Q1 2020 Earnings Call

Greetings and welcome to the Calix first quarter 2020 earnings conference call.

All participants are any listen only mode.

I didn't answer session.

Presentation, if anyone should require operators such as during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host <unk> director of Investor Relations. Thank you Sir you may begin.

Thank you operator, and good morning, everyone. Thank you for joining our first quarter 2020 earnings conference call.

On the call, we have president and CEO, Carl Russo as well as Chief Financial Officer Cory similar.

A reminder, yesterday after the close of market, we released our letter to stockholders in an 8-K filing as well look on the Investor Relations section of the Calix website <unk>.

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

Before we continue to 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 at 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 or.

Fourth in our first quarter 2020 letter to stockholders and in our annual and quarterly reports filed with the FCC Calix assumes no obligation to update any forward looking statements, which speak only as of their respective states.

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 financial measures.

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

Thank you Tom.

We have every one of college, our heart goes out to all those around the world who has been affected by most especially those who have succumbed to cope with 19.

Well. These are the most uncertain of times due to this pandemic.

Our mission to connect everyone and everything has become more vital than ever.

That's why the uncertainty as all around US we believe our future success is more certain than ever unlikely sooner.

However, before I discuss this opportunity.

I want to share with you what my thoughts were at the onset of this pandemic and how we are leading the company through these turbulent times.

As the leader Rob.

And the largest shareholder in Calix My mind immediately went to ensuring our employees were safe.

So we moved to weren't all virtual stance earlier in March.

I'm happy to say that we have had only one reported illness, among our employees and that person has fully recovered.

Second I wanted to ensure that we had room to maneuver.

So we tightened our operating expenses across all fronts and created plans to tighten even further if we saw the economy getting worse.

Third I wanted you ensured that our balance sheet with sound and strong so that we could execute through these challenging times.

Oh that was he is my house outperforming and generating positive cash flow from operations in the quarter.

With all this behind US we could execute.

And execute we did.

Starting with our move to weren't all virtual stance during which the team performed flawlessly.

This was no surprise as we have been building a remote and virtual culture for some years now.

Even being recognized by glass door in a recent Forbes article that was one of the best companies to work out if you are remote worker.

This set us up to deliver first quarter results that were all in range and earnings per share.

Is that the top of our guidance range.

Well supply constraints remain due to the Coke 19 outbreak in Asia.

Our visibility into future demand continues to grow.

This is due to our customer diversification.

And accelerating penetration.

I will all platform offerings and this increased visibility is represented in our strong guidance for the second quarter.

The secular forces that are sweeping through the communication space.

I've just been pulled forward.

As this pandemic has required society to take actions that are representative of a significant acceleration of behaviors.

That were five to 10 years and our future.

We intend to seize the opportunity.

We also believe the opportunity to accelerate transformation exists for our customers and we will continue to help them as we have the right platforms and the rights surfaces.

At this critical time.

With that.

Lets open the call for questions.

Jackie.

Thank you we will now be conducting the question and answer session. If he would like to ask the question. Please press star one on your telephone keypad.

Ladies and gentlemen indicate that your line is in the question Q you made fresh start Sheila if he would like to move your question from the Q.

For participants using speaker equipment and made the necessary to pick up your handset before press you must turkeys one on the T., let me pull for questions.

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

Hi, guys. Thanks, very much in Doug Congratulations on the strong results in a as you said an uncertain environment I guess I wanted to start by.

Talking about calix cloud in understanding what kind of adoption rates, you're getting there I think a this quarter you mentioned a 18 new customers.

I'm curious about what portion of those are taking calix cloud and then you also you know buying a your CP strategy with gigs fire and you also asked just wondering what the acceptance rate is on on new customers in terms of those are the platform type products and then I guess is a corollary to that if I'm wondering how that's been changing overtime.

[music].

George Good morning, Thanks for getting up early.

[music].

So as you might imagine our new customers as we've said in the past have been virtually 100% platform new customers for quite some time now.

