Q2 2020 Calix Inc Earnings Call
Second quarter 2020 earnings call at this time, all participants are in listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero or your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the call over.
To your host Mr., Tom <unk> director of Investor Relations for Calix. Thank you you may begin.
Thank you operator, and good morning, everyone. Thank you for joining our second quarter 2020 earnings conference call today on the call we have president and CEO car. So that's all 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 website.
This conference call will be available for audio replay any 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 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 are set forth in our second quarter 20.
20 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 Tom.
As the Cobot banking pandemic continues it is clear our mission to connect everyone and everything is more vital than ever.
The second quarter reinforced our view that the pandemic has accelerated the secular forces moving through the communications industry, while also creating additional demand.
Resulting from the expansion of capacity to meet immediate subscriber needs.
These two effects combined to drive strong bookings in the second quarter.
However, the pandemic has continued to challenge the component supply chain.
Fortunately.
The calix supply chain team outperformed in the quarter and enabled us to deliver results well above the high end of our guidance.
For Calix.
It appears the future.
It sooner.
As a result, we have undertaken a targeted restructuring of the business.
Ironically, the pandemic has allowed us to reimagine our business as it might be three years from now and that's we have decided to embrace a full work from anywhere culture.
This impacts our facilities requirement and as of the ended the second quarter, we have reduced our overall real estate footprint.
Furthermore, as our customers are accelerating their transformation.
We are further focusing our product offerings on our all platform future.
These changes are reflected in the charge, we talk to our GAAP earnings in the quarter.
There was a growing class of service providers building new business models on top of the unified access infrastructure.
These service providers deliver superior subscriber experience and do so at the lowest cost.
They are aggressive and growing their subscriber base.
They are attracting capital.
Our all platform offerings to speak loudest when the service provider is the aggressor and we are focused on helping them win.
Even with customer travel virtually eliminated we still added 18, new customers in the second quarter.
This along with our strong guidance for the third quarter is confirmation of the opportunity ahead.
With that let us open the call for questions.
Melissa.
Thank you at this time will be conducting a question answer session. If you'd like to ask a question. Please press star one under telephone keypad a confirmation total indicate your line is in the question Q.
Maybe first start to if he'd like to remove your question from the Q for participants you think speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of George Notter with Jefferies. Please proceed with your question.
Hi, guys, thanks, very much and.
I guess a lot of my questions were answered already just through the the release from last night and that the shareholder letter but.
I wanted to ask about gross margins.
Particularly systems gross margins if I look at.
You know systems revenue was roughly equivalent to what you guys print did you know a couple of quarters ago in the December quarter, and yet gross margins for systems were three points higher certainly I understand the product mix and customer mix are helping you, but I'm wondering if you can give us some more color around that is that a is that calix cloud is that.
You know anything else it might be going on there and then also you know did you guys get impacted by additional supply chain or expedite costs, yeah, because it depends on Nick is that is that in that systems gross margin also.
George first of all I will pass on your complement the Tom being a Sunday stockholder letter for being comprehensive in answering lots of your question. So thanks for that complement.
And now directly to your question on gross margins I'm as you know we have set for a long time that Uh huh.
The platform business accelerates, we expect gross margins to expand.
Well, we have also said that we expect gross margins on any particular quarter to be noisy, even though the long term trend it is clear.
And this quarter, we saw the benefit actually up a little bit of sort of upward noise.
So we had better mix a number of factor is that we're just in our favor.
But we've also seen.
In my opening comments I talked about sort of the the pull forward of capacity during the pandemic versus what percentage of what we're doing is an uplift of our strategy. So customers actually using this as an opportunity to transform themselves quicker and the minority of it is that.
Information, but it's a good minority so those.
Factors combined are just further down the path so ed in the quarterly noise and I think you get to where we are to your question on expedite fees actually yes.
They are included in gross margin and we are still a challenge with expedite season spot charges on components core or do you want to add some color on that.
Yeah, I would you say that.
Yeah. We are we're seeing a fair amount on probation supply dream. So we are out there looking for component inventory, sometimes we're buying that on the spot market, that's usually higher than our standard cost.
And then then expedite piece right no we're continuing to air freight material into the United States were to meet customer customer demand.
And we're continuing to.
I see that trend into the third quarter for sure.
So yeah, we continue to work the supply chain aggressively.
In response to that component shortages from where we see them.
