Q3 2022 Calix Inc Earnings Call
Greetings and welcome to the Calix third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the brief prepared remarks, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference.
It's being recorded its now my pleasure to introduce your host Jim Fanucchi Investor Relations with Calix, Sir. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining our third quarter 2022 earnings calls today on the call we have Alex Chairman, Carl Russo President and CEO, Mike, a weenie and Chief Financial Officer of course simple or.
As a reminder, yesterday after the market close Calix issued a news release and filed an 8-K with the SEC, noting that our stockholder letter had been posted in the Investor Relations section of the Calix website.
Today's conference call will be available for webcast replay in the Investor Relations section of Calix website.
Before I turn the call over to Carl that Michael for their opening remarks, I want to remind everyone. On this fall we will refer to forward looking statements, including all statements. The company will make about its 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 trends to differ materially are set forth in the third quarter 'twenty two letter a 2022 letter to stockholders and in the annual and quarterly reports filed with the SEC.
<unk> assumes no obligation to update any forward looking statements, which speak only as of their respective dates.
Also in this conference call, we will discuss both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in the third quarter 2022 letter to stockholders.
Otherwise stated all numbers referenced in this call will be non-GAAP measures.
With that it is my pleasure to turn the call over to Carl Carl.
Thank you Jim.
Robust demand continued in our third quarter, which resulted in a 37% year over year increase in revenue.
65% year over year increase in RPE OS.
This growth continues to be driven by broadband service providers that are providing broadband as a service rather than just a dumb pipe.
We expect this trend to continue as many of our aggressive DSP customers are using the economic slowdown as an opportunity to gain share.
Delivering an exceptional subscriber experience to those who have never received one.
On the supply from the Calix team again outperform.
And we benefited from a pull forward of inventory.
Which provided us with the resources to meet more demand and after the fourth quarter in a better position to meet our customers' subscriber growth.
Higher revenue in the third quarter combined with the revenue guide for the fourth quarter puts us on a path to deliver our third consecutive year of 25% growth.
The disruption that we have spoken about for years continues to pick up speed.
Our medium sized customers are growing as a percentage of our business and why.
While we do not normally forecast bookings mix.
I expect we will see more than 90%.
Our bookings in the fourth quarter come from our all platform cloud software associated systems and services.
These two observations.
Combined with our consistent performance indeed.
Indicate that our transformation is nearly complete.
Thus it is appropriate that I stepped up to the board and have Michael lead our evolution going forward.
It's all yours.
Thank you call the opportunity to follow you and these talents into the next phase of our evolution.
Last week at connections our annual customer success and innovation conference. We shared the challenges entering a third phase of our corporate journey.
Which we define as the ecosystem and partner.
In this phase we are building on 12 years and more than a $1 billion of investment in our platforms to help our service providers transform their business.
At connections, we demonstrated that the maturity of our platforms allow our customers innovate at speed and has never been seen before in the broadband industry Inc.
In closing the enormous opportunity we are capitalizing.
We're always every day.
The calix team is committed to executing with excellence.
Our customers simplify their business.
Site their subscribers and grow their value to shareholders or members and their communities with that let me hand, it back to Karl Karl Thank.
Thank you Michael.
This is the last time, you'll hear me say all.
Operator.
The open the call for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is into question. Kim you May press star two if you'd like to remove your question from the camp for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
The stocky.
Our first question comes from the line of Paul Silverstein with Cowen. Please proceed with your question.
Thanks, guys.
Michael Congrats you kept your shoes to fill.
Hum.
Right.
I think you won't be cleared in your remarks, but I got to ask because it came up last night. After you reported from some clients.
The shift to software I heard you say that 90% or do you expect 90% of bookings to come from more platforms.
Our pure numbers sequentially in deferred revenue number sequentially for cynics out there.
Wasn't cooking system.
I'm not overly concerned but didn't appear consistent with the overall growth in.
Any thoughts you could share in terms of software cloud progression.
As a proportion of revenue.
Oh, no that speaks to future revenue growth and just to be clear the pull forward. Your reference was inventory not taking into future periods.
So let me start with the pull forward was inventory.
