Second-quarter earnings may have declined, but Calix CEO Carl Russo is convinced the vendor is mere months away from returning to profitability thanks to its emphasis on software and services and the diversification of its customer base.
Calix revenue for the three-month period ended June 30 was $100.3 million compared with $111.7 million 12 months prior. Systems generated revenue of $92.8 million, while services accounted for $7.5 million in its most recent quarter; in 2Q 2018, systems created $102.6 million in revenue and services produced $9.1 million. For the half-year 2019, Calix' non-GAAP revenue is $189.7 million compared with $211.1 million for the first six months of 2018.
Margins are increasing a tad: In this most recent quarter, Calix earned non-GAAP gross margins of 46.6% on gross profit of $46.7 million and 44.2% gross margins for the first six months on profit of $93.3 million. In Q2 2018, Calix produced non-GAAP gross margins of 45.7% on gross profit of $51.1 million; in the first half of last year, it generated 44.2% on $93.3 million. This quarter, Calix reported its net loss increased $2.2 million year-over-year to $5 million, including $1.9 million from US tariffs and tariff-related expenses. However, these expenses are easing, given Calix' new non-China manufacturing relationships, Russo said during today's earnings call.
"There's no meaningful risk remaining," Russo said, noting the vendor will finish its transition to other suppliers during the third quarter.
Calix expects to soon return to profitability, Russo predicted.
"We look forward to a good quarter as we return to profitability," he said, noting "headwinds" such as trade tariffs, CenturyLink's acquisition of Level 3's impact on purchasing decisions and Verizon's longer than anticipated time-to-deploy NG-PON2 affected Calix' earnings. "We're returning to growth. We're gaining much more confidence."
Diversity as a platform
Legacy systems continue to make up the bulk of Calix' sales, but the vendor's energy -- and future -- lies squarely on its fast-growing cloud-based solutions and services, said Russo. "Our platforms are growing very rapidly," he said. "Our traditional and supporting products are still the large majority of the business."
When it comes to new customers -- like the 33 it signed this quarter alone -- many come from non-traditional provider arenas, such as utilities and municipalities without legacy systems, Russo noted. When given total freedom to choose, new-breed service providers prefer Calix cloud-based platform to legacy options, he said. And it's why the vendor is focusing efforts to find diverse new providers. In 2Q, more than half these new additions came from emerging customer verticals and this ongoing expansion of the customer base is "fundamental to our transformation," wrote Russo in a letter to shareholders. In 2Q, traditional ILECs -- which once made up most, if not all, Calix' customers -- represented less than 25% of sales, Russo said in today's call. And that includes CenturyLink, which represented 17% of the most recent quarter's business, he added.
Verizon and British wholesaler CityFibre are each becoming bigger Calix customers, said Russo. In fact, Verizon's NG-PON2 infrastructure should account for 10% of Calix' business before the end of the year, he said, repeating a prediction he's made before.
"We've got two quarters to go for that promise to be fulfilled, and I can now tell you I'm quite certain they'll achieve that in this year," said Russo.
"It's still early days for the system side of their buildout. As you know, when you start an infrastructure buildout, you start with the engineering and the pulling of fiber, but we are starting to see orders from them, starting last quarter and moving into this quarter and accelerating," Russo said. "Keep in mind these are multi-year infrastructure builds, but both are going well."
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