Q3 2020 Calix Inc Earnings Call

Greetings welcome to the Calix third quarter 2020 earnings call.

At this time all participants are in listen only mode a quick.

A question answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll now turn the conference over to Tom <unk> 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, Corey Central are also joining us today as executive Vice President and Chief operating Officer, Michael waning.

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.

<unk> conference call will be available for audio replay on 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.

Actors 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 Capex.

Future it's.

It's sooner and so it continues.

Third quarter reinforced our view that the pandemic has accelerated the secular disruption moving through the communications industry wide.

While also creating additional demand, resulting from the expansion of capacity to meet the immediate subscriber needs.

These two effects combined to drive strong bookings in the quarter.

Well 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.

And then building the new colleagues as an all platform provider of software systems and services. The C. S. P of all types.

In a challenging journey.

What kept us motivated throughout with 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 effect.

The effects of our new business clearly show through this quarter as we delivered all time record quarterly revenue of $151 million.

All time record quarterly corporate gross margins.

51.5%.

All time record quarterly systems gross margins of 52.6% and.

An all time record net income of $25 million or 40 cents per share.

Clearly.

Our future is now.

It is now.

To reiterate we are just getting started.

The trends are continuing in the current quarter with our strong guidance for the fourth quarter, representing a balance.

You mean strong demand and continuing component supply challenges.

And we step up into the fourth quarter from the strongest financial foundation and our history.

There was a growing class of service providers building new business models on top of a unified access infrastructure. These.

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 connections conference.

In full virtual mode this coming week.

With that let us.

Let us open the call for questions Rob.

Thank you well now be conducting a question and answer session. If you.

If you'd like to ask a question. Please press star one on your telephone keypad and a confirmation tone indicate your line is in the question queue.

He'd be press star two if you'd like to move your question from the Q.

Just consider using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Thank you.

She'd like to ask a question you May press Star one.

Our first question is from the line of George Notter MS. Jefferies. Please proceed with your question.

Hi, guys. Thank you very much and congratulations on the strong results I wanted to <unk>, maybe you start out by 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.

Certainly pulling forward demand from from future periods any sense for how much that effect might be and then also it certainly didn't seem to be in your Q4 guidance.

Yeah. It was 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 in I guess okay.

You know, but by I guess the implication here is that at some point, there's an air pocket you know out in the future as you get to satisfy that demand I guess kind of wondering what that dynamic looks like.

Okay, sorry, I want 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 a 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 a quarter before we spoke to the fact that we were going to underwrite an opex because.

Of our concerns over how much of this was a pull forward so.

So we're getting more comfortable that there was a new level of demand here.

And they're 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 yeah.

Yeah, that's great and I guess I'm, just as a follow up on that.

You know what is it about your business that makes you confident that a this is indeed, a new level of demand I mean, I certainly the new customers I would imagine play into that but is there something else you're seeing in your order book in conversations with customers that kind of reinforce the idea that we're at a new level.

So the answer is you know obviously part of that is an outcropping or what we've spoken to for many quarters. One is obviously from a product standpoint rotating to more and more of a platform model.

Change is the visibility in a number of dimensions its.

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 but as you look forward off of the base that we just established.

Or just our largest customer this quarter was again centurylink at some 12% of revenue.

I will.

I will tell you it is likely that in Q4, we had 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.

Got it great very good thank you very much.

George Thanks.

Our next question is from the line of Paul Silverstein with Cowen. Please proceed with your questions.

<unk> core oldest parts of the business the 1000, plus smaller customers those customers that are 250000 subscribers grew less than it was.

There was a huge step up in growth from the customer base.

I trust those customers or the primary and the bulk of the revenue you're doing.

Would you saw for both platforms can you confirm that first off.

And then I've got a couple of questions talked about.

The answer is yes.

All right, but I think you said <unk> Oh I'm sure the letter that customer base was up 53% number in the quarter.

What is it the same response you have for George in terms of what we <unk> revenue, which was the same response in terms of budget you step up from the prior you had strong group prior to this quarter, but not 50 plus percent from that customer base.

Oh, we're going to continue to see the diversity occur, but you know if you really want to micro parse the numbers.

So does that there was also growth in the medium size as well. So you know as we've discussed in the past disruptions typically happens 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.

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 size space as well.

All right.

Oh, assuming this question was asked every quarter we're now.

A month.