Ordinarily that words are scary word.
Our supplier challenge times being able to pull forward inventory it was a good thing.
And you saw that in the outperformance on revenue by the way that also actually partially answers. The first question you had which was we had significant revenue growth on the hardware side because of the pull forward of supply.
But I think I'll, let Michael speak to the nature of the platform business in general and how bookings Joe and maybe it might be you can share your experience.
It can be lumpy, we were up 65% year on year.
And we continue to close contracts, so that growth will be at very low levels.
Alright.
Last quarter last quarter, we had 18% growth, which was one of our greatest quarters.
Coming out of connections.
Very clear that our customers understand the opportunity.
And as we help them move into new markets and change how they address their subscriber opportunity through incremental cloud and services and everything that we're doing with suites. There is no doubt that there is a significant growth opportunity ahead with those customers.
Or will that supports them on may <unk>.
<unk>. Thank you Buddy trust by definition visibility into next year in terms of the current strength that youre seeing that you continue to have good visibility and that the strength youre seeing is not being benefited much if at all by the coming disbursement of funds from the various broadband logistics.
So in the U S and abroad, a trusted steward trickle not even a stream.
But that's a question.
Absolutely correct Paul.
Trickle that will take a decade to rollout.
And your visibility into the mixture Michael.
Continues to be strong as Korea will talk about as we provided our guidance we have no <unk>.
They'll continue to grow at an incremental lever level every single year.
You're talking about demand.
Oh I am sorry.
I am talking about me and I'd love to ask you about margins as well, but I don't want to incur the wrath with my peers, who are worried anymore.
[laughter].
Demand visibility.
As we believe quite strong and I would echo having attended connections.
So just a few minutes on stage.
Excitement.
It's just off the charts.
Alright.
Carl I E.
With respect to margins I'll apologize to <unk> question.
It sounds like this is the start of meaningful margin recovery and back to that very strong trend you would establish some up until you've got gobsmacked, along with everybody else by the increase in freight logistics.
Etc.
As we said so the answer is.
We think this is the beginning of recovery.
I'm excited to see it just starting to turn up in our guidance would indicate for Q4, you might get a little more of a turn up the way I think about that which is back to the 100 to 200 basis points into 2023.
Do you feel that much better about us achieving that.
Keep in mind that we've always said that if the headwinds slow the mix of the business will start to take over again at margins will start to expand and I think that's the way I would characterize it without going too long on a dispersed into supply chain.
There is still lots of issues out there, even though we're seeing some improvements.
Well, we call you did you say 200 to 300, not 100 to two one.
100 200.
Alright, I'll passenger volumes this quarter to 300 I was mistaken if you heard 200 or 300, you weren't mistakes.
Thank you Carl.
[laughter] I figured this being our last conference call, you and I have to get it.
[laughter].
Thanks, Paul Thank.
Thank you. Our next question comes from line of George Notter with Jefferies. Please proceed with your question.
Hi, Thanks, a lot guys and Michael Congrats on the promotion and we look forward to working with you.
Hey, I guess I wanted to ask about bright speed I noticed that your medium sized customers doubled roughly sequentially.
Off of what has been a pretty consistent revenue run rate from that medium sized customer category historically so.
I guess I'm wondering if that is a bright speed coming into the next here and any sense of that.
Well so.
The answer is.
<unk> is coming into the mix, but it's not the driver of that.
More medium sized customers, but.
Declare price paid is now accepting deliveries as they position themselves.
To take over which they did.
Beginning of October .
So it started coming into the mix in the third quarter.
But it's not the primary driver.
It is simply that we are seeing more medium sized customers.
Start to step into what we're doing and as we've discussed as you know George for many years when the small second segment was growing.
We had a 90%, which it didn't quite make it to them.
We said that as the disruption continues youll start to see larger customers take it off that's what that's all about it's not any one customer.
Got it okay, great that's helpful and then.
You know last quarter, if I go back to the earnings call you guys talked about $100 million buyback.
I guess I assume that you might've engage some of that buyback program during.
During Q3 I didn't see it looking on the cash flow statement any thoughts on the buyback program at this point.
Yes George.
