Calix Inc (CALX) 2023 Q1 法說會逐字稿

Greetings, and welcome, everyone to the Calix First Quarter 2023 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 first quarter 2023 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 closed, Calix issued a news release, which was furnished on a Form 8-K, along with our stockholder letter, which was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of our 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 first quarter 2023 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 speak only as of their respective dates.

Also in 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 first quarter 2023 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. As the Calix evolution continues, I want to start this call by sharing my view on why Calix is performing in a very different manner than the market in general, 3 consecutive years of greater than 25% growth, and as Cory will share raising annual guidance for 2023, 9 consecutive quarters of sequential growth. Three consecutive quarters of gross margin expansion as supply headwinds abate, 0 debt and a pristine balance sheet, which will see cash grow at an accelerated rate. These are clear indicators that Calix team is executing our strategy in a predictable and disciplined manner.

More importantly, it is making it clear that Calix is alone in a new market. This new market is made up of broadband service providers who are building consolidated networks and efficient end-to-end operations that yield incredible margins. This new market has BSPs leveraging data and insights from our platform and clouds to build an entirely new business model where they are the center of the home, the center of business and the center of the community through the power of our managed services that grow revenue and customer satisfaction to record levels.

BSPs continue to add subscribers and grow their business in Q1 through the power of the Calix platform, clouds and managed services. The land-and-expand nature of our business was on full display in Q1 as we landed 11 new BSPs and expanded platform adoption as 38 BSPs adopted 1 or both of the Revenue EDGE and the Intelligent Access EDGE. This brings the total number of BSPs deploying our platforms to 988. In Q1, 21 BSPs adopted one more of our clouds, bringing the total number of cloud customers to 865. And perhaps the most important evidence that this is a new market is the growth of BSPs deploying one or more of our 8 managed services.

In the first quarter, 41 BSPs began differentiating their offerings by launching one or more of our managed services. This is the fastest pace in the last 5 quarters and brings the total number of BSPs with managed services to 334. On that note, I'll now hand it to Cory to expand on the Calix team's performance in Q1. Cory?

Thank you, Michael. The Calix team executed well across the board as we delivered our ninth consecutive quarter of sequential revenue growth, with record quarterly revenue coming in at $250 million, which was modestly above the high end of our guidance range. As we have said before, we believe our supply chain will normalize over the course of 2023. And so it did. Vendors, for the most part, are meeting their delivery commitments, and we are starting to see lead times shorten.

Consequently, this allowed us to continue to reduce our purchase commitments to $306 million, which were down $35 million from year-end, and we expect our free cash flow to improve significantly as we invest less in inventory. The improving supply chain has also allowed us to reduce our lead times to customers and to work with them to shrink their inventories as well. The consequence of this work was a sequential reduction in our Revenue EDGE system shipments within our small customer segment. At the same time, our large- and medium-sized customer segments increased.

Specifically, we saw strength from a large platform customer and continued shipments to a recently acquired medium customer, which contributed to the Intelligent Access EDGE record revenue in the first quarter. In sum, our platform model provides us with a view of end subscriber demand, which enabled us to work with our BSP customers to optimize their inventories. This enables us to perform in a predictable manner and forecast what we expect will be our 10th consecutive quarter of sequential growth. Based on our first quarter revenue overperformance and the expected sequential increase in our second quarter revenue, we currently believe our annual growth for 2023 will be between 15% and 20%.

Back to you, Michael.

Thank you, Cory. In closing, I will call your attention to 2 additional data points that further amplify that Calix is on a mission in a new market. First is the talent that we are attracting to our team. Industry leaders like John Durocher, who joined from Salesforce as the Chief Customer Officer, are joining because they are inspired by our purpose-driven culture, which is enabling even the smallest broadband service provider to simplify their business, excite their subscribers and grow their value for their members, their investors and the communities they serve.

Second is the fact that Calix was recognized by comparably as the #1 best place to work in the Bay Area. In addition, our sales, marketing, engineering and HR teams were ranked top 20 globally because our team members are inspired every single day to help our BSP customers transform the communities they serve by empowering families, students and local businesses to thrive. More than ever, I'm excited about the future at Calix. As Cory stated, we raised 2023 revenue guidance as we continue to execute a disciplined and predictable fashion, supported by an enviable balance sheet.

