Calix, Inc. (CALX) 2026 Q3 法說會逐字稿

Greetings, everyone, and welcome to the CALEX Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the brief prepared remarks. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Nancy Fazioli, Vice President of Investor Relations. Nancy, please go ahead.

Thank you, Sam, and good morning, everyone.

Thank you for joining our third quarter 2026 earnings call. Today on the call, we have our President and CEO, Michael Leaning and Chief Financial Officer, Corey Sindelar.

As a reminder, yesterday after the market closed, KAUS issued a news release, which was furnished on a Form A-K along with our stockholder letter, was also posted in the Investor Relations section of the KAUS 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 that 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 that 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 third quarter 2026 letter to stockholders and in the annual and quarterly report called with the SEC.

Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective date.

Also in this conference call, we will discuss both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in the third quarter 2026 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead.

We have just returned from Calyx Connections, where thousands of customers and partners joined us to discuss the path forward and the reality that there is no version of the future where AI is optional, a future we intend to lead for our customers and the markets we serve.

With Kalex One deployed since March, we deliver the trust and security that our customers require to be successful within the new AI reality, allowing us all to move from experimentation to execution safely.

In these uncertain times, we believe that predictability is highly valued by our customers and their subscribers, our team members, partners and investors.

For our customers, we provide predictability of cost through our leadership with open weight models, the platform and the evolution to specialized models that will land on all devices over time and return on investment as we operate billions of workflows annually, giving us unmatched insight into which agents and workflows will yield the greatest returns for our customers.

Predictability for customers extends into predictability for investors, as evidenced by the records that we broke in third quarter and the end-of-year forecast that we'll see revenue at the midpoint hitting 19% year-on-year growth while OpEx leverage begins.

At Connections two weeks ago, the new CEO of Aloe clearly stated the value of our platform pre-AI.

He had come from a multi-vendor broadband provider to Allo who has partnered exclusively with Kalyx.

The Kalyx platform at Allo yields 40% lower truck rolls, 60 point higher net promoter score and is supported by 25 IT people versus 400. That is the power of our platform before AI.

With Calex agent workforce, which is rolling out at a rapid pace, those results will expand as we automate functions and workflows, yielding new subscribers, revenue growth, reduced churn and even higher profits for broadband providers, while our platform expands to manage service providers for apartment buildings and multi-dwelling units and then on to hospitality.

Last week, we released the next step in our AI strategy, the Kalex Communications Language Model or CLM and Kalex GEMS, which are designed to bring communication-specific intelligence to the right place across the platform from the cloud to the network to the subscriber premise.

This architecture will enable us to deliver increasingly specialized capabilities. For platform customers while enabling large service providers to partner with Calex by consuming our AI component capabilities into their unique environments.

That combination of a differentiated platform, expanding segments with the ongoing expansion of MDU, agentic workflows, AI agents, and the addition of specialized learning models coupled with a customer success organization that is leveraging AI. To enable customers to adopt at scale gives us great confidence in the opportunity ahead and our ability to lead.

Our third quarter results demonstrate that customers are responding. This is the payoff from the investments we have made and the partnerships we have built with our customers. We went slow to build the platform correctly. Now we move fast with our customers to compete, win and expand.

Corey, over to you to walk through the details of the strong quarter.

Thank you, Michael.

We delivered record revenue of $302 million, up 3% sequentially and up 14% year-over-year.

A key highlight was record software and service revenue of $52 million, up 3% sequentially and 19% year-over-year.

As our customers continue to win new subscribers and take market share, Calix One contracts signed in the third quarter more than doubled from the prior quarter with RPOs reaching a record $396 million, up 2% sequentially and 12% year-over-year.

One important note, in connection with our customer supply assurance program introduced early in the third quarter. We began receiving non-cancel appliance orders, which are added to RPOs.

To avoid distortion of this key metric, we elected a practical obedience to eliminate the value of RPOs for contracts with the duration of one year or less, thereby eliminating hardware from RPOs. As part of that elimination, the value of software and service contracts with the duration of one year or less. Totaling $6 million was also excluded.

These software and service contracts were included in prior period.

Without giving effect to this change, RPOs attributed to software and services would have grown sequentially by 4% and year-over-year by 13%. Non-GAAP gross margin was 53.5%. Non-GAAP software and service gross margin reached a record 67.2%, increasing 340 basis points sequentially, driven by subscriber growth and continued optimization of our third generation platform.

As our customers continue to focus on subscriber experience and take share, our software and services revenue will continue to increase, expanding our software and service gross margins.

Non-GAAP appliance gross margin was 50.7%, which represents a sequential decline of 220 basis points, primarily due to higher memory component costs.

