Calix Inc (CALX) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Calix first quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Dinges. Thank you; you may begin.

Thank you, Matt, and good afternoon, everyone. Today on the call we have President and CEO Carl Russo as well as Executive Vice President and Chief Financial Officer William Atkins.

This conference call will last approximately 60 minutes and will be available for audio replay in the Investor Relations section of the Calix website.

Before we begin, I want to remind you that in this call we refer to forward-looking statements, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in today's earnings press release, and in our annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates.

Also on this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP and non-GAAP measures is included in our earnings press release available on our website at www.calix.com. All numbers referenced in today's conference call are non-GAAP unless otherwise noted.

As a reminder, our earnings press release, supplemental financial data, and an accompanying earnings release presentation are available in the Investor Relations section of the Calix website.

For the quarter ended March 26, 2016, Calix reported revenues of $98.4 million and a non-GAAP loss of $0.09 per share.

In just a moment, William will take you through the quarter in greater detail and Carl will conclude with his thoughts on Calix's strategy and market outlook. This will be followed by questions from analysts. With that, I would now like to turn the call over to Calix's Executive Vice President and Chief Financial Officer, William Atkins. William?

Thank you, Tom. We last provided you with guidance regarding Q1 on February 9, and in that guidance we called for revenue of between $95 million and $99 million, a gross margin of between 47% and 48%, and operating expenses in the range of $52 million to $53 million, including approximately $2.6 million of Occam litigation expenses, thus resulting in a net loss per share of between $0.15 and $0.11, or $0.10 to $0.06 if Occam litigation expenses had been excluded.

Actual revenue for the quarter was $98.4 million and EPS was a loss of $0.09 per share, including litigation expense; or a loss of $0.02 per share excluding litigation expense. The revenue's at the upper end of guidance and the loss per share above the top end of guidance.

Gross margin was 48.1% and operating expenses came in at $51.7 million.

At the gross margin level, the largest drivers were the contribution from the impact of the first full quarter of revenue from our previously announced turnkey network improvement project as well as product and customer mix.

Operating expenses included higher-than-expected legal expenses but, nevertheless, came in below guidance, with the major factor being a modulation of our R&D expense growth.

Good linearity of Q1 revenues, combined with a strong focus on collections and shipment of inventory related to orders received in Q4 and Q1, resulted in a positive operating cash flow of $5.3 million.

Our aggregate balance of cash and marketable securities decreased to $64.3 million from $73.6 million in the prior quarter primarily due to share repurchases of $12.8 million and capital expenditures of $1.5 million offset by the positive operating cash flow I just mentioned.

As of the end of Q1, we completed the Board-authorized repurchase of $40 million of Calix shares.

Getting into a bit more of the detail, our $98.4 million in revenue for the quarter showed an increase of $7.3 million, or 8.1%, from last year's first quarter level of $91 million. This marked the strongest year-over-year increase in revenue for the first quarter period over the past three years.

At 11% of our Q1 revenues, international revenue was $10.5 million, slightly higher in absolute dollars from its $10.1 million, or 11%, level in Q1 of last year.

We had two 10% or greater customers this quarter. This was the first quarter when we recorded more than one 10% or greater customer since our 2010 IPO and it is a result of our focus on increasing penetration of larger customers.

As I noted earlier, at 48.1%, Q1 gross margin was above the upper end of our guidance range. This gross margin in Q1 was down from Q1 2015's 49.2% level, with the decrease driven in part by the turnkey network improvement project that I've discussed in our recent financial results calls. We expect the ramp of this project to keep margins somewhat in check relative to our long-term 50% margin target but we expect that the drag should abate later in 2016 as this program matures.

Q1 operating expenses at $51.7 million were up $3.5 million from the same quarter a year ago, with this year-over-year increase primarily due to additions in headcount, particularly in research and development, and by litigation costs. We've invested in R&D to support our systems and software platforms to capitalize on the significant growth opportunities we see starting later in 2016 and beyond.

In 2015, we launched the largest number of new systems and platforms in the Company's history. So far in 2016, we are seeing solid momentum from these launches.