I would like to thank our amazing customers for their partnership and it is their ideas that are delivered every 91 days when we update our ever-expanding platform, cloud and managed services. I would also like to thank our partners and Calix team members for their continued support and dedication as we execute on this once-in-a-generation opportunity.

Jim, let's open the call for questions.

Operator, let's open to Q&A.

(Operator Instructions) Our first question is from Christian Schwab with Craig-Hallum.

Great. Well, I guess, first of all, congrats that macroeconomic uncertainty hasn't significantly affected your customers' spending patterns like your peers. So congrats on the continued business transformation and a different value proposition. With that, Cory, would we expect continued sequential revenue growth throughout the remainder of the calendar year from June?

The simple answer is yes. But I would mute your expectations, obviously, with the macro environment, that outlook in the second half of the year is murky. But our expectation is that, yes, we'll continue to grow, but at a very small pace.

I'm just going to add one thing that -- I would add one thing to that, Christian, as you saw in the investor letter, Cory clearly called that out. And we've always said this is one of the transitions that we have gone because we are on a new mission, in a new market. And part of that is moving away from that legacy model, which is highly cyclical, and it's moving into a sequential business.

Great. And then can you give us a little bit of clarity on the large customer activity. Your revenue in the March quarter was the largest for greater than 2.5 million subs in years. Is this the beginning potentially of an inflection point? I ask that because we kind of saw the beginning of the inflection point in the medium base customers. And over the last 2 years, that went from a $35 million business to a $52 million business to almost $105 million. And I know the story has always been, we'll start with the small guys. And then the medium guys will figure it out and then the large guys would figure it out. So is everything going as planned, should we assume?

Yes, Christian, thank you for highlighting what we've been saying. This is one of those things where technology adoption start with small customers and working to a large. In terms of what you've seen in the first quarter relative to our large customers, it was -- the increase was with one customer. They're an existing customer. And I think it's just kind of a lumpy delivery schedule associated with the large customer. I don't think it's an inflection point where you shouldn't just expect continued growth from that one customer.

Okay. That's fair. And then I know we started the year or started the year previously, it kind of like a 10% to 15% growth rate. Now we're moving it up to a 15% to 20% growth rate. And if we even get modest sequential growth from June, we're almost at that 20% range. So what -- was it just conservatism given the macroeconomic environment that the expectations have been exceeded or have you been positively surprised somewhere?

As we said last quarter, our view of the annual growth rate is a combination of not so much demand, but more of our view of supply chain. And we saw that improve within the quarter. We built a little bit more inventory. We worked through some issues. And so consequently, we were able to overperform in the first quarter by a little bit and give a little bit more confidence on where we're at in Q2. But I think at this point, as the supply chain is expected to continue to normalize over 2023 the concern becomes the demand equation in the back half of the year. And so we're just taking a conservative view of what that might entail. But that being said, demand continues to be strong.

Great. And then my last question, your objective of growing gross margins 100 to 200 basis points a year, given that lead times are partly becoming normalizing for lack of a better word. Does that give you -- should we be more encouraged that maybe we can start operating to the higher end of that 100 to 200 basis point range as the mix continues to improve and the supply chain costs, not only the cost of the chips procured, but the expedited fees in some cases to get them as we get into '24 and '25 or should we just stick to the 100 to 200?

Yes, Christian, I think you're going to want to stay within where we just provided a 100 to 200 basis for the year. And you can see we're tracking along that line in each of the last couple of quarters, we've increased by about 0.25 point. And so I think that rate will continue through the quarter. I don't think we're at a point where you're starting to see costs come down precipitously where you would see a faster than that rate expansion of gross margins. So it's still early days. We're still normalizing. And so we feel better about it, but it's not at a point where I can give you to an accelerated pace.

Okay. Great. No other questions.

Our next question is from George Notter with Jefferies.

I wanted to ask about the software play here. I noticed that RPOs were up about $7 million sequentially, which is one of the smaller sequential growth numbers you guys have put up in a while. Obviously, it captures just a portion of your software business. I get that. But then conversely, the customer adds look really good, as you guys pointed out in the monologue and in the shareholder letter. I guess I'm just trying to better understand how you feel about the progress you're making in software at this point in this quarter in Q1 specifically?