We also continue to demonstrate operating discipline and early productivity gains from our human-centric AI investment.

Third quarter non-GAAP operating expenses were $124 million, representing 41% of revenue. And down from 42% of revenue last quarter.

Our balance sheet remains strong.

We ended the quarter with $155 million in cash and investments after deploying $50 million to repurchase 1.4 million shares.

DSL was 38 days and inventory terms were 2.8, reflecting improved collections and delivered inventory investments to support customer demand and product availability.

After quarter end, we increased our stock repurchase authorization by $100 million, adding to the $44 million that remained at the end of the quarter.

Turning to guidance, for the fourth quarter of 2026, we expect revenue to be between $311 million and $317 million.

This outlook reflects the ongoing broad-based deployment data and order visibility across our customer base.

Our fourth quarter non-GAAP gross margin guidance is 52.25% to 54.25%. The range reflects component cost expectations as well as customer and product makes.

As noted last quarter, we chose to include surcharges on new orders.

As such, we expect to recover a greater percentage of higher memory costs in the fourth quarter as we work our way to gross profit neutrality.

Our fourth quarter non-GAAP operating expense guidance is $129.5 million to $131.5 million.

The range reflects fourth quarter investments in our annual Connections Customer Innovation Conference and five additional days in the quarter.

Partially offset by continued productivity gains.

Setting aside the fourth quarter bump we see every year due to connections, we expect operating leverage will continue as OpEx as a percentage of revenue continues to drift downward to 40% and below as we continue to deploy human-centric AI internally.

Our guidance for non-GAAP EPS is $0.41 to $0.49. At the midpoint of guidance for the fourth quarter, our 2026 non-GAAP EPS is $1.76, which would represent an annual EPS growth of 30% compared to revenue growth of 19%. Michael, back to you.

We have built the industry's leading AI-native platform. Now we go fast with our customers, amplifying their teams and ours to compete, win and expand at a rapid pace. Nancy, let's open the call for questions.

Thank you, operator. We're ready for questions.

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Our first question is from Ryan Koontz with Needham & Co. Please proceed with your question.

Great, thanks. Good morning. I wanted to ask about RPOs and specifically software bookings there.

Are you pleased before you're out there in your recovery from the cloud transition, any trends within the mix of RPOs you'd point out and what sort of Year-over-year booking rate you think you can get to next year on software RPOs?

Yeah, I'll talk to the trends and then Cory can talk about one specific nuance in RPOs. And so from whether we're pleased, yeah, I'm wildly pleased because what that showed was. Customers in Q3 actually started to commit to our AI, where we're going from an AI point of view, even though our first workflows just started to roll out in August.

Which is the beginning, but as they start to see what's possible, a huge percentage of them just jumped in as you saw by the doubling of the contracts because they agree with where we're going. And frankly, what it validated is that we're going to be the easy button for AI.

Everybody in every market needs to figure out what their AI strategy is. And if you're the one who can provide that in a trusted and secure way, but also give them predictability of cost. Which as we know with tokens and all those things is an issue, we've resolved that, but more importantly, give them a road map that shows where they can get predictability of return on investment, which is very hard to acquire and we can actually give that to them really clearly saying here's the stack ranking of the workflows. We're implementing them in this order and based upon everything and how you run your broadband business, this is the ROI on it. So those were the early adopters, but I believe in the previous call, I had a customer who, and I'll reiterate this, who basically stated they've never bought into our longer-term vision with regards to what we're doing on the smart side of stuff. So no matter how much I tried to sell them on smart home and.

Smart business and where we're going, he never bought in.

But they signed up in third quarter and the reason why is for five years. And the reason why is because they know they need artificial intelligence. It was time for them to get on the experience bandwagon and doing AI and experience at the same time was highly valuable. And then having just come out of Connections where we had almost 3,000 people there, the momentum was incredible if you haven't had the opportunity to watch that event, that's the best event we've ever done and I could stand up there with confidence in front of all those customers and say, we have nailed it. We absolutely 100%, if you sign up with us for the future with AI, we will give you everything you dreamed. And I can commit to that because as I said on stage, our Chief Product Officer, who congrats to him, he just won CTO of the Year here in the Valley, which is a pretty huge accomplishment. And the reason why you won that is because you could stand up in front of our board in the last board meeting and say, we will deliver more innovation on our platform in 2027. Then we have in all of '26 and all of '25 combined.

And more importantly, he will do that at flat to down from a budget point of view, showing a massive jump in productivity.

So do I feel good about this? Hell yeah, for sure. Corey, why don't you talk about the numeric nuance?

Yeah, Ryan, as I said in my prepared remarks.

