Calix Inc (CALX) 2020 Q3 法說會逐字稿

Greetings. Welcome to the Calix Third Quarter 2020 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. At this time, I'll now turn the conference over to Tom Dinges, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining our third quarter 2020 earnings call. Today on the call, we have President and CEO, Carl Russo; and Chief Financial Officer, Cory Sindelar; also joining us today is Executive Vice President and Chief Operating Officer, Michael Weening. As a reminder, yesterday, after the close of market, we released our letter to stockholders in an 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 we continue, we 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 third quarter 2020 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 call, we will discuss both GAAP and non-GAAP financial measures. 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.

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

Thank you, Tom. As we said last quarter, for Calix, the future is sooner, and so it continues. The third quarter reinforced our view that the pandemic has accelerated the secular disruption moving through the communications industry, while also creating additional demand, resulting from the expansion of capacity to meet immediate subscriber needs. These 2 effects combined to drive strong bookings in the quarter. While component lead time challenges remain, our supply chain team outperformed in the quarter, which enabled us to deliver results significantly above the high end of our guidance.

The third quarter also marked a milestone in our history. Building Calix initially as a broadband access system provider to wireless services. And then building the new Calix as an all-platform provider of software systems and services to CSPs of all types has been a challenging journey. What kept us motivated throughout was our vision of a new and better service provider business model built on these platforms. And we were certain that once achieved, the Calix business model would be similarly enhanced. While it is still early days in this transformation, the effects of our new business clearly showed through this quarter as we delivered all-time record quarterly revenue of $151 million. All-time record quarterly corporate gross margins of 51.5%. All-time record quarterly systems gross margins of 52.6%. And all-time record net income of $25 million or $0.40 per share. Clearly, our future is now.

To reiterate, we are just getting started as the trends are continuing in the current quarter, with our strong guidance for the fourth quarter representing a balance between strong demand and continuing component supply challenges, and we step up into the fourth quarter from the strongest financial foundation in our history. There is a growing class of service providers building new business models. On top of a unified excess infrastructure, these service providers deliver superior subscriber experience and do so at the lowest cost. They are aggressive and growing their subscriber base, and they are attracting capital. And we are excited to host them along with 21 new customers added in the quarter at our annual ConneXions conference, in full virtual mode this coming week.

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

(Operator Instructions) Our first question is from the line of George Notter with Jefferies.

Congratulations on the strong results. I wanted to maybe start out by asking about the pull-forward effect. I think you mentioned in the press release that, obviously, work from home is driving some real strong demand and certainly pulling forward demand from future periods. Any sense for how much that effect might be? And also, it certainly doesn't seem to be in your Q4 guidance, is that pull-forward effect something you'd expect to see maybe in 2021? I guess I'm just trying to understand the dynamic there.

George, I want to make sure I heard the last part. Did you say it wasn't in the Q4 guidance or is in the Q4 guidance?

Well, I mean, the Q4 guidance looks extremely strong also. And I guess -- by -- I guess the implication here is that at some point, there's an air pocket out in the future as you satisfy that demand. I guess, kind of wondering what that dynamic looks like.

Okay. Sorry, I wanted to make sure I understood. So our sense of the mix is that it's still part of both. Part of it is we're accelerating our all-platform model, and part of it is just the demand pull forward. We see it continuing into Q4. And we are getting more comfortable that this is a new level of demand for the company. And you can see that reflected in our guidance on OpEx. As you may remember, last quarter and the quarter before, we spoke to the fact that we were going to underrun OpEx because of our concerns over how much of this was a pull forward. So we're getting more comfortable that there's a new level of demand here and more comfortable that there won't be a negative growth air pocket after that. So let me stop there and see if that shapes the frontier for you to ask another question.

Yes, that's great. And I guess just as a follow-up on that, what is it about your business that makes you confident that this is indeed a new level of demand? I mean, I -- certainly new customers, I would imagine, play into that. But is there something else you're seeing in your order book or conversations with customers that kind of reinforce the idea that we're at a new level?

