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Edited Transcript of CALX earnings conference call or presentation 29-Jan-20 1:30pm GMT

Q4 2019 Calix Inc Earnings Call

PETALUMA Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Calix Inc earnings conference call or presentation Wednesday, January 29, 2020 at 1:30:00pm 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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* Fahad Najam

Cowen and Company, LLC, Research Division - Associate

* Timothy Paul Savageaux

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

* Tyler Leroy Burmeister

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

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Presentation

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Operator [1]

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Greetings, and welcome to the Calix Fourth Quarter 2019 Earnings Call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Dinges, Director of Investor Relations. Thank you. 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 fourth quarter 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, yesterday, after the close of market, 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, 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 our fourth quarter 2019 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. A 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. We delivered strong results in the fourth quarter with revenue, gross margin and profit at the high end of our guidance, all while achieving solid balance sheet metrics. It is clear the market is looking for our platforms to build the next generation of CSPs, and it is likewise clear, the Calix team is executing with precision.

One noteworthy example of crisp execution this quarter was the move of our entire ERP and IT infrastructure to the cloud. Even more exciting was our return to growth in the fourth quarter with a 4% year-over-year increase in revenue. Our transformation to an all-platform company, providing cloud, software, systems and services to CSPs continued in the fourth quarter with solid bookings, coming off our 2019 ConneXions conference, our largest ever. There is a secular disruption moving through the communications service provider space, and we have it right. We have the right platforms and the right services at the right time.

Some brief examples of our progress in the quarter were: adding 20 new customers of all sizes and types, which means we added over 100 new customers for the second year in a row. Calix Cloud revenue in the quarter more than tripled year-over-year and quadrupled for the full year. The Revenue Edge Solution, leveraging Calix Cloud and EXOS systems, came to market this quarter, bringing real-time subscriber insights and new revenue-generating Edge suites, helping our customers solve and support the rapidly growing management and security complexities of the smart connected home. AXOS everyPON leads the market, with over 75 10-gig PON deployments. And our customer Success Services are proving their worth in helping our customers achieve exceptional business outcomes. Helping our customers achieve their business outcomes when they deploy our platforms is core and central to our mission. Being a part of our customers' success is very motivating for the entire Calix team and directly aligns with building value for Calix shareholders.

To further help you understand one important aspect of the transformation we are driving at Calix, we have included a revenue by customer segment breakdown in our stockholder letter. This will give you a better understanding of the headwinds we faced in the past, the diversification we have been pursuing throughout and the predictability driven by an increasingly broad customer base.

In retrospect, 2019 was a year of significant transformation for Calix. It is clear we are positioned to ride the wave of secular disruption moving through the communications service provider marketplace.

As the all-platform leader, we intend 2020 to be a year of continued expansion of our platforms in the market as well as a year of revenue and profit growth. And to start it off, we are pleased to forecast double-digit year-over-year revenue growth for the first quarter.

With that, 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 the line of Christian Schwab with Craig-Hallum.

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Tyler Leroy Burmeister, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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This is Tyler on behalf of Christian Schwab. Congrats on the solid quarter. So the breakdown of your revenue by customer size is very helpful and appreciated. You can see the trend over the last couple of years moving away from some of your larger customers. I was hoping maybe you could talk about where you saw those numbers going in the medium to longer term, maybe for the next year or a few years?

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

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Thanks, Tyler. I think you'll see the trends continue that we're going to continue to diversify the base. We will likely see more growth in the small customers and less growth in the medium and large, but it's clearly going to moderate from where it's been over the past few years.

That -- obviously, if we kept up at that rate, we would be a 100% small customers, and no medium and large. So the numbers will simply force it to moderate, but I think you'll see the trend continue for the next couple of years.

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Tyler Leroy Burmeister, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Great. And then with the -- software part here and kind of improving guidance, I was hoping you could talk, maybe, longer term, your 600 million and the $1.25 EPS target. I guess first, if you'd just reaffirm that?