We wanted to avoid a distortion created by including the clients' gross margins or clients' RPOs in that metric and keep it a pure software and services number.

And so with that, we elected a practical expedient to eliminate contracts of the year or less. So you need to add back $6 million to have a comparable number to prior.

And so what would RPOs in the percentage spend then?

4% quarter on quarter and 13% year on year.

Which is pretty good.

Great. That's great, guys. And Michael, I totally agree with you on the certainty around costs and the ease of adoption. It's very compelling. It's exciting.

Yeah, Ryan, we're the easy button. Right? All you have to do is sign up and then what happens is these workflows and agents just start popping out. In Ad Connections, I demonstrated when I was on stage just how trusted and secure this can be because I gave the example of there was one of the employees of our customers did something funny. He tried to break one of our agents.

And this was like you would use Microsoft Copilot or something like that. He basically pounded on our agent inside Service Cloud and tried to get it to answer how many calories are in a McDouble, which I didn't know what a McDouble was. I'm a McMuffin guy, but it's basically a two patty cheeseburger and it has 400 calories in it. Lord knows a lot of that.

And he took him 51 tries before he could break it. So we also leave them with certainty that from a data privacy and security point of view, that we're going to be able to protect them because you think about the data that they have, that's really important, especially in the -- look what happened from cyber hacking this week where 6 billion got sold off of a crypto exchange, right? So the attacks are increasing from -- and pretty much guaranteed that came from Korea.

These crypto attacks from these nasty nations continue. So we give them that security, we make them really secure, and then we can demonstrate, hey, by the way, if you implement this, we're going to help you get 30% or 40% productive.

That's great, guys. And maybe just a quick follow-up if I could. Could you maybe characterize where you are in terms of some of your Tier 1 engagements, what kind of conversations you're having there, what kind of the nature of the business opportunities looks like?

Maybe give a little color on some of the larger.

Yeah, so we have two large tier ones in North America that we deal with on a regular basis, as you're well aware of, and those continue to progress at a very rapid rate. We're doing really well. On the international stage, we have started those engagements in 2026. You know these are 18 to 24 or 36-month life cycles, and we have many engagements going on internationally.

But those are '27 through to '28, where '28, what happens is you go and win some business in '27, demonstrate it, build footholds, and then you start to really drive revenue through the latter part of the next year and into '28, and so those are going well.

And I would say that if you look at some of the press releases that we put out at Connections, there were two specific ones that are relevant to large customers. The first would be our announcement that Smart Life products are now on Purple. If you're not familiar with what Purple is something that a bunch of Tier 1s have come together and built a standard around operating systems on-prem. And so our Smart Life products are now available so that they can actually run those in a purple container. And that's just the first step for us. We'll actually take our entire operating system, everything that we've done in EXOS on the prem, and we will make it purple certified in the early part of 2027 so that anyone who wants to adopt our operating system can, again, purple certified. The second part is with what we did with language models, and I cannot overstate how important this is the release of the Catalyx communications language model was where we demonstrated that we're not just a data and experience company, we're an AI company. Let's be really clear.

We released a language model for the communication sector that is ahead of everybody else.

No one else has done what we did. And what it is we basically implemented specialized training so that language model would understand what communication service provider needs. Again, if you go to Kaos.com, you can see that in my keynote, I actually talked about the release of the language model. And what differentiates that is that you can take a large language model and I can have it paint Corey on a pink unicorn flying over a. Over a mountain, which was exactly my reference, although I used John DeRocher on stage, but all of that is useless when I'm running a broadband company. What I need is I need to understand how to network and provision. I need to understand how to have great Wi-FY, what is the experience in an apartment building, all those kind of things. So we stripped away all that superfluous components. Got the model down to a significantly smaller state, and then we trained the **** out of it at a very low cost. And in fact, the way that we trained it was really the innovation that we did with AI. And then out of that will come. So that's one of our CLMs. We will have multiples of these open weight models that we have trained specifically for the communications market. But then the next big step for us is then that's where I announced the release of. Alex gems, which is what will happen is that we will then take those and slim them down further into very bespoke and specialized capabilities. So for example, we will have a CLM that is really great at just doing security and it will be small enough because we're going to get it down to a couple hundred million parameters where we can run it for cybersecurity. On a premises system or we can run it for Wi-FY management on a premises system or we can get a bigger version of that and run it in the network on an E92. And so the evolution of artificial intelligence is frankly what we're at the forefront on for the communication sector because we are taking these open weight models and transforming them into specialist models that our customers will leverage. Our existing customer base. We'll not need to understand any of that other than to know that we're doing it because it's just going to show up. It's going to show up on an E92. It's going to show up on a Gigaspire. It's going to show up all across the new switches that we've just released. That'll just show up on the appliances running as part of the operating system in the cloud. And they're just going to, back to why we're the easy button for AI, because we're so far ahead of what's going on in the AI world.