Expenses related to the Occam litigation amounted to $3.4 million, or $0.07 per share, in Q1 2016 compared to $1.7 million, or $0.03 per share, in Q1 2015. This was higher than our guidance for $2.6 million as we incurred additional expenses ahead of trial.

You have seen, from our SEC filing of April 18, that we have signed a memorandum of understanding regarding a settlement in principal to litigation. Under the terms of the settlement, Calix does not make any contribution to the settlement and Calix will receive $4.5 million in cash as partial recovery of costs incurred, equivalent to $0.09 per share.

This cost recovery is likely to be more than the total of the Occam litigation expenses that we expect to incur in Q2 and Q3. We anticipate that Q2 Occam litigation expenses will be of the order of $2.4 million, or $0.05 per share, before taking into account any impact from the $4.5 million contribution, should it occur in Q2. This settlement results in a positive outcome for Calix and, more importantly, puts an end to the litigation.

Turning now to the balance sheet, as noted earlier we ended the quarter with total cash and marketable securities of $64.3 million, a decrease of $9.3 million from Q4 and a decrease of $33.5 million from last year's Q1 level.

The primary driver in both the year-over-year and sequential decrease in cash was our share repurchase program. During the quarter, we repurchased 1.8 million shares, using $12.8 million of cash at an average price of $7.16. As of the end of Q1, we completed our Board-authorized share repurchase program, having spent $40 million and having repurchased 5.3 million shares.

Receivable DSOs were a healthy 38 days, up 3 days compared to the previous quarter, and up 1 day from the 37 days in Q1 2015. The quality of our receivables and our collections performance remain strong.

Inventory levels decreased to $41.1 million in Q1, down from Q4's $47.7 million level and up slightly from $40.6 million in Q1 2015. This follows the typical decline that we usually see in the first quarter and is commensurate with our sequential change in revenues.

Inventory turns decreased to 3.9 times in Q1 from 4.1 times in Q4 and increased from Q1 2015's 3.6 times.

Now let me turn to guidance for the second quarter of 2016. We expect revenues to be in a range of between $104 million and $108 million, with a midpoint, therefore, of $106 million, up 7% from the $99 million level of Q2 2015. At the midpoint, first half 2016 revenues will increase 7.5% year over year. This will be the first year since 2013 that our first half revenues will have grown at this strong a pace relative to the prior year.

We are guiding gross margin to a 46% to 47% range for Q2, down from last year's Q2 level of 51%, with this decline relative to Q2 of 2015 largely driven by the continued ramp of our previously announced turnkey network improvement project as well as by our expectation of slightly less favorable product and customer mix relative to Q2 2015.

Of note, the 51% gross margin reported in Q2 of 2015 coincided with the lowest reported level of international revenues since we acquired the Ericsson assets in late 2012.

In terms of operating expenses, I'm going to go into a bit more detail with guidance this quarter, given the litigation settlement we entered into a couple of weeks ago.

Operating expenses, including litigation, are expected to be in the range of $52 million to $53 million, up from last year's Q2 level of $47.3 million, reflecting some incremental hiring costs, annual merit increases, and incremental litigation-related expenses.

While we've announced a settlement in principle of the Occam litigation, we expect to record litigation-related expenses for Q2 of approximately $2.4 million, compared with less than $200,000 in Q2 2015. Therefore, excluding litigation expense operating expenses are expected to be in the range of $49.6 million to $50.6 million.

Importantly, the recently signed settlement brings an end to this litigation and we expect no further meaningful litigation expenses after Q2.

Based on 48.4 million shares, the expectations that I've just taken you through result in a guidance range for Q2 of a net loss of $0.09 to a net loss of $0.05 per share, or a loss of $0.04 to $0.00 per share, or break-even, excluding litigation-related expenses.

These estimates do not include any benefit from the $4.5 million of litigation settlement proceeds. Our current expectation is that these proceeds will settle either late in Q2 or in Q3, which is why we are excluding the settlement proceeds from our Q2 guidance. Importantly, the settlement proceeds will more than offset our litigation costs in either Q2 or Q3 and will result in a positive benefit to operating expenses in the quarter when recorded, and will be the equivalent of $0.09 per share on a per-share basis when the settlement is deemed accepted by the court and recorded.

At this point, let me hand the call over to Carl. Carl?

