Calix Inc (CALX) 2024 Q2 法說會逐字稿

Greetings, everyone. Welcome to the Calix second-quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Rob and good morning, everyone. Thank you for joining our second quarter 2024 earnings call. Today on the call we have President and CEO, Michael Weening; and Chief Financial Officer, Cory Sindelar.

As a reminder, yesterday after the market closed, Calix issued a news release which was furnished on our Form 8-K along with our stockholder letter and 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, 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 second quarter 2024 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 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 second quarter 2024 letter to stockholders. Unless otherwise noted, all financial information referenced in this call will be non-GAAP.

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

Thank you, Jim. Our results in the second quarter demonstrated the strength and execution of our strategy. Our platform, cloud and managed services continue to enable our broadband customers to dominate their markets as they simplify their operations in go to market, innovate across the consumer, business and the integral segments of the markets they serve and grow the value for their members or investors and in turn to Calix.

Once again, our unique broadband business model delivered record gross margin. Robust expansion of our platform cloud and managed services led to a sequential 9% increase in RPOs as BSP continued to turn to Calix in the face of growing competition to win new subscribers through the ever-expanding capabilities of the Calix platform, cloud and managed services.

As we have discussed, the market is Crossing the Chasm and this is best evidenced by our landing footprint with 24 new BSP customers who started their business transformation with Calix in Q2 up from 10 in Q1. Our appliance business is settling into a new normal where we see smaller orders and many, many more of them.

This gives us the confidence to forecast to return to sequential quarterly revenue growth in Q3. And our momentum continues into Q3 as the team recently closed our largest platform cloud and managed services deal setting a new record.

With that, I'd like to turn it over to Cory to review our financial results for the first quarter. Cory?

Thank you, Michael. The second quarter represented another quarter of deliberate and disciplined execution. We delivered revenue of $198 million, which was within the guidance range we provided in April. As we continue to navigate the crosswinds that are still prevalent in our industry, the continued growth in our platform, cloud, and managed services drove record non-GAAP gross margin of 55.1%.

In the second quarter, we saw strong platform adoption with 17 customers beginning their platform journey with us, 19 new cloud deployments and 22 additional customers deploying a managed service for the first time. Remaining performance obligation or RPOs grew to $267 million at the end of the quarter. This is an increase of $22 million or 9% sequentially and up $54 million or 25% year over year.

Furthermore, our current RPOs were $103 million, up 4% sequentially and up 28% year-over-year. As we've discussed before, the increases in RPO reflect new customer additions and the continued adoption of our platform offering as our existing customers add new subscribers and expand their use of our platform, cloud, and managed services. As a result, we expect RPO will continue to grow.

In the second quarter of 2024, non-GAAP operating expenses were $104 million, down $4 million from the prior quarter. The decrease is mostly attributable to lower outside services and professional fees.

As we have said before, our plan is to keep 2024 operating expenses, expense investments, relatively consistent with 2023. As we believe this level of investment represents a great opportunity for us to grow our footprint ahead of the expected US Government broadband investment.

Our debt-free balance sheet and balance sheet metrics remains strong. At the end of the quarter, cash and investments were just over $261 million, representing a sequential increase of roughly $22 million. This was our fifth consecutive quarter of double-digit free cash flow.

DSO was 38. Inventories were 2.8, down from 3.1 last quarter as our component inventory increased. Excluding component inventory, our inventory turns would have been 3.7 and inventory deposits decreased by $6 million, bringing our total inventory deposit down to $70 million.

Furthermore, we expect continued profitability, combined with working capital reduction, will result in consistent double-digit quarterly operating free -- operating and free cash flow.

Now let's discuss revenue guidance for the third quarter. Based on the current ordering trend and new customer acquisitions, we believe the second quarter marks the bottom for 2024 and we will grow from here. For the third quarter of 2024, our revenue outlook is to be between $198 million and $204 million.

In terms of BEAD, we've seen a lot of progress since our last call. As we said here a quarter ago, only one state, Louisiana, had completed all 10 steps of the program. Today, there are 20 states and territories approved through all 10 steps and they represent [$12 billion of the $42 billion] program. While the approvals had accelerated, we believed that we will begin getting orders in 2025 -- early 2025.