And part of it and then the comedy and the just real quickly towards the combination of course. These comments and mine are also obviously what gives us the guidance for Q3 right.
Got it okay any sense for how big that.
That supply chain impact was in the quarter I guess I'm just trying to you look at your systems gross margins and tried to normalize for some of that stuff.
Ah, Yes, George that's something we haven't broken out.
We don't report that separately.
Certainly couldn't quantify it but.
I can give you much help on that piece.
Got it and then you talked about the work from home you know benefit in the quarter could could you give us any sense for how much benefit that might have been on the topline I know, it's probably a not an easy question to answer but any color you could give us there would be great. Thanks, a lot guys. When you say on the top line. So so what we saw from a revenue standpoint.
Correct.
Yeah, I want to break it up into a two different things again, the pandemic drives a number of behaviors in our customers.
And so you know there's a significant portion of the beep.
That relates to that for sure.
And it's broken up into the majority of it was pull forwards on capacity the minority we actually saw an acceleration of our all platform model.
So I don't know how to quantify at more than just to say, let's just say that it's the majority of the b.
Great. Thank you.
Thanks George.
Thank you. Our next question comes from line of Paul Silverstein with Cowen. Please proceed with your question.
Thanks, I'll try asking the question all Lewis is supposed to ordinarily answer or coral on taxes that says club or.
Beyond what you had the shareholder letter.
Can you give any sense for what do I know, there's still small and really wont be ramping aggressively but can you give us any sense for worthy or as a percentage of total revenue collectively.
No differently than we'd characterize before Paul So you do not to the answer it's a we've said, it's greater than 10% and less than 50.
And that's where we would keep it today.
Okay.
<unk> it was greater than 7% also last quarter, presumably that much greater super centers, given both the numbers that you discussed the mature over the long.
Correct, it's continuing to grow at an aggressive pace.
Okay with respect your larger customers wall, they have been called the minority of rather not much over 20%. It looks like there's also trying to growth not only as Louis moderated, but it looks like there and also contributing to the larger growth profile any thoughts you could show.
In terms of what's going on at Centurylink number one but also with those two or two customers that are still 567 personal revenue.
Yeah actually let me broaden your your comments because if you look at large medium and small.
All of our growing now.
And so you know it would appear that we're through the dread many quarters of headwinds and everybody is now starting to grow with their own rate.
Centurylink My comments would not change from where they had been in the path.
Which is we expect that relate to be roughly flat year over year.
And you know their businesses moving forward on plan.
Everyone else is basically in those that's sort of.
Chugging along on plan, you know one quarter might be up a little bit one quarter might be down.
But there's no new news there Paul.
All right for anyway is there anything of a one off nature either in the quarter worried that you're ready to be in this quarter in coming quarters.
I can't think of any one offs.
From my perspective, Corey you.
I think I'm a couple in the Opex area Paul.
Uh huh.
The over performance in the second quarter has led to a higher level incentive compensation and in Q2.
Peer into Q1, or what we would expect it to be going forward.
And we also as you come through that.
In Q, you'll see that we took a bad debt write off in the second quarter or one international customer.
And so that was.
Reasonable size enough, so that we called it out Q.
Wouldn't expect that to happen again.
Inquiry on the over compensation or the better the expect comes as I used to.
No there similarly strong order in Q3 it in Q4 routes you the Super normal.
[noise] not true, but not to the same extent.
Right. So if you were looking at kind of where the targets where said.
Q2 target was lower so there is greater percentage over performance.
Our expectation for Q3 is larger which will be harder to over performed at the same degree.
All right drawn but maybe let me ask this question.
She is pretty good about the future <unk> or dos there's been a lot for us.
A lot of actions in Congress, most recently suited rebuilds <unk> acceleration.
If the once you can sure <unk> incremental insight did you out on the timing.
Hi, speculating about the future as funny.
So let's spend a moment on Florida as we've discussed.
The rural digital opportunities on.
Is currently in full flight.
There are bids going in there will be awards being made but current course and speed on our GAAP.
The funds wont be distributed until third quarter of next year.
There is.
Oh discussions going on a on Capitol Hill about potentially accelerating this program.
If those discussions bear fruit you may see some of those funds being let.
Earlier next year, maybe you know even pulled into late this year.
However, if that occurs.
For us being a platform and systems provider.