Thank you, William. Predictable profitable growth. Those were the words I used at our Investor Day in mid-March to describe our goal for the years ahead. In last quarter's conference call, I stated that while our revenue continued to grow over these last three years, the rate of growth had slowed and the re-acceleration of our growth rate was a key goal for 2016.

We have made meaningful investments in research and development and it is time to reap the rewards.

With this in mind, the first quarter was a good one for Calix. The 8% year-on-year growth we achieved was driven by activity across all of our customers and products. Given our guidance, we are looking forward to a strong second quarter and if we execute well, this will mark the strongest first half revenue growth in the past three years.

While I am encouraged with our performance on gross margin, I believe our caution on guidance is prudent and correct. As you may remember, two quarters ago we announced a key turnkey network improvement professional services win with one of our existing customers. We believe the team is executing well on this project and our professional services business over all is growing. However, as we build this business it has a downward effect on gross margin, which you see reflected in our guidance for the second quarter.

As you should expect, we have an appropriate focus on lowering the cost structure to deliver these services and on raising profitability through the remainder of 2016.

Also encouraging were the results from our focus on gaining leverage from our investments in OpEx. Excluding litigation expenses, our OpEx in the first quarter was $48.3 million, which increased 4% year over year. Delivering 8% revenue growth on 4% OpEx growth represents good progress and our focus on operating leverage will remain strong.

However, OpEx will likely be a little noisy throughout the year as we complete major product development efforts, converge our resources on our Compass and AXOS software platforms, and further invest in expanding our focus on larger current and prospective customers.

I am glad that any noise stemming from the Occam litigation will be behind us.

We saw CAF II orders grow in the first quarter and that momentum is continuing into the second quarter. While we remain of the belief that CAF II will be mostly substitutive to our customers' CapEx plans, we do believe it establishes a base to our business as it provides dedicated funding for access network investments.

On a related note, we are pleased that the CAF rules for rate-of-return carriers, in essence the other half of CAF, have now been finalized. To be clear, the rate-of-return carriers are smaller in size and many are long-time Calix customers. This now brings to a close the multi-year effort to transform the Universal Services Fund, which for many decades was a subsidy to provide voice services into the Connect America Fund, which is an incentive to deploy broadband services. We believe the finalization of the entire CAF program is a positive for our customers and a positive for Calix.

However, we would caution that there are many aspects of this plan that must first be sorted through by our customers and we expect it will take until our next quarterly earnings conference call to give more insight into this significant development.

Our global traction continues to improve and I am encouraged with both our international business and our Ericsson partnership as we had numerous wins in the quarter.

Our GigaCenter family, combined with our conference application, continued its strong growth as our customers look to own the subscriber experience.

Likewise, the interest in next-generation technologies such as NGPON-2 and G.fast continues to grow. And although we do not produce 5G products, the advent of ever-higher-speed wireless systems will clearly have an impact across the entire access infrastructure.

We believe we are well placed to benefit from all of these new technologies. In fact, we are seeing the highest level of activity and inbound interest in our history. To be clear, this comes from customers and prospects both large and small.

In closing, I would like to take a moment to discuss the rate of industry change. From the subscriber to the cloud and all of the service provider business models in between, this is the highest rate of change I have seen in my career. I believe that this increased rate of change is why we are seeing the interest in software-defined access and the early traction for our Access eXtensible Operating System, AXOS.

There is an enormous need for a fast, always-on, and simple unified access infrastructure and AXO meets the challenge. Now that AXOS is well and truly in the market, it is growing at a good pace, and over 20 service providers have deployed the AXOS platform in production networks.

With that, I will open the call for questions. Matt?

Thank you. (Operator Instructions) Meta Marshall, Morgan Stanley.

Hi, this is Eugene Anderson on for Meta; thanks for taking my question. I was hoping to get your comments on the pockets of weakness we are seeing from some of your peers. Would definitely appreciate your perspective on that, and just from your end of things what you're seeing out there -- if there is any incremental weaknesses since the beginning of the year, where they might be or might not be. Thanks.

Eugene, just out of curiosity, when you say some of our peers, is there a particular area that you can point me to to maybe help me answer your question?