We talked about last quarter.
When we decided to go work with the board with that.
Buyback in place.
The company's stock was at a much different level.
We are looking at our cash requirements. When we look at it on every quarter at the board level at a strategic level.
We're getting to a point, where we had no immediate needs for cash.
And all of a sudden you're sitting there looking at a $30 share price going up we don't know where the sentence, but at some point our stock becomes a better alternative use for cash than our existing agent just having it ready for the business and.
So we went ahead and do that capital allocation process decided to go ahead and put them through a program in place.
By the time, they got put in place, obviously ensures that recovery to a point where.
We're going to leave the cash on the balance sheet and we'll continue to revisit this every.
Six months or so and.
And then so that's kind of where we're at so yes. The shares youre kind of recovery that we didn't have an opportunity to.
And buy shares.
Got it Okay and then just last last one is it's a quick one.
At this point what is the.
Sort of impact you're getting through the gross margin line.
Associated with higher input costs I think at one point you guys told US 400 to 700 basis points I'm just curious what that is now thanks a lot guys.
Yeah, So I wouldn't change that that range, George it's still kind of in that number.
And as we stated in the stockholder letter you know.
The improvement in margin this quarter was largely a more of a reflection of product mix.
We finally solve some of those golden screw problems on our access product lines, and we were able to ship more of that inside the quarter and that product mix. Then obviously helped us with the overall margins.
And to set a prospectively George let me ask I'm going to ask for your questions.
Are you done with Expedites.
Are you still doing them well inside this quarter, we had as you know again another component issue and so we had to expedite actually put.
Some product on airplanes, which is always expensive.
So we're still dealing with them. We are expediting less you can see that our inventory balance has taken a nice step upward during the quarter still within the range of what we had said outset from the very beginning of it turns ratio of somewhere between three and four were at <unk>. One so that's good.
And with that amount of inventory, obviously, we will have to expedite lessen hopefully avoid all that air freighting.
Thank you Corey.
Thanks, guys.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Michael Genovese with Rosenblatt Securities. Please proceed with your question.
Great. Thanks, very much congratulations on the good quarter guys.
Now you, obviously hardware isn't an extremely strong cycle and it seems like it's going to stay in a strong cycle of my question is.
Free for your sales cadence and your sales cycles is there is there a phenomenon, where do where customers tender order hardware first and there's a software pull through later.
Is that is that a good way to think about it or.
Could you could you just talk about that a little bit please.
And that's a great way to think about it in fact as we've talked about over the last few years, where we're going into a marketplace is that once they put for example, a serious buyer into the home, whether it's a home or small business.
The that's where the service provider then has a unique opportunity which has never happened before which is going way beyond connectivity, where they start to sell services managed services. So that started out with protect our Q and experienced thank you and if you watch connections you will see that we continue to expand that portfolio.
Attunity for broadband service suppliers, we announced.
Our service eight 910 and 11 all of those are monetizing the opportunities for the broadband provider and then in turn for US. So absolutely that's the right way to think about it.
It sounds like just to even take that on a deeper I mean, if we looked at it new customer like bright speed, which I.
I understand isn't the main reason for the 6% growth of medium as a as a category.
As a percentage, but if you're just taking them as an example, we would you expect that in the beginning the heart.
The mix is more towards hardware and that later that mixes more towards software is that fair or or or episodic. Yes, yes. Okay. No. That's great that's absolutely right.
Okay.
I wonder if that's a little bit more about the gross margin in the supply chain and these are really small points. So maybe this question is like you know too cute or something but you.
Yeah, Corey said, there was a supply chain issue in the quarter, but you still did 50.7 I think.
50, 60 basis points above consensus.
And then the guide for the next quarter, it's better than the Guy who gave last time, but it's the midpoint is down very slightly sequentially. So just can you talk about really the fourth quarter versus the third quarter supply chain is it. The same is it improvement are you guiding that there could be more surprises and if there arent maybe it would be at the higher end of the range.
What are you thinking there.
I don't.
The question is marginally to acute but not too cute Mike. So we're going to answer your question.
<unk>.
Let me go back and frame it in the macro sense, which is again, if the headwinds even start to abate the mix of the business will start to statistically push it.
