Calix Inc (CALX) 2022 Q4 法說會逐字稿

Greetings, everyone, and welcome to the Calix Fourth Quarter 2022 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations. Sir, Please go ahead.

Thank you, Paul, and good morning, everyone. Thank you for joining our fourth quarter 2022 earnings call. Today on the call, we have President and CEO, Michael Weening; Chief Financial Officer, Cory Sindelar; and Chairman, Carl Russo. As a reminder, yesterday, after the market close, Calix issued a news release, which was furnished on a Form 8-K along with our stockholder letter, which was also posted on the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of the Calix website.

Before I turn the call over to Michael for his opening remarks, I want to remind everyone on this call we will refer to forward-looking statements, including all statements the company will make about its 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 actual results and trends to differ materially are set forth in the fourth quarter 2022 letter to stockholders and in the annual and quarterly reports filed with the SEC.

Calix assumes no obligation to update any forward-looking statements, which state 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 the fourth quarter 2022 letter to stockholders unless otherwise stated, all numbers referenced in this call will be non-GAAP measures.

With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead.

Thank you, Jim. In the fourth quarter, the Calix team once again executed with excellence, continuing our track record of improved financial performance across the 4 measurable objectives that we have outlined for investors -- [ever] revenue growth, gross margin expansion, disciplined operating expense management and continued predictability, demand from new broadband entrants, progressive broadband investors and legacy mining communication service providers that are transforming from (inaudible) providers to a Calix platform-based broadband service provider was strong in the fourth quarter.

The team delivered 39% year-on-year growth in Q4. This closes out an incredible 2022, delivering our third consecutive year of greater than 25% revenue growth. [ConneXions], our Customer Success and Innovation Conference hosted more than 3,000 attendees coming together in person and virtually. The excitement after Connections was a key contributor to our fourth quarter results as we added 26 new broadband service providers, bringing the 2022 new BSP total to [190]. As of the fourth quarter, the number of BSPs started their platform journey with us increased by 20% year-on-year. We ended the year with 950 BSPs leveraging revenue edge, the intelligent [assets edge] or both. In addition, RPOs were $199 million in the fourth quarter, up 59% year-on-year and 15% sequentially as more BSPs leveraged Calix’s platforms and managed services to transform their business.

Our platform and managed services bookings were more than 90% of our total bookings in the fourth quarter, thereby completing our transformation to a platform company. As our transformation is complete, we will no longer talk about this metric. Instead, we will talk about how our team is enabling BSP customers to transform their business through the power of the platform and managed service offerings. Every 91 days, our cadence of innovation delivered new capabilities that help the Calix platform-based BSP.

Before I share my thoughts on 2023, I'd like to turn it over to Cory for additional commentary. Cory?

Thank you, Michael. On the supply front, the cash team outperformed again, allowing us to deliver revenue of $245 million at 51.6% gross margin, both slightly above our guidance range. At the same time, we built incremental inventory of $8 million relative to the third quarter at an inventory churn of 3.0, which remains within our inventory guidance range of 3% to 4%. While the supply chain environment is improving in some areas, the challenging areas remain unpredictable and result in surprises. Lead times remain extended, decommits still happen and sourcing components in the secondary markets require extraordinary effort.

We continue to expect the supply chain environment to be challenging through 2023. Balancing our strong demand expectations with our current view of supply chain performance, we reiterate our target financial model of 10% to 15% revenue growth that we offered during our Investor Day last February and again last quarter, albeit we expect to be at the high end of this range for 2023. We also reiterate 100 to 200 basis points of gross margin expansion.

Furthermore, as we continue to evolve in our platform and managed services grow, we are making modest changes to our operating expense model. The sales and marketing operating expense range will increase to 18% to 20% of revenue from 17% to 19%. R&D operating expenses will be 29% of gross profit versus 30% of product gross profit. Remember, we are no longer breaking out product and services revenue in gross profit going forward. And G&A operating expenses will decrease to 7% of revenue from 8% up or for other. Calix is leading the disruption occurring in the communication industry and to address this opportunity, we plan to invest ultimately to the target financial model.

Back to you, Michael.