So the answer is, obviously, part of this is an outcropping of what we've spoken to for many quarters. One is, obviously, from a product standpoint, rotating to more and more of a platform model, changes the visibility in a number of dimensions. The second piece, as you've seen in this quarter is a continuation of the diversification of the customer base. And as you know, it's not a deliberate pursuit of diversification, it's merely the outcropping of where the more aggressive service providers are.

I would also call out that as you look forward, off of the base that we just established, our just -- our largest customer this quarter was, again, CenturyLink, at some 12% of revenue. I will tell you it is likely that in Q4, we have no 10% customers in the quarter. And so it's all of those things put together. And then I think if you combine that with, frankly, what we believe to be the best direct selling engine in the industry, it gives us a lot of visibility into how customers are thinking.

Our next question is from the line of Paul Silverstein with Cowen.

Carl, with respect to the base of 1,000-plus smaller customers, those customers that are 250,000 subscribers or less, there was a huge step-up in growth from that customer base. I trust those customers are the primary and the bulk of the revenue you're doing with your software-based platforms? Can you confirm that, first off? And then I've got a couple of questions tied to that.

The answer is yes.

All right. That -- I think you said in the shareholder letter, that customer base was up 53% year-over-year in the quarter. Is it the same response you have for George in terms of what -- would that -- those customers tapping 76% of revenue? I trust it's the same response in terms of that huge step-up from the prior -- you had strong growth prior to this quarter, but not 50-plus percent from that customer base?

We're going to continue to see the diversity occur. But if you really want to micro parse the numbers, you'll notice that there was also growth in the medium-size as well. So as we've discussed in the past, disruptions typically happen to small customers first, up to large. And I think we're slowly but surely seeing that progression. Keeping in mind that, as we've said, this is a multi-decade disruption. But clearly, the customer base is growing and not only are we growing with smaller customers, those smaller customers are they themselves growing their subscribers, and we're beginning to see the signs in the medium-sized space as well.

All right. And I'll ask you the next question, which I ask every quarter. We're now a month -- we're now -- I guess, not quite a month into the new quarter, but I trust the strength from that small customer base when there's no one customer that has that much throwaway, you're seeing that continuing at this level?

Yes, we are. Yes, we are, and that's the guidance that we gave for Q4.

(Operator Instructions) Our next question comes from the line of Rich Valera with Needham & Company.

Let me add my congratulations on the strong results. Carl, I was hoping you could maybe shed a little more light on the sort of non-pull forward part of the strength you're seeing. Particularly with, I guess, the platform business, how much of you think that acceleration is due to new dynamics imposed by COVID and just sort of natural momentum you're seeing in that from you guys learning to sell it better and broadening out your product platform -- your product offerings in the platform area? Any color you can provide on that?

Sure. I mean, part of it very clearly is driven by the coronavirus, as we discussed way back when we thought that there was a pull forward of behaviors that would not only affect the subscribers, but also affect the service providers that are delivering those services to the subscribers because they, too, are trying to deal with folks working remotely. I was looking at a Microsoft Azure -- I think it was an Azure article where they talked about looking at all of their data, and they have seen 2 years of digital transformation acceleration occur in 2 months. So it gives you some sense for the order of magnitude of that pull forward. And then obviously, there's the pipes on the other side.

The second piece is there's just a general continued ramp of our platforms. And maybe what I'll do here is -- Michael Weening is on the phone. I think he's currently having a power outage where he is. Michael, are you on?

I am.

Maybe you want to just share with folks what you're seeing in our all-platform offerings and how that's going in the marketplace?