On any one quarter you better be careful but let me now ask Cory to add comments to that.
Yes, so Mike I think you kind of.
Cut it too finely.
There is still enough variability inside the quarter that youre going to be able to see.
Various things that for example.
I entered into or read to you know $5 million worth of <unk>.
To solve a problem that we have right. So those ppvs are purchase price variances are still coming through.
And I'd characterize the whole supply chain is this.
In the last 91 days things have improved in certain areas.
But those areas that where those component parts that were problematic remain problematic or still chasing them. So theres still.
Call it dozen or so that makes it very difficult for us to get everything that we want.
And so when we're buying them, we're buying them or paying up for it.
And in certain areas, that's getting better.
So lead times remained extended albeit I've heard for the first time, one vendor or reduce the lead time from 52% to 26 weeks. So there's some evidence of it getting better.
On the logistics side of the house.
Rates have come down continuing to come down there is still not pre pandemic levels.
The port congestion seems just cleared up in long beach, but rail and trucking seems to still be kind of a mess so its getting better its not where it needs to be.
And so then you're still looking at.
The fact that we're having.
More products, but I would say.
The increase in inventory that Youre seeing is really a reflection of all of the work that we did in the last six quarters.
Finally, getting some of those purchases that we made six quarters ago, when they're actually starting to show up so.
Yes, it's a combination of that a lot of the order funnel yours that we bought.
Solving some of the Golden screw problems and.
Improvement on the shipping logistics.
Right. So that's good.
Great color. Thank you.
Lastly, I just wanted to ask I want to ask Karl and Mike a quick question each.
So Carl you're not going to be in the next conference call. It sounds like what what are you going to spend your time I know you're.
100% focused on calix or other things and what have you.
Sending your time doing.
I will not have prepared comments I will attend.
Our next quarters conference call, just because I'll Miss it if I don't.
I'm, just kidding, but I won't be on the conference call in case, there's a particularly refine the question that you asked Mike.
Okay.
And to your point.
Hello.
I've been focused on the board in the future and those pieces of the leadership team has been executing this is just a natural next step of what we've been doing.
This has been a 20 plus year endeavor I'm not going anywhere.
As the company now speeds its evolution.
I will certainly be on the board and the chair of the board that said.
I have lots of interest, but my first interest will remain Cowen.
Okay, great great I'm glad I'm glad that we'll be able to talk again.
On the next call.
And Mike.
Would you how would you just describe this is this a new era at start of a new era for Calix is this continuity I suppose it could people. So let me stop talking and hear how you would characterize that.
What does this change signals for calix.
It doesn't signal anything other than a kind of a continuation of our pursuit of our strategy. So as I announced at connections. We've entered the third phase of the company and then third phases, where now that our platforms have reached a level of maturity. We can now shift some of our innovation efforts into how do.
We continue to provide ecosystem and managed services that really speed.
Access for our broadband service providers. So from my perspective, I would say from a leadership team perspective, and our teammates. There is no change. This is just a continuation.
Alright, fantastic. So again, congratulations oh, congratulations on the new role and congratulations on the performance.
Thank you very much.
Thank you. Our next question comes from the line of Ryan <unk> with Needham <unk> Company. Please proceed with your question.
And congrats Mike on the appointment and to the team on great results here.
I think we've hit most of the key points, but I want to ask about international.
It sounds like that was down and I know last quarter, you mentioned that UK customer that brought onboard another vendor.
To set expectations accordingly to the Investor community, how should we think about the <unk>.
Prospects there over the next 12 months for on the International front. Thanks.
Yeah. So let me start off with this one and I'll ask Michael to comment on market, but.
What I'd highlight is the fact that if you remember a year ago.
We had kind of this anomaly, where we add shipments that I think got stuck in the Suez Canal and then really didn't show up until Q3, a year ago, we had like two quarters of revenue ended up going to city fiber.
So has Europe was very strong this year, it's more normalized so the decrease that youre seeing is really just a function of that kind of prior year anomaly.
And then Michael do you want to just comment on our thoughts on international.
We have expanded into the UK market, we made that very public.