That if you didn't see the CNBC interview that we did, look at how that interview is leaning forward because we are way ahead and we're going to keep our customers way ahead. And then to your question on the Tier 1s, that will be consumable by a Tier 1 where I have this massive bespoke custom Gordian knot of an infrastructure and I will be able to say to Calex. You know what? I'm running purple on a premises box.

And because I'm so slow, I can only have one. So I'm running purple there. But what I'm going to do is I can run SmartLife on it. Oh, and by the way, I can also grab a cyber jam from us that will constantly be updated and will be the best way to protect their customers from a cyber point of view and small or extra small language model that's specialized for Wi-FY capabilities or cyber, and they'll be able to consume that from us. And so our differentiation in these large Tier 1s is that we're going to make for them, we will make artificial intelligence an easy button.

And so that is all of the elements if you didn't parse that out from Connections because Connections was at our regional customers who range up to about a half million subscribers, but embedded in there were some very clear messages for Tier 1 that will be the messages we bring to World Mobile Congress and all those and NetworkX and those places as we continue to roll those out at an aggressive pace.

That's really impressive, Michael. Thanks for that rundown. Appreciate it.

Thanks for the question.

Our next question is from George Nader with Wolfe Research. Please proceed with your question.

Hi, guys. Thanks very much.

I was just looking at the appliance growth in year-on-year terms. I think 12.5% is the number I'm looking at.

I'm curious what that number looks like in unit terms.

Obviously, there are price increases, I think, embedded in that improvement in the appliance side. I'm just curious what that looks like in units.

Yes, George, we don't break that out.

For the gigaspires, we're like so our deployment rates of gigaspires continue to go up.

So we see an increase in appliance sales.

But your point is that customers have been burning down inventory, frankly, because of the fact that they've been trying to work through that.

But Gigaspire deployments continue to increase in our customer base, which means that the core demand affiliated with it, George, is still there. So that's why we look forward into 2027 and we still see very strong demand because Gigaspire growth keeps going up.

Got it. Super. That's great. And then just trying to understand some of the changes you made here in the current RPO metric. It sounds like there could you explain what the customer supply assurance program was all about and why we're including appliance revenue in that number and then I guess subsequently backing it out? I'm just curious on the puts and takes of current RPOs.

So I'll explain the program, you explain the financials, okay?

Go ahead. Okay, so the program from an insurance point of view is that they give us a non-cancellable PO and then we guarantee the price for a period of time. The best for the customer is we're basically giving them some price assurance as it's been a pretty volatile time from an appliance with memories, right? And what we get is we get assurance on their order flow. And so that's what we put in place. And then every single month, George, unlike in COVID where we only did one price increase in COVID, this is a very different time. So every month we change the surcharge on memories. And we keep it up to date. And so therefore, if they don't make that commitment, then they risk if memory goes up again. The next order will be at a higher price. And so that was kind of the incentive for them on why we did that. And it was well received. Obviously, no one likes proxy increases, but simple reality is everything in the world has gone up in price, whether it's gas or membrane. So Corey, why don't you walk through, George, on the RPO metric and what we did there to make sure it was not polluted?

Yes, so George, to ensure that we don't have an RPO number that includes both hardware or software and we're distorting that growth rate on software.

We decided to back out contracts of a year or less. All the appliances will be shipped within less than a year.

The certainty is for a six-month window.

And so the $6 million applies both to the RPO number that you would add back, you would also add it back to the current RPO number. It goes into both because it's all short-term, one year or less.

Super. Thanks very much. I appreciate it.

Thanks, operator.

Next question Our next question is from Chris Squat with Craig Howham Capital Group. Please proceed with your question.

Hey, guys, it's Ben Taxall on for Christian Schwab here. Just a quick question. We took the top-line.

We're at 19% or above the previous 15 to 20. I guess just any commentary on how we should think about 27?

I know you guys probably can't guide 27, but just any commentary on, as it compares to 26 would be very helpful.

Yeah, so I would say the biggest thing you should look at is the fact that we are with we've deployed the platform that was in March, we have all of our R&D organization on full throttle to build out sellable things. To drive our sales organizations so our customers can be more successful and win more. And as we go through 2027, I stand here telling you that we will deploy more capabilities into the market than we have in the last two years.

So the number I gave on stage at Connections was 1,400 capabilities versus what we did in '26 and.

25, which comes out to about $1,300. So the value there is twofold. First, as evidenced by the momentum that we saw in contract closings in Q3 before, which was really the early jumpers, even before we got the connections and the release next week is a big release with a whole bunch of workflows and new agents and all these capabilities. So it's kind of like pre-saw it there.