Sure. The benefit that we have to your question around our ability to sell it better is really one of partnership. So how we work very closely with CSPs of all sizes and become that partner who coaches them through their business transformation as they adjust to the new market dynamics. They have new competitors. There's large customers -- large companies like Amazon and Google, who are aggressively attacking their subscriber, and they're looking to companies like Calix and what we're offering to partner with them, to actually provide a great subscriber experience and win that customer for the long term. In other words, win the home. And so we're doing very well, our customers are seeing robust demand and we continue to partner very closely with them to help them transform their business.

Michael, thank you. Rich?

Yes. And so I wanted to look into '21 and see if there's any more you're willing to talk about that. I think the Street had been sort of at the low end of your multiyear target range, I think, the 5% to 10% for next year. You're obviously going to have much tougher comps now, particularly in the back half. And just wondering if there's anything you're willing to say at this point about how we should be thinking about '21 from a growth perspective?

Let me tell you what Cory will tell you, 4.999%, which I've rounded up to 5%. To your point, at the low end of the range, let's face it, these are significant uplifts. I think when I looked at it, this is lifting up 2021 by some 8%. It's a big step. And George earlier had asked the question about an air pocket, and my comment was we don't see a negative growth air pocket, but it would be foolish -- unwise to the point of being foolish to do anything other than 5% until we get more visibility. So 5% it is, in my mind.

That totally makes sense.

And Rich, a hearty welcome aboard.

Our next question is from the line of Christian Schwab with Craig-Hallum Capital.

Congratulations, guys, on the great quarter and guide. Just to follow-up to George and the last gentleman's question is as we go through '21, Carl, not expecting an air pocket, but -- and you said kind of, don't want to put words in your mouth, but on to this kind of being a new normal as we accelerate deployment for network capacity constraints. Should we anticipate exiting 2021 to be kind of a time frame that you would probably have enough time frame to update your long-term model to see if that growth rate long term could actually now be greater than the 5% to 10%, or we just take it one quarter at a time?

So look, we're going to take it one quarter at a time. But to answer your question, any adjustment like that is easily 4 quarters off. When we set the model, we set it for 2021 and beyond, for the next few years, to make sure that we could get everybody a view of the business. If there's something that causes us to have much better visibility, we obviously would come back and adjust the model. But anything in the next 4 quarters, for sure, Christian, would not happen.

Okay. Perfect. And then lastly, can you give us an update on Verizon and any chance or opportunity over the course of the next few quarters where we may begin to see a more material reacceleration with that customer and how likely that may or may not be?

Yes. So let me frame that -- actually, a great question. Let me frame it in the answer that I gave on CenturyLink. As we go forward, I think our larger customers are going to perform in a noisy fashion because that's the nature of their rollouts and their business. As an example, CenturyLink is going through a brand and then ultimately, a restructuring around Lumen Technologies. Verizon is in the middle of a multi-decade infrastructure build that has puts and takes every quarter. On their other customers that we have that are doing large infrastructure builds, I think the opportunity for any one of them to be a 10% customer in any 1 quarter is pretty good. I think the opportunity for any of them to be a 10% customer for the entire year is diminishing rapidly.

Okay. Great. And then lastly, can you let us know on the component challenges, what components that are most stressed in the supply chain system for you currently?

Sure. And this is not an uncommon phenomenon. It's the more complicated silicon components. And when you go listen to the silicon quarterly earnings, you'll hear them talking about their challenges, upstream, as an example, with substrates and other things. And that if they had more supply, they could, in fact, do more revenue.

The fact of the matter remains is that when you listen to Michael's comments, the fact is we're helping our customers succeed by building very valuable business models. That demand drives the demand for our all-platform offerings, some of which have hardware underneath them. The increase in our demand combined with the increase in component lead times, it's not one or the other, it's both, is what drives the supply constraint. And balancing our demand with our supply to make sure our customers are moving forward, it's a daily executive meeting and executive focus. It also makes forecasting revenue a little tricky. But that's what we're seeing and that's what we're working through. But to just put one last fine point on it, it's not really smaller components, it's the larger silicon.