George, thanks for the question. We feel good about it. If you were to go back to the third quarter, we had a similar lower growth sequentially. And everybody was alarmed by that lower increase. And then fourth quarter came along and we blew passed that number. And everybody was like, oh, is this another inflection point. And we've consistently said contract signings are lumpy, and they go up and down. I mean we anticipate RPO to increase sequentially going forward, but the rate at which it increases will vary from quarter-to-quarter.

And I'll add in. Look, I spend all of Q1 on the road. All except for 2 weeks I was with customers and conferences and CEOs and talking about their business and what is really great is that our message is landing with them. And in fact, I was with one customer actually not a customer, someone who, in essence, has refused to talk to us for 25 years. And with some of the things that are going on at a macroeconomic level, in fact, that's been their only source of funding for their business. When they heard me speak at a conference, we got into a conversation around how do you actually build out a different business model that allows you to attract a radically different type of investment, whether it's private equity or family investors or whatever it is.

And if you're just selling a dumb pipe, that's really hard with your margin level, but are low. But if you're partnering with someone like Calix, not only are margins significantly higher from an operations point of view, but you're also building incremental ways to monetize that subscriber and grow revenue for the long term. What does that mean? Well, that means that when you get that investment, it's going to be higher valuation and they will pay more attention to you. So while RPO is one element of it, I would return you heavily towards 38 customers adopting one or more of our platforms, 41 people starting on the managed services journey, we continue to see, and I would say that if anything, this whole dumb-box mindset is actually really going to go to the side as customer really understand how much value we bring to their business. I am really excited about it.

Just to follow up on that. If I look at the differential between managed services adoption just in terms of numbers of customers and Calix Cloud. Obviously, there's still a really, really big gap there. And I get it, it's a land and expand strategy. But maybe talk about what the -- why can't you get those guys kind of ramping faster? Is it just inertia? Is it some other sort of technology piece that I don't appreciate. Maybe just kind of talk through that gap.

George, that's a great question. And if I was to actually walk through the continuum of moving from becoming -- from being a legacy provider to entering this new market and becoming a broadband service provider who has a radically difference position in the home business and in the community, it's a journey, right? And so if you've been in business for 25 years, the only thing you're used to is you're a construction company, you actually operate a network. And then as long as you exist, you get customers and speed is the only thing that you ever talk about. You're now moving into a scenario, well, first of all, you're reengineering your network and collapsing everything, so you can get 80% higher margins.

Then you're saying, okay, well, I have to change my call center. I have to make it so that when I'm doing an install, they're not just going and installing a Wi-Fi router, they're actually talking to the customer, educating on how to use the app. And then my installers, I'm converting them into you upsell people, right? So if Cory is my installer, you can say, let's get the app. By the way, do you have children, would you like to add parental controls, all those kind of things. It's a completely different market, a completely different mindset.

So I would say if you think about that journey, we're the ones taking them on that journey. And that's why it's really exciting that John Durocher joined the team to lead our customer success army and where dumb-box companies don't have success teams because hey, go to the construction and install and sell your pipe. The Cali team is helping them create an entirely new business model, and that's what our success teams do, and that's why we continue to invest in. So I wouldn't be concerned in any way shape or form other than this is the beginning. And this is something we've been saying on every one of these calls, right?

You look at managed services. And even that number at 334, I would -- you should be pushing on us saying, how -- what about underneath of that because there's 8 managed services today, we've announced 11. So there's massive expansion even inside of that, right? So there's all these different ways to grow. And look, if we can put up these kind of numbers and project higher for 2023 with this early stage of where we are in this market, we should be very excited about the future.

Our next question is from Ryan Koontz with Needham & Company.

Thanks for the question and great execution on the quarter, obviously. Regarding the small and medium kind of customer set down market and as you think about that driving growth through the rest of this year, I wonder if you could reflect on your conservatism around growth there. And specifically, are you seeing impacts from labor in these down market areas or in -- how are the kind of subsidy trends working their way through the processes from RDOF and the ARPA funds, which you've seen a lot of announcements of late.