We probably wouldn't see an effect until second quarter of next year, So it might change.
The revenue impact for us by two quarters.
But it's still would be very speculative to say that that's going to pass Congress.
Just as a you know we've talked before.
About other infrastructure investments that might be coming on top of our adult.
Oh, along with various states investments so.
Under the general heading out we believe there will be a lot of infrastructure investment and broadband.
I think you and I would agree the timing of those things then the magnitude is spread out frankly, all over the next decade.
So Paul just you everybody also recall for one more question on the <unk>, which is it's not just federal but also states can you give us new flavor.
Mr programs and magnitude.
There's lots of state programs that would be a much longer conversations because we'd have to sort of go through them, but you know there in the tens of millions and potentially hundreds of millions of dollars, so they're modest compared to our doubt but.
But these go on in various states are quite frequently and actually fly below the radar.
I assume as reviews photos and some pick up in those programs to so it's too.
With all the focus is.
Yeah, I was I was saying that our thinking about over history, how much pick up there's been I.
Hi.
And let me deferred that and do a little homework I don't know if there's been a material pickup they've sort of always been there, but there may have been Paul so long and I'd.
Take a range check on that when it come back to you.
Alright.
Thank you.
Thank you Paul.
Thank you, ladies and gentlemen, as a reminder, star one to ask a question at this time.
Our next question comes from line of Christian Schwab with Craig Hallum Capital. Please proceed with your question.
Oh, Hey, congratulations guys other great quarter, and ER and a good outlook.
I only have one quick follow up question regarding Centurylink. It just let me share I heard you correctly.
That you would expect them to be flat year over year potentially in 2020 versus 19, given the very strong start that they've had in the first half.
Are you, suggesting that in aggregate.
September December will be less than the the first half of the year is still your current plan is that correct.
Well, they've been a 15% <unk> customer I think in both quarters.
And with that they're running a couple of million dollars ahead of that flat number.
So it's not going to be it's kinda sorta via the same.
A question and I think to try and parse it any closer would really be.
Getting down to detail that we don't have a few went too.
Great and then I guess one last question can you highlight for us in particular, what components or need to be expedited that are super tight.
For you today.
They they run the gamut from silicon to optics too.
Small components and checklists, it's all over the place.
I wish it was a narrow set.
But it's a broad based out of south is as I guess is what you're saying is that fair. It is and it slowly improving but so is our demand and so are we we have a another quarter of.
Supply chain team you know burning the candle at both ends.
Okay Fabulous Congrats again no other questions. Thanks.
Christian Thanks for the congratulations appreciate it.
Thank you. Our next question comes from line of Tim Savageaux with Northland Capital markets. Please proceed with your question.
Good morning, and I'll add my congratulations on a very strong result.
They got a two questions.
On on margins I'm, what I'm, a cop one I'll start with the gross margin question.
And what I want to focus on.
Incremental gross margins.
Which you know seem to tell a fairly interesting story. If you look at I guess I'm a year over year basis [noise].
Both your results and your guidance.
Incremental gross margins look to be you know.
In the seventies, I guess are close or maybe even greater than that.
And I Wonder you know, what we should take from that with regard to <unk>.
That being an indicator of the.
And the status of the company software platform transition.
And you know what the eventual business model of Calix to Dato real might look like.
And then I'll follow up.
So first of all one thing that I take away is that your good but a calculator.
So that would be my first comment.
Secondly, we've spoken in the past about.
Our long long long term.
But this model.
Could resolve itself in the sixties.
So I think Directionally that gives you a sense for how were thinking about it.
Keep in mind.
That our platforms.
As you know our hardware independent has their fully abstracted.
Operating systems, but while that sets us up.
To potentially have done all software future, we believe for the foreseeable future, we will always be providing systems.
For many of our customers because there's really not a stable white box market.
To provide the hardware.
Independent from the software so overtime, we think we'll continue to see the model more.
You are directionally on the right track with your incremental margin calculation.
But I would just weighed you from taking that number and starting to drive it into the model in the near term.
Right now no no problem there records in terms of of direction I think a pretty.
Pretty healthy looking metric.
Switching to the top line you'd mentioned I think 17% growth promote excuse me smaller carrier.
Although you did see some weaker.
Internationally in the quarter I Wonder if you might make a comment on died and in that context. It looks like you out.
All carrier or.