And with that being said, a very very high percentage, our cloud and get spire new customers. So I'll just leave it at very high percentage.

Many of them are a actually wasn't intelligent access edge customers for our systems.

Many are for both product sets that we that we work on.

The second piece is.

That over time.

We've continued to see that amplify and ramp up.

But I also wanted to add a one other item.

That in this sort of remote virtual instantaneous cultural shift.

As you know from having drilled down with our customers you might imagine that the cloud.

And specifically our calix cloud offerings have enabled our service providers to continue to function in an environment, where in many cases, they're not allowed to go in certain premises.

Or you're dealing with social destined thing I'm. So we've actually seen a an increase in interest in the cloud because of the pandemic.

Got it okay, great and I guess, a that's there's a natural follow on there I mean.

Obviously, we've had this sort of forced experiment here with with work from home and I'm wondering what kind of incremental business you guys. Maybe picked up this quarter because of all the work from home activity and then you know I guess in the fall into that I.

I assume there's no. Some portion of that is also embedded in your guidance for Q2, but if you could you know somehow get at yeah, what kind of incremental benefit you're getting from this I think I'd be really interesting.

So it by the way it's the correct question to ask because obviously it is a pull forward and the question really is that a pull forward and then a slack or is it a genuine pulled forward a behaviors in demand.

So.

We believe it as a genuine pull forward of behaviors in demand, but it's too soon to tell.

And so we are definitely seeing a pickup in business.

It did not materially affect Q1, because I think your question would be more from a revenue standpoint in Q1, we did however indicate that obviously.

We have a strong backlog and strong demand and obviously with given what I think a strong guidance for Q twos. So it started showing up.

On the bookings side in Q1.

And again, we'll see over the quarters, how all of this works.

But it is it's clearly an interesting behavior shift for sure for both the subscribers.

And for their service provider or buyers.

Got it okay, and how did that.

You know if you've got some incremental business and you're looking for incremental business in Q2, I mean, how does that manifests itself is that yeah more customers you know upgrading from lower spear T or lower speed tiers. The higher speech years is that [noise].

Is it increasingly you know your customers winning new subscribers I guess I'm kind of wondering how you see that filter into your business.

[laughter], yes, and yes.

As you might imagine one of the immediate issue is that many families ran into <unk>.

It was not necessarily that the broadband infrastructure.

Wasn't fast enough. It was that all the sudden they had more people at home trying to compete for a single antenna.

And so you see.

That pull in the form of trying to upgrade the premises and also have visibility into the premises.

One of the offerings that we made to our customers and you can see this on our website was actually to allow customers that were on a simpler tier.

I'm kind of like support cloud.

Upgrade for free during the pandemic to a more sophisticated tier.

And we had a very high take rate of folks taking advantage of that because to help them.

Run their their service providers, even more remote and virtually then they could without it so that would be sort of an anecdote I would share with you today to give you some guidance on what we saw does that help.

Yeah, that's just I'll pass it along thanks very much guys George Thank thank you.

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

Hey, guys congratulations on a great start to the year [laughter].

[laughter] Carl Centurylink came back is kind of a notable strength customer can can you talk about your thoughts throughout the rest of the year can.

Oh can business you know be sustainable at these levels can it oh grow from these levels any type of clarity there would be great.

Christian Thanks, as we called out in the latter there were some 15% of revenue.

I I would simply answer your question by saying that feels like a reasonable marker for the remaining of the year.

Perfect <unk> of the or pardon me.

Got it Yep. Thank you and then and then my next question. You know you guys talked about you know backlog exiting the quarter.

Being strong is there any type of quantification that you can give us some metrics versus what you historically see so we can put strong backlog into a context.

Oh, yes, and you're going to.

Get angry at name for this we moved the word on solid just strong [laughter] and so it's better and that's the best way would do obviously, we're not going to go out and start quantifying things like book to bill or other things.

Hi isn't to say that we definitely back to George's question are we saw an uptick in demand.