In summary, Q2 represents the low point for revenue in 2024 and we will return to sequential quarterly revenue growth in Q3. We continue to add new BSP customers every quarter, which over time will support our growth objectives. In addition, our platform, cloud and managed services grow in each quarter driving our RPO and gross margin expansion.

We have the most pristine balance sheet in the industry, which gives us the financial capacity to invest in our operation and expand our footprint as our industry Crosses the Chasm.

Michael, back to you.

Thanks, Cory. Throughout Q2, I continued to meet with broadband customers and their investors with the discussion remaining the same, how to win? The industry is under significant stress as legacy network operators faced the disruption of increased competition and the expanding risk of commoditization as broadband speed disappears as a differentiator.

This shift from speed to an experienced mindset is critical to our Crossing the Chasm from early adopters to winning the early majority and it is accelerating. With 1,065 BSPs now deploying our platform, which grows every quarter, we continue to engage with prospects of all sizes to advocate them on the power of the platform while supporting our existing customers as they expand their business model across consumer, business, and the communities they serve.

It is the winning business model that is achieving incredible revenue, margin, cash flow and customer satisfaction results every single day. In closing, our confidence in returning to sequential quarterly revenue growth is driven by an expanding funnel of opportunities as our unique platform, cloud, and managed services model enables our customers to succeed.

We have the financial strength and balance sheet that allows us to execute without distraction, while maintaining a disciplined and steady hand on our operating and expense investments and support our BSP customers as they win their markets and together, we succeed for the long-term.

Jim, let's open the call for questions.

Thanks, Michael. Rob, at this time you can please open up the lines for questions.

(Operator Instructions) Samik Chatterjee, JPMorgan.

Mr. Chatterjee, your line is open for questions. (technical difficulty)

Rob, let's go to the next one. We'll call Samik back into the rotation.

Ryan Koontz, Needham & Company.

On the pressure on the large and medium customer cohorts and the decline there, give an updated view of the drivers behind the tight capital environment between interest rates and BEAD preparation. How would you characterize the top three drivers there among your largest customer base?

Well, actually, I don't think it's a large customer phenomenon. I actually think it's across the entire base and this goes back to what we've articulated in the fourth quarter and first quarter. It remains the same. So this first one is that they're going through decision-making process with regards to BEAD. You've seen the complexity of that scenario.

Now it's making progress and Cory can talk to that extensively. But as they go through that again their planning teams are now focused on how do they do those submissions and then in second half a lot of that will finally come to clarity. And that's companies of all sizes, small, medium and large. That's the first one.

The second one is that again, small, medium and large, the second thing they're considering is that if they are an entity that has private equity backing or investors, the pervasively high interest rates and the increase in competition, which again we forecasted for many years has caused them to say, okay, should we slow down a little bit or contemplate our business model as we're not getting the loads that we need.

And so, let's really pivot our into our existing investments and win new subscribers, which really comes down to the Crossing the Chasm part is that we really needed them, if I go back a year ago, I was at US Telecom, which was a big CEO event and a year ago, I was -- and the year before, I was the one who is a bit of a naysayer in that room constantly seeing the same thing that we set at our ConneXions event, which is speed is going to commoditize, it's not a differentiator. Building fiber is not enough. You actually need to build a comprehensive business model to own the community.

And as little as a year ago, especially with the medium and large customers, they were dismissive. They're like, no, I'm doing well enough, I keep going at it. Where our smaller customers were aggressively pivoting into that experienced community center brand message. I was there again this summer and frankly, they are all saying the same thing. There is a ton of investors there.

And there are all like, you know what, we've been building for the last three years, we're not getting the subscriber loads on our networks that we thought we would. The competition is a lot higher than I expected and I really need to be contemplating my business model.

And frankly, to us, this is the exact thing that we have been building our company for the 13 years to have built that opportunity and it makes us Crossing the Chasm that Crossing the Chasm is easier because now they're under a ton of pressure, which is what I talked about in my opening remarks.

Cory, anything to add?

(technical difficulty) no, that summarizes it.

And Cory, you mention of the largest platform deleverage that was included in your stated RPO for 2Q or is that a 3Q event?

That is a new event, Ryan. That will be reflected in our Q3 RPO number. Also be clear, in second quarter we bought the largest platform in cloud deal in the company's history in the second quarter and then run out to this call. We actually closed a larger deal. So seven new record for our cloud and managed services, but that's a Q3 deal.

