Calix Earnings Reflect Shifting Service Provider Market

Success with smaller, new customers -- including municipalities and utilities -- and its array of new platforms helped Calix allay the impact of Tier 1 customers' delayed purchases in the first quarter of 2018.

Like competitor ADTRAN and other vendors in the communications arena, Calix's sales were affected by the ongoing merger between CenturyLink and Level 3 and the company's subsequent review of infrastructure, future deployments and technology strategies. (See ADTRAN Upbeat as Q1 Results Reflect Stalled Spending.)

During the company's earnings call on May 9, Carl Russo, Calix Inc. (NYSE: CALX) CEO and president, said he remains "bullish on their strategic opportunities to succeed and very bullish on our ability to help them succeed so there is really no change there other than as you might imagine it's taking them time to work through the process and perhaps a little bit longer than we thought." (See the full transcript at Seeking Alpha.)

The vendor released its earnings in a letter to shareholders designed to share the financial results, how they tie into the vendor's shift from a hardware focus to a software and margin-richer services strategy and describe how the first-quarter loss fits into the company's bigger picture.

By the numbers
Calix reported a loss of $11 million for the quarter, which ended March 31 with revenue of $99.4 million for the period. That was down 15% versus first-quarter 2017 earnings of $117.5 million and 15% down from its record 4Q earnings of $137.9 million. (See Calix Hits Half-Billion-Dollar Revenue Mark in 2017.) Non-GAAP services margins totaled 42.5% versus estimates by Jeffries LLC, of 39.8%, writes George Notter, managing director for Equity Research, Telecom & Networking Equipment Analyst at the firm. Non-GAAP EPS of $(0.20) agreed with Jeffries' estimate but was below the Street's estimate of $(0.18), he added.

Calix saw a $6 million loss in operating cash flow for its most recent quarter.

However, the vendor expects sales of between $110 million and $115 million next quarter, says Russo, during the earnings call. That's slightly above Jeffries' estimate of $110.1 and just shy of Wall Street's evaluation of $116.9 million, wrote Notter. Due to Calix's information, Jeffries amended its outlook for the year.

"We're bumping up our 2018 revenue and EPS estimates from $458 million and $(0.12) to $462 million and $(0.08), respectively. Looking at 2019, we're taking our revenue estimate up slightly from $488 million to $493 million," writes Notter in an email to subscribers.

A changing company
Whereas Calix once focused primarily, if not solely, on service providers, today the vendor is diversifying its customer base. In the first quarter, it added 37 new customers, including a number of Tier 3 providers, along with municipalities, utilities, co-ops and other "non-traditional" infrastructure providers, Russo said. For Calix, these smaller customers represent a big opportunity, he said.

"We tend to think of smaller customers as all of the species of customers whether they are ILACs or CLECs or municipalities or small cable MSOs or electric utilities or hospitality providers, that whole segment is the growth opportunity for us -- both in revenue as well as customer count," said Russo. "And what's really very good for us is the diversification. So we continue to diversify our revenue base at a pretty steep clip."

In addition to needing more margin-rich professional services, these and larger customers are adopting Calix' new offerings, he added.

"We're seeing very good uptick and amongst diversified customers, we're seeing our new products and platforms continue to have very favorable reviews in the marketplace," Russo noted. "So, that's what we're just seeing on the gross margin."

One thing unchanged: Calix' relationship with Verizon and the partners' work on NG-PON2. Like ADTRAN, Calix is working with the service provider on NG-PON2 to transform Verizon's infrastructure to a single network. In January, Verizon announced it would begin a large-scale NG-PON2 deployment in Tampa, using Calix solutions. Verizon most likely will share some results of this deployment later this summer, perhaps in June or July, Vincent O'Byrne, director of technology planning at Verizon, told Broadband World News earlier this year.

Calix wasn't talking about the deployment yet, either.

"We continue to progress with Verizon and continue to ship to Verizon," Russo added during the earnings call. "And I mean that's all I think we would be willing to say at this point in time other than we continue to be very excited about where they are heading as a company and our alignment with it."

Tightening the budget
Calix continues to keep an eye on operating expenditures, in part due to the slower purchasing practices from Tier 1s. Company executives agreed there is little chance of a sudden surge in late-year spending as a result of pent-up service provider demand. Rather, said Chief Financial Officer Cory Sindelar on the call, operators most likely will loosen budgets but won't revert to huge spending patterns.

"It's pretty difficult [up until] where you see a seasonal uptick with purchasing cycles and probably making up a little bit of it from the shortfall in Q1," said Sindelar. "I just think if we're better served by being cautious about the fact that if you get too far behind, it's just very hard to catch up. So, we're going to be very muted on how we forecast those customers and we're going to focus on making sure that we're driving our gross profit growth and that we're being disciplined about our OpEx."

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— Alison Diana, Editor, Broadband World News. Follow us on Twitter @BroadbandWN or @alisoncdiana.