[laughter] do you guys have visibility you know given kind of the dynamics and the changes in the strength of your product platform to help service providers.

You know as you get is it disgusted and discuss in more detail and in your letter.

Are you seeing visibility beyond Q2 or are you seeing that increase funnel of a of customers whether they'd be small you know medium or large that that gives you further enthusiasm beyond Q2.

We we get out visibility a number of different ways.

And as you look even better follower I've asked for quite some time now.

I think Mike you have seen certainly over the last day quarters, but very specifically over the last four.

As our visibility, it's continuing continuing to increase and that manifests itself and its first and foremost predictability.

So our visibility continues to go up and out but I would be careful.

About pushing too hard on that because when I say visibility at times I think people here backlog.

And it's not backlog that drives the visibility there a number of different metrics that we look at.

Suffice to say from a visibility perspective, we certainly have better visibility than just Q2, but obviously as you go into Q3, the odds of that diminish.

So be careful that you don't take it as a binary they know what Q3 is that would not be the case.

Great No I understand great I don't have any other questions. Thank you Greg Christian Thank you.

Thank you once again to kill question at this time. Please press star one on your telephone keypad. Our next question comes from Paul Silverstein with Cowen. Please proceed with your question.

Oh, I apologize, but Mr below because so on the letter anything about like Uh Huh.

<unk> incurring your bill was the rocks most of minimum wage understand your foot assistance for pretty big issue in terms of various operators actually getting access into ones residents are ones of course, but if you're building.

And I'm wondering if there was an issue.

[music].

Result, the and.

Pent up demand, but don't recognize.

Oh that hope that revenue recognition either in the March quarter will come from the June quarter. In fact that it's an issue over and above the supply chain constraints that appeared to talk to your board <unk> Smith.

Samina answer to different ways. The answer is we saga heard about it ran into it a little bit but most of our customers have worked around it.

If nothing hard then [laughter] whimsically handing a gig aspire through an open window.

So one of their subscribers.

So we haven't seen it materially affect the business, we have heard anecdotes around about it and we've certainly seen people are just some of our customers adjust to it.

But the second part of that equation is because of the cloud platforms that we have built.

We're actually uniquely positioned to help our customers not access the sites.

Be able to achieve their missions and so you've seen it over the years with us working with our customers to reduce truck rolls and things of that nature.

Actually the technologies, we built or almost tailor made.

For not having site access.

So I hope that makes sense to you.

Yeah I assume it also drove this year olds through so many operators finder works for short stuff.

Carbonite soon a trust your prudence responsible sucrose about the thought was locked in a meaningful issue.

And to your point it addresses that to the exact opposite the platforms enable extraordinary leverage.

Oh for our customers and their personnel.

And so not only can they work.

The short staffed fashion, they actually themselves going to start to remove moved to a remote.

Function as well and still have all the power and the tools that they would have had at work.

<unk> core I'm sure since the newer platforms, we're still not a majority <unk> for from a.

Oh, yes puzzle, but felt was not more good news should be so lot of operators.

On the older platforms.

For more plain vanilla broadband access if you will.

Puzzle that that's not more been issue in terms of.

But.

Revenue, but as good as revenue growth <unk> demand back order flow through.

It won't even greater but for the slate access and short stuff labor issues.

Yeah, Let me, let me see if I can paint a slightly different picture because I think part of it relates to or where you are in the network I think as you get closer to the core of network.

Vendors that might be vendors are the core might see it as being a larger issue.

For us less so we have certainly seeing customers.

Not wanting us to visit them on sales called as an example.

So there are clearly have been everybody's doing the social distancing thing and so we've certainly seen that that occurs to me as you're asking me. The question that if there was a vendor that was really functioning inside of one of their core facilities that might be an issue. If they were required to install things remember a large part of what we do is not in the core obvious.

They had a lot of it has also really engineered to be self install.

Oh, we just well talk about it.

Our pauses or looks really good through a questions what percentage of your raw what percentage of your shipments dorsal from Stifel.

