Q4 2019 Earnings Call

Greetings and welcome to the Calix fourth quarter, two 2019 earnings call. At this time all participants are in listen only mode brief question and answer session will follow the fall presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad headroom under this conference is being recorded and it's now my pleasure to introduce your host Mr. Tom.

I guess director of Investor Relations thinking maybe yet.

Thank you operator, and good morning, everyone. Thank you for joining our fourth quarter 2019 earnings conference call today on the call we have president and CEO Carl result, as well as Chief Financial Officer, Corey similar as a reminder, yesterday after the close of market. We released our letter to stockholders and an 8-K filing as well as on the Investor Relations section of the Calix web.

This conference call will be available for audio replay in the Investor Relations section of the Calix website.

Before we can tenure, 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 in 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 fourth quarter 20.

19 letter to stockholders and in our annual and quarterly fight reports filed with the FCC Calix assumes no obligation to update any forward looking statements, which speak only as of their respective days.

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 Tom.

We delivered strong results and the fourth quarter with revenue gross margin and profit at the high end of our guidance, all while achieving solid balance sheet metrics.

It is clear the market is looking for our platforms to build the next generation of Csps and it is likewise clear the calix team is executing with precision.

Why noteworthy example of crisp execution. This quarter was the most of our entire ERP and IP infrastructure. So the cloud.

Even more exciting was our returned to growth in the fourth quarter, where they 4% year over year increase in revenue.

Our transformation to an all platform company, providing cloud software systems and services to CSP continued in the fourth quarter with solid bookings coming off our 2019 connections conference our largest ever.

There is a secular disruptor moving through the communication service provider space and we haven't right.

We have the right platforms and the rights services at the right time.

Some brief examples that our progress in the quarter were.

Adding 20, new customers of all sizes and types, which means we added over 100, new customers for the second here in a row.

Calix cloud revenue in the quarter more than tripled year over year and quadrupled for the full year.

The revenue edge solution, leveraging calix cloud and he actually west systems came to market this quarter, bringing real time subscriber insights and new revenue generating edge suites, helping our customers Sol and support a rapidly growing management and security complexity of the smart connected home.

Hey, extra well every PON leads the market.

With over 70, 510 gig PON deployments.

And our customer success surfaces are proving their work.

And helping our customers achieve exceptional business outcomes.

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

Being a part of our customer success is very motivating for the entire calix team.

And directly aligned with building value for calix shareholders.

The further help you understand one important aspect of the transformation we are driving accounts.

We have included a revenue by customer segment breakdown in our stockholder letter.

This will give you a better understanding.

The headwinds we faced in the past.

The diversification we have been pursuing throughout.

And the predictability driven by an increasingly broad customer base.

In retrospect 2019 wasn't Europe significant transformation for calix.

It is clear we are positioned to ride the wave in the sector with disruption moving through the communication service provider marketplace.

As the all platform leader, we intend to 2020 to be a Europe continued expansion of our platforms in the market as well as in Europe revenue and profit growth.

I just started off we are pleased to forecast double digit year over year revenue growth for the first quarter.

With that let's open the call for questions.

Operator.

Thank you at this time will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. It confirmation tone will indicate your line is in the question Q. You May proceed start to if you'd like some of your question from the Q for participants you think speaker equipment, maybe necessary to pick up your hands that before pressing the star Keith.

One moment, please we pull for your questions.

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

Hi, guys is Tyler on behalf of Christopher <unk> banks to let me ask the question Congrats on fourth quarter.

To the break all your revenue by customer size.

Very helpful. Appreciate it you can see the trend over the last couple of years moving away from some of your larger customers I was hoping maybe you could talk about where you saw those numbers going in the medium to longer term maybe next year for few years.

Thanks, Tyler and good morning.

I think you'll see the trends continue.

That we're going to continue to diversify the base, we will likely see more growth in the small customers.

And less gross growth and the medium and large, but it's clearly going to moderate from where it's been over the past few years that obviously, if it kept up at that rate, we would be 100% small customers and no meet in the March so the numbers will simply fourth it's a moderate I think you'll see that trend continue.