Thanks, Cory. The market is entering a period of inflation. The legacy provider is faced with the growing reality that speed as a go-to-market strategy will not succeed in the long-term, as most consumers simply do not understand broadband speed. In markets with more than one provider, a speed only strategy will result in the commoditization of their product, which always starts a price-eroding bottle with no path to revenue or subscriber gains.

This is the once-in-a-generation opportunity that Calix is uniquely positioned to address. 12 years and over $1 billion in investment into our platform and growing portfolio of managed services has enabled Calix to be the company that is uniquely enabling a growing number of broadband service providers to dominate their markets and be the legacy provider. We remain committed to our mission to enable our DSP customers to simplify their business, which consistently delivers new levels of operational efficiency. They cite their subscribers through a growing portfolio of managed services and grow their business, delivering subscriber-based expansion, improved profitability, revenue growth and an ever-growing positive impact on the communities they serve. We thank everyone for their continued interest and support at Calix.

Paul, let's open the call for questions.

(Operator Instructions) Our first question is from Ryan Koontz with Needham & Company.

I wonder if you could expand on your impressive surge in RPO you saw in Q4. Is that driven at all much by a change in mix or contract duration across your customer segments? Any kind of color there would be helpful.

As we said, we had strong demand in across our broadband service providers as they continue to adopt our platforms and adopt our managed services, part and parcel of that as you see growth in RPO as we close more contracts. Anything else you'd like to add, Cory?

Yes, right. I think it had more to do with the strength coming off of connections. We also saw some specific around our new product, Marketing Cloud Plus. But it was on contract duration extensions. It was just increased business activity following the strong attendance coming out of connection.

Yes. I'll just add one piece on that, Ryan, is that like I said, there are over 3,000 attendees, not just in person when we ran the event in October, but also we ran a very successful virtual connections 2 weeks later. So with over 3,000 people attending those different events, there was a huge amount of interest in what we're doing.

That's great, really helpful. I wonder if you can make any comment at all on kind of the bookings climate out there in Q4? I know this is seasonally a softer time for major CapEx investments, and there's been some commentary in the industry around booking softness as customer lead times. Customers don't order product in quite as far a lead. Any color you can share with us there on the general climate around bookings?

Thanks, Ryan. As you know, we do not disclose bookings or backlog. That said, demand for our platform in managed services was strong in the quarter, as you can see by the red RPO growth and our new land and expand chart, which we provided in the investor letter for the first time, gives you good insight into the growth of that landing expansion.

Ryan, this is Carl. I want to take the benefit of my gray hair, advanced age and advantage of the chair position to just share with folks the fact that I have been through these cycles, not pandemic-induced multiple times. And I want to highlight what Michael just alluded to and what Cory spoke about at your conference and from my perspective, a plastic box company, by the way, which Calix 1.0, we remember way back when it was, we experienced in this time, higher book-to-bill ratios because of your point, lead times extending out, customers will order further out, sometimes they'll double order, for example, if you have a distribution channel, you're going to see double ordering. We saw that back at the dot-com bubble and burst in 2002.

Those are factors that could get people to think we're going to have the same sort of thing, and I suspect you'll hear from vendors book-to-bills that are less than 1. Calix is not Calix 1.0 anyone. And what you're seeing is the strength of the platform and managed services and the difference it makes in our demand profile and the team's ability to forecast that demand. And so while I appreciate the question, I will inform you to understand that this is no longer that sort of animal. And so I'll simply amplify on what Michael said and what Cory spoke about at the conference, demand visibility here is very good and the demand for the platform and managed services business is strong. Fair enough?

Our next question is from George Notter with Jefferies.

I was just looking at the shareholder letter and there's a chart that focuses on platform and managed services adoption. I think you just referred to it in the land and expand slide. It's great to see all the new customer adoption. But I guess the question I have is like when you look at the growth of the software side of the story going forward, do you think more of it is really predicated on you adding new customers or do you think more of it is really about deepening your penetration in existing customers? How do you think about those dynamics?

Thanks, George. So as we put in that chart, it gives you good indications of the 3 levels of adoption, right? Starting out with the platforms and the second bar is what we're doing on the clouds and the third bar is as we've always stated, the early inception of us going down the managed services. And so to your question, we actually think about it in all the ways that you identified. On one side of it, we're acquiring new customers. We talked about how quarter-on-quarter, we keep adding more new customers. That was 119 in the year, right?