And then we went to Connection, showed our customers what's going on. And so I would expect that there is going to be a lot of enthusiasm out of our base for these capabilities because, again, there is no reality where AI is not the center of everything. And anyone who doesn't have a ******** AI strategy is cooked. And so we're that easy button. For 1,000 service providers, and as I evidenced in the previous commentary on where we're going with SLMs, we're going to be the easy button for Tier 1s too, and then with regards to the incremental capabilities, as I continue to mention, we've launched our Smart MDU product, there's another big release in November.

And then there's one for smart MDU, what the R&D organization says it's never done, but it gets to a significant level of completeness. I'm already aware, the smart MDU consumers are like, that's the product that I needed. And then you're going to see a massive expansion into new markets as we go after MSPs who sell to MDUs. So those are non-fiber-based providers. They're just the ones who build out custom integrations into complex buildings and the expansion into hospitality.

And so you're going to start seeing us do what we've never done before, which is actually expanding beyond broadband providers into MSPs and hospitality in those areas through the year. So how do I feel about the year? Corey is not going to guide to that. We're pretty damn good.

Ben, let me give you we'll fall back to our long-term financial target of 15% annual growth. We feel good about that.

And that's our baseline as we roll into the next year and look to work to improve upon that number.

Perfect. Thanks. And then just think about the long-term targets shared earlier in the year.

Gross margins can be flat, consolidated gross margins guide to be flat. I guess it kind of applies to me like to we're kind of expecting to maybe stabilize here and then as we go into next year, we could see that.

Increase from these levels, is that kind of the right way to think about it?

Well, I would personally like to see the blow-up of the artificial intelligence market to happen because those ********* are the ones who are driving up all the memory costs across the world and while losing hundreds of billions of dollars, while those of us who actually make money. Suffer at it. So as that actually happens, then what will happen is you'll see the memory market collapse because it's artificially hot. If you look at Marvell as making 90 points of margin or 85 points of gross profit, at some point that's because of what?

Micron making 85% of gross profit. At some point, those guys are going to be punished aggressively for their greed.

And for what they've done to the broader market. And then at that point, we'll get to a more normalized state and there'll be other countries who also start manufacturing memory as that capacity comes on, you're going to see a massive glut in the memory market and it's going to do what it does every freaking time, which is the prices are going to drop like crazy and we're going to throw that straight to the bottom line. But when that happens, that's what we all got to wait for. It's great to see Google lose half a billion dollars or half a trillion dollars worth of market cap. So maybe they'll actually get punished with regards to the stupidity on their capital investments, which will be great. And then that all follows to the bottom line for us so that we can actually have proper margins again.

And no, I'm not being hyperbolic.

Hi, Ben. Let me give you a little bit of perspective.

And if you wonder, Corey is waving me down, but it's true.

From Michael's commentary, you can take that it's likely to be a very noisy environment.

The AI data center bill continues to put pressures on the supply chain as well as we realign global supply chains to take into consideration geopolitics.

So both those two things create a very noisy environment for supply chain and costs as we roll into 2027.

We are looking to do our best to manage through this with our program as we partner with our customers to get to a gross profit neutral state by passing along the cost without putting profit on top of it.

But I can't tell you as I sit here the rate of change as it relates to memory prices, we're expecting it to flatten out relative to what we've seen in 2026, which should make it more manageable.

But I would also say that the pressures put on the AI supply chain build-outs are pressuring other parts of the supply chain, memory just happens to be the single largest one of those.

So I think you have it right. I think we look to stabilize appliance margins at these levels and try to build on where we are now, knowing that it could go up or down as we move into 2027 and we're uncertain about that.

That's extremely helpful. That's all I got. Thanks, guys.

Our next question is from Joseph Cardozo with JPMorgan. Please proceed with your question.

Hey, good morning, guys, and thanks for the question. Maybe just following up on the margin question, but focusing on the other side of the portfolio here on software and services, obviously saw a nice bump this quarter to the record that you guys kind of articulated previously. Maybe just curious, I think you put out in the past, talked about kind of this maybe a 70% type bogey.

Going forward as maybe a little bit of a near-term or medium-term North Star, how are you thinking about trending there? Is that something we can see in the next couple of quarters? And maybe what are the moving pieces there that we should be considering? And then I do have a follow-up.

Yes, I think the volatility and the noise associated with the platform transition is now well behind us, right? We articulated that we would get back to a new record we did.

And from here.

It's all about software revenue growth.

We are optimistic about the trajectory of RPOs and where that's headed with all the AI work that we're doing.