For the next couple of years.

Great. Thanks, and then you know what the Salt report here and kind of improving guidance I was hoping you talked we longer term your 600 million and adult EPS target I guess first if you just reaffirmed that and then if you give any maybe timeline on how you guys see that.

Maybe rank or a couple specific things that you're focused on to drive that that type of growth over the next handful years. Thanks, So actually I'll call your attention to the stockholder letter.

In the stockholder letter, we have in fact remove that guidance.

Long term and have encouraged everyone to attend.

Our analysts.

Meeting, which we're going to hold on March 4th I think it as Tom.

Our Wednesday March 4th.

At which time, we'll be updating it.

So that that's sort of.

Removes the rest of your question I think unfortunately.

Okay. What's a good update we'll look forward to that that's all for me. Thanks, guys. Thanks.

Thanks Tyler.

Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Fahad Najam with Cowen and company. Please proceed with your question.

Good morning, Paul question on your comment about adding 100 new customers.

As I look at your sales and marketing spend has been pretty.

[laughter] then.

I'm trying to understand what the leverage in the model or how can you continue to grow hundred to meet accounts without creating substantial amount of killed the marketing.

The glued to speak to the leveraging the model that you have that should we I know you.

I didn't know blow small customers to moderate but.

So to the leverage is there any incremental spend that you need to quote from you or should we expect some moderation in sales and marketing spend going forward.

Actually let me take you back to our last quarter, where are we actually discuss it.

I remember.

He is saying that you're gonna start to see US now start to invest in the business from an opex standpoint that we believed that the trough of revenue was behind us that we would start to grow.

And inside of that you should expect to see us being relevant relatively disciplined as we have been on R&D.

And I'm GNS.

And that we would drive to absolute numbers and if you look at our models it'll be pretty clear where those absolute numbers are.

But that we will start to invest in sales and marketing.

And have it grow.

I basically at the rate of revenue growth.

So we expect R&D and GSK to stay roughly flat on an absolute number basis.

But on a percentage basis, we intend to invest in sales and marketing and have already begun.

Those investments, but does that shape the frontier for you.

Hey, Doug Thank you.

If I may ask one more question on the as I think you mentioned in New York at all in your shareholder letter that gross margin benefited from lower hardware unit sales.

I know you're going to give a long term guidance to know March is that they but.

No.

Capacities are focused on price declines.

Yes.

One of the primary driver in growth margin.

How should we be thinking about yes. These impacting your software.

Margins.

You shut in my opinion.

The biggest driver of our margins will be the a mix shifts.

In our product market.

From Red Ocean to Blue Ocean from hardware to software.

And so as you see the mix of more software platforms going out the door. They are obviously had eddie considerably higher number than corporate average gross margins.

And so the margin shift that we that we have message consistently will be driven purely.

By the go forward growth platform business.

Nothing more in my opinion on any given quarter.

I think I've tried to caution everyone be careful because there's lots of noisy little implication.

But as a long term trend. It is pure we are ramping the front end of that business and that ties back to your first question, which is we intend to make those investments in sales and marketing to do precisely that.

Got it. Thank you if I could ask one last question on a big picture.

In terms of the competitive dynamics.

Have you.

Well they can consistent pressure from the U.S.

Any changes in the competitive dynamics that you have more this over the last 90 days.

Non.

Alright. Thank you somebody that's helpful. My.

Okay.

Thanks, Bob.

Thank you once again, if he would like to ask a question. Please press star one on your telephone keypad for participants you think speaker equipment may be necessary to pick up your handset before pressing the star Keys. Our next question comes from the line of Tim Savageaux with Northland. Please proceed with your question.

Hi, Good morning, a couple of questions and congrats on the congrats on the strong result.

And I'm sure.

Kind of working pretty real time, what's your and your new break out on the customer side.

But if you look at their small customer metrics in particular.

Kind of Q4 year over year looks like you saw some very strong growth in that vertical you know over 20%.

Is that.