Once we're in, they generally start out with our platforms. So if they're a new broadband service provider, they're deploying a new network, if they're a brownfield, existing service provider, they're maybe doing a new build-out, they're overbuilding their old technology, whether it's old DSL or old cable, right? And then as they start to embrace the transformation of their business from a speed-orientated dumb type company into an experienced company, then they start rolling out our clouds to transform their call centers, so they have a great experience and they have a managed service and their marketing organization and operations. They have automation and ROI, which then leads them to the third stage in their transformation, which is then going beyond speed and offering full managed services.

So my point is that it's a staged model that we go through with every customer. Many of them are at different stages in this scenario. So we have huge opportunities in all kinds of places. I'll give you one last example is that if we have an existing competitive account, it wasn't a huge opportunity for us to go in and we can start by transforming the marketing organization or we can start by transforming the managed Wi-Fi and the incremental services. So we have a land and expand all of the (inaudible).

Let me just add on to that, George. I look at it in 3 dimensions. So first dimension is adding customers. Second dimension is adding subscribers. So as they grow their networks and evolve their networks and then adding new applications on top. So to your point and to your question directly, we could stop landing new customers and continue to grow for a very long time. Of course, the growth is still going to come out of the additional subscribers that they take and grow their subscriber base and as they add additional platforms.

And then one other one for you, Cory. I noticed the change in the target model. Can you talk a little bit about why you're making that change right now? Is there something you see that's different about the ultimate profitability of the company? Or anything you're seeing fundamentally in your business? Is it more just a recognition that you guys have been kind of undershooting relative to some of those targets on the cost side previously?

Yes, George, it's more of a function of the evolving business model. Remember, as we started adding additional software to the business mix, we will invest more in the sales and marketing side. So the increase that you're going to get on the sales and marketing side will be offset by higher gross margins. But over time, if you think about a mature software model, sales and marketing is higher than where it is today. So what you're seeing there is we're going to -- we took up that range to take an effect at a greater software contribution. At the same time, now that we've grown for 25% for the last 3 years, our G&A model is too high, and you've seen that we've consistently underrun that by about 1%.

So all we're doing is really lowering the G&A model to reflect the realities of where we're at this side of the business and the synergy that we've achieved and moving that up to the sale of the marketing, reflecting the software contribution. Does that make sense George?

(Operator Instructions) Our next question is from Paul Silverstein with Cowen and Company.

Can you all remind us relative to the 950 that adopted the platform managed services. The total customer count now is -- I think last time you was there it was $1,700 plus. What's it now?

You'll see in the 10-K that we're approaching $2,000 Paul.

(inaudible) color around there. So it's almost 50% penetration in terms of breadth...

That's right way to look at it, Paul. We'll wait. It's 50% penetration of one platform or more starting the platform journey. So that means that they could have the Intelligent Access Edge, the revenue edge or both.

Understood. You're anticipating my next question, which is if I look at the 844 disclosed customers that have adopted one or more clouds, can you give us some sense for -- from a depth of penetration standpoint, what was the incremental adoption? For those who had already previously adopted 1 or 2 clouds, how many added a second or a third cloud or the bulk of those 84 already at 3 clouds.

The bulk of those are not at 3 clouds. But we are not providing any further granularity on that Paul.

Can you give us a qualitative insight? Has there been a healthy progression? So I assume most customers start with one cloud as opposed to 2 or 3 and then progressed over time. Any sense for what's been the average -- I recognize in one case, you just launched this past year. But any sense of what the progression has been qualitatively?

Well, you're right. They always start with one cloud. The majority of the time they start with one cloud. And then what happens is that depending on the cycle of their deployments and their transformation again, so let's say they start out with support cloud, so you're transforming a call center, and if you take a traditional network company, that transformation of a call center is very part and parcel of what you do every day.

And then it goes into the next one, which is do you actually understand the need to transform away from a speed-based go-to-market model and then you're going to go after the marketing cloud or you're looking for operational efficiencies and you're going to deploy operations cloud, because it drives massive reduction in OpEx. So it really just depends. So qualitatively, you're right, it depends on the length of the deployment before they go to the second and then third.

Paul, this is Carl. I'm frankly amazed that you weren't simply overwhelmed by the addition of this new metric and didn't have literally the oxygen smashed from your lungs in the awe of this chart.

