Calix Inc (CALX) 2021 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Calix Second Quarter 2021 Earnings Conference Call. (Operator Instructions). It is now my pleasure to introduce your host, Mr. Tom Dinges, Director of Investor Relations. Thank you, sir. Please go ahead.

Thank you, Donna, and good morning, everyone. Thank you for joining our second quarter 2021 earnings call. Today on the call, we have Chairman and CEO, Carl Russo; Chief Financial Officer, Cory Sindelar; and President and Chief Operating Officer, Michael Weening.

As a reminder, yesterday, after the close of market, we released our letter to stockholders and 8-K filing as well as on the Investor Relations section of the Calix website. This conference call will be available for audio replay in the Investor Relations section of the Calix website.

Before I turn the call over to Carl for his brief opening remarks, I want to remind you that in this call, we refer to forward-looking statements, which include all statements we make about our future financial and operating performance, growth strategy and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in our second quarter 2021 letter to stockholders and in our annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates.

Also on this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our letter to stockholders. Unless otherwise stated on this call, we will reference non-GAAP measures.

And with that, let me turn the call over to Carl. Carl?

Thanks, Tom. The second quarter saw the Calix team achieve a number of milestones on our march to an all-platform world. On a wave of continued strong demand, for the first time, our All Platform offerings, software and the associated systems and services were greater than 50% of our bookings. We expect this trend to continue. For the third quarter in a row, we did not have a 10% customer, and we do not expect to have one in the current quarter. This speaks directly to the breadth of our customer base and the predictability of our All Platform model. At the same time, we brought our B6 and C7 products to end of sale. These 2 systems were the founding systems of Calix, and this marks another milestone in our continued pursuit of our All Platform future.

With these milestones behind us, the Board of Directors has added the Chairmanship to my CEO role. I will continue my focus on our long-term strategy, and I am confident that our executive team, led by Michael Weening, our President and Chief Operating Officer, will continue to execute our strategy with excellence.

While supply remains a challenge and will remain a challenge well into next year. Organic demand for our solutions remains robust. Every day, we are excited to help our customers simplify their business, excite their subscribers and grow their value.

With that, let us open the call for questions. Donna?

(Operator Instructions) Our first question is coming from George Notter of Jefferies.

Congratulations on the strong results. I guess I wanted to ask about gross margins. If I remember, going back 3 months ago, you mentioned that you had a shipment of low-margin product that got pushed from Q1 into Q2. I guess I'm wondering if that had some impact on the gross margin result this quarter? And then also, I would imagine your component costs are higher also given the supply constraints around the industry. And any sense you can give us for how that might have impacted gross margins also would be great.

Yes, George, you have that right, if you remember correctly that, that shipment pushed from Q1 into Q2, and it had some impact on our margins. And you're also correct that the component increase in prices and higher freight costs contributed to the sequential decline in margin from Q1 to Q2.

Any chance you guys could quantify that? Is it 1 point margin, 2 points of margin, 0.5 point, anything you could steer us to would be great.

Yes. I think, Cory, in the past, you've said it's not insignificant, but we haven't tried to bracket it. I think in the past, Cory has said that it's more than 1 point less than some higher number. It's a significant number, George. And that's, I think, the best way we do.

And then I guess I also wanted to ask about CenturyLink, I guess now called Lumen. Your larger customers were -- that segment was down quite a bit year-on-year. Obviously, CenturyLink, it sounds like, is going through a strategic process with some of their assets. But any perspective on what's going on there? And any chance that account could improve going forward? Let's say, they do make some strategic decisions, maybe get some cash proceeds from those strategic decisions. Could they reinvest in areas of the business that you guys are exposed to?

Yes, George, I think that's the correct observation. As you know, over the last couple or a few quarters, they've been pretty tight on CapEx as I think they've been going through their strategic valuations. I think you'll notice in the announcement around the Latin American assets. They spoke directly to likely use of proceeds into CapEx and investments. But we think it's going to continue like this for a while as they continue that focus on where they want to go strategically. So our business continues to move along. If you look across the industry, you'll see that their CapEx was down across a number of spaces. And I think there is a chance it will improve. But it may improve through Lumen. It may improve through the spun-off assets, whatever they may be. So stay tuned.