Sure. Sure. Well, so I'll proactively ask funding because someone were going to ask that question. So look, there's tons of investment that's coming in the market, we have said over and over again in regards to private equity and family offices investing in these incredible businesses. KKR recently purchased one in the Texas area, you see everybody coming into it. Berkshire is now in here. So there's lots of funding. The government funding is, as we've said, consistently slow. In the end, it will take 10 years, a lot longer than we anticipated and but in the end it will also be larger than we anticipated, that quarter on quarter trickle that is coming through and all the debates that are going on, right?

And then with regards to deployment, we can get into the whole immigration thing if the job market is still strong. So to your point on hiring people, yes, I was with a customer the other day, and they literally at any point in time, have 1,100 open jobs, 1,100. And if you look at the job adds in the U.S. market, like I believe, last month, it was 330 and then the month before it was 600 and then the month before was hundreds of thousands. The job market is really strong. There is no recession. So they have to hire good people. They have to train them and they have to bring them forward. By the way, if you're looking for a job to pay $70,000 to someone to splice fiber, like out of school. So there's lots of opportunity, but yes, those are normal headwinds, but the positive headwinds because the economy is still strong.

That's great. That's great, Michael. In terms of the product mix there, it sounds like it was a great quarter for Access sales. That's great to hear that footprint going out. I assume the kind of softer Revenue EDGE is mostly from customers reducing their kind of inventory holdings around customer prem type hardware. Is that correct?

Yes, Ryan. Like in my prepared remarks, said, with the normalization of the supply chain, we started seeing the lead times pull in. That consequently allowed us to reduce our lead times to customers. And so we've been working with our customers to help reduce their inventory levels, they can become more capital efficient. So they can start taking down their inventory and that's what you're seeing. So not obviously concerned about it. Obviously, by our second quarter guidance that we gave, obviously, we're seeing another sequential quarter. And so there's obviously no air pocket behind this reduction in supply chain or a reduction in premise systems shipped.

I'll just add one comment in that, that, again, back to this whole concept that we're in a new market, and we are a different company. And everyone needs to start thinking about us as a different company in a different market. We understand exactly their deployment rates. We understand everything they're doing. We know how much inventory they have. And therefore, the keyword that you heard from Cory was actually working with and manage. In no way, shape or form is anything a surprise to us because we generally are now seeing if they're having a problem beforehand and that's what our customer success army is for.

They pop in and they say, "Hey, we go -- we say, well, are your deployments are slowing? What's going on? Oh, it's because I can't get my permits fast enough or I'm struggling. We then subsequently go on top of that and we look at, for example, every time they install a new router, we're saying, what is your attach rate on CommandIQ, which is our mobile app. Are you ensuring every one of your customers getting the mobile app because that becomes an early seed to driving upsell with managed services. So it's not just about the hardware and everything else, it's also about making sure they have a really strong business in the long term and win against the legacy providers.

Super helpful, Michael. And just a quick question, a quick follow-up on RPO. Cory, was there any -- I didn't quite see the release of the numbers of current versus total RPO in the letter. Was there any mix shift at all in current versus total RPO in the quarter?

No, Ryan. Nothing substantial.

Our next question is from Fahad Najam with Loop Capital.

Cory, Michael, let me start with -- I'm trying to model a little bit differently given your shift in how you disclose numbers. And the way I'm thinking about is average revenue per BSP. If I look at it, I see a trend starting a ramp in -- or I guess, growth in average revenue per broadband subscriber -- service provider. One, as you head into the second half of this year, how should that normalize? Is it -- one, I guess, was that catalyst event that started in 3Q 2022 that really expanded your average revenue for BSP and how should we think about it in the second half of this year as it normalizes against a tough comp?

Fahad, I guess I'm not exactly following your line of questioning. Maybe we can...

I take your revenue and I divide that by total broadband service providers that you disclosed, and I see a trend of average revenue per BSP. And I see that the average revenue per BSP is growing considerably over like the starting second half of 2022. Is there anything that is, I guess, driving that step function improvement.

What you're trying to do, we're not reading anything into it. So for example, our definition of a small service provider is from 0 subscribers to 250,000 subscribers, right? If that customer has 250,000 subscribers, if they are a really good executing Calix customer. Their market share is about 60%. So they have significantly more homes passed. If they're actually early stages of their deployment, those 250,000 subscribers could only be 25% market share on a broader goal, right? And so as you go and use that logic, I think there's a flaw to it. The other part of it is the company. So there's all kinds of ways you can parse this. I just don't know if that's the right thing.

