Q3 2019 Earnings Call

Greetings and welcome to the Calix third quarter 2019 earnings Conference call. At this time all participants are in listen only mode. A question answer session will follow the brief introductory remarks.

No one should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded it's now my pleasure to introduce your host Mr. Tom thing, Yes. Thank you may begin.

Thank you operator, and good morning, everyone. Thank you for joining our third quarter 2019 earnings conference call.

Today on the call, we have president and CEO Carl worry so as long as Chief Financial Officer Cory.

As a reminder, yesterday after the close of markets. We released our letter to stockholders in an 8-K filing as well look on the Investor Relations section of the Calix website.

This conference call will be available for audio replay 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 truck and trends to differ materially.

Are set forth in our third quarter 2019 letter to stockholders and in our annual and quarterly reports filed with the FCC.

Alex 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 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. So.

We delivered solid results third quarter, achieving flat year over year revenue.

Which marks a significant terms in our business.

To be clear.

We intend to grow our revenues from here.

Our results in the third quarter were strong with revenue and earnings.

Street expectations.

We generated cash.

Demand was strong throughout the quarter.

We ended the fourth quarter, where they solid backlog of business.

Our forecast for returned to growth.

Our transformation plan for company, providing cloud software systems and services.

Facilities based csps of all types.

That's been underway for a few years.

We are pleased and energized to having now began to show through on the top line.

As for the secular disruption rolling through our industry, we believe we haven't right.

The right platforms and the right services.

Right time.

Three examples of the business outcomes, we helped our customers achieve in the third quarter work.

Farmers telephone co-operative achieved 66% reduction in tech support costs, but cannot support cloud.

And as reallocating those resources to elevate our subscribers experience.

With our exit was powered gig aspire.

Three rivers communications engaged our professional services team leveraging automation tools best practices.

Well, what do you systems that resulted in a 50% improvement and their resource efficiency.

And northwest Communications cooperate abuse calix marketing cloud.

To achieve a nine fold increase in their most recent marketing campaign.

Helping our customers achieve their business outcomes when they deploy our platforms is core and central to our mission.

We're excited that this focus now has us entering the fourth quarter without strong pipeline of demand.

On top of a solid backlog.

And next week, we're hosting our 2019 connections that that which promises to be the best yeah.

We are positioned to ride the wave sector when disruption moving through the communication service provider marketplace and has the all platform leader, we intend to grow from here on out.

With that let's open the call for questions.

Operator.

Thank you will now be conducting a question answer session I feel like ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question Q.

The press star to if you'd like trove. Your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star is one moment. Please all we pull for your questions.

Our first question comes from a line of Paul Silverstein with Cowen. Please proceed with your question.

Thanks Cool two questions one.

One.

Your comments are in industrial older adults margins.

Correct.

Like customer products.

Any incremental insight you give us on a new products are growing I would think up positive for incremental margins not negative.

Rejoin the U.S. would all through the person is locked down over the last to be positive what's going on there.

And then with respect to Webinars from a customer perspective.

It doesn't look little insight on the quote unquote legacy group of customers century link.

Which obviously, all disclosing 60%, Syracuse, which the drag or rather the growth.

<unk> costs year to give us an ethanol and so nothing would be appreciated. Thanks.

Oh, Thanks, and good morning I.

Let me address those in order so from a margin standpoint.

As you know as we've said throughout we think of it in terms of Red Oceana Blue Ocean or legacy.

Systems versus our Blue Ocean platforms.

And you're right product mix as we accelerate on Blue Ocean would tend to move the margins up.

The challenge that we have really are two one is that in any given corner product mix rent the blue what what they are et cetera can vary the margins.

And then these next four corners, I would say continuing to transition the business. While we expect revenues to continue to grow from here, there's still going to be some noise in the margin line for red and Blue.

The second factor actually is we haven't very large customer that as you might imagine has pricing that might be better than corporate average pricing and therefore margins lower than corporate average gross margins in horizon that now with more than a 10% customer in the corner.

Frankly, I'm pretty happy with the margin line being where it is and having that in the mix. So that's the way I wouldn't look at the margins on your second question.

We spoke about the legacy group and we included if you remember centurylink and that inside.

It's less than 25% of our business and I take on the last call. We said it was roughly between 25 and 20%.

Last quarter century link being 17% of that.

