margin just continues to go up. Now let's be careful, because to your point, in this incremental quarter, if you do the math, we delivered some, I don't know, $12 million, $12.5 million of incremental revenue and what $9 million of incremental gross profit. That's like 70% -- what 73% incremental gross margin. I want to make sure I caution you that those gross margin improvements are coming from not only the improved systems software mix, but they're also coming from the increased performance by the services team and some other things that we're working on from cost reductions, but directionally, your statement is correct. So sorry for all the words, but contextually I think you've got the direction exactly right.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [23]

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No that was very interesting. And the Verizon comment, sort of, leads to my next question. I don't know if it's in the shareholder letter here, but I did want to ask about 10% customers and customer concentration. In the quarter and maybe as part of that, the overall puts and takes and kind of a flat to up guide Q2 to Q3 in terms of what might be ebbing and flowing there?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [24]

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Okay, so let's...

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [25]

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Either our customer category or international or what have you...

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Carl E. Russo, Calix, Inc. - CEO, President & Director [26]

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Yes, so let me directly address the caution on the revenue side. The caution on the revenue side is an extension of what we struggled a little bit within Q2. But we don't see that challenge going away and we're going to make some additional investments in inventory to deal with it, but there is a worldwide shortage of components that run straight through our product sets. Especially those product sets that are more subscriber edge premises oriented. And so that's the piece that we're grappling with. As directly to your question, I mentioned significant, so there's these old words material is, sort of, like 10% or greater, significant is less than that. So we made a significant set of shipments to our large Tier 1 that we've talked about. In addition, we had 1 10% customer and really, the only thing that's changing with our traditional 10% customer is frankly visibility is slowly but surely improving. We've talked about in the past, they have new capital allocation processes internally that we're seeing the folks inside of the company now start to understand how to work. And so we're just seeing more consistency from that customer, as they work, I think, to finalize their AXOS strategy. And so it's directionally the same as we have indicated before and we're excited by what we see happening there. Does that help?

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [27]

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It does. And last question for me. What I was able, I think, to find is I want to make sure this is comparable and I'm looking at it right, was new AXOS customer metric I believe was 50 in the quarter. I think that compares to 37 last quarter. And with that as a starting point, I wonder if you can address kind of overall growth trends among the kind of Tier 3 customer base, smaller operators, and I'll leave it there.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [28]

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So let me -- I want to -- I'm glad you're picking that out. But I want to make sure that I don't leave you hanging in the breeze with the wrong conclusion. So let me separate a couple of things.

On the 50 AXOS customers, it's specifically speaking to more than 50, actually, took delivery on AXOS on the E7-2, which is specifically on the GPON functionality in it. So we have more than 50 customers now running AXOS on the E7-2, the E7-2 being probably the most widely deployed AXOS system in North America and performing GPON functions. That's what that's referring to. As for 37, what you're referring to actually was last quarter we opened 37 new customers. This quarter, we opened 29, and I mentioned at the start the TAM expansion, the fact that we have platforms that allow us to address all different segments, was just allowing us to open new accounts at a record pace. So they're really 2 different numbers. Does that help?

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Operator [29]

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(Operator Instructions) Gentlemen, there are no further questions registered at this time. I would like to turn the floor back over to Mr. Tom Dinges for closing comments. Thank you.

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Thomas J. Dinges, Calix, Inc. - Director of IR [30]

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Thank you, operator. 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 [31]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a pleasant day.