Sorry about 90 plus percent thing so from school Oh it yet.

Focused hard on having things.

Be self install the ball so it's a very large percentage.

Oh, <unk> I would actually Georgia, the bigger issues nobilis through our exposed roseland floor. So so from a success because were again, you're saying about the overwhelming majority of cells.

We're solving school.

Yeah.

Okay.

Oh.

One other question sort of a are you seeing emulator a trust there was only one some percent customer centric.

There was 115% customer and that was that yes. So we actually gave you the percentage as well.

Or so obviously board of Ocean city, but we're still in <unk>.

So and the contribution growth is not yet meaningful from a 10% crucial.

There are no other customers that have passed the material threshold at 10% that's correct.

HM across the board Oh, [laughter] [laughter] I'll leave it at that girl thing Crusa.

Well I appreciate thanks very much.

Thank you. Our next question comes from Tim Savageaux with Northland Capital markets. Please proceed with your question.

Hey, good morning, and a good morning.

On the result, very impressive barb.

I wanted to kind of follow on the notion of Colin par or kind of go back to your commentary.

About a the company's success being I think.

For certain in sooner.

And I guess I want to ask about that comment in the context of your financial targets recently shared at the analyst day.

So I think what's kind of the last time I was out of the house by the way.

[noise] and welcome order [laughter] wasn't wonder if weekend infer a pull in those targets, which I think had to be.

Double digit operating margins and.

Calendar, 22 et cetera, or.

Kind of what you meant by that.

And are coming up.

I think that's it by the way thanks for asking I'll see if I can clarify.

One is the strategic themes of sooner.

And so all of the cultural behaviors that have continued to render our society's more virtual more interconnected in that way.

We believe had been pulled forward and when those behaviors get pulled forward. It has a mad <unk> no impact on the two disruptions that we spoke of.

At our Investor day.

So the Grand broad scheme of the strategy clearly has been pulled forward.

And we believe our opportunity therefore is pulling forward I would dissuade you are drawing any individual quarter.

In France from that that's the first phase the second piece is.

Now tying it back to an individual quarter I did say, we saw an uptick in demand.

But it's too soon to tell whether that's an uptick in demand.

And this quarter or next orphan in fact, it represents an up tick in broad demand, which would then addressing your question. So it's too soon to tell right now as to which is which.

But there's no question in my mind that strategically this represents a pull forward of our ability to execute our strategy.

In any given quarter not clear yet.

So does that help.

A little huh.

And let me move onto another question, which is as <unk>.

Let me be explicit we're not changing our model from the Investor day, if that's what you are asking.

Okay, well that helps more.

I'm, sorry, so I guess, it's it's a positive but without discernible financial impact.

Yet.

Correct.

That's fair enough I understand and as well.

Well, if you can discuss your growth drivers across.

Your carrier.

Categories large medium and small.

So obviously were very impressive no kind of strong double digit growth respond to kind of your or a carrier panic or excuse me in Q1.

I Wonder how you expect that proves it always [laughter] guidance as you look across that her strata of carrier customers.

What sort of Ah you expect those growth rates are contributions to change at all that's we look into Q2.

Yeah, I mean, so with the obvious copy out if we don't guide that way I mean, if you're looking for just general color.

I think we're going to continue to see success across all segments.

I think are smaller customers are continuing to transform their businesses.

I think a lot of our medium customers are now in a position where actually.

We've obviously experienced tremendous headwinds there.

But those medium customers are going through their their own transformation than are starting to pick up a bit.

And obviously, we have our large customers that seem to be doing fine. So I'm not sure I would necessarily paint in wildly different growth picture across those three three segments in the next few quarters, but certainly the one that is.

More understandable and we have greater visibility into would be the smaller segment.

Okay, well, maybe one more follow up on that and I guess part of the rebound that quick question is you know we did see speaking your coal forwards.

Hey, you know and and the correlation to this number to any individual results is always difficult to track for very big capital spending number out of Verizon.

In Q1, and you know a lot of commentary from them with regard to.