And Cory would like to take that question offline and explore it to see if there is -- if we can understand more how you're thinking about it. But with regards to our business, large customers, small customers, again, small customer can be a $300 million business. So there's all kinds of variables in there, and it's lumpy and all the different elements. So I would say no. But Cory will take it offline.

Got it. Appreciate that. If I -- I was going through the proxy filings, and I noticed that your bookings were $1.3 billion, which gives you significant visibility. Can you just maybe talk about the momentum in orders certainly relative to your...

Thanks, Fahad. We don't talk about bookings. Demand is strong.

Our next question is from Tim Savageaux with Northland Capital Markets.

Congrats on the quarter. Well, hopefully, you do -- okay. And you saw a nice increase in cash in the quarter, and I know I've been talking to you guys previously, and I think Cory mentioned some purchase commitments coming down. Do you still anticipate there to be a significant positive impacts on cash flow from both, obviously, ongoing operations, but this kind of balance sheet impact, kind of maybe review how that works and what your expectations are? And then any comments on capital allocation, given the strength in cash.

Thanks, Tim. So yes, over the course of last year, we used a lot of our cash from operations to buy inventory. And now as we are getting to a plateau, you can see that the rate at which we're investing in inventory is slowing into additional free cash flow. And so we are expecting as we progress through 2023, an increase, a significant increase relative to where we've been of more cash. Over time, we'd expect our inventory to normalize and start coming back to where we were pre-pandemic. That will then free up additional cash. But that's still a ways away.

We need lead times to come back in kind of where they were, and then that will make that trend happen. In terms of capital allocation, it's a process that we have -- that we look at every quarter. And as we think about our cash, there's an opportunity cost with the use of our cash. Our decision to allocate capital kind of relates to its opportunity costs. Cash that could be used to operate a growing business comes at a very high opportunity cost. Cash from strategic investments would come in at a high opportunity cost. Cash beyond those categories would be at a lower opportunity cost. And as we generate more incremental cash the opportunity cost goes down -- in other words, the price at which we're willing to buy shares goes up as we accumulate more cash.

I'm sorry about that. Any updated quantification on -- I think you talked about before, I don't know, tens of millions coming off the balance sheet. But as we sit here, any updates on that? Or are we still in the same range in terms of incremental free cash?

Tim I expect we'll start seeing double-digit cash generation, double-digit millions. Yes.

Our next question is from Greg Mesniaeff with WestPark Capital.

Congrats on the print. Last couple of quarters, your OpEx levels are running a little hot, I thought. And I was wondering, as we look beyond the guidance you gave for the June quarter, what should we kind of be modeling as far as OpEx levels? Do you foresee continued investment in sales and marketing? Or do you second half of the year?

Yes. Thank you. I would give you the same counsel that I would give you every quarter, just so we're going to continue to invest according to our target financial model. We haven't deviated from that. You can see in the quarter that we were a little bit higher on the engineering side, a little bit less than the G&A. But for the most part, we're executing very predictably to our model. So as we continue to grow the top line, there will be incremental investments up into, I guess, the word we like you say, is we're going to invest fulsomely to our target financial model. So specifically, every area will grow according to the mark.

I'll add on to that. Look, we're in a new market. It's the beginning of that new market. It's a once-in-a-generation opportunity. In fact, new markets don't happen and not in once in a generation opportunities. I think to investment in our model fulsomely is actually the team doing their jobs as leaders and making sure that we drive organic growth in this new market and it's a key. And so we predicted for everybody to ensure we can take advantage of this opportunity.

And one last thought on this point as I will highlight in the fourth quarter, we have our ConneXions user group event. And obviously, sales and marketing will pick up by an incremental percentage in the fourth quarter.

Got it. And just a quickly recap. You had mentioned earlier in answering a question that regarding the broadband stimulus road map that you're basically it's taking longer, but should be bigger at the end of the day. Is that right?

Correct.

Our next question is from Michael Genovese with Rosenblatt Securities.