And then if you could give any, maybe, time line on how you guys see that, and then, maybe, rank a couple of specific things that you folks want to drive that type of growth over the next handful of years?

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

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So actually, I'll call your attention to the stockholder letter. In the stockholder letter, we have, in fact, removed that guidance, long term, and have encouraged everyone to attend our Analyst Meeting, which we're going to hold on March 4, I think it is, Tom? Wednesday, March 4, at which time we'll be updating it.

So that, sort of, removes the rest of your question, I think, unfortunately.

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Operator [6]

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(Operator Instructions) Our next question comes from the line of Fahad Najam with Cowen and Company.

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Fahad Najam, Cowen and Company, LLC, Research Division - Associate [7]

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A question on your comment about adding a 100 new customers. And as I look at your sales and marketing spend, it has been pretty consistent. I'm trying to understand, what's the leverage in the model? How can you continue to grow 100 new accounts without increasing substantial amount of sales and marketing? What's the -- can you just speak to the leverage in the model that you have? And should we -- I know you said you expect the number of small customers to moderate, but in terms of the leverage, is there any incremental spend that you need to incur from here? Or should we expect some moderation in sales and marketing spend going forward?

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

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Actually, let me take you back to our last quarter, where we actually discussed this that you may remember, me saying that you're going to start to see us now start to invest in the business from an OpEx standpoint that we believe that the trough of revenue was behind us that we would start to grow. And inside of that, you should expect to see us being relatively disciplined as we have been on R&D and on G&A and that we would drive to absolute numbers. And if you look at our models, it'll be pretty clear where those absolute numbers are, but that we will start to invest in sales and marketing and have it grow basically at the rate of revenue growth.

So we expect R&D and G&A to stay roughly flat on an absolute number basis. But on a percentage basis, we intend to invest in sales and marketing and have already begun those investments. So does that shape the frontier for you, Fahad?

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Fahad Najam, Cowen and Company, LLC, Research Division - Associate [9]

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It does. If I may ask one more question on -- so as, I think you mentioned in your shareholder letter that gross margin benefited from lower hardware unit sales. I know you're going to give a long-term guidance in your March Investor Day. But in terms of -- in the past you used to focus on price declines, and ASPs were the primary driver in gross margins. How should we be thinking about ASPs impacting your software margins?

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

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You shouldn't in my opinion. The biggest driver of our margins will be a mix shift in our product market from red ocean to blue ocean, from hardware to software. And so as you see the mix of more software platforms going out the door, they are, obviously, at a considerably higher number than corporate average gross margins. And so the margin shift that we have messaged consistently will be driven purely by the go-forward growth of the platform business, nothing more in my opinion.

On any given quarter, I think, I've tried to caution everyone, be careful because there's lots of noisy little implications in it. But as a long-term trend, it is pure. We are ramping the front end of that business, and that ties back to your first question, which is we intend to make those investments in sales and marketing to do precisely that.

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Fahad Najam, Cowen and Company, LLC, Research Division - Associate [11]

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Got it. If I can ask one last question on a big picture, in terms of the competitive dynamics, have you -- with Huawei facing consistent pressure from the U.S. any changes in the competitive dynamics that you've noticed over the last 90 days?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [12]

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None.

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Operator [13]

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(Operator Instructions)

Our next question comes from the line of Tim Savageaux with Northland.

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

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Couple of questions and congrats on the strong results. And I'm, kind of, working pretty real time with your new breakout on the customer side. But if you look at the small customer metrics, in particular, kind of Q4 year-over-year, it looks like you saw some very strong growth in that vertical, over 20%. Is that -- am I getting that right? Is there some sort of acceleration going on there? I wonder if you could talk about, kind of, growth dynamics among your smaller customer vertical. And whether you expect that kind of growth to continue?

