During its fourth-quarter earnings call on Feb. 5, Calix executives gave not only a snapshot of the last three months of 2018 but also shared an optimistic preview into the vendor's future, one filled with richer margins and revenue more dependent on margin-rich platforms and professional services sold via a diverse ecosystem of partners than volume sales and legacy-based services skimpy on points.
The San Jose, Calif.-based company reported revenue of $115.5 million and a loss of $5.6 million in its most recent quarter, ended Dec. 31, 2018. In comparison, Calix earned $137.9 million in the year-ago period. The vendor lost 10 cents per share; earnings, adjusted for one-time gains and costs, were 13 cents per share -- better than average Wall Street expectations of 11 cents per share.
For fiscal 2018, Calix earned revenue of $441.3 million, with a loss of $19.3 million, or 37 cents per share. The prior year, total revenue reached $510.4 million. For this quarter, ending April 30, revenue will be between $100 million to $106 million, Calix predicted. (See Calix Hits Half-Billion-Dollar Revenue Mark in 2017.)
The vendor delivered better-than-expected non-GAAP earnings, numbers at the upper-end of the guidance range, last quarter which beat consensus by $0.02 per share, said Carl Russo, president and CEO, during a call with analysts after Wall Street closed on Tuesday. (See Calix Releases Q4 Earnings.)
"This was driven by better-than-expected progress and our transformation to an all-platform company. Our high-margin platforms performed better than we had expected, while our lower margin legacy business underperformed," he said. "This resulted in an overall underperformance on total revenue and yet we beat on earnings. One might ask, 'how is this possible?' The mix between our platform and legacy business was such that our gross margins came in at the very high end of our range and in special note, the non-GAAP gross margins for our systems was 50%."
Calix's all-platform business -- the focus of Calix today -- features more opex leverage, Russo said. The developer's profitability now is tied more closely to how this all-platform business performs versus its waning legacy business; although older hardware and, to some extent, legacy software still make up some Calix sales, the company's redesigned focus on margin-rich platforms, software and service give it an opportunity to reap expanded gross margins, reduce operational expenses and yield "significant income leverage," he told analysts.
Under its old, hardware-focused model, price sensitivity could have forced Calix to chase revenue, entering diminishing pricing deals in a desperate effort to earn income, boost volume and cut operational expenses, said Russo. Being centered on software and services, on a modular platform, eliminates that type of competition, since Calix pitches itself to operators based on value, on return on investment and time-to-revenue, not price.
In a Valley Kind of Mood
Last year, Calix President and CEO Carl Russo (center) relocated the company's headquarters to Silicon Valley to both underscore its software focus and work with the best software talents, he told BBWN in September 2018.
The last quarter of 2018 provided a sneak peek into Calix' full-year 2019 strategy -- and beyond, according to Russo. Three highlights stood out for the most recent reporting period as building blocks for the near- and long-term future, he said. They include:
Expanding the addressable market and broadening its base "at a torrid pace," as Calix added 190 new customers in 2018. "To put this in context, we sell only to communication service providers and there just aren't that many of them," Russo noted. "To have this magnitude of new customer addition is extraordinary. And virtually, all these new customers purchase
d one or more of our AXOS, EXOS or Calix Cloud platforms."
Sales of Calix Cloud analytics platform more than doubled for the full year 2018, making it on track to become a "significant contributor to the business," he continued.
Finally, Calix is targeting its platforms and aligned services at forward-looking greenfield builds. Russo cited British wholesaler CityFibre and US wireless giant Verizon as examples of "state-of-the-art networks being deployed with our platforms."
Despite these victories, Calix -- like ADTRAN and other vendors -- noted a slowdown from some Tier One providers, that have been focused on reducing capex, on post-acquisition integration or financial results, such as dividends for shareholders.
"There were some predictability issues on their part actually in the quarter, which caught us by surprise. But it's not a market share, as you per say: It's simply a Q4. To be blunt, a bit of this is fool me once, shame on me, fool me again, I'm sitting here, again going, 'interesting,' " Russo said. "But I think it highlights the very different place we are in as a company with our model. Do I think it's going to represent a continuation, as we've messaged throughout this segment, of customers in that middle set are those that are going to be most prone to erosion of capex? To be blunt, there's not a lot of shrinkage left."
More service providers now focus on adding value, according to Calix, versus cutting more costs out of the infrastructure. The developer's service provider mix also is more diverse, reducing its reliance dramatically on a small handful of powerful operators. In 2018, for example, only one customer represented greater than 10% of Calix's sales; it signified an 18% share, said Russo. By comparison, noted Calix Chief Financial Officer and Chief Accounting Officer Cory Sindelar, one customer accounted for 31% in 2017; two customers represented 36% in 2016 and two customers accounted for 21% in 2015, he said.