And Cory, can you give us any color on the product mix in the quarter across network versus CPE in general like, how has that trended in 2Q versus say the last 12 months?

Yeah. Margins -- in terms of our gross margin, what you're seeing is a kind of amplifier for what Michael just talked about. We're seeing operators spending less time, building out new networks, and working towards adding new subscribers to their networks, turning on revenue and cash flows for them. And so, we've seen a shift in our product mix towards premises away from our client's revenue -- from the network compliance side.

Got it. So even though the hardware there's got lower gross margin, the higher software mix you're selling more than makes up for that?

That's spot on.

All right. I'll get back in queue. Thanks for the questions.

Samik Chatterjee, JPMorgan.

Hey, thanks for letting me jump back on here. I know, Michael, you mentioned about BEAD early on in the prepared remarks. Just wondering we've seen some other suppliers start to talk about receiving BEAD related orders already even though they ship out in 2025. Can you just address where you are in terms of the timing?

And I think the primary question from investors is how material can BEAD related revenues be for your model in 2025? Anything you can share on that front in terms of how to think about whether it should be revenues from all 50-plus states or should it be really a fraction of the geographies just considering how the DSO approvals are? And I have a quick follow-up.

Sure, happy to talk about that. While there's others out there that are talking about orders and revenues starting this year. We've been consistent regarding our thoughts around BEAD. We expect to start receiving orders in the first quarter of 2025. Orders, not necessarily revenue. We do not know what that ramp will be after we start receiving orders.

We do know that 20 states have their volume to proposals approved and it represents [$12 billion of the $42 billion]. So you might recall on our last call, I suggested that as long as there were at least 10 to 15 States approved that we would get enough to actually start seeing an impact -- a meaningful impact in 2025. And so, we're sitting here today with [20]. So that's the good news.

Now there's certainly enough money now available for that program to have an impact on 2025. But there's other steps that will follow such as NTA's approval of each state's broadband map subsequent to the challenge process.

So there's certainly more challenges to overcome as that program continues for a while. That said, we will do well with BEAD as we have with every government program large and small for the last 20 years.

Okay. The -- just the other question that I'm getting this morning from investors is, we've seen the lower mix of revenue from your large customers, is there anything beyond sort of the cyclical headwinds in terms of market share with some of your large customers just given the revenue decline you've seen with them on a year over year basis?

Yeah. So in the quarter it is actually better than we thought it would be. So it's better than fear. So that was a positive and encouraging sign for us. The whole back in our large and medium segment is a lot of reduction in CapEx spending as they're re-evaluating their priorities.

But you might recall that we had talked about we thought that large and medium segments would have again inside of Q2. And obviously, it did not, and it did better than that we thought. So there's signs of them coming out of those decision-making process and getting back on with their ordering programs. So we're encouraged by that.

And so, I think that's a positive development. And if anything they're -- the medium and large are actually starting to finally listen around the conversation which I talked about around the threshold quantization and actually how they have to change their business strategy.

So in the second quarter, we closed we know there is Tier 2 that we never done, who used to be a big customer of ours but has not actually done anything with our cloud and we closed with them on a go to market strategy around smart business. So how to actually attack their very sizeable small business base and win with a radically different experience.

And so, if anything I would say that this is now our share opportunity to grow, and you saw that as represented by the 24 new logos that we added this quarter. Those are not new companies starting up. Those are wins for companies who want to change their business model and evolve and transform with Calix.

Thank you. Thanks for taking my questions.

George Notter, Jefferies.

Hi guys. Thanks very much. I wanted to ask about -- as we think about the impacts in the business, I think you guys have mentioned a number of things, certainly in the shareholder letter, certainly in recent quarters. But I'm wondering if you could talk about what the biggest impacts are on the hardware side of the business right now.

We've talked about delays in decision-making associated with BEAD and government funding. You've talked about customers adjusting lead times because of adjusting order levels because your lead times are shorter. We've talked about higher interest rates. We talked about a shift towards adding subs versus core infrastructure.

I guess, I'm just wondering if there's a map to what these different factors are in terms of how important they are? Is there a rank order of issues here? Or how do you think about what's fundamentally going on here? Thanks.

Well, actually, George, you summarized them very clearly. If you want us to stack rank them, I would say that it depends on the company and therefore inside each company, they're going to be different. So let's cover up what you succinctly and accurately covered which is what we've been saying for multiple quarters since we started to see this in late 2023.

