Calix Inc (CALX) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Calix First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Tom Dinges. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Thank you for joining our Q1 2018 earnings conference call. Today on the call, we have President and CEO, Carl Russo; as well as Chief Financial Officer, Cory Sindelar.

As a reminder, this afternoon, we released our Letter to Stockholders in an 8-K filing as well as on the Investor Relations section of the Calix website. The Letter to Stockholders is in lieu of any prepared remarks and this call will consist of question and answer only. The conference call will be available for audio replay in the Investor Relations section of the Calix website.

Before we turn the call over to the operator to start the question-and-answer session, we want to remind you that in this call, we refer to forward-looking statements, which include all statements we make about our future financial and operating performance, growth strategy and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause results and trends to differ materially are set forth in today's Letter to Stockholders 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 to non-GAAP measures is included in our Letter to Stockholders.

With that, operator, please open the call for questions.

(Operator Instructions) Our first question is from Meta Marshall from Morgan Stanley.

Just maybe a couple to start with. On the shortfall to kind where you expected. Understanding and having read the letter, is that shortfall more on just the difficulty in predicting kind of services on a quarter-to-quarter basis post cap 2 and post cap 2 slowdown or implementation slowdown? Or was it more on the product side where you were surprised? And then second, understanding that you might not have full visibility into kind of your largest customer, but just kind of where you're seeing them fall out for the rest of the year as they finish their kind of post M&A review would be helpful.

Thanks, Meta. So let me address the revenue part first. The way I would characterize it is actually less to do with product, interestingly enough. It actually has more to do with sort of thinking through more of our legacy revenue mix versus where we're heading from a new customer standpoint. As you noticed in the stockholder letter, actually new customers and new products are actually doing very well. And the challenges on the revenue side are really back to the same theme that we've had for a number of quarters now, you and I as an example, around getting our arms around predicting some of the projecting revenues from some of our legacy wireline customers as they go through some of the transitions that they're going through. So the lightness on the revenue was really driven by that, offset by actually what we're seeing on new customers and new platforms, which, by the way, you can see show up in the gross margin line. Does that all fit for you and make sense?

Yes. No, that makes sense.

Okay. And then to your direct question about CenturyLink, there is really no change in our message. They are continuing to work through their strategies and their processes. We're starting to understand how the internal purchasing processes and capital governance process works. From a strategic standpoint, I remain very bullish on their strategic opportunities to succeed and very bullish on our ability to help them succeed. So there's 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.

Okay. And then in your letter you noted that kind of your smaller customers or small new customers, there is success across AXOS and Calix Cloud, but just -- like on the Tier 3 traditional customers, can you just like, maybe, point to a couple of the products? Like is it the Wi-Fi product? Is it -- where are you seeing the most kind of uptake with the Tier 3 customers?

We're seeing uptake across all of the -- our -- in essence, our 3-legged product stool. Basically thinking about it from a network standpoint from the premises side and then from the Calix Cloud side. If your question is from a revenue standpoint, well, the revenue in cloud is going to be smaller, for example, than in the network around the premises side. But actually, all 3 are doing very, very well.

I mean -- I guess, just since kind of the premise side is the newer side, just trying to get a sense of is that -- was that a material part of growth? Or is it still just an uptick kind of in new customers and just traditional network products? (inaudible)

Okay. So let me see if I can give you a little bit more there. So remember, EXOS is coming to market now. EXOS is on the subscriber edge, but it's our third generation. Our second generation was the Giga family, and the Giga family has been growing like a weed for quite some time and continues to. So we're very bullish on the opportunity on the subscriber edge for opportunities for growth. So that's clearly an area that's been growing and will continue to grow. Having said that, Calix Cloud analytics are growing at a great clip as are AXOS licenses. They're just different revenue dollars, and they're different margin dollars and you sort of have to think through all of that, but all 3 are showing growth. As far as customers, because you sort of segmented me into the sort of the traditional ILECs, the small ILECs, we tend to think of smaller customers, as all of the species of customers whether they are ILECs or CLECs or municipalities or small cable MSOs or electric utilities or hospitality providers, that whole segment is a growth opportunity for us both in revenue as well as customer count. And what's really very good for us is the diversification. So we continue to diversify our revenue base at a pretty stout clip.

(Operator Instructions) Our next question is from David Williams from Drexel Hamilton.

I guess, first, I wanted to see if you maybe wanted to talk a little bit about the Verizon ramp and if you're seeing any movement there, if anything has changed maybe since last quarter. Just any update, I guess, on Verizon.

We continue to progress with Verizon and continue to ship to Verizon. 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.

And you had said before that you thought they could be better than a 10% customer. Is that still maybe -- still how you picture your -- you can say it's the -- it could still be that size, I guess, going forward. Are you still comfortable with that?

