San Jose, Calif. -- Calix Inc. on Nov. 5 shared unaudited financial results for the third quarter 2018 in a letter to stockholders on its website. Edited excerpts from the letter follow:
"Our mission is to connect everyone and everything. Calix platforms empower our customers to build new business models, rapidly deploy new services and make the promise of the smart home and business a reality. In the third quarter of 2018, we continued to make steady progress on our mission. We expanded our addressable market and added 33 new customers. This expansion of customers demonstrates the value of our all-platform product offerings. In addition, we broadened our relationship with key customers, enhanced and extended our product portfolio and honed our service offerings, all while dramatically improving our operating leverage.
Another quarter of solid progress through our transformation
Our relentless focus on the transformation of Calix into a communications cloud and software platform, systems and services business yielded further progress in the third quarter. As we stated in last quarter’s letter, over the long term we believe these achievements will manifest in improved financial performance across four measurable metrics:
- Gross margin expansion
- Disciplined operating expense investment
- Deliberate revenue growth
- Increased predictability
We are happy to report in the third quarter we continued to deliver on these objectives and expect these metrics will continue to improve as our platforms increase as a percentage of our total business. We will continue to take every opportunity to simplify our business and increase our focus on our all-platform offerings.
Examples of our progress made in the quarter were:
- All financial metrics in guidance ranges except for net income per diluted common share which was above our range, and operating cash flow, which was positive.
- Continued traction for Calix Cloud as we closed a record number of customer agreements driving Calix Cloud revenue up by a high double-digit percentage sequentially.
- Announced UK-based CityFibre chose AXOS to enable advanced capabilities, network intelligence and automation across its national fiber network as it builds out its multigigabit network in the UK to as many as five million households through 2025.
- Unabated momentum by customers adopting our mesh-enhanced carrier class WiFi solutions and established a new quarterly benchmark with more than 600 service providers purchasing the solution year to date.
- Further expansion of our customer base as we added 33 new customers, bringing our year to date total to 99. These new customers include operators from nearly every service provider segment.
Platforms built to ride wave of disruption
Our vision is focused on providing the platforms and services that enable innovative service providers to create services at a DevOps pace and provide their subscribers with an exceptional experience.
Service providers achieve this objective by building their infrastructure and service offerings on platforms. The ongoing wave of disruption sweeping across the communications space remains unprecedented in our experience. We continue to see traditional business models being disrupted as service providers of all types learn to adapt to the needs of the device-enabled subscriber. We believe the winning service providers in the future will be those who relentlessly focus on providing an exceptional experience for their customers. As we demonstrated again this quarter, these service providers continue to find our Calix Cloud, EXOS and AXOS platforms enable them to win and increase the value of their businesses. We in turn are doing the same as we gain greater leverage from our platforms business as demonstrated once again this quarter through improved financial results.
Our focus remains on finding like-minded customers regardless of their legacy type, size or location. This expansion of our total addressable market and diversification of our customer base resulted in stronger financial performance in the quarter as gains in our all-platform product portfolio delivered value greater than the declines in our legacy product portfolio. Therefore, we are once again pleased to discuss our results for the quarter.
Results in the quarter were within or better than our guidance. Revenue, gross margin and net income all increased sequentially, while we were able to reduce operating expenses both yearover-year and sequentially. Total revenue increased sequentially benefiting from solid demand for our platforms, ramps of new offerings with both domestic and international customers as well as increased customer diversity partially offset by declines in our legacy systems portfolio. New products and continued diversification of our customer base offset a decline in gross margin for our services business and helped drive overall GAAP and non-GAAP gross margin up over 50 basis points sequentially. Importantly, we increased our revenue while improving our operating leverage. Operating expenses declined both year-over-year and sequentially and were at the low end of expectations as we continue to reap the benefits of our all-platform model. This led to a reported net income per diluted common share above the high end of our expectations.