So the one was the decision-making on BEAD and as we've always stated that government funding is going to take much longer than anticipated and, in the end, there will be a much larger funding outpouring over time. So while it's a $42 billion program on BEAD, it's actually has a 25%, it's significantly larger.

You succinctly stated that lead times has been adjusting, how they think about inventory because we actually dropped our lead times down. They're now at what is our new normal on the appliance side, which is why we're also comfortable with stating very clearly that we're going to return to the sequential revenue growth because of the fact that our lead times are now where they are.

The good thing in that is that I constantly get questions from customers that as they clear that first point on decision-making, will we have enough inventory to serve them? That question continues to get out to me like that.

I probably answered it 10 times this quarter alone. And my response is the same though that we've given to investors also which is that when we entered the pandemic and faced that surge in demand. It was a significant issue, we had 3,200 SKUs. We're now turning around 200 SKUs. We have an incredible supply chain.

We are optimized we can meet any demand spikes. And so, that's great. So we're in great shape there as that changes. And then the interest rates, you succinctly covered off interest rates. If I'm a private equity investor, they were investing with abandoned through during the pandemic.

If you had -- as I like a joke if you had fault, you could raise $20 million and could spell broadband. And people were throwing money willingly and now what they're starting to do is take a step back and say, wait a second, we've been at this now for two or three years and the business model shows that I would be getting this amount of ramp and I'm not achieving that ramp.

And in fact, what I'm seeing is, when I go into certain markets, I have more competition than I anticipated. But more importantly, the fundamental thesis that the beginning of the pandemic which is build fiber and they will come, and you will win is actually fundamentally flawed, again what's we've been stating.

So that and in fact that interest rates are higher are having some of them say, wait a second, I need you to go pivot all your attention back to -- it's great that you're a good construction company. And that's what a lot of broadband companies are, great construction companies, great network operators.

But how are you going to market and sell them when that community and do what Tombigbee has done and get market shares is at 60% in an NBS of [92] and shedding off incredible ARPU, massive cash flow and huge margin or like Arlos is doing. How are you going to go do that?

And so that not only interest rates that becomes a reason why they have the conversation, but it also is leading to these management teams coming under significant stress because their investors are saying where's the freaking money, right?

And that's great for us. I go back to US Telecom when I was there a year ago people were kind of, yeah, yeah whatever Michael, whatever what Michael, but when I was there, this go around there were many of them saying, hey I'm working with Calix on this. I'm working with Calix on that because I need to change my business model if I'm going to win.

And that's what we've always stated, and it just becomes the impetus to actually have the conversation and realize that the pain is right there. So the interest rates, I would say are just an impetus to having the conversation is your business model needs to change, right? You need to Cross that Chasm with us.

And then, which then led to the very succinct thing so I think your third point and then your subs versus infrastructure those in essence are the same thing. Because if you're if you're winning a shed load of subs like Allo is, or a Tombigbee or many of our other customers are who cares about interest rates because your margins are so strong. Your take rates are so high. Your return on invested capital is so massive. You don't care.

If it was a 20% interest rate, you'd still be investing because your market share is yielding a huge return on investment. And so, it's difficult for us to stack rank it others and say, George, you are spot on. And it just depends on the customer.

And so, when I go back to, well, the quarters adds, the 24 network operators decided to become broadband service providers this quarter, 24, and that's and these are not new companies. These are ones that are deciding that what I'm going to partner with Calix to actually change my business model. And so that's the market, that's the industry.

Got it. And then just one quick one. On lead times, was there more reduction in lead times this quarter versus last quarter or have we've been at a stasis on lead times all year and what are lead times?

We've been consistent with our lead times this year. And it's 12 to 14 weeks.

Okay. Thank you very much.

Scott Searle, Roth Capital Partners.

Hey, good morning guys. Thanks for taking my questions. Nice to see the bottom put in for the second quarter and looking for sequential growth as we go into the back half of the year. May be quickly to just hit on a couple of share questions Mike, it sounds like you're gaining share within the Tier 2. So I was wondering if you could address that.

And then more specifically as we look to BEAD, I know you guys have been working in -- consulting with many of these BEAD requests. I'm wondering if you have some early thoughts in terms of what you think share is going to look like between Tier 1, 2s and 3s as BEAD funding starts to roll the market in 2025.