We include Centurylink, because they were one of those legacy customers from the start of our business, albeit today, there's sort of a very different customer, but if we project that forward I would tell you that in Q3. They were roughly in the same zone of 20% to 25% by the way and they've been running and that's why it's 25% range.

All three quarters of this year, so hopefully that helps you before I ask Corey.

He has color to add does that answer your questions. Paul It does my quick follow up on that I. Appreciate you all give us give us a number directional data points about growth new products from a customer acquisition. It's was 4% growth perspective, I recognized so girly in the wants it to those platforms actions like system.

Well, what can you give us a sense for what the revenue base is today.

So the answer is no because we consider it unfortunately to some kinda data point.

The best thing I can do is use some language and just basically say it's [laughter].

What does it significantly it's obviously material at this point.

And has been for quite some time and it's growing quite rapidly.

Add a little color that you didnt ask for but maybe just to help we are very excited going into connections.

It's all three platforms, our full fledged in the market.

And at the subscriber adds we have great expectations for the extra web platform and that gets buyer systems that running.

So that's I wouldn't beyond that I would not go or do you have any complete whenever it is.

No I think were.

Okay, sorry, he got yeah quote going back to the margin question I troughs.

I understand the point about rising footage. That's you look over the longer term <unk> and I recognize it was pulled where to go.

What I Trust this can still be 50, plus members and perhaps meaningfully above.

50, plus percent margin model with the benefit of.

<unk> revenue or is that not because.

That is definitely the guys.

Okay I appreciate that small like.

Thanks, Paul.

Thank you. Our next question comes from the line of Christian Schwab with Craig Hallum. Please proceed with your question.

Oh, great congratulations on Brazil, being a 10% customer in the quarter as we look to that customer and in 2020.

Is that a part of the enthusiasm for growth from here on out.

Its part of the enthusiasm, but it's really not what drives the enthusiasm we're driving enthusiasm in the company is.

You know the continued expansion of our addressable market and served market manifested in two ways.

The new platforms and their gross.

Yeah, I'll be and we're not giving your numbers on what those arms for Paul's earlier question, but the numbers that we are giving years, our new customer.

Great.

And that expansion is really in my opinion whats building the value of the does because not only use that unlike anything else we see in the marketplace.

But it's a very predictable highly differentiated set of customers that are on attack.

That being said, yeah, we were very excited by horizon, but.

What drives our excitement by far is a sea change that we see in the marketplace.

Great and then just a follow up on the gross margin question in your comment that we're very happy with the gross margin guidance for for the December quarter.

Given the mix of business and would expect that to continue.

Can you give us a scenario of what type of mix or revenue.

It would be needed for you to get to 50% plus gross margin.

[laughter].

I'm sure, we're just sort of a different way of asking the question.

Paul last summer I guess, the way I would answer and Christian is the following as we continue to accelerate our new platforms.

There's going to comment on time, and not too distant future, where we think that 50 point margin.

Occurs and then that's in our rearview mirror and we continue to grow from there.

Obviously, our new platforms or.

A material part of the business in growing rapidly.

I wouldnt reserved the right to come back to you on that in a couple of quarters and give you a more direct answer.

Great no other questions. Thank you.

Yeah. Thanks Christian.

Thank you once again as a reminder, if he would like to ask a question. Please press star one on your telephone keypad. It confirmation telling will indicate your line is and the question Q for purchased since you think speaker equipment, maybe necessary to pick up your hands that before pressing the star keys.

Our next question comes from the line, Tim Savageaux with Northland Capital markets. Please proceed with your question.

Hi, good morning, and congrats on the result, I guess my first question kind of higher level, which is.

Yeah, there's been a fair bit of a relatively I guess, you know more when youre.

Your peers across the kind of broadband access space spanning both.

You know fiber and copper solution I guess, you're most that's been.

Within internationally, but I wonder if you might.

No comments or you're sort of reflect a bit on kind of the difference in terms of what you've seen in terms of your results and outlook seems like a in addition to horizon.

We kind of U.S. pure three market has been sort of important to that growth.

It seems like it was up 15, 20% I Wonder if you expect that continuing.

Yeah would you points or died and.

<unk> in your more domestic focus is the real delta.

Between yeah. Some of the unsettled results, we've seen and you know were the performance of Calyxt is putting up here you talk a little bit about that thanks.

Temperatures and and thanks for the question I'm in a related factor Christians question about enthusiasm around horizon, and then see if I can paint a picture so.