No, I think just generally a lot of the optical players and a lot of the people in carrier space have been reporting weaknesses for the first quarter.

Okay, so -- I didn't understand how broad or narrow you were looking for. So I think there's been some weaknesses in different areas and some, I guess, expectations that, looking out, were reset.

We're seeing reasonably good strength in the access space and I think that speaks to what we have spoken to for a long time, which is ultimately the access space is what connects the subscriber to the cloud, and therefore for service providers it's essential. We've seen pauses as some of our service provider customers have looked at their investment portfolio and reset it; or rejiggered it, if you will.

I can't speak directly to other spaces because, to be blunt, we have enough to do focused on our own space. But right now in our space, we see a solid investment [set] going on with our customers.

Other questions, Eugene? Matt, I think next questioner.

George Notter, Jefferies.

Hi, there. Thanks a lot, guys. Hey, I wanted to, I guess, kind of ask about the new CAF II rules that are out there for the rate-of-return carriers. You referenced that it's going to take some time to kind of understand how customers are looking at those rules and how it impacts their investment plans. Can you kind of walk through sort of the puts and takes there? What's the positive scenario for you guys in all this? What would be the negative scenario? How do you kind of view it in terms of the potential wild cards for your business?

Let's start with the negative scenario, and the negative scenario is prolonged uncertainty. That would always be negative to our customers.

However, I think we feel differently about the rate-of-return scenario, and here's why. Our customers have been in a situation of prolonged uncertainty as they knew these rules were going to be renegotiated and reset as they got converted into CAF. And now, actually, the plans are out there. So I'm hard pressed to see a negative in this regard, George.

As you look at the details, one of the negative could have been, had they done the rules differently, they might have actually set the rules up to penalize, oddly enough, those service providers that were more aggressive in their broadband build-out.

But in fact, they've given two different plans that the rate-of-return carriers can choose from. And as near as we can see from looking at it, we believe people that choose one or the other are both going to be happy, and that's the early feedback we are getting from our customers.

So actually we see it as neutral to a net positive. The only thing that's going to take some time is people are going to go choose plans and the FCC's going to look at who chooses it and come back -- they have a 91-day period I think that ends in July, and they may come back and make further adjustments. So it may take one or two cuts at this to get it all sorted and agreed. But we don't see a negative to this half of CAF.

Got it; okay. And then, the other question I wanted to follow up on -- you made an interesting comment earlier; you said you're seeing more interest, I guess, inbound in the Company from customers than you've seen in your history. I'd be curious -- what exactly are you talking about there? Is that literally inbound phone calls from customers? Is that trials? Is it evaluations? Hits on the website? Give us a sense for what exactly you're seeing. Thanks.

Good question. So let me characterize it this way. Clearly, we've been expanding our reach and our channels globally. And so when I say inbound, actually what I was sort of alluding to was as we're reaching out we're actually finding some service providers of different types reaching back towards us.

And I think the reason is that fundamentally the industry has been through a set of consolidative events that, as service providers are now looking at these next-generation technologies, there's just a lesser number of players for them to go look at. And in times past, they may have overlooked us; in times present, it seems that we are in the mix.

So we are actually seeing both us reaching out to them and them reaching back to us. Does that help?

Yes, it does. Thanks very much, guys.

Thanks, George. Matt?

(Operator Instructions) Simon Leopold, Raymond James.

Great, thank you. A couple of questions I wanted to ask. One, just from trying to straighten out the noise from litigation, can you talk a little bit about how you're budgeting operating expense for the second half of the year? Should we be thinking about something like $51 million, $52 million a quarter once you're through the litigation? Is that the right way to think about it?

Well, we don't go out, obviously, beyond one quarter. We came in at $51.7 million including litigation, or $48.3 million for Q1. If you look at what we said about Occam-related litigation expense, we called for Q1 $3.4 million. We're talking about $2.4 million incremental for Q2. And we're saying there's not going to be any meaningful expense thereafter. So that's basically $5.8 million of Occam litigation expense in Qs 1 and 2.

Then you've got set against that the $4.5 million that we are going to receive. That could fall in Q2; it could also fall in Q3. And because of the uncertainty over the timing, we're specifically not guiding to any number that includes that $4.5 million coming in.