Our next question is coming from Paul Silverstein of Cowen.

The 43 new customers in the quarter, that's a big step-up from your historical past. I think you did 24 the preceding quarter, in the 20s and the teens before that. Is this the new norm? Was there something specific about this quarter? Then I've got a couple of follow-ups.

I don't know if it's the new norm. I would really characterize it as, you know that we've been investing to get up to our model. And a significant portion of that has been in sales and marketing. And so I would say stay tuned, but I think you're going to see an increasing aggression on the part of the sales and marketing organization.

Michael, do you have any words you want to add to that?

I would just say that the different sized customers from small- to medium-sized and exactly what you said, Carl, is that the investments that we're making in the sales and marketing organization are paying off, along with the platforms being very mature. Had a customer say to me the other day that we're the only WiFi 6 platform that's carrier class and mature in the marketplace, and that's why they went with us, and it's paying off dividends because we were the first in the market. And now that we have all of our new platforms coming into place in our new solutions they are very excited about the future, which is leading a new customer acquisition.

All right. Then your midsize customers, I remember the number, they were up again very strong. I think it's what, 60% or 80% growth this quarter on top of the 130% growth from the previous quarter. Is that indicative of something that's clearly a (inaudible) that level, plus are they back to growth mode for an appreciable period of time? And what's going on there, any [sight] you could offer?

Yes. So I think we have to be careful about midsized customers because it's easy to remember the past and think of midsized customers as the Tier 2s. And if you remember, we set midsized customers at those greater than 250,000 subscribers, less than 2.5 million. So it is indicative of something in the future, but it's not necessarily that the Tier 2s are rekindling. It's that value proposition, as you heard Michael allude to, install and medium customers is starting to work its way up the stack of customer size.

One last question, if I may. On the non-U. S., I know you've had your hands full with U.S. demand. And so you haven't -- correct me if I'm wrong -- been deploying a significant amount of incremental investment in terms of OpEx at set time resources into non-U. S., and if the non-U. S. was up strong once again this quarter. Any incremental insight to offer there?

So same story from my perspective, and I'll let Michael add some color. We are being very much focused on North America, but globally, this whole drive towards -- or from anywhere of broadband, et cetera, is a wave that's moving through the marketplace. But Michael, maybe you want to -- ask you color.

Yes. On the international side, we're very -- being very pragmatic on how we expand and a lot of the growth that we're seeing is actually from existing customers who are making incremental investments in their networks in the markets that they cover, and we're getting the benefit of it as we have a long history with them. They chose us as their strategic partner. And I think that's the key differentiator, is that the companies who are with us in the international markets were the ones who actually understand the value of our platforms, how they simplify their operations and excite their subscribers, and they're betting on us long term. And that's -- and as they get more capital, they partner with us.

Our next question is coming from Chris Howe of Barrington Research.

A few questions here. But leading off, just tying together some thoughts with some of the previous questions, the 43 new customers in the quarter and in the shareholder letter, you had a brief highlight related to favorable regional mix. The success you had in adding new customers, should we think of that as being tied to how you targeted your potential customer base on a geographic basis?

It's tied to the same model that we've been pursuing, which is we have a direct model that we're continuing to invest in. And so look, there's more smaller customers than there are medium customers. There's more medium customers than there are larger customers. And so on a numbers basis, you're going to see the most of them in the smaller customers. Michael, do you want to add anything to that?

Yes. The other part is that if you look at the maturity of our cloud platforms, what we are unique in the market with is the fact that we can actually enter a customer on many different vectors. So where if you go back to the history of Calix 15 years ago, we would have primarily partnered with a customer as an access vendor. We're now able to go and transform their call center, we're able to transform their marketing like nobody else in this marketplace through behavioral analytics insights, we're able to help them build out a virtual storefront in the home with WiFi 6. And therefore, that gives us an access to competitive accounts that we never had before, and we're entering into a different vector and allowing us to win those customers.