"If you look back at CenturyLink, which is our largest customer, and you look at it year-over-year, CenturyLink accounted for $80 million of our $70 million reduction in revenue. And as you might imagine, there were a few other contributors to that around it," said Russo. "As the business shifts, if you just to do a fourth-quarter to fourth-quarter comparison, I can't give you a better way of understanding what's happening at Calix other than to say,'I think we did a $137 million or roughly in revenue versus the $115 million in revenue this year, so down $22 million in revenue. And I think we lost $7 million last year -- and we made $7 million this year. I don't need to say anything else about what's happening in the business as we shift to our platform company."
In other words, remove the CenturyLink loss and Calix's platform and services business would have generated positive income, especially in light of the vendor's growing work with "non-traditional" providers including coops, utilities and municipalities. But, Russo cautioned, first-quarter 2019 services gross margins may be down because Calix will make some additional investments in this unit.
And, as Calix moves further and further from its legacy business -- which as an overall industry has sub-30% margins -- it will live in a technological world of 50-plus points, said Russo.
"I'm not telling you that our legacy products are in the 30s, but they're obviously lower than corporate average gross margin," he said. "While we are continuing to grow our platforms and in this year, a lot of our customers that are buying our legacy SKUs are actually going to replace them with our platforms going forward, I suspect we may see some erosion in the margins of our legacy platforms because they're going to be under pricing pressure in that marketplace. So I just don't know yet what it will look like over 2019; as we go through this year, we're going to get a much better read on what that looks like. But inevitably, we're driven to going over 50% as a company and that's where our focus is on in this next year."
The move away from hardware, relocating its headquarters into Silicon Valley and focusing on software allowed Calix to almost halve its employee base to 800 last year from 1,200 in 2017, Russo said. That number should remain flat, he said, although "the team has done a continually excellent job of finding expense in nickels and dimes to take out of the legacy business and invest dollars in the platform business," he added. "And so you see... a lot of work going on in opex. We didn't do anything extraordinary in Q4. It wasn't like we ran and ran and ran. Okay, we're going to miss on revenue, let's go cut opex. We're just continuing to work the plan. And that's what it resulted in. So I think, we have a good shot at staying pretty flat."
More than a half-million Irish residents expected to have fiber broadband by 2020. But Ireland's National Broadband Plan has not even begun — and government officials today postponed any agreement again.
In a new report and searchable database, Broadband Now discovered fiber is the is the least expensive technology powering subscribers' connections. But the poorest, most rural residents pay the most for connectivity, regardless of underlying infrastructure.
As Vice President of Global Healthcare at AT&T, Maria Lensing oversees the telecommunications operator's technology and professional services offerings across the spectrum of medical providers, from solo practitioners and walk-in clinics to giant hospital chains, medical-device vendors and consulting firms. Lensing also sees more interest from traditional service providers -- cable and telecom operators looking to expand or build relationships with their own medical communities, perhaps as an adjunct to smart-home successes or standalone.
Lensing, who took on this role almost a year ago in May 2018, oversees both the sales and technical teams responsible for developing growth initiatives for AT&T's Global Healthcare business -- including products, services and industry-specific solutions. She also very actively promotes business minority inclusion, education and female empowerment programs and has been recognized both within and outside AT&T. Some awards she's received include "Top 40 Under 40" and "Super Woman in Business" from the Memphis Business Journal.
Join Maria Lensing, VP of Global Healthcare at AT&T, on Tuesday, April 23 at 12:00 p.m. ET / 9:00 p.m. PT, when she's the guest on BBWN Radio, hosted by Broadband World News Editor Alison Diana. Register now!
So far, the agenda includes a discussion of technologies such as fiber and 5G; defining the needs and solutions for a widely diverse range of customers; partnering for success in a typically slow-moving, budget-constrained market; learning and dispersing best practices from other verticals and within other business groups; promoting diversity and female empowerment when so many say they're doing so but so little has changed; and what she hopes to accomplish in another year in this role.
Register and post your questions for Maria on BBWN Radio's easy-to-use chat board. We will get to as many questions as possible. Please post questions before and during the broadcast. Once you've registered, you will be led to the chat board page. Talk to you on April 23!
Tune in to Broadband World News Radio on February 14 at 11 a.m. ET / 8 a.m. PT / 4 p.m. UK when John Isch, Practice Director of the Network and Voice Center of Excellence at Orange Business Services, discusses use cases, ROI and misconceptions of software-defined wide-area networks, virtualization and cloud.
Just when you thought the answer to your next technology direction question was clear, the noise around multiple new technology options fills the Internet and airwaves. Multiple 5Gs are being deployed; there's CableLabs' 10G initiative; the ITU and IEEE are toiling around 50G PON – and we haven’t even talked about Wi-Fi6 yet! Is any of this real, do you have to pay attention or can you just let the dust settle and then decide?
Since waiting is often not the best option, let’s demystify technology options, their impact on your business, and how to prepare for whatever the future brings.
In this webinar, Service Providers will learn:
Current state of 5G and how it affects everyone, not only mobile network providers.
Latest technologies being developed and how they will benefit their networks and subscribers.
How to prepare their networks for the future – whatever it may hold.