Which allows our clouds and everything that we're doing from a broadband innovation point of view too.
Benefit the folks in the U K.
And we have a very pragmatic approach to our international expansion, while optimizing the opportunity in the North American markets.
That's helpful.
You are looking at other markets in Europe , there and how do you see the opportunity developing.
The Chinese suppliers are moved aside are you seeing a return to any kind of pricing normalcy there in mainland Europe .
The primary focus remains in North American market and as I said.
Third we've expanded pragmatically into the U K and then we'll assess it on a go forward basis, we really do want to optimize everything in North America at this point and also keep in mind Ryan.
The Huawei replacement opportunity was a price driven acquisition by <unk>.
Certainly sir.
Service providers that if they're looking for a replacement are probably going to be very price sensitive or price driven.
And that's not the message that I mentioned upon which we compete so Michael do you want to add color. Yeah. This is something you've heard Karl say many times on many calls which is our whole focus is on finding a strategically aligned customers people who understand that this is not a dump.
Hi.
Speed is it go to market is something that needs to quantization and they're looking for how do I build out a completely different go to market and in fact, I talked a lot about that at connections is that they they the broadband market is right. It's a perfect opportunity for them to actually capitalize on their infrastructure by expanding user.
And we are the only company in the world.
So that's great.
So it is merely a coincidence.
Otherwise your country.
The next step is how do I actually monetize on top of the existing infrastructure investment and that is all through incremental services. So if you watch connections one of the things I've talked a lot about consumer behavior and the consumer really doesn't understand speed, but when they do you understand as we understand reliability.
Understand.
The service provider areas about the community and then they also they understand the service provider, who has a plethora of services that actually transform their home and each one of those or months' audible and become an excellent opportunity to build loyalty eliminate churn.
And grow revenue.
So hopefully that helps Tim on your question about inventory.
<unk>.
I want to Echo, what Corie said and amplify it.
We're seeing some benefits now frankly more due to us being after this for the last six 810 12 quarters.
Our purchase of <unk> the data that we have on our customer demand all of that is giving us the ability to perform better.
What the macro is that said there we've said before there were some green shoots last quarter, but you still have countervailing effects of those green shoots.
I do believe over the next four quarters as you see in our letter. We think this is going to continue to mitigate but I think it's gonna be a gradual thing over four quarters Greenfield freed up yeah.
I agree and I would say Paul Kim we're not seeing that now.
So it's not like the consumer segment's weak it's all of a sudden the networking space as strong last one inherently will take time, if you just think about it.
The demand decreases in that those other segments.
We'll have to start with wafer starts.
Time, you run them through wafer starts getting them down the line having been bills have been put on a car to put them on boards into products, putting them on the water.
It just takes us.
In quarters not weeks.
Got it and I appreciate that if I could just follow up.
Another kind of high level question here, but as I see discussion of the third phase of the business.
Around ecosystems and partners and of course, we see.
Carl's role evolve.
To the board level.
And congrats to both of you guys on that.
You know should I, what should we infer from there I'm I'm more of a strategic and externally focused view from calix here going forward as you ponder what to do with your $4 billion market cap or is it business as usual.
So let me let me start the front end of that but I'm going to ask Michael to amplify.
Platform partners.
As you and I have discussed before Tim the platforms open up a very interesting opportunity to bring things to market as you heard Michael say at an incredible pace.
But it also opens up the opportunity every time, we look at something that you know in the URL old World as a complex systems business.
Look at acquiring because you have to integrate it.
We don't have to.
And so from a strategic standpoint, I am certainly going to stay focused on.
Both laterally and deep what's going on.
I would I would dissuade you from thinking there or any inorganic.
Opportunities that are in front of mind as a matter of fact I'm going to turn it back over to Michael I think our focus is on the rapid evolution of that ecosystem. So Michael if you could add some anecdotes to that sure.
Kind of connections in the industry really stops because they didn't have not built the platform.
A few services, we demonstrate and are demonstrating every single day that by integrating with partners, who have great technology that our customers see in the market opportunity that we can bring things to market at a rate that's never been seen before in telco and in fact in the broadband market. This has been the biggest issue.