And just digging into total operating expenses, we came in better than expected. Can you put this leverage into context for the current quarter? And kind of at what points you saw the potential leverage start to realize itself and how perhaps we should think about that on an ongoing basis. I know we're moving towards the target financial model on a percentage basis that you highlighted in the letter. But perhaps you can go into some of the leverage opportunities or what we could potentially see as revenue perhaps overgrows your total expense line?

So let me shape my answer to your question in a return on investment manner because, obviously, we expect to make disciplined investments in OpEx that yields returns, and we are very focused on growth. That being said, the leverage is, in our view, in a return on investment by driving the growth of the business and opening up new margin expansion opportunities. It is not in leverage at the bottom line from having OpEx be below our model. So Cory, do you want to add some color for Chris to that?

In where we are heading?

Sure.

The underperformance on OpEx was largely due to not meeting our hiring goals in the quarter. So we did add a roughly a little more than 5% to the workforce in the quarter, but fell short of what we expected. But over the near term, we intend to get to model. And so those OpEx investments will continue to increase.

Yes. And so the I -- we refer to it, Chris, just for your perspective is, we are planning for success, but we're not going to lower the bar for folks coming in to meet a headcount goal. We're going to go get the very best talent we can, and we think our culture supports that.

And I guess that speaks to one of the recent press releases surrounding the high-quality of talent that you're attracting to Calix, not lowering the bar for that. My last question is just quickly. It was asked about the lower margin items that got pushed forward from Q1. As we look at kind of the end of Q2, anything there that we should make note of as it relates to Q3?

Sure. We -- I've seen a little bit more of purchase price variances. Spot market values are going to start affecting margins. We factor that, obviously, in the guidance that we provided. But we are moving into the tougher part of our fourth quarter. And remember, back when -- in our first quarter call, we've talked about the push out in lead times and lead times leaving a gap in the fourth quarter. And so as we approach the fourth quarter, it's obviously becoming increasingly more difficult to meet the demand. And so that has been assuming costs of increased air, increased component prices. So we're going to go through the most challenging supply part that we've faced in the last 18 months in the next couple of quarters.

Our next question is coming from Michael Genovese of WestPark Capital.

So with the upside versus where the street numbers were in 2Q and 3Q, do you have any update to the full year outlook?

Mike, we do. And I'll let Cory cover that with you, Cory, go ahead.

Yes. Last quarter, we said that we could grow at about 15% for the year with the improvement of our performance in the second quarter and outlook for Q3. At this point, I think we can grow at 20% or more for the year.

So for the year, what does that make it? I mean...

I guess we are talking $660 million for the year.

Does that help, Mike, at all?

Yes. Yes, absolutely. Thanks. Okay. So just -- can you just quickly talk about -- I just think it's important, when you talk about the legacy products, I didn’t, I guess, quite realize you have so many legacy products because -- I mean, they're all fiber, but what's really the difference between the legacy stuff that's phasing out and the all access, if you can give us some color there, that would be helpful.

Well, we do have -- we're a 21-year-old company. The company was founded on the C7. We acquired a company called A-CAM, which had its founding product called the B6. And you may notice from my introductory remarks that we actually achieved end of sale in June on both of those systems. After those systems came to market in 2007, we built the E-series product family, which may ring a bell because the E-series continues to today, but the initial E-series was built on an operating system called EF&I, and those were copper and fiber systems. We also then build the GigaCenter family, which was our first-generation of premises systems, and all of those are in what we refer to now as our traditional or legacy systems. They sell -- they have broad deployment. The E-series was a phenomenally successful system. And so we have many, many customers that have built networks with E-series and have premises systems on GigaCenter that are still robustly ordered.

When we brought our platforms to market, AXOS and EXOS, which have become the Intelligent Access Edge and the Revenue Edge, along with our clouds, that is our All Platform business going forward. The AXOS and EXOS operating systems, even though they are abstracted from the hardware, still have hardware resources underneath them. We continued with the E-series for the Access side, and we have now brought the GigaSpire family to market for EXOS. So we are slowly but surely growing our All Platform systems. But customers that have networks built on E-series or the GigaCenter premises if they choose to continue to order those systems; I for one, I'm perfectly happy to take the order. And as they see the opportunity to deploy our platforms, they'll move to them.

