Calix Releases Q4, 2019 Earnings in Letter to Shareholders

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SAN JOSE, Calif. -- On Jan. 28, Calix released a letter to shareholders regarding its Q4 and full-year 2019 earnings. Following is part of the long letter, plus some key charts, as well as a link to the rest of the detailed information.

Fellow Calix stockholders:

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, connected home and business a reality.

The fourth quarter brought a fitting close to 2019, a pivotal year in our transformation. Beginning with significant headwinds from certain of our medium and large customers and a tariff accelerated redesign of our supply chain, 2019 saw us returning to year-over-year revenue growth in the fourth quarter. We look forward to continued growth as we build Calix into the all platform leader.

Coming off our 2019 ConneXions conference in October, the value of our all platform offerings continues to resonate, and demand for our platforms continues to grow. Our expanding addressable market was demonstrated yet again this quarter as we added 20 new customers. As has been the trend over the past several quarters, most of these new customers came from emerging customer verticals. This continued expansion of our customer base is fundamental to our transformation and will create a foundation for predictable, profitable growth for years to come.

Riding the 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 demands of the device-enabled subscriber. As the market continues to disrupt, the gap between subscriber needs and service provider supply continues to grow. New service providers are being created to address this unmet need, and capital is being formed to support them. We see this investment accelerating in the market, and it is well aligned with our mission; and we see the pace of existing service providers transforming to address this need hastening as well. As these service providers realign their investments, we are finding areas where our platforms can help them grow. In short, when a service provider of any type chooses to own the subscriber experience, we are well positioned to help them succeed.

Continued Transformation to an All-Platform Company
Our relentless focus on the transformation of Calix into a communications cloud and software platform business yielded further progress in the fourth quarter. As we stated in our prior letters to stockholders, we continue to believe this transformation will manifest in improved financial performance across four measurable metrics over the long term:

  • Gross margin expansion
  • Disciplined operating expense investment
  • Deliberate revenue growth
  • Increased predictability

  • In the fourth quarter of 2019, we made progress on these metrics, and we expect these metrics will continue to improve as our platforms increase as a percentage of our total business. Examples of our progress made in the quarter were:

  • Added 20 new customers in the quarter bringing our 2019 total to 101 new customers from all segments of the market.
  • Calix Cloud continued its rapid growth more than tripling revenue in the quarter and quadrupling revenue year over year.
  • Launched the Revenue Edge Solution leveraging our EXOS systems and Calix Cloud, integrating real-time subscriber insights with new EDGE suites to help CSPs manage, secure and monetize the increasingly complex smart, connected home.
  • AXOS everyPON leads the market with 75 customers deploying our 10G PON solutions.
  • Success Services enabled our customers to achieve exceptional business outcomes such as reducing support costs by up to 66%, generating up to 9-fold improvements in campaign response rates and growing revenue by up to 23%.

  • Our focus remains on finding like-minded customers regardless of their type, size or location. We are motivated by the ramp of our all platform offerings and excited by the level of customer engagement coming off our 2019 ConneXions conference. Furthermore, we remain committed to aligning our investments to our strategy and maintaining strong discipline over our operating expenses. Over the long term, we believe this focus will drive continuous improvement in our financial performance.

    Overall results for the fourth quarter of 2019 were solidly within our financial guidance for the quarter. Total revenue returned to year-over-year growth and increased 4% compared to the year-ago quarter as another strong quarter of demand for our platforms, ramp of new offerings and increased customer diversity more than offset declines among a subset of customers within our large and medium-sized customer base. Non-GAAP gross margin was above the upper end of our guidance owing to favorable customer and product mix, while operating expenses were within our guidance range due to our continued focus on maintaining financial discipline.

    Systems revenue for the fourth quarter of 2019 increased 7% compared to the year ago period due to demand for our Calix Cloud, EXOS and AXOS platforms partially offset by continued pressure on our legacy systems revenue. Compared to the prior quarter, systems revenue increased sequentially by 6% due to positive seasonality. Services revenue decreased 21% compared to the year ago quarter as the continued ramp in our next generation service offerings was more than offset by lower professional services related to CAF deployments. Compared to the prior quarter, services revenue decreased 3% due to lower professional services. We continued to align our services business with our all-platform model through the creation of higher differentiated-value services.