Am I getting that right is there some sort of acceleration going on their own. If you talk about you know kind of growth dynamics among your smaller customer vertical.

No I expect careful that right.

Yeah, I would be careful to say acceleration does that imply that implies a curve as opposed to a line I.

I think you're going to see continuous programmatic growth.

Across the whole company, but as a message earlier to Tyler's question.

Probably a more rapid growth and the smaller assessed and that's due to a number of reasons, which weve message before.

Part of it being the capital formation.

We're seeing.

And part of it but we're also seeing relates to government funding as well.

Okay, well I, just you know what to try and get to get the math, it's about your regular shipyard Purcell last year and 71%.

This year in terms of your concentration.

I mean with that degree of growth in Q4 to know what your what what's implied for war on but it seems like double digit growth.

For the year in 20 for that small customer vertical given that type of performance in Q4.

Might be a reasonable expectation I don't want to jump the gun.

On the analyst day.

But I wonder if you have any sort of comments around.

Around that.

So, let's not jumping on the Atlas right, that's not jump the gun on the analyst day.

Number one number two to your point could possibly be double digit growth in that segment.

But we're not we're not going to forecast growth by segments.

Because they were focused on the overall business.

So I mean, your math could be right it may not be right.

Tim and keep in mind that.

As we continue on the platform model. The platform model has a very different growth attribute to it which is much more akin to a software business, where you are landing a customer in expanding as opposed to the nature of the box business.

Calix, one data was in.

As you know a book ship revenue in the quarter lumpy business right. They are very different.

Models, they have very different.

Revenue shapes.

Does that make sense.

It does and.

I guess moving Croswell first let's let's stick with the Q4 results you did see some strength in.

International revenues from a quarter I wonder.

Yep go city Fibrwrap was a part of that and and what sort of expectations you might have for that ramp going forward.

Yes.

It was a part of it.

But you know as we've talked about before.

The international business.

Has been honed in focus.

And is actually behaving quite well.

So it has not attributable to attributable to any one customer.

Okay.

And.

You'd commented earlier.

That you expect.

Absolutely.

Operating expenses true to remain.

Sort of flattish.

You know along with some degree of revenue growth I Wonder if you could talk about the.

Dynamics, you expect to be driving gross margins throughout the year, you, obviously saw a little bit of.

Upside it here in the quarter guiding for.

Kind of a similar range with revenues down seasonally in Q1, but it seems like given the increasing software content.

Of the.

The all platform business that we should.

We expect.

You know some increases in gross margins as we go throughout the year.

So I want to go back and break that question up into two parts first of all so that I don't Miss communicate.

On the operating expense side to be clear I'm gionee and on R&D, we expect the whole those in an absolute way.

To a number.

And you can look at our history, you can pretty much extrapolate what that number is.

On sales and marketing we are going to invest as revenue grows. So we're going to continue to invest in our growth from the sales and marketing standpoint.

Sorry, I don't I want to actually I understand the three different lines on Opex, Okay, Yep got that and I heard that wrong. Okay.

Okay call on the gross margin side.

Your point, there's no question that gross margins will expand over time.

And with the only caveat being on any given quarter you can have noise in them due to mix or other pieces.

The other piece, but that.

I've taken pains to hope everybody understands is that as.

The software business grows and some of our older traditional products.

Slowly decline.

There are cleanup items et cetera in any hardware business that you're doing that can inject noise at any time in a quarter.

So I wanted to be careful about anybody drawing a straight line through quarter by quarter, because it is likely going to be ups and downs on a quarterly basis, while over the long term. There's no question, it's kind of go up.

Got it excuse me got it thanks very much on customer.

Yep Thanks, Tim.

Thank you once again, if you'd like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment. It may be necessary to pick up your hands at the four pressing the star keys, one moment. Please the we pull for more questions.

There are no further questions at this time I'd like to turn the call back over to Mr. Davis for any closing remarks.

Thank you operator, Calix will host its 2020 Investor day on March 4th 2020 in San Jose information about this and other future events, we posted on the events and presentations what page of the Investor Relations section of Calix Dot com.

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

Good bye.