Oh, we're now.

Well, I guess, well quite a month them from the new quarter well to trust the strength from that small customer base was no one customer that was almost threw away.

You're seeing that.

Annually.

At this lot yes, we are.

Yes, we are in dialogue to guidance the guidance that we gave for Q4.

All right I'll pass it on to come back in would you Oh personal thank you.

Thanks, Paul.

Thank you as a reminder, if you'd like to ask a question today you May press star one from your telephone keypad.

Our next question comes from the line of Rich Valera with Needham and company. Please proceed with your question.

Thank you good morning, let me add my congratulations on the strong results.

Carl I was hoping you can maybe.

Shed a little more light on the true non pull forward part of the strength, you're seeing particularly with that.

Particularly with I guess the platform business, how much have you seen an acceleration is due to new dynamics imposed by co bid 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 product offerings and the platform area any any color you can provide on that.

Oh sure I mean, a part of.

Part of it very clearly is driven by the Corona virus, you know as we discussed a 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 their subscribers because they too are trying to deal with it you know 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 see it they have seen two years of digital transformation acceleration occur in two months.

So it gives you some sense for the order of magnitude of that pull forward.

And then you know obviously, there's the pipes on the other side.

The second piece is there's just a general continued ramp.

Of our platforms and you know maybe what I'll do here is Michael winning is on the phone I think he is currently having a power outage, where he is Michael are you on.

I am.

Maybe you want to just a share with folks you know what you're seeing.

Our all platform offerings, and how that's going in the marketplace.

Sure the.

The benefit that we have to your question around our ability to sell it better is really want a partnership so how do we work very closely with U.S.P.'s of all sizes and become that partner, who coaches them through their business transformation as they adjust to the market new market dynamics you know they have your competitors there's large test.

Summers are 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 simple.

Hartner with them to actually provide a great subscriber experience and when that customer for the long term in other words when the home.

And so we're doing very well our customers are seeing.

Seeing robust demand and we continue to partner very closely with the help them transform their business.

Michael Thank you rich.

Yeah, Thanks for that.

Carlin Michael and.

So wanted to look.

Into 21, and see if there's any more you're willing to talk about that I think you know the street had been sort of at the low end of your multi year target range I think a 5% to 10% for next year, you're always going to have much tougher comps now, particularly in the back half and just wondering if there's anything you're willing to say this.

At this point about how we should be thinking about 21 from a growth perspective.

Let me, let me tell you what Corey well tell you, 4.999%, which I've rounded up to five.

See your point.

At the low end of the range, let's face. It. These are a significant uplift I think when I looked at it you know this is lifting up 2021 by some 8%.

It's a big step and you know 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 you know [laughter].

Unwise to the point of being foolish to.

To do anything other than fibers that until we get more visibility so.

5% it is in my mind.

Okay that totally makes sense.

Thanks, Jim and all I'll yield the floor.

And I read a hearty welcome aboard.

Thanks. Thank you appreciate it.

Our next question is from the line of Christian swap with Craig Hallum Capital. Please proceed with your question.

Hi, congratulations guys on a great quarter guys.

Oh up to two Georgia, the last gentlemen.

Sure.

True 21.

Carl.

No unexpected.

You said you know kind of.

But you know.

Odds of this kind of being the new normal.

Good.

We anticipate.

So the 2021.

He kind of the timeframe that you would probably have enough time.

Update your long term model.

To see if that growth rate.

I'll be greater than the 5% to 10%.

Well, we just take it one quarter.

Yeah. So look we're going to take it one quarter at a time, but to answer your question or any or.

Any adjustment like that is easily four quarters all.

When we set the model we set it for 2021 and beyond 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 four quarters for sure Christian would not happen.

And then and then lastly, you can give us.

Update on horizon, and any chance or opportunity.

Over the course of.

The next few quarters, where we may begin to see.

A more material acceleration with that customer.

[laughter].

<unk>.

Yeah, So let me frame, but actually a great question, let me frame it in the answer that I gave on 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 in their business.

You know as an example century like is going through a brand and then ultimately or restructuring around lumen technologies.

Horizon is in the middle of a you know a multi decade infrastructure build that has puts and takes every quarter.

There are other customers that we have that are doing large infrastructure build I think the opportunity for any one of them to be a 10% customer in any one quarter.

It's pretty good I think.