Clearly, you guys would be better positioned with the Tier 3s and Tier 2s. But I'm kind of wondering what your thought process is there in terms of the share gains that they might have within those categories?

So, complex questions in there. So the first one is with regards to share and the way we think about market share is actually the customers that we're aligned with whether or not they're taking share. And one of the best examples of that this quarter would be that we had a small customer group that meet investor why? Because they're taking -- they are actually adding subs. They're growing their business and they're winning in the markets that they serve.

So when we think about market share, we think of it that way. And then on adding subs, one of the things that we talked about the Tier 2 is actually went to our small business solution. The way this goes back to the underlying business strategy that we've always articulated which is, we're uniquely positioned in that we have this very diverse platform that allows us to find a beachhead into a customer. And then demonstrate to them what success looks like.

So with that one, they are coming under pressure with regards to, I need to improve ARPU. I need to slow churn. I need to grow revenue and that's why they chose our small business solution. And once the small business solution goes into that customer who now the entire platform is in. So we hooked into the back office. We hooked into the business processes and it's easy for them to continue to expand as they see success.

So the key thing about gaining share for us is that once we garner that beachheads like we have in that Tier 2 with small business. We then flood our customers success team into it to help that customer transform their go to market strategy, win a whole bunch of new small business customers and then hopefully expand with us over time.

With regards to BEAD consulting, the way that our BEAD process is radically different than most others. You saw that in Q1 when we announced the relationship with Ready.net who has incredible cloud and software tools to help broadband service providers actually understand BEAD.

And so, we're hand in glove. So while others are, as Cory said touting, hey, I got some orders in, I got some orders in, we're actually sitting down beside them putting in their BEAD submissions, helping them articulate it.

We've got a team -- a big team of people who do have plus our ready partnership to ensure that we are side by side and planning with them not only and how to win and how they pitched the local state office. But then also what the implications are in timeline. And that's through the second half will get clearer and clearer.

With regards to who's going to win Tier 1, Tier 2, Tier 3, the reality is that one of the things you've heard a lot of grossing about is that if this program was actually centralized in Washington DC and everything was through a single office centrally, then the bigger companies would definitely have a significant advantage because they'd be able to do what they do well and they put a massive lobbying arm into DC and they could influence the outcomes.

By having this as a state-by-state, territory-by-territory program, the ones who are advantaged are the ones who are at local. And you hear that in when I'm out and speaking to the different groups, you hear a lot of that is that as these are state-run projects, they really want companies who care about the local state, whether that's a for profit or a cooperative to actually be that voice in that office and win the money.

Because they know that they're not in a just scarp up a bunch of money and had a P&L like other programs have in the past. They're actually -- they care about the communities. They're in the community. They're in the state and they're there for the long term.

And so, while that has definitely been one of the reasons where you've seen a slowdown in the BEAD process, at the same time I think that's very democratic process and that's been diffused out to the different states is really powerful. And frankly, I think it advantages the companies that care about the state.

So I think bottom line --

Scott, just to amplify one thing on Michael. BEAD is just a single program. Yes, it's a big one. But there are lots of government programs I think out there, a lot of state money. Our customers do very well, and Calix does very well as a result and had so for last 20 years of taking advantage of these government programs. We're going to do just fine with this people as well.

Got it. So not to put words in your mouth, but it sounds like your customers disproportionately through their current broadband share should participate pretty well in BEAD and other programs going forward. Is that correct?

That is true line, and these are particularly you guys thinking then these are hard locations, right? These are the most rural parts of the country. And so, these are the ones that have done lasts. And so, it's going to be somebody with a community-minded prospective willing to make those investments to go after those hard-to-get locations. So we think that'll disproportionally lead to the smaller footfall players to go after those locations.

Great. And lastly if I could on a follow-up, I think last quarter you talked about certainly '24 is a transition year but it seemed like there was enough green shoots that '25 you'd be shaping up to get back into the targeted 10% to 15% growth range. I'm wondering if you could update your thoughts on that front and also kind of fold BEAD into the conversation.

Cory, you said, look if we get 10 to 15 states or territories, you'd be feeling pretty good about the BEAD contribution into 2025. Now we're at 20 States. You've got another 36 states that have completed 9 out of 10 steps. So by the time we have this call in the October timeframe, you could have doubled that number. So, I'm wondering how BEAD layers into that thought process for growth in '25. Thanks.