And so now it's just about adding subs and helping our customers go faster to accelerate the software revenues.

And so yes, 70% is on the horizon. Is it in one quarter, two quarter, three quarters? I can't say for sure, but it's inside that 2027 envelope.

And it's just going to continue to build there. There is not a single day that goes by that software revenue does not go up.

Because remember, all of our software stack is all tied to subscriber ads. And as our customers do better, we do better.

And with an NPS score of north of 70, 80, 90, our customers are the share gain winners, right? They are taking market share because their whole focus is on subscriber experience.

And when they win, we win. So it's going to continue up. There's just no stopping it.

Got it. And then maybe switching gears just more on working capital dynamics and free cash flow. Obviously, you guys kind of talked about it already in terms of the higher price inventory kind of taking a toll here, but just curious as we're thinking about how that trend is going forward and maybe what needs to happen, anything, any other levers at your guys' disposal that can kind of help with the trends as we think about our models in the subsequent quarters?

We made a lot of progress this year on building that supply assurance seat with our customers to make sure that as they are taking share, we have appliances that can back them up.

I think we've added almost $75 million or more under the balance sheet over the last 12 months, ensuring that we have the inventory necessary to meet those customer demand environment.

As I look out at '27. I don't think we're going to need to be making the same level of commitment as we did in '26.

So from a working capital perspective, you would expect to see free cash flow improve year-on-year inside of that trend. And understand at some point, I don't know what that some point is, the investments we had in inventory will reverse themselves and then obviously the free cash flow generation will accelerate much higher than where we've been.

But In this entire environment, we are looking to make sure that we are supply certain as our priority and allows us then to focus on footprint expansion.

And so that's what we'll continue to do and knowing that free cash flow generation will accelerate at some point here in the not too distant future.

Got it.

Thank you, Corey. I appreciate the color.

Our next question is from Scott Searle with Roth Capital Partners. Please proceed with your question.

Good morning. Thanks for taking the questions. I apologize. I got on a minute or two late. I'm not sure if you addressed this. But Mike, from a high-level macro perspective, certainly some momentum coming out of connections, but are you seeing any slowdown in terms of decision-making or otherwise given the current macro environment, interest rate environment? It sounds like you're still comfortable with that long-term 15% growth rate, but wondering what you're seeing on the margin. And looking to '27 and '28, if you could comment just on the MDU opportunity in terms of what you think that's going to represent in the mix and how that revs up in '27 into '28? And lastly, operating leverage, it seems like.

From an internal standpoint, you're seeing an incredible amount of productivity from your own AI implementation. You've laid out some goals at the Analyst Day in terms of '27, '28, I think from an operating leverage standpoint. I'm wondering how you're feeling about that and if you're feeling better in terms of some of the internal productivity gains that you're seeing?

Well, that's three questions. All right. So first, what was the first one? Revenue and -- Yeah, so I did address that.

I feel very good about that as we went through the -- there's multiple -- there's three really elements to that. So the first one is that we saw the momentum going up to connections because the early adopters actually seeing that we are the AI easy button.

As we went into -- as we presented that connections, again, we had. All those folks there, it was an incredible event and we demonstrated the roadmap for AI based on the insights that we have with regards to workflows, but more importantly, the fact that we can do this at a really rapid rate. So we have a big release next week where we're releasing more and more workflows in AI. We also talked about the fact that we were releasing or we announced the release of. Workflow Studio, which is the ability for a service provider to actually take, think of our workflows as a reference workflow, then they go into Workflow Studio and they have the ability to see the MCP connections they have with other systems, they're able to see agents, agent to agent that are connected to other systems and expand out their workflows and do customizations to improve their business. And that's a critical component and at the same time, tomorrow or next.

Next week, we released our Agentic-based CommandIQ application, which is a huge step forward from experience, and then also AI Command Center, which is the ability to see everything that's going on from an AI point of view. So I feel very comfortable that as we go through 2027 that our customers who have to face the reality that they need to do something on AI and building it themselves is a fool's Aaron. And frankly, it's going to leak death and if not the hacking of their companies because there's so much complexity around AI that we have the ability to give them something that's secure, that they can trust and that will provide predictable outcomes because we're looking at billions of workflows and building out what are the right workflows to improve a business. So on the existing business, I feel very comfortable with our ability to continue to grow and that growth comes from one thing, them. Winning more subscribers and growing revenue per sub while reducing churn. And the metrics are very clear that we're adding Gigaspires at an increasing rate, and so that's going to continue. The other two segments.