I think the opportunity for any of them to be a 10% customer for the entire year.

Is diminishing rapidly.

Okay, great. Thank you and then Oh.

Lastly, can you live.

Can you let us know.

The challenges.

Opponents that.

Most dresses system for you.

I'm sure. This is not an uncommon phenomena.

It's a it's the it's the more complicated so what kind of components.

And you know when you when you go listen to the Silicon quarterly earnings you'll hear them talking about their challenge is upstream.

As an example, with substrates and other things and that they if they had more supply they could in fact do more revenue.

You know the fact the matter remains is that when you when you listen to Michael's comments.

Yeah. The fact is we're helping our customers succeed by building very valuable business models that to meet that demand drives the demand for our all platform offerings. Some.

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 little tricky.

That's what we're seeing and that's what we're working through but you just put one that's fine point on it it's not really smaller components, it's the larger silica.

Great no.

My questions and congrats again thanks.

Thank you Christian.

The next question is from the line of Tim seven inch with Northland Capital markets. Please proceed with your question.

Hi, good morning, and and congratulations on the results.

I wanted to kind of continue along with a team of kind of puts and takes on.

[noise] growth going forward, given how strong your.

Second half of <unk> is and want to focus on a couple of areas.

First international where you saw a pretty significant uptick and.

I Wonder if you would describe that similarly in terms of a pull forward dynamic or is that more.

Kinda ramps and roll outs 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 with good bounce are pretty sharply in at all well 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.

So that's the two answers I would give you to characterize what you saw.

Sorry, you just for their well.

Well I guess would you expect that to continue as you implicit in your Q4 guide do you expect international revenue is to kind of maintain at this elevated level, you've seen or is there any kind of bounce how governor though.

They'll continue to bounce around so.

Great generally I wanted to focus on was kind of the medium carrier segment, where there's been you know a lot of activity lately and I think you referenced some of it in terms of attracting capital Herman.

Oh, how that with with one of them.

Kinda midsize players.

And you are seeing some growth in that group as well for the first time in a while even though the smaller group its been a real engine, but I wonder.

As as you look forward into the next year or or maybe Oh, so implicit in next quarter's guide.

What kind of trends, you're seeing above that group of players many of whom are kind of emerging from bankruptcy, attracting new capital and an engaged in big fiber builds is that.

Something you could see accelerating.

Next year or or is that also kind of part of the go 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.

But I think if I were going to characterize what's going on for many of the former.

Mid sized wireline telcos.

They are being recapitalizing restructured.

And Lo and Behold the capital that's coming in to do that in.

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 other simply spin off from frontier.

If you listen to the words that are coming from Windstream if.

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 that.

But I would be wary of trying to fold that into numbers in any given quarter as they are larger and going through.

No pretty significant restructurings.

Got it and last question for me and I know you know given the magnitude.

The magnitude of the strength, you're seeing you know short term.

Yeah, there it sort of prudent to be conservative about you know growth for next year.

So I don't know if you could have a specific answer to this but you know as you look at 21, obviously, we're going to see the the art off process is going to kick off and a week or two here.

Yeah.

And I guess implicit in at least your starting point for next year, you know what sort of assumptions are you, making about incremental business coming out of that process.

Or might even be the case that you know some of the actives.

Some of the activity were seeing now is your sort of big accelerated in anticipation or in advance of that process, how any update on how incremental you expect all four indeed any other stimulus.

To before you and 21.

Yes or no.

What you're seeing currently has anything to do with BARDA.

Let me be clear about that number one number two pretty clearly.

Pretty clearly.

And.

The guidance that we've given.

For Q4 and then.

And then obviously extrapolating that into the answer that I gave to George for 2021.

You know that's a [laughter] that's.

That's I I did that with some 40 million dollar 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 too so there.

So there's some of that art out that's clearly being factored into that.

All of that having been said I.

I don't.

See anything that causes us to change from our guidance on our dog, which has been set at the 2022 event. Thank you.

And you'll see some of it in 2021.

And.

And that right now it's steady as she goes.

Okay, Thanks, very much and congrats thanks, Dan.

Thank you at this time I will turn the floor back to Tom Davis for closing remarks.

Thank you operator Hello.

Calix management will be participating in three virtual investor conferences during the fourth quarter of 2020 information about these future investor events will be posted on the events and presentations page of the Investor Relations section of Calyxt Dot Com why.

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.