Thanks, Scott. What we're seeing here on the appliance side is that we're establishing a new normal where our smaller orders, same small order sizes, but many, many more of them including those healthy trend with us landing new footprints as evidenced by the 24 new customers.

When you combine that with the robust demand of our platform, cloud, and managed services as (inaudible) by the 9% sequential growth and the signing of our largest cloud deal ever in this quarter, in Q3. I think what you're seeing is we've put the bottom in and we're going to return to that sequential revenue growth.

What you're poking at is, what is that quarterly growth rate look like from here on now. I think we're going to take a very pragmatic shoe about it given the fact that we've had a -- there is the last few quarters on the appliance side and so, we will be cautious going forward.

I think as we look out at the next several quarters, we had talked about a quarterly gross rate of 1% to 5%. What will we be at that lower end of that range here for the next several quarters and as we progress through 2025, as we start seeing contributions from the customer acquisitions, as we see the large and medium customers continue to return back, as we start seeing some of the BEAD shipments not just orders, but shipments, we will move to, let's call it the middle of that range by the end of the 2025. So there'll be a not a general progression there as those revenue streams layer into this bottom that we're creating right now.

Yeah. And a good example of that would be we've won a really incredible customer in Q2 last year. They were at the upper range of small, we'll definitely crossover in the medium. And they are an innovator with a huge amount of money behind them. But it took them some time to actually migrate their way over to Calix.

They had to get rid of some of their existing inventory, those different elements. And Q2 is the first time we started to see -- actually mid-Q2 this year and year later doing all that work with inventory finally started to see the orders lot.

So the key thing in all of that is this that we can have a short-term view of this, but we're actually as we stated on and on every single time. Our whole goal is to use this disruptive time whenever things are popping up or pop on apart or the disruption is happening to Cross that Chasm win a whole bunch of new customers and then basically set in place by winning those beachheads as I mentioned with that Tier 2.

So that becomes the beginning of an expansion of the footprint in an entire new customer. And so, this footprint attack that we're on. We'll not -- it has not yielded in this quarter or next quarter. Although, we have hit the bottom and now grow sequentially, but we're laying those currently green shoots in net new accounts to win for the long term.

And that's what our entire leadership team, our entire field team is where they are focused on is we're thinking about 2025 and 2026 is like the work that we're doing right now will pay off in a huge way. Again, it's evidenced in by how new logos we went over this quarter.

Great. Thank you.

Tim Savageaux, Northland Capital Markets.

Hey, good morning. I want to stay with BEAD for a second here. As this opportunity maybe comes into greater view or greater focus, with the approvals that we've seen. I mean, I understand the mechanics from a customer standpoint.

I wonder if you have any updated thinking on what BEAD could mean to the company just from an overall revenue opportunity standpoint right? We've got a $40 billion program where there's I guess the grantees are supposed to bring some money to the table as well. So maybe that's even a little bigger.

I think you guys have talked about a high-single digit percentage exposure from a access infrastructure and network standpoint. But what do you -- when we get rolling up to up to something significant with BEAD, what do you think that could mean to Calix from a revenue perspective on an annual basis?

So Tim, that's a great question. I think it will be a significant number. You've laid off the math, right? So it's a $42 billion program. There's a 25% match. So you looking at over $50 billion of capital being put to work. It'll be over a five, six, seven, eight-year time frame and we're going to start seeing the beginning of that in 2025.

So I think it'll take some time to get rolling and we'll see. Our expected amount that Calix can serve is about 8% of that number. So you think 8% of $50 billion, so it's a very large amount of money that will come over the next five, six, seven, eight years.

And so, you put your own kind of ramp on it to when it gets to that full steam. And I think we'll just do very well of its past experience on these government programs if any indication and the bias towards smaller service providers serving those rural areas with any indication. Calix will get its more than its fair share of those proceeds.

Great thanks. I'm sorry. If I could follow-up try to combine a couple of things here. But really starting with the new large cloud order that you mentioned if you had any color on that with regard to type or size of service provider new or current customer. And I guess I asked that in the in a broader context of the uptick in RPOs.

And it sounds like given your earlier comment you said maybe expect that to continue with this new order contributing, but if we look at the drivers of RPOs, it seems to me it's probably three big, I won't say one-off, but big orders like that.