Michael, do you want to add some color?

Yes. When I joined 5 years ago, Carl shared the view. He was 5 years into it, and we were down this path, on the journey to build these platforms. And I would say the only thing I would say that's important to understand between the legacy and the new is that we've chosen a very different path than our competition. What our competition has done is actually kept their existing systems that have been there for 20-plus years. They haven't upgraded the fundamental underlying technology, and instead, they're taking the very traditional technology path but actually putting middleware over top of it and actually building out over top of it and covering it up.

What Carl and the leadership team did 10 years ago was actually rebuild these platforms from the bottom-up using industry [tab] scanner technologies like Netcom [Gang] and all those elements, which is why our products are unique in the market. They are built from the bottom-up to actually embrace the future, which is all around helping service providers understand their customer, leverage data and win. And so that's the difference between the old and the new from my perspective.

I just want to point out that I'll take that compliment.

Yes.

Mike keep going.

I'm going to ask 2 more, and I'll just ask them at once, even though they're on different topics. I just wanted to take your temperature on gross margin expansion for the overall year, the typical 100 to 200 basis points, where you stand on that right now? And then secondly, just how are you feeling about Congress and infrastructure-related further stimulus for this industry?

Okay. So let me just -- I want to put some color on the gross margin and ask Cory to then add to it. I want to go back to what Cory was saying earlier about Q4 filling in, et cetera. And I want to frame that with what Michael just said. We have an enormous opportunity in front of us. It is a secular disruption. And we are very energized by helping our customers succeed. What that drives us to do is to work very hard to meet their expanding needs, which means delivering systems and not raising prices, for example, because our vendors have raised their prices. So we are all oars in the water to meet our customers' demand, which means we will pay expedited fees, do things on freight, find things on the open market for silicon. And that's the color that Cory was talking about. So Cory, do you want to shape that to the direct question, and then I'll come back and talk about Congress.

Sure. I think the strength in gross margin in the first quarter and the continued performance in the second [makes me confident] that we think will achieve margin expansion of 100 to 200 basis points year-over-year. So I think we're on track to do exactly that.

And it's a fight. No one should take away, that's an easy thing right now. It is a flight. On Congress, look, there's lots of puts and takes, and we're all following these things. Here's the thing I would leave you with. It seems that in the vernacular, regardless of affiliation, everyone now knows to say, "We're interested in hard-core infrastructure, roads, bridges and Internet." No matter, party affiliation, you hear the same phrase. So why do I say that? Because it's clear that they didn't ask and Internet infrastructure has resolved itself with [55 million]. Either way, there's going to be a large amount of dollars invested in. When, how it shows up, we could have long discussions about, I am on record as having said the following, and I'll repeat it. These programs always turn out to be larger than you think. They take longer than you think. And what I've said about Calix remains true. It is not a pull forward of boxes. It is an uplift of our entire model as we help our customers build a new business model on top of the new infrastructure they're building.

Our next question is coming from Ryan Koontz of Needham & Company.

Impressive metrics there with the software bookings, north of 50%. Can you give us any color there on what some of the trends are, fairly familiar with the products, but what's driving that? And is that -- should we think about that as the new normal or kind of a onetime event?

So let me make sure I'm being very clear. It is our All Platform business, which is software, the associated systems. So remember, there's a hardware resource underneath both the Access infrastructure and the premises. And the services that go along with it. So that business, not just software, the whole business has now made it over 50%. And obviously, once having made it over 50%, it's not going backwards. So I won't speak of it again. Ryan, prior to you joining us. I had said at some point in time, we're going to go over the 50% in revenue. I thought it was meaningful to share when we had eclipsed the 50% in bookings. So that's the one tidbit, and we expect it to continue. Does that help?

It does. Specifically on the odd off programs, are you seeing any action there? We've heard from some of your peers that maybe some of the engineering work is starting to be funded maybe by internal mechanisms, but folks are looking to get going late this year, early next year. Is that in line with what you guys are thinking?