The your traffic growth they're seeing.

And their network given your uptick in Centurylink is actually looks like Verizon was was down you know reasonably good for you at least year over year in Q1.

I, just maybe using that as a guide post I.

I mean, I wonder if it's fair to expect.

Any acceleration there given you know both an increase in their overall capital budgeting a bit of a pull forward understanding of on track quarter to quarter necessarily.

Or you know what your expectations might be for your other.

Sometime 10% customer this year.

So you know when we look at Verizon I would not change our commentary, which has been pretty consistently as its lumpy.

They do things through and assembler.

So it's it gets surgery.

We are obviously aware of what they are looking at investing.

We are very aligned technologically and we have a very good relationship with them.

Overtime I think are rising continues to grow as a customer.

But I would caution against anyone trying to extrapolate inside of what they're doing a.

Any given quarter.

A number coming from horizon.

And that's the best way I can answer.

Your question to be honest.

Okay. Thanks, I'll pass it off.

Thanks, Dan.

Thank you as a final reminder, basic your question. Please press star one on your telephone keypad at this time.

For any additional questions.

Thank you we do have a follow up question coming from the line of Paul Silverstein with Cowen. Please proceed.

<unk> <unk> was born through both Morgan structure and the benefit from a new platforms holds its margins billion. So you're sure with us in terms of margin progression.

So trust sort of been slow it's gonna be 50, plus percent mortgage model, obviously really pseudo progression.

From the new platforms or was even pseudo progression your quarter.

Which one would expect to see platforms ramp, but any thoughts for sure.

The margin progression story is unchanged I'm glad you asked one of the things you'll see highlighted in the letter not highlighted the talked about in the latter.

Yeah is endless supply constrained environment that we continued to be challenged with as the supply chains that moves through Asia or in various levels of disruption I'm sure you've seen.

And now incidents from Silicon companies that we know lead times have been stretched out et cetera.

We are expediting to make sure that we meet our customers' needs.

And so in the near term.

There are significant expedite.

Ah charges that show up in shipment in old Cogs, and therefore in Cogs and have a downward effect on margin.

And we expect to have those in Q2 as well.

<unk> gross margins are going up.

Oh, well for those looks like <unk>.

I would have been higher because we obviously had expedited.

And they are you know they they exist a they're not material.

It is 10% range, but but but they are certainly measurable unreal and they manifest themselves and potentially higher spot component prices, a ship and higher shipment costs at different stages in the supply chain, it's just there and until the supply side.

Classes.

They're going to exist. So I just want to make sure you know that there's a near term downward pressure on margins that somewhat masked things.

[noise] crucial.

Thanks, Paul.

Thank you we do have an additional question from Tim Savageaux Northland Capital markets. Please proceed with your question.

Yeah, I wanted to follow up and.

On the overall topic or.

[laughter] kind of.

Government.

Subsidies are brought none to not necessarily broadband stimulus remained your may or may not see that but I wonder if we can get an update on a.

Rural Digital opportunity fund, what you're seeing there.

What sort of contribution you know you might expect exists in any way figuring into your commentary about.

The increase demand or whether you expect to immaterial impact in this year or more looking.

Into a 21 thanks.

So our golf is you know slowly, but surely getting underway and we we don't expect any significant impact in 2020, that's a 2021 event.

But you know, it's a <unk> again, we called it out.

Not because we view it as a secular driver.

I'm frankly, we just view it as a a cyclical insurance on the downside that you're going to continue to see investment in infrastructure.

And it's certainly puts a floor.

Under the investments in our customers.

So right now it's a 2021 event.

But it is progressing accordingly.

Thanks.

Thanks, Dan.

Thank you we have reached the end of our question answer session I'd like to pass the floor back over to management for any additional concluding comments.

[noise] Calix management will be participating in to virtual.

Investor conferences during the second quarter of 2020.

Information about these future investor events will be 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 bigger interesting calix and thank you for joining US today. This concludes our conference call Goodbye for now.

[music].