Great. There was a little bit of upside in the first quarter, a little bit of upside in the second quarter outlook. I'm assuming that with the mix shift to infrastructure, that's probably a mix shift to Intelligent Access EDGE. That's probably a function of supply chain. But I wanted to check with you the business model, the mix shift to software, cloud recurring revenue driving the gross margin. I mean, how do you think about that for the first half of '23.

Yes. So here that you're right, Mike. It's all those things, right? So it's the continued adoption of our software that's obviously giving us a margin uplift as well as you are seeing the Access business drive expansion as part of a product shift. I expect that, that will continue to normalize, meaning I think we'll go back to more prem shipments in the back half of the year, and I think it's just the limpiness of when they want to take delivery of their systems. You've seen this in the past when we had a customer here wanted to get all their equipment into the warehouse at the end of the year. It's just a normal process of large customers on that the timing of shipments, but it will be lumpy on how we get there.

And just to be clear, a mix shift to Revenue EDGE in the future should have more positive gross margin implications. I mean we're kind of more powerful than we see currently. Is that correct?

For sure, when you're looking at the managed services and then that attaches on top of it for sure, that's the greatest portion of the reoccurring revenue comes on prem systems.

Great. And then finally, I mean, a lot of good questions were asked on the conference call already I wanted ask ask about the new customers in the quarter falling to 11. Do you think that there's a macro reason for fewer new customers. And obviously, the expand part of the model is working really, really well. But as we look to the rest of the year on the land part, should we think about this lower number being the new normal? Or do you think that we could go back to what we saw last year or the year before?

Yes, it's a good question. So remember, in that number, there's 2 component parts to that. The first is it could be an existing service provider who's actually now recognizing the need to create a new business and are joining Calix at this time right, or it could be someone actually starting a broadband service player, which is something that we've seen a lot of over the last couple of years. And clearly, with the rise in interest rates, that has made the hurdle for someone to acquire capital to start a brand new company, harder. And so we noticed that's happening in the market for sure. What's interesting, though, is that the ones who did get capitalized, our analysis is that they're getting a lot more capital than we anticipated, and they're going to be more successful over the long term because they built into their business model. This significantly higher margin model affiliated with Calix and everything that we're doing from a platform and managed services point of view. And so their investors are saying, hey, let's go big. And so what will it be long term? We'll see.

Right. And actually, my very last question is I just wanted to check is Carl in the room? Is he on the call?

He is in the corner. Yes.

He's doing his best to not speak, Mike, but I do appreciate the shout-out.

Our next question is from Scott Searle with ROTH MKM.

Nice job on the quarter. Maybe for starters, could you just talk a little bit about linearity in the quarter, what you've seen through the first quarter and kind of early parts of the second quarter here? And also on the small customer front, taking a little bit of a pause, it seems like it's a managed inventory reduction on your part. Are we through that? Do we start to see a sequential increase back within the small customer base into the June quarter and beyond? And then I had a couple of follow-ups.

Sure. Let's start off with your linearity question. Linearity was good in the quarter. I mean you could see that in the fact that the DSOs are down. So that was a very positive trend and it's continued. And as it relates to the second part of your question, Scott, was whether or not there is...

Small customers in terms of [division].

Yes. So it's likely continues into the second quarter, but obviously, it's something we're not very much worried about that you're showing the sequential increase quarter-on-quarter. And so there's going to be a little bit of that as we continue to normalize the business and manage them.

Got you. And if I could, Mike, from a high level, when you're in discussions with your current customers right now, how are they thinking about their build-out plans in terms of footprint expansion versus harvesting within the existing footprint as we kind of look at the second half of this year and maybe early thoughts on '24? And then also in terms of the Revenue EDGE side of the equation, how should we be thinking -- I know you give numbers in terms of how many customers have adopted one service or more. But I'm wondering if there are some other metrics or idea that you could help us see into in terms of penetration of multiple services target on that front from customers and the velocity on that front? I know we get an RPO number, but if there are some other metrics we could think about.

Right. So first of all, the customers now they're thinking about their business. I would actually say there -- every single one of them is thinking in both ways, unless they're like a few legacy providers and you're seeing that from some of the big ones, too, with interest, we see this all the time with large public legacy service providers. As interest rates increase, they're actually pulling back on CapEx because their margins are declining, and this is a way for them to fund it. So they just -- they slow down, and our customers are seeing this as an incremental opportunity, right?