Really struggle going beyond our pipe shelling speed and we've solved that problem.
And that's evidenced by the fact that we really smart Wi Fi, which was our eight service really smart business Smart business is fascinating because it's 28 million small businesses in North America.
And while everybody else looks at that as like what connectivity into the business, we actually see it radically different we see that you give a great experience. That's reliable and then we see a whole range of services that we can build with partners on top of it things like incremental cyber security services.
Foot traffic analysis marketing demographics, all this information so for US every single time, we land. It's just another opportunity to find the right partner that our customers identified as an opportunity and integrating it into our platform for them and then for the partner group. This is where I'm spending a lot of my time partners in the past would have to one.
Often a great with every broadband service provider, we have explained to them by integrating with us once they have the opportunity to reach thousands of broadband service providers in tens of millions of homes and businesses and so they are flocking to us because it's a huge opportunity ahead.
And then last piece, we also announced two additional services are tenants, which is arlo security, allowing a small service provider to do whole home security and then our service around reliability and for home office home office. Thank you.
What you should think about that is that that's just the start.
We need eight 910 11.
Every corner, we will be on a 91 day cadence and releasing more.
I don't want to probably one clarification could go back to your recession comment Karl said that the pipe provider actually.
With suffer from their recession, I would actually expand that out and say that the company who is only focused on speed based marketing and the broadband service provider is not just open to the recession more importantly, they are open to them significantly losing market share to a calix part and broadband service provider.
<unk> experienced this in the paradigm shift that we're seeing not just discussion they are going to fall prey to our calix customer.
Okay, Thanks, very much and congrats once again.
Thanks, Tim.
Thank you once again its star one to join the question queue. Our next question comes from the line.
Michelle with loop capital. Please proceed with your question.
Good morning, and thank you for taking my question, Mike Congratulations on the promotion as well.
Let me start off with if you can double click on the supply chain.
Some of your suppliers like Broadcom have increased pricing, but you know on the other hand memory pricing is coming down pretty hard sequentially can you walk us through the dynamics in the supply chain apart from improving availability our prices.
This is beginning to normalize.
No generally no, but we're still looking at facing price increases come January one so quite contrary to that so.
No I have not seen prices come down a any material way.
Ongoing audits on the freight side, we said, yes that youre starting to see pricing come down on your list pricing great logistics.
But as you know is it you would expect pieces over the next four quarters or is that pricing component will begin to normalize.
Alright, so normalized meaning stopped going up.
Those are mine.
But if you mean normalized going back to like the good old days, where someone can went down every quarter no not in the next four quarters.
Okay.
And then lastly, if we look at the improving gross margin outlook driven by just I guess.
Great cost coming down and your ability to ship more and thereby.
Driving higher revenue.
Putting from volume.
Your R&D spend is pretty much tied to your gross profit line and at some point I suspect your youll grow gross profit is going to grow faster than your ability to invest in R&D.
How are you thinking about it.
You know your historical 19% of our gross profit is that still going on.
Look or do you think that there is an opportunity to.
We visit that framework.
Okay. So let me start where you started.
Which was.
The notion of gross margin because of going up because of logistics or other pieces.
To be clear.
As.
Pricing headwinds slow down.
The mix in our business so the mix towards more platform software et cetera is what will drive the margin expansion.
Logistics costs or lower component costs.
All of that has to happen as we've said.
Each quarter or is it the.
At some point in time, the headwinds just slow down.
We should start to see some margin expansion and that's what we are saying.
So that's the first base on R&D.
Our Opex investment model remains the same.
As a reminder, it's 30 points.
Our product gross profit.
Is that your question about growth.
These rates of growth can we invest.
That's our target we're going to do our level best to do it.
Yeah, and let me expand on that.
Executive leadership team has been our most important commitment and goal is that as we continue to go through this quarter and subsequent quarters that we invest right up to what's available we would be fools to.
Not do that because the growth opportunity ahead is so significant and because of the fact that our platforms are now at a level of maturity that allows us to expand that and innovation level that has never been seen before.
Slowing down at this point would be wrong now one last comment on that for us in this quarter.