Just smashed the oxygen from my lungs Carl. Ryan already asked this my apologies, but from a macro perspective, of course, the investment community understand the worries about the current climate, the increase in interest rates, macro environment. I know you get asked this at least once every 90 days, if not more often. But any sign of a pullback in BSP deployments, projects, delays, project cutbacks, whether due to interest rates or the ongoing lead constraints? And on the latter, are you seeing any improvement given what's going on in the economy with layoffs, etcetera, are you seeing any improvement in the labor constraints that insurance translates more (inaudible) projects going forward?

Yes. It's a good question, Paul. And I think what's very interesting about interest rates as they have moved and the general economy is it actually highlights the differences in the market and the disruption. But rather than me answer that, Michael, obviously has relationships with many, many of the leaders in our segment, and I think can speak more eloquently to it.

Yes. So Paul, interest rates create an opportunity cost bar. If you're running a low ROI business, the opportunity cost bar is above your business case, so you stop investing. If you have a high ROI business model and the bar is lower, while you'll continue to invest even when interest rates go up. So now I'll fly that to a service provider. The legacy provider who use the terms like homes passed and only compete on speed and price, they're really just an infrastructure player. Whereas Calix BSD uses subscribers served and Net Promoter Score, which enable them to drive a dramatically higher ROI. So when these interest rates happen, it is irrelevant because their ROI is way over the bar. So that's kind of how we're seeing the market.

And on the recession side, that Paul asked about from a jobs, labor, potential layoffs or whatever, what are you seeing there from our customers?

Well, so with regards to the recession at this point, actually, job adds are still strong. So if you look back -- correct me if I'm wrong, Cory, but in December, job adds in the United States were 230,000. I think there were -- the month before, job adds were 261,000. So while we hear the general noise in the market for people who follow tech, it's actually a completely opposite scenario across the United States. When I can still go into Chipotle and yet I see the signs of hiring, hiring, hiring and they're offering $22 to $25 an hour. That doesn't really translate into labor markets growing up in the rural market at all.

So for our customers, the labor is still a constraint.

Yes. And I was just at a conference with a bunch of CEOs and they all said the same thing and said, labor remains a constraint.

All right. Before I pass it on, just to clarify your previous comment about carrier activity, deployment activity. I've heard you make the comment before. I understand your point about your higher ROI and therefore, being less of a challenge. But if I could just ask you the simple question, independent of that fact, are you seeing any pullback, any delays by carriers in project deployments?

You mean Calix broadband service providers? No.

Our next question is from Michael Genovese with Rosenblatt Securities.

Great. I guess I want to talk about the supply chain and some of the comments made at the conference a couple of weeks ago that there were decommits in the quarter. I think if you hadn't said it at the conference, we wouldn't have noticed it in the results. So could you talk a little bit more about this quarter's decommits versus last quarter's decommits, the kind of changes in the environment in the supply chain and then what you expect going forward for the next few quarters?

Yes. Thanks, Mike. Over the last 2, 3 years, it's been a challenging supply environment. We've had decommits and schedule outs all the time. So it's a continuation of the same that we've been experiencing. And what you've seen us this quarter do again continue to execute with excellence, and our supply chain has met those challenges and rose above them. So I think I've said that we think the worst is behind us. Last quarter, we talked about the supply chain bottoming and improving. So we expect that the supply chain will continue to improve, yet it remains challenging in certain regards. And so those things will continue to work through. But if I were to go year-over-year, it's a better supply environment than it was a year ago.

And I guess just my question or follow-up to that is, so if it's better than it was a year ago. I mean, do you expect the improvement in '23 to be sort of smooth sequentially with this improvement occurring through the year or are you braced for potential lumping back and forth throughout the year and that the later quarters could be tougher than in the earlier quarters, if that question makes sense?

Well, that's the interesting thing about a challenging supply environment, they are surprises. So I can't tell you what's going to happen in the future, right? But I can tell you that if you look back a year ago, we were only forecasting revenue growth of 5% to 10%, we're sitting here today saying we're going to grow at 15%. You're seeing that we've built inventory up year-over-year. We're sitting here at a turns ratio of 3. So we feel a lot better about where we are today. But yes, you have to understand it's still a very challenging supply environment and surprises do happen, and we will continue to manage through it like we have in the past.