You mean, you've heard from some folks that previously 2 years ago, said it was going to happen next quarter. So all sarcasm aside, let me be clear. As I said, it at least takes longer. That being said, we are clearly seeing now people planning, starting to put in some orders, but it's still early days. Michael, do you want to add some color to that?

I would say that's exactly the case. The growth that you're seeing right now is based upon us taking market share. And so while that's a great future-looking opportunity for us, as Carl just stated, it takes longer and it's bigger. And so we expect that to start flowing through in subsequent years. But the results that you're seeing today are about our organization actually taking market share-based upon our customers understanding the value of our platforms and their desire to build a new business model to fundamentally transform and win customers, again, it's their biggest threat, which is the consumer direct companies who want to get inside the home, own that subscriber and monetize into incremental services, which the service provider needs to do.

Lastly, any color on the international side? Obviously, a great quarter there on revenues. Any regional color you can offer up?

Just continued execution. Cory, do you want to add something?

Yes. You'll see in the Q tomorrow, it was -- it's pretty broad-based. It came from a number of regions, strength, particularly in Europe.

Our next question is coming from Christian Schwab of Craig-Hallum Capital Group.

Congratulations on another good quarter and guide. Most of my questions have been asked. Carl, I just have one quick question. When you look at small customers here domestically, the less than 250,000 subscribers, so what do you think your penetration rate into that customer base currently is? And could you identify a number of how many target customers that are left out there that are not customers at all of your All Platform offering?

So we are well penetrated from 20 years of working in North America as Calix. Having said that, with our All Platform offerings, you've heard me say we are very early days. And so I would say to Michael, as a VP of Sales, once said in my very early selling career, "When it comes to orders, too much is never enough." So Michael, I don't know if you have some color on. But these are -- we are so early in this transformation process. But Michael, maybe you want to give some color on the business transformation and how early it is.

I want to go back to what we talked about earlier, which was that in the past, if you were to go back 15 years ago, we would have competed with a number of vendor competitors and our only offering would have been the Access network. What we're actually seeing over and over again is, again, with multiple vectors into a customer with the ability to win their marketing organization, to win the transformation of their call center, to completely change how they bring services to market in the home to compete with the consumer giants. And then the access side, that means we can go back to customers who we really had nothing to talk about it before because they made a big access network investment, and they're like, "I'm not going to switch midway through" and talk about all these other business transformation elements. So for us, it's an amazing opportunity, which again, goes back to my previous comment, which is the growth that you're seeing is us taking market share as we enter into not only new customers, but actually places where we didn't have something to go to talk to them about the parts and absolutely now we do.

Let me ask it a different way. Given your long history in access, what percentage of your historical access customer base over the last 15, 20 years that you've been selling to, is currently buying your All Platform solution today?

A large minority are buying some portion of it, but it is still a minority.

You know where I'm going, Carl. I'm just trying to frame a couple of different ways, how big the opportunity for you can be at a small penetration rate, follow-up on the earlier question about the new customer additions and the All Platform. So is there 500 existing customers that don't buy an All Platform solution, so it's something like that, I guess, (inaudible) a standing.

Yes. So let me be clear. You've heard me say this many times. Every day I get up and go to work, I get more excited by the opportunity we have in front of us. And the reason I'm getting more excited is because I'm looking at what customers are doing with us. And I then come to the realization that we're even earlier in this opportunity than I thought. So that's one way of thinking about it. The second thing you've heard me say is that our model expands in multiple dimensions in multiple ways. And so it's not only -- as you heard Michael speak earlier, we can enter a customer with marketing cloud, and that might be the only thing they deploy.

But as they start to do marketing cloud, then they might expand into support cloud and they might go to the Revenue Edge. There's so many dimensions of expansion that even with our customer base, which is 1,500 plus strong, we are still barely scratching the surface for that expansion opportunity even though there are quite a few hundred that have deployed some aspects of what we're doing on the platforms. So the expansion, which is what you're getting at, we are just getting up to bat in the first inning.

Our next question is coming from Tim Savageaux of Northland Capital Markets.