In any given quarter in this year, we think that's possible, and long term, certainly. Yes, we are, David.

And then thinking about the -- obviously, the budgets have been a little constrained, or maybe not constrained but just held up. Do you think that maybe we're creating some pent-up demand that comes back into the back half of the year? And does that maybe commence slowly? Or does it come in all once? Kind of what are you thinking? I guess, how are you preparing for how the rest of the year unfolds if this -- if those budgets do get released and you get a -- maybe a flood of orders?

So I think there's a specific set of customers that you're referring to there that would be more of the publicly traded traditional wireline folks, is that correct?

Yes, sir.

So I don't know, David. There's lots of messaging on the street on CapEx that would indicate that, that would be the case, i.e., that people are holding to their CapEx projections even though they're off to a slow start. But I think we would be wise to recognize that when that typically happens, it's sort of systemically hard for a customer to catch up later in the year. There's just too much to do. So I think it'd be less than wise for anyone of us to sit here and think that, that's the case, albeit we expect spending to pick up. I don't know if it catches up to previous year. So is that -- does that help you?

It does, and I appreciate that. And then, I guess, maybe one last question. What exposure or what opportunity did you previously have with Level 3? And I guess kind of thinking about the combined CapEx budgets between CenturyLink and Level 3. Is there a potential, maybe an opportunity to pick up some increased dollars there with CenturyLink with the acquisition?

So -- yes, and I think it let's -- so the direct answer to your question is none, as in we did not have exposure to Level 3 given their history and what markets they were serving and where we were coming from historically. To then think about their combined strategy and what it might be, as we think through the new CenturyLink and what their strategies are going forward and what we think they might be, we see significant opportunities for strategic alignment around higher-speed services that are likely more fiber-based. And we're very encouraged by the early signs that we see there. So yes, we do see an opportunity for a strategic growth. But again, I would just merely caution you that they're still working through those things.

Okay. And then one last one, if I may here. On the guidance...

Please do. Please go ahead, David. Take your time.

Sir, I was just saying, on the guidance, how much of your guidance is dependent on some of that budget, I mean, release? And how much of that is maybe just the visibility that you have in front of you today? I guess, what are the risks to that, the revenue guidance that you provided? It seems to be a little better than I would've thought, just kind of given the shortfall this quarter.

Well -- so I'm going to -- I'll tell you what, let me let Cory answer that question first, and -- well maybe I'll give you a little bit of color on this and have you think this through. I think our guidance is the sum total of the messages I just laid out, which is, we're seeing very good uptake and -- amongst diversified customers. We're seeing our new products and platforms continue to have very favorable reviews in the marketplace. So that's what you're seeing on the gross margin side. On the revenue side, we're being somewhat attenuated because of trying to understand what's going on, on these customers. And so together, I mean, it sort of speaks to where we're going as a company. You're going to see gross profit continue to grow, and you're going to see us continue to keep our hands on OpEx in a very disciplined fashion. But in the next 90 days, we're still a little bit cautious on revenue growth in some of the segments. So, Cory, any color to add?

I'd just say that part of the increase from Q1 to Q2, it's pretty typical to where you would see a seasonal uptick, where we're at with purchasing cycles, and probably making up a little bit of it from the shortfall in Q1.

(Operator Instructions) Our next question comes from Christian Schwab from Craig-Hallum.

So as far as cap 2 with your key customer in 2017, it was a rough expectation of the dollar amount that was just all cap 2 for that customer. And then can you also let us understand what percentage of that might have been service versus product?

So we never broke out cap 2 other than to say that we were focused on making sure we could deliver it. For a breakout of service versus product, Cory, do you have that?

I don't have that.

I mean, I would be very careful about doing this. So let me see if I can come at it differently. Obviously, if you look at our services mix in Q1, our services mix as a percentage of revenue was down quite a bit from previous year, while at the same time, the gross margin on the services were up. So I think you can probably start to extrapolate from there, Christian, as to what's happening on the services side from a deployment standpoint and cap. We're continuing to deploy against the cap 2 program, but I would say in a very controlled fashion is the way I would color it.

Right. So in line with what you've been saying for the last few quarters, said another way. Now that the maybe poorly structured cap 2 service agreement that other people kind of put together that kind of held us back that, that is done and the profitability of that will improve as kind of we've talked about over time as other things are layered in. Is that still your fundamental viewpoint on a go-forward basis?