Last question for me, because I feel like I always have to kind of ask you guys a question just about level of disclosure and what kind of new stuff we can get. And you obviously gave us new disclosure on the platform in managed services, customer count over the last 5 quarters. And I guess my question is that if you're disclosing that customer count, it's not too far away from just telling us the revenue breakout. What are your thoughts on that -- if you're not trying to give away too much, but it's not that far of a step from just telling us more of a revenue segmentation as a company. Can I just get your thoughts on that?

Mike, let me take this real quickly. It's Carl. I'm excited by the change in leadership at Calix with Michael and Cory leading the show. I'm excited that they chose to share this new graph. But I'm still in the room. And so to be clear, you're right, directionally, you're getting closer. But remember, competition still is something that I have no personal interest and encouraging. And so I think the combination of RPOs, combined with customer land and expand penetration gives those investors who have been following us and even better sense for the power of the model and probably aides them modeling the business; subscriber counts, ARRs, things of that nature are way off in our future. So I think you now have the new chart. We'll be speaking to it more as we go forward. I'm excited that Michael and Cory chose to show it. And I think we would best stand pat on that. Fair enough?

(Operator Instructions) Our next question is from Gregory Mesniaeff with Westpark Capital.

Question on sales and marketing levels. You've partially addressed my question with raising the guidance on that. I did notice that your Tier 2 customer breakdown was up most significantly in your letter. How does that correlate with the increase in sales and marketing? In other words, is that because you are targeting the Tier 2s a lot more now, and that's requiring higher sales and marketing resources?

No. Actually, it has no correlation with sales and marketing. It's actually just focused on what we're doing with regards to platforms and software. That's what's attracting them, but that doesn't require incremental in a Tier 2 at all. So there's no correlation.

Our next question is from Fahad Najam with Loop Capital.

I want to go back to the supply chain comments. If I look at the level of beat you had in Q3 versus the level of beat versus consensus you had in Q4, that is narrowing yet your commentary about supply chain improving. So I'm trying to maybe understand are you still like having golden parts missing and that impacted the quarter? Just if you can elaborate a little bit more on that.

Yes, sure. So I think we were clear in the stockholder letter last quarter that last quarter's revenue lead was more of the anomaly, right? We had a certain amount of our inventories line up that allowed us to overperform in the quarter. I think we also said that that was more of an exception at that time. And what you should expect from us is to have narrower differences between what we actually execute to in the guidance we've performed. So that's what you've seen in the fourth quarter. We did what we thought we would do and now it wasn't anything related to Golden crews or anything along that line. We just continue to work the problem and made steady progress on the quarter.

Got it. If I revisit your new disclosure -- can you give us a sense -- I know you mentioned that there are 3 dimensions to your opportunity. One is the number of service providers, but then the other is subscribers that they serve and how many subscribers they have enrolled onto your platform. Can you give us a sense on what percentage of your or maybe professionally give us some helpful hints on how we should be thinking about the subscriber penetration within your broadband service providers that you have disclosed, those who have adopted the cloud versus those who are just adopting one portion of your cloud service?

So as we've stated frequently, it's early days. So when you think about the penetration on the suites, we've demonstrated in there, if you look at the number, there is 293 (inaudible) more and more suites into their subscribers. But that also, they have different go-to-market models with regards to, I think (inaudible), are they included as an embedded into their platform, there's all kinds of different ways to look at this.

So I would say because it's early days, there is no additional insight other than they have at least one. It's against a portion of their subscriber base and there's lots of upside. As we've mentioned in the letter, there's currently 7 managed services that are available for them to deploy and we've announced another 4 on top of them. So lots of opportunity ahead, but it's still early days, Fahad.

(Operator Instructions) Our next question is from Tim Savageaux with Northland Capital Markets.

My question is about, kind of growth metrics, I guess, at a high level. And you've given us some new ones here with the platform adoption, kind of indicators and at least if you take the big ones, those appear to be growing, kind of in the 15%, 20% range in terms of platform adoption. Of course, as you mentioned, you've got customer additions on top of that. And I want to contrast that with the RPO growth rate. In the 60% range, 15% sequential. So as we look at those 2 metrics, I guess, which one would you say is more important in terms of speaking to the overall future growth rate of the company and how do you reconcile the delta to those 2 and where do we end up and also relative to your overall 10% to 15% growth rate? Looks pretty conservative relative to the metrics. I'll leave it there.