I'm going to come out from a customer segments standpoint.

And reiterate that were looking for strategically aligned customers of all sizes.

That being said there are more customers that are small and large does.

As a general industry Megan.

Well, some funny that more of them.

Our being aggressive and the way they think about deploying fiber in wireless building out a next generation infrastructure being open to changing their business model using analytics.

And so those are wine customers are our key focus.

Horizon at one level is somewhat unusual rising is obviously very large but for us they represent the very technological leading edge of where we are actually heading.

With obviously and you know the I intelligent edge, one fiber infrastructure.

Which basically combines the best of wireless and fiber and a next generation infrastructure. So that's clearly what we are focused on.

The second piece of that.

He is from a product market standpoint.

Our platforms.

Obviously, you're changing a number of things about the business.

One other things, it's changing is actually in the future we are less likely to have 10% customers that in the past.

And the reason for that is.

You know when you're when you're selling big boxes, and obviously calix one thought I was a box company your forever chasing large customer deals to fill in the next quarter.

As we do more software more platforms more services.

Our revenues are actually stretched out overtime, there higher differentiable value.

But there are lower in a in any given quarter from a box ship standpoint. So we can do a very significant contract with a very large customer that happens to be software.

I would never make the 10% threshold.

So you wouldn't see it from that perspective.

Yeah, the revenues are quite diverse.

And obviously, our visibility is going up and our predictability should go up with it.

So when you tie all those together.

I look at.

Companies that are sort of like were calix, one data was like and I have you know there's some level of empathy there because it's like it's witheringly difficult business to predict and you always end up at a high concentration environment.

Some of the company's you imagine our highly concentrated it's the antithesis of where we are going within all platform model are not center intact, we're just going to be less concentrated because many many more customers and because as you move towards software platforms anyone customer is less able to get the temporary.

Uh huh.

So does that paint a picture for you.

[laughter] sorry, it does good I would like you to comment further on the the tier three years to market in particular, what sort of.

Your weather right I guess that market growth.

Or no share you know increasing penetration.

You're kinda platform sales.

In terms of they're pretty significant.

Both sequential and year over year growth you saw in that segment.

And then you know kind of ironically back on the topic of big customers, possibly could be 10% in terms of your.

Outlook you seem to reference.

You know some kind of being a increasing ramp.

Oh with a big international customer, you're probably city fiber in the UK work that you're talking about.

How that's progressing as well.

Well that's go that's going to take that the larger ones first I'm right that you know, we said that we believed it would get to be a 10% customer and I think it'll bounce up and down as a 10% customer from quarter to quarter.

Century, like you know obviously.

Is a very good customer has huge colleagues embedded base.

I expect that they will remain a 10% core customer for the most part each and every quarter at some level.

Oh City fiber is you know they're doing a huge infrastructure build and you know the fiber first thing you do the head end the old he second and then ultimately get easier Wendy's and so that ramp is so well in front of us and they're making progress, but as we've said before they're building brand new infrastructure and it always takes longer than you think.

When you talk about I use the term tier threes, we do not use the term tier threes anymore. We use the term small customers and the reason we do that has delivered tier three is sort of a legacy telco statement small actually opens it up to all the different customer segments that we see not just the telco was or I am season or ER.

Cooperatives, but municipalities cable Msos electric cooperatives Wes.

You can go on and on and in that space, we see tremendous growth lots of capital formation to go address unmet needs.

And we believe we are growing share as probably as the market is growing in of itself.

You know if you look forward and I don't look I agree peril, I don't want anybody getting overly excited.

But there's a next generation of cash that's being currently to be.

Which is referred to as our golf, which is the rural.

Digital opportunity fund.

The key differences between our GAAP and cash.

As a clause around allowing price cap carriers to bid for the whole state.

Which is which was a feature of Caf, which is now proposed to be removed, which means it would be distributed on offense is blocked by senses flock basis.

So no longer but a big service provider come in and take the whole state.

Because they committed do right now you're going to be down in the census block level.

All of these smaller service providers are gonna be quite advantaged.

And pursuing those funds as well so we just see lots of capital formation lots of capital flow into the space, they're able to build brand new models very quickly.

And so we see that space growing and we see our presence in them growing.

Okay. Thanks, very much right yep. Thanks, Tim.

Thank you once again, if he would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment, maybe necessary to pick up your hands that the four pressing the star keys.