I just wanted to follow up on some of the market share commentary. And obviously, you guys are -- have been a pretty established player in the market, especially on the rural side for quite some time. So I was a little bit struck by that comment. And in order to follow up with whether -- and you can define your addressable market, however you like, I'd be focused on that kind of maybe the small carrier segment or perhaps the U.S. in general, if you could estimate what you think your current share of that market opportunity is? And from whom are you taking market share, do you think? And I'll follow up?

Yes. So market share, Michael used that term, market share. You have to keep in mind that in the disruption, market share is an interesting thing because what you're focused on is actually, as you heard him say, addressing new opportunities that don't exist in the way the service provider thinks about it. So if you look at it as just overall "spend from service providers," we are growing the share of that spend. But it's in places that are different than the way you would traditionally think about. And so the best way I can point this to you is, over time, you'll have -- you'll be able to look back on a basket of different vendors that are in the space. And I think you'll see a different growth rate out of Calix than others around us in the space. And that's the best way I can give you to think about it in the aggregate. So hopefully, that makes sense.

The second piece is, when you look at the overall opportunity, TAM, SAM, all those different metrics, you've heard me say that hardware aside, we think that our customers will share between $1 and $10 per month per subscriber as we help them grow more and more successful business models. And so who are you taking "share" from -- you got to be careful about that term share because part of it is new spaces that don't exist. And so ultimately, the best way I can answer your question is, I think you know this, but the folks that you would think of. And then let's see, in the rearview mirror, which businesses grow at what rate, which businesses expand margins at what rate. So that's the way I would address the question.

Okay. I think I understand that. So you're kind of saying you're taking share from your -- maybe your customers kind of internal marketing departments for IT departments in sort of a nontraditional definition of the TAM, although in finding it that way.

No.

Go ahead.

Hang on, Tim so let's be clear. When you hear us say, simplify their businesses, excite their subscribers and grow their value. What we're actually trying to do is actually increase the value of our customers by helping them grow their revenues, lower their costs, and we will participate in the share of that. It's a very different way of thinking than the traditional market share statistics.

Okay. Still have a number there, but I hear what you're saying. And I wanted to follow up on just a couple of finer points on a few market segments that you touched on. One would be Tier 2s, where we do perhaps see some uptick in activity there as a few of those when -- again, it's hard to tell in terms of how they're defined, but there does seem to be some broadly some more activity there. So I wonder if you could maybe segment. Again, and I think the overall theme here I'm trying to get to is market growth versus share gain, and there does seem to be a lot of market growth. So in terms of whether there's something new and interesting happening in Tier 2 land on the one hand. And then international, I guess, the comment was about existing customers. So we should think more about Canada, Mexico, Caribbean, in terms of growth versus some of your new kind of odd carrier engagements U.K. and elsewhere in terms of what's driving that? And that's it from me.

So Tier 2s, again, to go back to what I said earlier, the midsized customers, 250,000 to 2.5 million is the segment that's growing. But Tier 2s are part of that, but they are not all of that. And so what we're seeing, back to Michael's point earlier, is we are having more and more success working with customers that are larger and larger to deploy platforms and build these new business models. As for the traditional Tier 2s that are going through various forms of restructuring and reinvestments. We think there will be an opportunity there over time, but we'll see how they align their business strategies. As for international, I think we covered that earlier on where we're seeing it, which is, to Michael's point earlier, from our existing customers, for the most part, expanding. We have new -- we did add new names in the international market to be sure. But it's, frankly, the result of our continued focus as we have been, where we're aligned with customers internationally. It's not because we are expanding internationally yet.

(Operator Instructions) Our next question is coming from Paul Silverstein of Cowen.

Sorry, Carl, you're competing with the conference and that on broadband. I'll ask you guys off-line.

Thanks, Paul. Okay, Paul. Others?

At this time, we've reached the end of our question-and-answer session. I'd like to turn it back over to Mr. Dinges for closing comments.

Thank you, Donna. Calix leadership will participate in a number of investor conferences and meetings during the third quarter of 2021. Information about these events, including dates and times for public webcast management interviews, will be posted on the Events and Presentations page of the Investor Relations section of Calix.com. Once again, thank you to everyone on this call and on the webcast for your interest in Calix and for joining us today. This concludes our conference call. Goodbye for now.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.