Systems revenue decreased 1% compared to the year ago period as a result of less CAF2- related turnkey network deployment project revenue. We saw continued traction with our AXOS and Calix Cloud platforms partially offsetting declines in our traditional systems revenue. Compared to the prior quarter, systems revenue increased 3% owing to strength in our Tier 2 customers. Services revenue decreased nearly 60% compared to the year ago quarter as we continue to align our services business with our all-platform model. Similar to last quarter, we faced a challenging comparison with the year ago quarter as we saw lower levels of CAF2- related turnkey deployment revenue. CAF2-related work continues as customers drive to meet 2018 milestones. However, the absolute level of activity is lower in 2018 relative to 2017. Compared to the prior quarter, services revenue was relatively flat as we continue to deliver CAF-related services.
Domestic revenue was 87% of total revenue for the quarter and decreased 16% compared to the year ago period due to the just noted challenging comparison with the year ago period. Revenue from large customers also decreased significantly compared to the year ago period due to the challenging comparison as well as the ongoing merger-related slowdown in capital spending by one major customer in the current period. This was once again partially offset by continued shipments to a large, North America-based service provider as they build out their next generation network. Revenue from medium-sized customers increased meaningfully relative to the year ago period as project-specific spending picked up. Revenue from small and regional operators increased substantially compared to the year ago quarter led by strength in Calix Cloud, AXOS and traditional systems along with CAF-related program builds. International revenue was 13% of total revenue and increased 39% year over year as the team continues to focus on finding strategically-aligned customers for our all-platform business including new international customers announced this quarter such as CityFibre and Housing Development Corporation of Maldives.
Overall gross margin continued to improve in the quarter owing to favorable product and customer mix as well as the benefit our platforms provide as they continue to make up a greater portion of our revenue mix. We saw benefits from continued customer diversification and improved systems mix driven by our all-platform offerings. The increase in systems gross margin more than offset the sequential decline in services gross margin. Systems gross margin increased both compared to the prior quarter and to the year ago quarter on both a GAAP and non-GAAP basis. The principal drivers of the improved systems gross margin were continued growth in our all-platform offerings, customer diversification and mix. Services gross margin on both a GAAP and non-GAAP basis improved dramatically this quarter compared to the year ago quarter as the team again executed well against current contracts after the process improvements and efficiencies implemented in 2017. Compared to the prior quarter, services gross margin declined due to a higher volume of third-party costs related to CAF installations compared to services rendered by Calix resources.
Operating expenses for the quarter were at the low-end of expectations on both a GAAP and non-GAAP basis as the team focused on maintaining disciplined investment while continuing to drive accelerated innovation for our customers. Importantly, once again this quarter, we were able to support a sequential increase in revenue, while reporting lower absolute levels of operating expenses. Compared to the year ago quarter, both GAAP and non-GAAP operating expenses decreased by more than 14%. Relative to the year ago period, these decreases reflect the combined restructuring activities from 2017 and 2018 and demonstrates the leverage of our allplatform offerings which enable a lower level of incremental research and development investment while driving a higher level of platform innovations that allow us to introduce new offerings at a DevOps pace. As demonstrated this quarter with our all-platform model, we expect to continue to improve our operating expense leverage, while maintaining an accelerated pace of innovation.
Profitability continued its dramatic improvement as the Calix team remained focused on realizing the leverage of our all-platform model. This improvement was driven primarily by reduced investments in research and development, improved services execution, results from restructuring and the ramp of our new offerings. GAAP profitability improved by more than $18.0 million year-over-year from a net loss of $17.9 million to net profit of $0.8 million. Sequentially, GAAP profitability improved by nearly $4.0 million. Likewise, non-GAAP profitability increased by more than $17.0 million year-over-year from a net loss of $14.2 million to a net profit of $3.2 million. Sequentially, nonGAAP profit improved by nearly $3.0 million. As a reminder, GAAP results include stock-based compensation, restructuring charges (benefit) and gain on the sale of a product line.
For balance sheet, cash flow and additional financials, read the rest of the letter from Carl Russo, Calix president and CEO, and Chief Financial Officer Cory Sindelar here.
Calix Inc. (NYSE: CALX)