Our next question comes from the line I saw had now Jim with Cowen and company. Please proceed with your question.

Hi, called Thanks for taking my question I wanted to visit your to do business.

Decline.

13% year over year and that has that would have been perspective, we have beneficial headwind. The bureau gross margin given that's always the subset so oh gross margin.

Extended these new customers are lapping should we expect services that we need to start decreasing and that's.

Some of his gross margin will become a he had been again.

Should we expect that illnesses the bulk of the.

Heavy lifting the services business is behind us.

I'm actually it's a combination of both.

So what we expect to see from here gently.

His service is actually to start to grow I'm at a modest rate.

Because the heavy lifting as you refer to it which was really the low margin deployment services.

Is behind us and as you've heard US say, we've been engaged in continually aligning our services business with our platforms and our customer success.

So what's happening underneath that number is the offerings mix is shifting towards much higher differentiable valued service offerings.

I'll be there lower revenue.

But as you do more and more than the revenues will start to grow but the margins will continue to expand so we expect modest revenue growth.

Reasonable gross margin expansion in services.

That's helpful. Too. So you know going back to your commentary about the next generational caf funding coming in I typically can you walk as to how the suits isn't next is in those type of deployment I would assume that heavy services component Oh gosh, two type deploying capital deployment.

Hi, so to be perfectly honest I don't know what it's kind of look like as we go forward because when our dot happens, we'll be full blown and platform mode.

With customer success oriented service offerings I don't know, what that's going to look like for hot I literally I would be throwing a dark.

Got it appreciate the answers.

The one thing I will tell you is we're not going to go backwards on gross margin.

Because we're not going to go take on low value added.

It on the street deployment services, so just to allay any any fears you may have there.

[noise] definitely helpful. Thank you very much.

Thanks to the question Rob.

Thank you. Our next question comes from the line of George Notter with Jefferies. Please proceed with your question.

Hey, Thanks, a lot guys I guess I wanted to its a neutral on the product transitions more you guys talked about the you know red transitioning to blue so to speak and [noise].

Is you think about the transition is it more about you know winning and ramping new customers are relatively new customers or is it really more about you know converting existing customers of older systems to the next gen products or accelerate cxo s. et cetera.

And then I've a follow up.

So so the answer is it's actually I don't know them. It's more it's both but I would I'd be cautious with the term convert so as we think about it.

We are certainly taking our blue ocean platforms do all of our customers.

Did the extent that they see the value and they want to update them. Obviously, we're happy to help them onboard to the extent that they go.

And they want to continue to order or legacy systems, obviously, we're happy to do that as well, so well certainly going to offer them, but were you know we're not going to go necessarily do a forced March if you get my direct.

Or discontinue.

Our systems, we sort of a shoe that behavior, we prefer to what our customers make end of sale decisions not huh.

So does that help paint the picture before.

Answer a question you Didnt ask.

Yeah, I guess I get that [laughter], obviously, you're looking you've gotta dataset right. You can go back and look at the stuff the mix of new customers you know it at that and existing customers buying the the new products. So.

You know get I guess I'm, just wondering you know, what's driving that increasing mix of nexgen product and then I guess.

The second piece of this is also trying to understand you know what the friction points are with existing customers who were not.

Moving off of the legacy products you know what is it about those customers or there are situations that caused them to move more slowly to the new stuff.

Oh, Great question I'll give you a very simple parameter the more aggressive the service provider.

More rapidly interrupt taking our platforms the less aggressive.

The more slowly.

Literally that simple.

So if there are aggressive in their markets and they want to take share they want to raise their ARPU is they want a lower churn.

Oh, they want to take footprint from other.

Competitors, they are unbelievably well along.

Today said that they're taking a slower approach.

There are lots of wind and we're happy to continue to support them with our.

Existing systems.

Got it.

Okay fair enough. Thanks.

Yeah. Thank you George.

Thank you we have reached the end of our question answer session I'd like to turn the call back over to Mr. Davis for any closing remarks.

Thank you operator, Calix management will be participating in a number of investor meetings and conferences during the fourth quarter of 2019 information about these future events, we posted on the events and presentations page of the Investor Relations section of Calix Dot com.

Once again, thank you to everyone on this call and on the webcast for your interest in Cali and thank you for joining US today. This concludes our conference call Goodbye for now.

Good bye.