Well, it is, except for you to make sure I correct you, giving me a pass because one of those other people that did it was me. So I'm the one that stepped in it in the first place. But if you go and look at -- in the stockholder letter, I think it's on Page 3, and you look at the services gross margin and the product gross margins, it is exactly what we've been saying for the last few quarters. What happened is that you'll see this snap back and then we'll get to profitability, and then in services. And then as we grow from there, we expect the gross margins and services to continue to grow as services themselves shrink as a percentage of revenue. And what's driving that margin expansion are 2 things: The better execution against the deployment services cap and other things. But also, as our platforms grow, we have attached services going along with them that, as we discussed, are at much higher margins. So yes, to your point, exactly consistent.

Perfect. And then with those migrations, the early successes that you're seeing as far as your new product platforms as far as reviews and customer uptake and Verizon beginning to ramp, I know we talk about $600 million being a long-term target, and we've talked about that for a little while. I mean, how long are we really anticipating that, that takes? Is that kind of a multiyear thing? Or do you not want to bracket it at this point?

I don't want to bracket it, but let's be -- I do want to make sure I spend a moment on the revenue growth and what we're seeing early in this year because it's causing us to be cautious from a revenue perspective. But the flip side is, here's what I can tell you about that model. I think you can now look at the chart on Page 3 and the chart on Page 4 around operating expenses and realize how we get to the gross margin and OpEx model. And to your point, really, now the question is, what's the revenue growth rate over time? And all I can tell you is, there are things that are in our control, and there are things that are out of our control. There are certainly a set of customers that right now are challenging to predict revenue on, but we are very busily growing our new customer base and our new platform uptake. So those are the sort of the levers. As far as bracketing it, it's not in the way out future. It's clearly within sight of what we're planning to execute against, but I wouldn't want to put a date on it.

That's great. I don't have any other questions, but I will say thank you for putting out a letter with all the information instead of reading it to us because we can all read, for the best use of everybody's time. So thank you for doing that.

You're welcome. And I'll take it both in that spirit and also that you were probably tired of hearing us prattle on. So -- I know we were. So we appreciate it, and thank you very much, Christian.

(Operator Instructions) Our next question is from George Notter from Jefferies.

This is [Kyle] on for George. I wanted to circle back in the services business and specifically the gross margin. Nice gross margin result progress on services gross margin, by the way, this quarter. But noticed that it was a lower total revenue result for your services business. So I just want to know how careful we should be in terms of projecting that trajectory going forward. Was there a higher mix of engineering-type professional services in the quarter? How indicative is the trajectory in this current quarter for going forward to the rest of the year?

Yes, so the makeup is largely still deployment services as a relative waiting amongst the different types of services. What you're seeing is the better execution, as Carl told you about, in terms of the margin improvement. We expect that, that will continue as we progress through the year. As a total amount of services, as a percentage of total revenue, we see that coming down significantly and the trend continuing to be about where it is for the balance of the year.

Okay. And then just kind of looking at seasonality through the end of the year, should we look to -- for this to kind of be shaped the way previous years have where it kind of ramps into the end of the year? Is there any -- are there any other cap 2-type project time lines that we should kind of think about in terms of the lumpiness of the services business through the year? How should we think about the top line services business?

Yes, so I think you're going to see a typical seasonality curve like you've seen in prior years. And the other thing I'll point out, particularly with our adoption of 606, our services contracts are now 100% complete. So it's going to be a little bit more linear progression in terms of revenue as opposed to completing contract and it being as lumpy as it would -- might have been in the past.

Okay, great. And one last one for me. Nice to see yourself some diversification benefit from some of the smaller customers picking up some of the slack and the weakness in the tier 1s. That being said, is there anything else you can add in terms of when business trends may pick back up at the larger, merger-related -- impacted customer? And what's your visibility looks like there, if any?

Yes, so I spoke to it a little bit before, Kyle, but happy to go through it. We as a company, when we were first founded, grew up with an initial set of wireline customers. And they're very good customers for us, and we want to do our best to help them succeed. But it is a challenging hand to work with right now for some of them, and so we're just very cautious on projecting revenues. So that being said, the new platforms and our ability to reach new prospects and expand our customer base and expand our applications inside of those customers is continuing to grow, actually, unabated. So it sets a very robust gross profit base underneath the business that's growing. And we will just be cautious on forecasting those customers. I think that's the only prudent thing to do. As far as it turning up, you heard a question earlier from -- David, I believe, asked the question around there's a lot of folks that are saying they're going to hold to their CapEx numbers, and so they're off to a slow start. Does that mean they'll catch up? I don't think they're being dishonest or disingenuous, I just think 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.

(Operator Instructions) And if there are no further questions, I'd like to turn the floor back over to Mr. Dinges for any closing comments.

Thank you, operator. Once again, thank you to everyone on this call and on the webcast for your interest in Calix, and thank you for joining us today. This concludes our conference call. Goodbye for now.

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