Okay. Thanks, Tim. Complex question. I would say that Cory mentioned that we were in the range of 10% to 15% now confident and said, we're at the top of that range as we look into 2023. So I think that's a pretty clear indicator. With regards to future opportunity, that's why I stated in my opening remarks that we're at this inflection point in the industry where we have all these service providers who are legacy minded who have been really focused on one go to market, which is speed and they're realizing really quickly that that's a coffin corner in the future because of the fact that it leads to the commoditization of their product and they need to differentiate.

And so they're looking at us. And as you can see, there's a small number of the potential base, which is up to 2,000 service providers who have deployed our, at only one or more managed services, right? So there's that 293 that have one or more. So I would say with the future growth rate, we're just at the beginning of what's possible. That's the best way to state it.

Our next question is from George Notter with Jefferies.

I guess I wanted to ask about the tax rate. So you guys changed the long-term model a bit on tax rate. I also noticed that your deferred tax assets are not going down. If I look at DTAs relative to some prior quarters, can you just talk about, sort of the picture on taxes going forward?

Sure, George. Happy to do that. I can't believe I'm doing it this early, but go ahead. Yes. So we continue to generate some DTAs through R&D tax credits and stock compensation that keeps on adding back to it, but what you saw in the quarter was a benefit that was realized in the fourth quarter. And that has largely to do with some of those deferred tax assets that I’ve talked about.

As far as the rate going forward, a couple of things are happening. Obviously, our level of income is going up and the way some of that, and I think I referred to this before, with a guilty and peace was based on foreign operations and that's relatively fixed relative to our growth rate. So you should expect that to come down unless you've seen us bring down the effective rate by 8%, relative to last year.

Thank you very much. And then also you mentioned foreign operations, obviously the company is still very North American centric, could you talk about your opportunity with the cloud platforms products looking into the UK or Europe or other parts of the world? Are you starting to invest there more aggressively and what's the catalyst for getting that side of the business growing?

Yes, George, let me just clarify. When I said foreign operations, it was really our offshore development teams in China and India. But I'll carry over Michael to talk about what we're looking to do on the revenue side for international expansion.

Yes, George, we've been really clear that the focus on North America because there's such a significant opportunity ahead. While we are running a limited expansion in the international market, primarily in the United Kingdom, we are making it limited. And the reason why is that until we have reached our full opportunity in North America, will be a full (inaudible) of us to go into other markets where there's so much opportunity ahead. And you're going to see that from us consistently for the foreseeable future.

Our next question is from Paul Silverstein with Cowen and Company.

Appreciate it. To go back to Tim's question, Michael’s response, I appreciate that (inaudible) disbursements are always slower than a lot of us would like and you folks would like. And I appreciate that the supply chain is still challenging. And I appreciate that there are risks to CapEx pullbacks, although you guys have said again and again with your return on investment that you enable that risk is not as promised a lot of us pursued.

So all that said, and I said, I'm sure the investment community appreciates you all having been pretty conservative historically, but all that being said, is there anything wrong with the logic that supply chain directionally will improve? Volume disbursement will increase over time, there will be overlap in all of the things being equal, and your clouds will progress and breadth of adoption, depth of adoption as well as the server-based applications. Shouldn't all that translate into revenue acceleration over time?

In the future, yes. Maybe, you know, the point is that Cory came out with confidence and said, if you look back on, let's step back a year or 2 years ago, we were saying 5 to 10, now we're at 10 to 15 and Cory was pretty clear in his commentary that D2C is 15%. And so I think the key thing for us is that we look into 2023 and we're going to cross an incredible milestone. We're going to be right at a billion dollars organically.

And the reason why we're doing that and accomplishing that as a leadership team and as an organization is because we're sticking to the tenants that we've intimated over and over again to be excellent at execution, we're focused on those 4 things. Deliberate revenue growth, gross margin expansion, disciplined operating expense management where we're investing wholesomely to ensure we capture all the opportunity and then most important or as important continued predictability.

So what we're giving you, Paul, is that continued predictability by executing against all those things. So in the future maybe, but this is what we feel confident as leadership team.