    Domestic revenue was 86% of total revenue for the quarter and decreased 2% compared to the year ago period as stronger demand for our platforms was offset by lower demand for our legacy products predominantly within our large and medium size customer base. International revenue was 14% of total revenue and increased 65% year-over-year due to the timing of network builds by several customers.

    A new addition to this letter is a breakdown of revenue by customer segment. The purpose is to help our stockholders better understand the underlying shift in our customer base. Our segmentation divides revenue into small, medium and large customers. Small customers have less than 250,000 broadband subscribers. Medium customers have between 250,000 to less than 2,500,000 broadband subscribers. And, large customers have 2,500,000 or more broadband subscribers. We are including an annual breakdown for this metric for 2017, 2018 and 2019 along with a quarterly breakdown for the trailing five quarters. We are providing the annual breakdown in this letter to give context for the initial disclosure. Going forward, we will include only the quarterly breakdown using this same trailing five-quarter format.

    For 2019, revenue from large customers was 22% of total revenue and declined 15% compared to the year ago period due to lower shipments to CenturyLink and Frontier resulting from pressure to reduce their capital expenditures and a pending asset divestment.

    In addition, CenturyLink had lower CAF-related services revenue. These decreases were partially offset primarily by higher shipments to Verizon as they continue to build out their next generation network. Revenue from medium-sized customers was 8% of total revenue for 2019 and declined 24% compared to the year ago period as this group continued to reduce capital investments in response to broadband subscriber losses. Revenue from small customers was 70% of total revenue in 2019 and increased 3% as compared to a year ago on continued momentum with our platform offerings and the addition of new customers more than offset a decline in legacy product revenue.

    Revenue from large customers was 19% of total revenue in the fourth quarter and decreased by 25% compared to the year ago period primarily due to lower shipments to CenturyLink. We had one greater than 10% of revenue customer in the quarter – CenturyLink at 14%. Revenue from medium-sized customers was 10% of total revenue in the fourth quarter and decreased 26% compared to the year ago period due to continuing challenges impacting a number of these customers. Revenue from small customers was 71% of total revenue in the fourth quarter and increased 24% as compared to the year ago quarter as continued strength in Calix Cloud and AXOS platforms more than offset lower legacy product shipments. We will continue to focus on finding strategically aligned customers for our all- platform business.

    Despite continued growth in our all-platform offering, both GAAP and non-GAAP gross margin, adjusted for the costs of tariff and tariff-related costs, intangible amortization and stock-based compensation, declined in the fourth quarter of 2019 relative to the year-ago period. Specifically, non-GAAP gross margin declined 80 basis points year over year. This decline was primarily due to unfavorable customer and regional mix compared to the year ago quarter. Systems gross margin on a GAAP basis increased 60 basis points compared to the year ago quarter due to lower U.S. tariff and tariff- related costs. U.S. tariff and tariff-related costs and intangible asset amortization costs were 150 basis points of systems gross margin compared to 300 basis points in the year ago quarter. Non-GAAP systems gross margin decreased approximately 140 basis points year-over-year. The principal drivers of the year-over-year decrease in systems gross margin were customer and regional mix partially offset by continued growth in our all-platform offerings. Sequentially, non-GAAP systems gross margin increased by 180 basis points mainly due to favorable customer and product mix. GAAP services gross margin decreased 150 basis points compared to the year ago quarter due to lower revenue, primarily for CAF-related deployment services and investments in customer success personnel, only partially offset by increased activity in our higher gross margin support services. Sequentially, GAAP services gross margin increased this quarter by 70 basis points due to higher revenue from support services, which generally have a higher gross margin as compared to deployment services. See GAAP to non-GAAP reconciliation on page 14.

    Operating expenses on a GAAP basis for the fourth quarter of 2019 decreased by 6% compared to the year ago quarter due to lower stock-compensation expense. On a non-GAAP basis, operating expenses were higher by $2.7 million as compared to the year ago period primarily due to higher incentive compensation. Sequentially, non-GAAP operating expenses increased by $2.7 million in the fourth quarter primarily due to normal seasonal fourth quarter expenses associated with our annual ConneXions customer and partner conference and higher commission costs on the higher quarterly revenue. As demonstrated this quarter, we expect to maintain our operating expense leverage, while maintaining our pace of innovation. See GAAP to non-GAAP reconciliation on page 14.

    For Calix' complete Letter to Shareholders, including charts and information details on oft-referred-to page 14, please visit this link to the vendor's Investor Relations' page.

    Calix

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