So the sum total of this, then -- if you look at operating expenses for Q2 is we're looking for operating expenses without litigation of being in a $49.6 million to $50.6 million, so a midpoint of roughly $50 million, a little bit above that. If you fold litigation into that, that's again $52 million to $53 million.

So you can see that ex-litigation, operating expense midpoint is around $50 million, a little bit north of that, for Q2.

I hope I haven't totally confused you by taking you through those numbers.

I followed you, I think, but I guess what I'm trying to get a sense of is Carl talked about some expense controls, and it was in the context of gross margin. I'm just trying to get a better idea of how to think about how we should model operating expenses in the second half of the year -- whether they should be increasing with growing revenue, which we'd assume, or whether you're going to try to hold operating expenses flat from the levels you forecast for Q2 excluding the litigation.

Okay. Well, I'm not going to guide you to the second half of the year, but let me just give you some aggregate data for the first half. We talked about revenues in Q1 going at 8%; we talked about OpEx going at 4%. So obviously that's a healthy trend.

If you aggregate our guidance for revenues at midpoint and our guidance for OpEx midpoint and add those to the Q1 historic, you're seeing operating expenses, excluding litigation, coming in at just over, I think, $98 million for the first half of 2016 relative to just under $94 million for the first half of 2015.

That's roughly 5% growth year over year for the first half. And we're also calling, at the midpoint, aggregate first half revenue growth of around 7.5%.

And let me add one comment, Simon -- and again, this is not guidance but you know this from following us for a while. Q4 has [user] group in it, it has commissions in it. So be careful there, please.

No, that's helpful; thank you. Now, in the prepared remarks you talked about the Ericsson partnership very briefly with some references to international, which actually on a dollar basis looks stable if my formula updated correctly last quarter. Which to me is pretty good, given seasonality.

So 11% of sales is still pretty modest for international. I'd like to see if you can give us an update on your prospects and how you see this evolving over the course of the next one to two years.

I would change nothing in what we said prior to this in the last quarter and at the Analyst Day in New York. We are very encouraged with how the relationship has continued to develop now, both at a channel and at a strategic technical relationship.

In addition, we've been putting pins on the map, and when you do that you get the ability to put more pins on the map. And the sizes of those accounts are starting to grow. So nothing's going to happen overnight; you're not going to see any big numbers pop up. I think you're just going to see programmatic more wins and international growing at a good clip.

Whether or not it outgrows North America, and by how much -- to William's point, we don't guide to that. The best I can give you is I now like what I am seeing.

And one last one. In regards to the rate-of-return CAF II program, I'm just wondering if you've got thoughts in terms of what technology those operators would show a preference for between fiber to the home or something like a G fast or VDSL2 fiber to the node. Do you have a feeling of how that mix might shape up within this program, given that the requirement is only 10 megs?

Great question; I'm glad you asked it. I think the answer is all three. I do not -- if you hearken back to the days of broadband stimulus, which you're old enough to remember, that was a dominantly fiber-based initiative. This is going to be something where you're going to see a mixture of fiber, short-loop technologies like G.fast, and longer-loop technologies like VDSL2.

If you've been following us, you've watched our portfolio not only continue to pursue aggressively the fiber-based technologies but also the short-loop copper technologies from a G.fast perspective. But we have also now brought to market a set of full-blown system-level vector VDSL2 solutions that we believe, if you look at them, you'll see that they in fact are the best in the market.

So we believe it's going to be a mix of all three and we believe we are extremely well set and prepared for all three.

Great. Thank you for taking my questions.

Simon, thank you as always.

[Ahsan Nashem], Cowen.

Thank you for taking my call. Just a couple of housekeeping questions. Can you remind us again what was your non-US revenue in the quarter?

I'm sorry -- what was our what?

Non-US revenue.

Our non-US revenues. We called our revenues at 11% of total revenues. So if you look at quarterly revenues (multiple speakers) $10.5 million.

$10.5 million; all right. And then also, can you give us your updated headcount for the quarter?

We don?t update our headcount other than in the K.

All right. Just also on the top 10% customers -- 10% customers that you had this quarter -- is it safe to assume that these are the normal suspects that have been traditionally your 10% customers?