New customers which you mentioned and also the shift in current customers towards additional platforms. Of those three factors, I guess, how did you see that play out in Q2 with the increase in RPOs and what would you expect in Q3?

Yeah. So as it relates to the RPO of those factors you outlined, it's consistent with what we've been saying. The number one factor for the increase in RPO is going to be the subscriber additions that our customers are adding. So they're out there taking share and growing their footprint.

The second one is they expanded their used cases and the amount of parts that we offer. So they're expanding the actual platform cloud advantage services. And the last contributor is new customer acquisition. It takes them a while to build up to it.

And so, this large contract with an existing customer, it was a renewal in Q2 and in Q3 existing customers and you get to further down the stream and what they come back in, they've grown their footprint over the last three years to a much larger size.

And so, when they renew that contract for the next three years on that larger base. It just tends to grow. So this is what you're seeing as these contracts come up. So that's the biggest genesis of it is not only did they take more of our platforms, but it's the size of base that they're applying that contract over.

Let me expand out on that. So I want to use these two deals as explicit examples of the land and expand strategy, right? So the biggest deal we've ever done that we had a record deal in Q2 and as Cory said that was a net new deal with a customer committed over time. Why do they do that? They've been working with us for a long while. They've been adding subscribers.

They see the value of the platform and then they made a pretty significant commitment to us over the long term. But their previous cloud contracts were trending right? The one that we closed last week was the same idea where it was essentially like a phase you go, working together, laying out the business model, identifying what the opportunity is and then as that customer enjoyed significant success, we reupped it into a massive contract.

And so, that's what you have to think about on the way that we do these. Sometimes we say, hey we added a new customer and like that small business customer, the commitment wasn't significant. But the commitment was significant mentally, because they went after our -- they landed our platform into their business and now we're going to help them transform how they win small businesses.

And what will happen is, that will then lead to at some point in the -- once we demonstrate that they add a ton of subs, they'll go, hey we want a better price. Therefore, we understand our volumes and let's actually do a proper contract and boom you have another record contract. And so this business requires patience. This business requires consistency.

This business requires us sitting besides our customers, their CEOs and their leadership teams helping them win. And we're the only ones doing it frankly, no one else is. Everyone else is popping into the office and saying, here's a PO by my boss, I've seeing a little while. We're going to win because our customers are going to win.

Well, I appreciate all that color. And last one for me and you mentioned that the large medium segments were less weak than you anticipated I think probably close to down 20% versus 50%. Conversely that implies some weakness among the smaller carriers that may be you didn't expect.

I know there's a shifting of the carrier classification they likely had some impact. But I wonder if you can give us a little more color on that dynamic amongst the smaller carriers and what you saw there? And that's it for me. Thanks.

The lower appliance revenue from our smaller customer segment is really from the normalizing orders due to our shortened lead times. And creating that base for what we're seeing as the new level.

Okay. Thanks.

Christian Schwab, Craig-Hallum Capital.

I think we all understand by this point the platform sales process of your company and the competitive advantage you have there. But in reality, when we go back to BEAD, done our math you have a little bit over 2,100 different service providers in the Tier 2, Tier 3, Tier 4 category.

And so when that BEAD money is released, obviously you'll have an expanded opportunity for customer dialogue on platform. But just as far as BEADs and FEEDs equipment, you should over time is that money is pulled out and deployed regardless of whether they buy your platform software. You should see a material increase in equipment orders, shouldn't you?

Yes. That is true Christian. But more importantly, understand that hardware is the ability for us then to follow that up with the premises and our platform cloud and managed services. So we look at BEAD, it's an acceleration to be able to pull forward our platform, cloud and managed services model. So while there will be an increase in hardware or appliance revenue. The real positive is the fact that it pulls forward our business model.

Yeah. Understood. I just wanted to make sure I was thinking about it correct. That's it. Thank you.

Thank you. We've reached the end of the question-answer session. And I'll turn the call over to Jim Fanucchi for closing remarks.

Thank you, Rob. Calix will participate in several investor events during the third quarter and information about these events including the dates and times and publicly available webcast will be posted on the Events and Presentations page for our Investor Relations website.

Once again, thank you to everyone on this call and webcast for your interest in Calix and for joining us. This concludes our conference call. Have a good day.

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