Hey, they were going to go build out this town. Now they're going to do it even faster. They still have access to capital because again, their business as a whole is radically higher margins. Therefore, they can pursue -- they can actually get all the capital that they need. So we recently had a service provider in recently. And what they did was they shared out their spreadsheet, and we went through 10 different markets that they're looking at towns. And we -- they have profiled now who the competitors were, in a number of those places were legacies and they were saying, let's go with a joint plan actually, attack those legacy providers and take share and where should we stack rank and we help them identify who we thought it goes back to the whole customer success discussion.

The whole point of our business model is the land and expand, and that permeates over to the customer's business model. All they ever did was they would sell the pipe and that's it. And then I would hope that I would monetize. And generally, that means that over time, they're under pressure because someone else saw a cheap price, whatever it is. Now their whole business model is I land in the home or the business and selling all these incremental services, I expand my margin and my revenue inside that account, but it also makes it wickedly sticky so that if somebody comes and throws a legacy provider who is only speed, throws in some cheap price, the customer is going to say, no, I've got all these things consider that cheaper price because of service is so incredible.

And by the way, my MPS is 75. So these customers are incredibly loyal. So that grow is absolutely front of mind. And that, I guess, comes to the core of what we're doing in this new market. It is a new market with a new business model, and we're teaching these customers how to transform their businesses and disrupt the legacy companies. Now with regards to your question on incremental metrics beyond RPO, we consider that competitive. And no, you can just assume that, again, we have a growing customer success army that spends every single bit, helping our customers use best practices and insights and understanding what works and what doesn't, segmenting data, all these different elements to grow the business.

Mike, maybe just to quickly follow up in terms of your commentary of the changing landscape and enabling the thought leaders. Is there an epiphany ongoing here that it's driving more conversations with them on that front? Or is that something that takes longer?

No. Well, I don't know if it's an epiphany. I'd say it's your normal product adoption curve. You always start with the innovators who are those thought leaders, then you follow up as the market matures. And if you look at our press releases, what are you seeing in those press releases is story after story after story of customer success and customer success and what's possible and what kind of NPS they're driving, what margin levels they're driving, all these different things. So as we go through a normal product adoption curve, you're going to continue to see more and more growth. And even somebody who is a legacy provider who has never thought that way at some point, everybody is going to have a different realization and say, oh my gosh, the whole market has changed.

It's a new business model, and there's this once-in-a-generation opportunity for me to grow my business in all kinds of different ways. But clearly, the only company that I can do that with is Calix. I wouldn't say it's like everyone epiphanies at different times, and we're up, moving up into the right, and that's just going to continue. And that's our -- why we have our press releases to educate.

And Mike, lastly, if I could, on the managed services front, I think you're up to 8 now that have officially been launched. But I was wondering if you could talk a little bit about the pipeline, the level of interest and kind of what you guys are waiting through there, if there are any targets that we should be thinking about? And maybe quickly like an update on things like SmartBiz and SmartTown.

Well, it's early days -- and as we have said and evidenced by the fact that there are 334 using managed services, we added 41 in the quarter. To your point on when they had the epiphany, those 41 decided that it was the right time to explore managed services.. And again, what's the pipeline. It depends on the customer, right? I know one CEO last week and he has an incredible go-to-market. He's got all his build plans in place. He's really focused on operational efficiency and customer satisfaction as his first go-to-market with a clear recognition that as you land, then you will be able to expand in those existing markets over time. So what's the uptake on these services? It really depends on the customer and where they are in their market needs, someone who's very mature is adopting, I would say, more managed services to differentiate.

Somebody who's just building out is going to be in a different mindset. And with regards to all the managed services, look, they're unique. This is a new market. We have a new business model and what we've done with small business SmartTown, they've never been done before, and they're super exciting. And so our customers, if they're deciding, hey, you know what, it's not the right time for me today or maybe 6 months, maybe a year from now, everybody is talking about it. That's what we do.

Nice job on the quarter.

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

Thank you, Paul. Calix leadership both participated in several investor events during the second quarter. Information about these events, including dates and times and publicly available webcast will be posted on the Events and Presentations page of the Investor Relations section of our website. Once again, thank you to everyone on this call and webcast for your interest in Calix, and for joining us today. That concludes our conference call. Have a great day.

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