We've only had one 10% or greater customer up until this quarter.

If I go back, I've seen Century Link and Frontier as amongst your customers. I was just asking is this a different 10% customer other than the usual suspects?

It's from the same set of customers. I would be careful about the same ones, so I will give you that, Nashem.

All right; thank you.

Thank you, sir.

(Operator Instructions) Greg Mesniaeff, Drexel Hamilton.

Yes, thanks. When you talk about the AXOS environment and how that's ramping as part of your overall system sales, what should we be thinking about as far as its impact on your gross margin line in terms of --

In the short term?

Yes. Well, two, three quarters.

Yes. So in the short term, not at all, and let me explain to you why. It is a framework and an operating system and a development environment that, as customers deploy it, they're really deploying an architecture. So we believe that over time, and over a long time, that that will have a positive effect on margins. But I would dissuade you from making any assumptions in the near term.

Okay. And just one quick follow-up. The 11% outside the US revenues -- should we assume that that's going to be more than likely the norm as far as higher levels -- north of 10% going forward?

It's going to be choppy quarter to quarter, inevitably. But we do expect our international revenues to grow and, over time, they should grow faster than our domestic revenues. So therefore the answer must inherently be yes, but we can't really guide to it. It's just that is what we see going on in our customer base.

Great. Okay, thank you.

Greg, thanks.

Sanjiv Wadhwani, Stifel.

Thanks. Hey, Carl, I suspect I know the answer to this question but I thought I'll take a shot. Any color on when you just look at CAF, and if you look at your total revenues this quarter -- any way to kind of say, hey, 20% of the revenues came from CAF, and that could go up to 30% over the next couple of quarters? Any sort of metrics that you might be able to share would be helpful. Thanks.

What's the answer you think you know? (Laughter)

The answer I thought you would give is, we're not going to share those details. But maybe you want to give a percentage.

So I appreciate -- no, we won't share it in that way. But let me go back to what we have talked about to this point. Again, we view CAF II into the larger carriers to be mostly substitutive. Having said that, as I said in my prepared remarks, we are seeing continued growth of orders around CAF II.

And we actually -- to my response to Simon's question about technologies earlier, we're actually very encouraged with our new technology set, especially around VDSL2 and G.fast as it fits into that segment of the business, if you will; if you want to call CAF II such a thing.

So we won't break it out percentage-wise; I do believe it's going to be mostly substitutive. But let me just take a moment to go follow it on the rate-of-return carriers. Because as I look at it today, I don't believe that that will be substitutive. I believe that that's actually good news in the long term. Most of the smaller carriers, as you know, are not public entities so they have different pressures that they deal with and a dividend is not one of them.

Secondly, the ones that have been more aggressive and have already been building broadband actually with this new program frankly would be further incentive to continue down that path. So in that space we think it's going to be a net positive.

So I know I'm not answering the question you asked, but I wanted to go back and at least frame up more information around CAF; I hope that helps.

That helps, actually. So just for rate of return, given that the rules have been just finalized, are you expecting some of the rate-of-return carriers to start using these CAF funds perhaps in the second half, or it's more like a 2017 event?

Good question, Sanjiv. You heard me mention there's a 90-day review period and if they can't get all the things that they want, specifically the FCC, they may go for another one. So I think if we're going to be realistic about this, I think we call this a 2017 event even though we might see orders that we sort of could tie to it or think they're coming from it later on this year. But I think you should be safe and say it's a 2017 event.

Got it; thanks so much.

Thank you, Sanjiv.

Thank you. If there are no further questions I'd like to turn the floor back over to management for any closing remarks.

Thank you, Matt. Calix will be reporting third quarter fiscal year 2016 results on August 2 after market close. Our annual meeting of shareholders will take place on Wednesday, May 18, starting at 9:00 a.m. Pacific time.

Management will be participating in a number of investor meetings and conferences during the second quarter. Information about these future investor events is posted on the Events and Presentations page of the Investor Relations section of Calix.com.

We remain focused on executing against opportunities ahead of us, and we look forward to meeting with you at one of these upcoming events.

Once again, thank you for your interest in Calix and thank you for joining us today. Goodbye for now.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.