You know rural broadband growth, if we can say that might have been in the mid twentys.
Which is pretty significant there and.
Yep.
Kind of already addressed this to some degree you know to the extent that growth rate in the Companys overall grow trade is well above.
Your long term targets at this point.
No I imagine there is you might point to Oh, Poland dynamic that would drive that short term.
Performance, but are there any other issues that are driving search.
Above trend U.S. rural broadband growth, if indeed, I'm getting that calculation right and if you can talk to what's happening internationally, especially in the context of no city fiber potentially ramping later on thanks, Yeah. So let's go to international first switches as you know international because they smaller portion of our business which is quite.
A lumpy and noisy and moves around and so there's no conclusions to draw their.
Tim.
Your other calculations.
I will directly point to the pull forward being the largest percentage.
What we're seeing in Overperformance, but there's a minority that is clearly an uplift of the model.
And so one of the thing is just sort of have to neutral as the pull forward nature from 2021, and how much of that continues.
Versus not and that's what we are looking to get our arms around as we go through these next couple of quarters.
But what we're focused on the minority of the outperformance representing an uplift as in a strategic uplift of our model where customers are genuinely looking.
At the pandemic has an opportunity to accelerate their transformations I think you can understand that we are obviously involved in helping our customers transform their business models and to the extent that more of them choose to do so sooner because at the pandemic. That's the biggest strategic driver of our business.
And ultimately what would feed the incremental margin calculation that you did in the future.
I trust that makes sense.
It does congrats once again, thanks very much than 10, thanks very much appreciate it.
Thank you once again, ladies and gentlemen star one is.
To join the question.
Our next question comes online.
Now with.
Cowen and company. Please proceed with your question.
Oh, Thanks for taking my question.
Call your comments about your supply chain warming is that.
But you think that you've gained market share against competitors.
And can you just elaborate on what do you mean, but <unk> supply chain outperforming what.
What do you think is the issue that the other broader supply chain that you think your supply chain outperform.
Oh, the out [laughter] very simple they outperformed our expectations going into the quarter. When we set the expectations for Q2 last quarter. We did so it's a balance of demand and supply.
Ordinarily you're setting up more based upon demand without supply being a particularly constrained.
And they simply outperformed our expectations going into the quarter.
As for from market share per se given the all platform focus of the business.
We don't see any competitors for that business or we don't think of it in terms of market share.
So I would simply not answer that question or that's just not everything.
Got it appreciate it in your response Tim's question you alluded to the fact that you would still trying to grapple with.
How much of a pull forward.
Experiencing right now, but wouldn't it be fair to say.
At the current climate, but we'll need the best thing that could ever happen and it's probably the best Keith an audio got all stuck and or well kind of limited and aren't mobility.
And so with providers a bit must be caught let's put it and so the the gap between demand for bandwidth ability to provide that capacity.
It is quite huge right now but as.
Add capacity do seem to be Sony indicative of your.
Results, there seem to be adding that capacity.
So maybe this is the best seasonality isn't the best in my scenario that you could think all.
And then from here on it but that's the kind of normalize as it goes down and decline this capacity gets added.
We didn't you said that this is probably the best.
Environment that you can never have.
No I wouldn't say, it's the best environment, we could ever have I have been imagination that could allow me to come up with better scenarios, but this is certainly a very good one.
However, this is why we we take the time to say the capacity upgrades and we're trying to parse that represents more of a pull forward.
It's the model uplift that we're focused on.
And so what's actually very good for us.
There's not the temporary pull forwards.
What's very good for US is that that work from home is causing a lot of our service providers actually say wait a minute.
We have to figure out how to deliver our services without rolling trucks.
We have to figure out a way to satisfy our subscribers in a way that we haven't in the path.
And those types of questions caused them to start to look at our all platform offerings.
And accelerate the uptake of those that's what is the most lasting and telling.
A shift in the business and that's what we're focused on.
Appreciate the essence I'll pass it on.
Thanks Todd.
Thank you ladies and gentlemen, this concludes our timing now for questions I'll turn the floor back to Mr. Davis for any final comment.
Thank you operator, Calix management will be participating in three virtual investor conferences. During the third quarter of 2020 information about these future 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 for your interest in Calix. Thank you for joining US today. This concludes our conference call Goodbye for now.
Thank you. This concludes today's conference call you May just disconnect your lines at this time. Thank you for your participation.