Your next question is from the line of Tim Savageaux with Northland Capital Markets.

Congratulations on the results. I wanted to kind of continue along the theme of kind of puts and takes on growth going forward, given how strong your second half of '20 is, and I want to focus on a couple of the areas. First, international, where you saw pretty significant uptick. And I wonder if you would describe that similarly in terms of a pull-forward dynamic? Or is that more kind of ramps and rollouts kind of proceeding along at their own pace, maybe accelerated by some of this? But I wonder if you can kind of characterize the strength internationally, whether you expect that to continue? It did bounce up pretty sharply. And then I'll go from there.

So the answer is the latter to your question, more ramps and rollouts. Secondly, as you know, international is the next phase of our growth and a work in progress as we are very focused on North America. So that's the 2 answers I would give you to characterize what you saw.

Well, I guess, would you expect that to continue as you -- implicit in your Q4 guide, do you expect international revenues to kind of maintain at this elevated level you've seen? Or is there any kind of bounce…

They'll continue to bounce around, Tim.

Great. The other area I wanted to focus on was kind of the medium carrier segment. Where there's been a lot of activity lately. And I think you referenced some of it in terms of attracting capital. I mean, we saw that with one of the kind of midsized players. And you're seeing some growth in that group as well for the first time in a while, even though the smaller group has been the real engine. But I wonder as you look forward into next year or maybe also implicit in next quarter's guide, what kind of trends you're seeing among that group of players, many of whom are kind of emerging from bankruptcy, attracting new capital and engaged in big fiber builds? Is that something you could see accelerating next year? Or is it also kind of part of the pull-forward dynamic you've described for this year?

Less the pull-forward dynamic this year. I think it's a longer-term play. But I think if I were going to characterize what's going on for many of the former midsized wireline telcos, they're being recapitalized and restructured. And lo and behold, the capital that's coming in to do that, in almost every case, I'm trying to think of a case where it hasn't been, has said, we're going to go build fiber. If you look at the Ziply spinoff from Frontier, if you listen to the words that are coming from Windstream, if you look at the investment that's being made by a private equity firm into consolidated, you hear the same theme. And so we look at those as the opportunity to help those customers not only build that unified access infrastructure, but then build an entirely new business model on top of it. But I would be wary of trying to fold that into numbers in any given quarter as they are larger and going through pretty significant restructurings.

Got it. And last question for me. And I know given the magnitude of the strength you're seeing short term, there's -- it's sort of prudent to be conservative about growth for next year. So I don't know if you're going to have a specific answer to this, but as you look at '21, obviously, we're going to see the RDOF process kick off in a week or 2 here. In -- I guess, implicit in at least your starting point for next year, what sort of assumptions are you making about incremental business coming out of that process? Or might it even be the case that some of the activity we're seeing now is sort of accelerated in anticipation or in advance of that process. How -- any update on how incremental you expect RDOF or indeed any other stimulus to be for you in '21?

Yes. So none of what you're seeing currently has anything to do with RDOF. So let me be clear about that, number one. Number two, pretty clearly in the guidance that we've given for Q4 and then, obviously, extrapolating that into the answer that I gave to George for 2021, that's -- I don't know, some $40 million step-up in 2021 from where we were 91 days ago. And obviously, we don't guide, but if you just look at the 5%, that's what it's going to take you to. So there's some of that RDOF that's clearly being factored into that.

All of that having been said, I don't see anything that causes us to change from our guidance on RDOF, which has been, that it's a 2022 event, but you'll see some of it in 2021. And that's -- right now, it's steady as she goes.

At this time, I will turn the floor back to Tom Dinges for closing remarks.

Thank you, operator. Calix management will be participating in 3 virtual investor conferences during the fourth quarter of 2020. Information about these future investor events will be posted on the Events & 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 thank you for joining us today. This concludes our conference call. Goodbye for now.

Thank you, everyone, for your participation. You may now disconnect your lines at this time.