I also announced, and I'm not going to go reiterate that because you did join late, and I talked about the release of Kalyx's communications learning model, where we're going with Kalyx Gems, which are specialized learning models that are large, medium, small and extra small. And those become yet another thing on top of the work that we're doing where Smart Life just got released to purple, which is a standard that large customers use. So our ability to actually go and partner with tier ones and help them press easy buttons on experience and AI continues to expand at a rapid rate. And then the third part of that, which also address your second question on MDU, is that the Smart MDU product. There's a big release in November and then one more in February, which Smart MDU gets to a level of completeness that frankly puts us as the dominant provider or dominant capabilities to serve the MDU market for broadband providers. And then we are going to see a significant focus through 2027 as we take this massive growth in capacity that we have as the people have moved away from building the platform into the R&D organization who has completely evolved their processes to drive massive productivity gains in research and development and now be focused on managed service providers who support apartment buildings and MDU facilities and then the expansion into hospitality, which is going to come at a very rapid rate through 2027. And that's all rooted in what I said on Stage of Connections, which is we will deliver more innovation in 2027 than we have in all of 2026 and all of 2025 combined.

That number is roughly 1,300 and we expect to do 1,400. So it's a massive jump in productivity. And my confidence with regards to our productivity on R&D side is evidenced by the fact that their CPO told a very interesting story that I shared on Mainstage 2, which is we had a function for a RADIUS server scoped at 15 min months and they did it in three. So that answers your last question, which is how am I feeling from a productivity point of view on AI work internally, well, that shows you what the RMD organization is doing, which is about 30% to 40% jump in productivity.

Also evidenced by the fact that we expect the R&D budget into 2027 to be flat and so having a flat R&D budget delivering 40% more product functionality is a pretty incredible testament to the power of AI. Across the broader organization, we look, implementing artificial intelligence inside an organization requires a massive managerial ship.

Managers to be successful in the past, there's a number of parameters on what you need to be. To be a good leader, there's a number of things that you need to do. I'm going to say this clearly. I'm going to explain what a good leader is. A good leader is able to have a strategy. They understand how to implement that strategy and execute against it. They're able to attract talent. And also manage talent, which means that they remove low performers, they coach people to a higher level of performance and that attracts people to the team and the next thing that they have to add to that skill is the ability to analyze workflows.

This is one of the biggest skills that new leaders are going to require, which means you need to take a step back and understand, and this is what's old is new again. So this goes back to, look, I'm old. So we go back to the Six Sigma work, right? It's not unlike Six Sigma work where you need to become as a leader, if you want to be successful, you got to do the hard grunt work of actually applying like a Six Sigma mindset to it, go through. Through what are all your processes, understand what your humans on your team are doing and then going through piece by piece, pulling all that apart and saying, what will I identify so I free my team from doing repetitive work that adds no value? And then how is my team going to evolve to achieve outcomes like the R&D organization is going to do? What I didn't tell you was we're going to drop R&D down by half.

I told you that R&D is going to be flat and deliver 40%, like a massive jump in productivity.

And so that, in the end, is what we are doing from a leverage point of view, which is every single quarter, and in fact, I have my ops review just before the board on Monday and Tuesday next week, and every team is getting, in essence -- I can't say that, that's crude an exam.

Their business from me and my Chief of Staff and what they're expected to do is grind through their organization top to bottom, understand how everything works, pull it apart and identify it, but this takes time. And so I think what you see in the results in Q3 is you saw some sparkles of that coming through. You hear the R&D stories, which is pretty bloody clear what the massive value is going to be there.

But then in the other areas of the business, you saw us go from 42 to 41, and you're starting to see the leverage come through. So the way I would describe this is, look, there was an article written about me in Selling Power.

About a month ago, and one of the things they called out is that I'm a grinder. Well what? The good thing is my leadership team is filled with grinders. This is what we do. And so I think that the Calyx organization is going to be dramatically more successful than other organizations, primarily because of the fact that I'm surrounded by a leadership team that all thinks the same. We know that we have to grind our way through our organizations and understand how all the work gets done. And root out inefficiencies, replacing those with AI to allow our teams to do higher value work.

So for example, if I have X amount of people in customer success today, if I double the size of the company, the goal should be I keep that flat and I do that work with agents and humans who are more effective.

And so that's the mindset that we're achieving. And I think you're going to see that from us, from myself and Corey. Every single quarter, we're going to be sharing with you something else that we grinded through and added agents to allow our teams to be more productive.

And so am I feeling encouraged?

The good thing is that the distraction of the platform lift that we went through for 2.5 years is now behind us. The road forward is really freaking clear and my Chief Product Officer, Shane and I joke about this all the time, the step that we're currently in is we're no longer trying to figure it out, this is just work, this is just grind this **** out.