But Michael, just to be clear, if the substance of the disbursement did accelerate, if supply chain does improve meaningfully, all things being equal, unless there's some other factor that would present upside 15% or that's embedded in the 15%?

We feel comfortable at 15% and that's with all the different variables affiliated with it, if that's what we actually do as we -- when we determine what is the growth rate that we feel is a predictable one for our investors. And so we take all those different inputs, if this was faster, if this was slower, if that was faster, to come up with our recommendation, and our predictions for 2023. And our prediction for 2023, Cory speaking away that he hasn't spoken before, but he actually, he, you know, would always (inaudible) 10 to 15, he said I see 15. So that should be an indicator of confidence.

Yes, I think your predicate -- Paul, it’s Carl. If and if, I mean, it's sort of like a mathematical proof. Yes. If you take assumptions and make guess, as we've said, this -- we think this is a huge multi-generational opportunity. You know, if I think back, if I was (inaudible), I never mind. (inaudible) Well, I was thinking about it, and then I was thinking, it’s not possible.

No, but can you expand on one thing though that you've been through multiple for example, government funding, say, you know (inaudible), right? So give (inaudible).

Michael is looking over here and seeing a lot of gray hair. Well, all of this and Paul, you actually, I know you have some gray hair on this too because you remember broadband stimulus in 2009? And the challenges are, I agree with the ifs. The problem is predicting the ifs. So the goal here with the team is to execute in the planning horizon knowing that this is a big opportunity, but predicting it is just too hard.

Carl, I appreciate that. I'm not being -- I appreciate the conservatism, but to me, it seems like it's stating the obvious. It's really not single and wants to say that if there's acceleration in disbursements, it has a meaningful improvement in constraints, labor and components that that should translate to acceleration for all, not just for you, but for the whole industry. What's so terrible about the logic, but…

Well, wait a minute. Wait a second, sir. It's not a matter of the whole industry. I can't speak to the whole industry. It's not a matter of the way you are conjugating the – and that's the theorem, which is if that does that happen, I agree. The challenge is, it's not conservatism. It's actually realism. I've been through this before. You've been through this before. And it's not being conservative.

These programs simply don't happen that way. They never do. And standing in front of them, predicting them, you’re just better off waiting until you start to see the demand, the actual orders and then getting through the coin of revenue and then you got to get to deployments through a labor constraint or other issues. So there are so many steps in that sequence that if you simply go to the end and say, yes, yes, sure, but it's not being conservative. It's literally being realistic.

Our next question is from Fahad Najam with Loop Capital.

So follow-up on your previous discussion, can you give us a sense on where your – how much of your revenue base is currently coming from RDOF? What's your expectations for this year from stimulus funding? And then I have a follow-up.

Sure. I'll take that. So today, I think we've been pretty consistent with what we told folks. There is some money coming through, but I understand that that program has had challenges with it. We did start seeing some of the money roll-out last year. That money comes over a 10-year timeframe. So it's just a small amounts of revenue that we are seeing today. This is a lot more in front of it, you know, to come.

Correct me if I'm mistaken, but historically, you -- I think your previous outlook has been, like, 10% to 12% of the funds ended up in the comm equipment supplier base. Is that still true?

Yes.

Okay. So my long-term question to you is, clearly your model has evolved to a point where it is almost getting close to, if I look a little bit around the corner that you're almost tracking to a Rule of 40 model that will suffer peers are tracking. Why not begin to convey a Rule of 40 framework as opposed to the current framework that you're still using, which is more consistent with box and ship type of companies?

Fahad, that's a much longer conversation on the Rule of 40 and the reality of it. We're not -- I'll take that one offline because I have a whole different set of beliefs. I'm looking at the market and the Rules of 40, etcetera. So rather than bore everybody with that here, find another one of my pedantic lectures. I'll take that one offline with you.

There are no further questions at this time. I would like to turn the floor back over to Jim Fanucchi for any closing comments.

Thank you, Paul. Calix leadership will participate in several investor events during the first quarter of 2023 and information about these events, including dates and times for public webcasts of management presentations when available will be posted on the Events and Presentations page of the Investor Relations section to calix.com. Once again, thank you to everyone on this call and webcast for your interest in Calix and for joining us today. This concludes our conference call. Have a good day.

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