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

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Yes, I would be careful to say acceleration because that implies a curve as opposed to a line. I think you're going to see continuous programmatic growth across the whole company. But as I messaged earlier to Tyler's question, probably, a more rapid growth in the smaller sets, and that's due to a number of reasons, which we've messaged before, part of it being the capital formation that we're seeing, and part of it, that we're also seeing, relates to government funding as well.

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

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Okay. Well, I just want to try and get some -- I guess, the math -- is the math here, right? It was 59% last year and 71% this year in terms of your concentration. I mean with that degree of growth in Q4, I don't know what your -- what's implied for Q1, but it seems like double-digit growth for the year in '20 for that small customer vertical, given that type of performance in Q4 might be a reasonable expectation. I don't want to jump the gun on the Analyst Day, but I wonder if you have any, sort of, comments around that, kind of directional.

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

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So let's not jump the gun on the Analyst Day, number one. Number two, to your point, could possibly be double-digit growth in that segment, but we're not going to forecast growth by segments because at the end of the day, we're focused on the overall business.

So I mean your math could be right, it may not be right, Tim. And keep in mind that as we continue on the platform model, the platform model has a very different growth attribute to it, which is much more akin to a software business where you are landing a customer and expanding as opposed to the nature of the box business that Calix 1.0 was in, which is, as you know, a book, ship, revenue in the quarter, lumpy business, right? They're very different models. They have very different revenue shapes. Does that make sense?

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

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It does. And I guess moving across, well, first, let's stick with the Q4 results. You did see some strength in international revenues in the quarter. I wonder if the CityFibre ramp was a part of that. And what sort of expectations you might have for that ramp going forward?

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Carl E. Russo, Calix, Inc. - CEO, President & Director [19]

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I'm sure it was a part of it. But as we've talked about before, the international business has been honed and focused and is actually behaving quite well. So it is not attributable to any one customer.

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [20]

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Okay. And you had commented earlier that you expect absolute operating expenses to remain sort of flattish along with some degree of revenue growth. I wonder if you could talk about the dynamics you expect to be driving gross margins throughout the year? You obviously saw a little bit of upside here in the quarter, guiding for, kind of a similar range, with revenues down seasonally in Q1. But it seems like given the increasing software content of the all-platform business that we should expect some increases in gross margins as we go throughout the year.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [21]

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So I want to go back and break that question up into 2 parts first of all, so that I don't miscommunicate on the operating expense side.

To be clear, on G&A and on R&D, we expect to hold those in an absolute way to a number. And you can look at our history, and you can pretty much extrapolate what that number is.

On sales and marketing, we are going to invest as revenue grows. So we are going to continue to invest in our growth from the sales and marketing standpoint.

So I don't -- I want to make sure you understand the 3 different lines on OpEx, okay?

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Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [22]

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Yes, got that, and I heard that wrong.

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Carl E. Russo, Calix, Inc. - CEO, President & Director [23]

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Okay, cool. On the gross margin side, to your point, there's no question that gross margins will expand over time with the only caveat being on any given quarter, you can have noise in them due to mix or other pieces.

The other piece that I've taken pains so everybody understands is that as the software business grows and some of our older traditional products slowly decline, there are cleanup items, et cetera, in any hardware business that you're doing that can inject noise at any time in the quarter.

So I want to be careful about anybody drawing a straight line through quarter-by-quarter because there's likely going to be ups and downs on a quarterly basis. While over the long term, there's no question it's going to go up.

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Operator [24]

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(Operator Instructions) There are no further questions at this time. I'd like to turn the call back over to Mr. Dinges for any closing remarks.

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Thomas J. Dinges, Calix, Inc. - Director of IR [25]

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Thank you, operator. Calix will host its 2020 Investor Day on March 4, 2020, in San Jose. Information on this and other future events, we posted on the Events and Presentations web page of the Investor Relations section of calix.com.

Once again, thank you to everyone on this call and those 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 [26]

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Goodbye.