And that's what we're doing. We're going to grind it out through the end of the quarter and through 2027. And so we're in a unique position because we don't have -- where other companies are still trying to figure out what the heck they're going to do in this massively changing world, it's really clear, now we just execute and grind.

Perfect. Thanks so much. Nice quarter. Keep grinding.

Our next question is from Timothy Savageaux with Northland Capital Markets. Please proceed with your question.

Hey, good morning.

And this is kind of good timing.

Question was going to be to follow-up on the operating leverage comments you guys made during the call.

And I guess, Corey, my question to you was going well, first going to be, Michael, did you got R&D flat to down and it looks like you did and then that.

I want to comment on that, so let me just comment on that first part is that what's great is we did need to do that actually, the leadership team inside the R&D organization, that was always their goal.

2.5 years ago, I said this in the if you haven't taken 10 minutes to watch the CNBC thing that Shane and I did last week, you should, and we'll repost this out the entire interview and what was interesting back in November of back in 2023, this is where Shane started to educate us all and his leadership team. To educate us on the value of open waste, building the platform and all those things. And then he also started to identify that we could really start to identify how we build product. And so I would say what's great is that comment about R&D being flat in 2027 with massive productivity gains is frankly just him doing what they promised to do. They executed against that vision, we made the significant investments over what is now three years of hard freaking work to get here and now it's going to pay, so that's kind of how I contextualize it, sorry, I just wanted to comment on that.

Carrying that forward, I mean, Corey, the original question was going to be over what time frame do you expect to see OpEx drift below 40% of revenue?

It looks like you'll be there for the year in calendar '27 in this context. I just want to kind of bounce that off you in terms of expectations for operating leverage. And well, let's just start there, but I'll follow-up.

So we outlined in our Investor Day back in April that we were looking to grow OpEx at half the rate of revenue growth in 2028.

And I think we've taken the goal internally to see where we can do to accelerate that into 2027.

So while we're not committing that now, that is still a goal that we have is to accelerate that into 2027.

We have to balance out is going into the new markets and.

I don't care what anyone says about AI, it's not replacing sales reps. It's just not. It's going to make salesmen more productive when they're doing less. They're going to do less of what they hate anyways. They all whine about it. I was a sales rep for 15 years. I whined about it, which is internal stuff and analysis and all those things.

I want to be real clear. Sales is still sales and anyone who thinks that AI is going to replace sales. Is probably a marketing or product person who's never sold anything in their life.

Those of us who understand the sales organizations know that AI will augment their capabilities, but you need sellers. So the investments that we make in 2027 are actually going to be in sales and marketing because we're entering into new markets. So for example, take the MSP builder market with what we're doing on MDUs. Our brand is well known with broadband providers. It's not well known in that market.

So, we've got to go make those investments to build brand.

So, we'll balance that out with massive productivity gains and OpEx leveraged, but we've got to go balance out how do we invest in it to grow brand.

Can you hear me?

Yes, we can.

And well, kind of hesitate to bring this up, but we've talked about memory a little bit. My own observation kind of in the early part of the call was, well, you seem to have gotten a pretty good handle on this, even though it's still a fairly volatile environment. But if you look at the compression and appliance margins that we've seen throughout the year, I mean, Corey, can you estimate.

I guess what this memory price increase has cost you this year, maybe from an earnings standpoint, is it 500 bps on appliance margins and that's how we should look at it and is it potential to should we see some more favorable movement, what we could see on the flip side of that?

Yes, but it's a time statement, I don't know when.

So I don't know what 2027 is going to bring.

I don't see it relenting in 2027. I still think there's going to be a fair amount of noise.

And you're also looking into a cost environment that is spreading beyond memory.

So I think 2027 will be as challenging, if not more challenging than 2026.

But again, we're focused on supply, making sure that we have that. And price is secondary to that, Tim.

But I can't tell you which way I think 2027 goes.

You tell me kind of where memory goes, and then I could probably give you a better answer.

Hopefully, NVIDIA is $1 trillion market cap. That'd be great.

A couple of those folks that we can actually see some of this.

And by the way, it'll be interesting to hear even what will be interesting is the elections today because there's a lot of questions with regards to data centers are an element of the election conversation, right? So.

Do we just see this unmitigated, unstoppable building of data centers which is consuming memory or does something shift?

We'll see. Do people actually need to make profit, right?

Lord knows OpenAI and Anthropic should be bankrupt.

We can hope.

Thanks a lot, appreciate it.

We have reached the end of the question-and-answer session. I would like to turn the floor back over to Nancy Fazioli for closing comments.

Thank you, Sam. Kalus will participate in a number of investor events during the fourth quarter. Information about these events, including dates and times and publicly available webcasts will be posted on the events and presentations page of the Investor Relations section of kalus.com.

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

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