Because of the late in the quarter and pulled forward.
The inventory that.
That additional revenue came unintended by Opex, because you can't react to that so in this quarter, we fell behind.
Given the opportunity to satisfy more of our BSP demand. That's what we chose to do but as a model we're going to stay focused on staying on that model.
Well you should appreciate that one more clarification I think you mentioned that 90% of your bookings in the fourth quarter are going to come from.
All platforms and cloud services and software.
What was the bookings.
Of course it is.
In this quarter in the last quarter, if you can share.
He was a trend that is growing.
Yeah in Q2, we said that it was it had crossed over 80%.
You can assume that it was probably above 80% in Q3, but we've been doing this sort of across the.
The quarters as you may remember.
I am saying as the departing CEO .
That it's got to be over 90% that's my guess.
Pretty sure I'm right, but we'll see if that in fact happens either way my point was at this point we are so close.
That what used to be calyx, we called Calix, one dot O.
So far in the rearview mirror that the transformation of Calix from what was way back when a systems company to now a platform company and now evolving into an ecosystem company.
Were there that was my only point of the comment.
I appreciate the clarification. Thank you.
Yep.
Thanks, Rob.
Thank you. Our next question comes from the line of Scott Henry with Roth Capital. Please proceed with your question.
Good morning, Thanks for taking my questions Congrats on the quarter, Mike and Carl Congrats on your new roles going forward.
Thank you.
Maybe to just dive in and get some clarification looking at mix and growth going forward.
Earlier in the call I think you addressed the mix of medium sized customers had a big step up in the quarter just wanted to clarify there that that it sounds like it's a pretty diverse mix of customers that are contributing to it and so we're not a one time event. We should expect this to continue going forward if not expand as we go into 'twenty 'twenty three and then looking at some of the.
I guess, new connections new lines actually had a big a big.
Big quarter up I think 118% year over year.
Could you talk a little bit about that dynamic in terms of what's going on there or preexisting customers starting to adopt the platform is this all new line driven growth both of which were good but trying to get a little bit more color on what you're seeing that was driving that performance in the most recent quarter and then I had a couple of follow ups.
Yeah, Let me just answer your medium sized customer base at all here.
The Sos piece over to.
Michael.
Be careful on the medium side. It is a trend for sure it is going to be noisy.
So youre going to see some quarters, where it's up some quarters, where it's down but in general.
Thank again about disruption.
You're starting to see larger customers take the thought oh by the way larger customers can also be noisier than they ended up themselves on shipments because it's a much smaller set of medium sized customers.
It is the hundreds is a small set so hopefully statistically that makes sense to you Scott Yep.
And for <unk> growth et cetera, but to turn that over to Corey or Michael.
Yes, so Scott on that piece that I talked about that a little bit earlier.
The quarter was contributed to the margin expansion was mostly product mix part of that was catching up on some ex GFS cards that we.
And we had built up a pretty big backlog on that we saw the Coles group four and it had less to.
So us over performance.
Okay. Thanks, that's helpful. And then if I could to kind of jump in on the expansion of the ecosystem virtual services.
You were talking about your excitement coming out of connections and Mike you were talking about basically the growing ecosystem in partnership opportunity. There are couple of things for starters I was wondering if you could update us on maybe how you're thinking about attach rates, what you're seeing in terms of the existing product offering with arlo certified bark and then expanding.
On that Mike you know again going back to the partnership and it sounds like that ecosystem in general I think earlier I was thinking about this more as a very confined and curated experience in terms of what you offer to a broadband service providers, but it sounds like it might be growing beyond that in terms of the interest level and the number of partners that are out there on that front. So it does it become something bigger.
Because of the level of interest in terms of the menu of services that you can go to your pre existing installed base.
Yeah, So real quickly just as a preamble as you remember Scott from our conversation.
The ecosystem partner level, we said, it's very early days.
We had a small number of customers taking it up but they were starting to be very successful with it.
And that was before connections.
And then at connections.
I would tell you very very different reception, just another step up but now I'm going to turn it over to Michael I'll, let him fill it all out.
So the first thing is I'm going to go back a little bit to the medium right. What you're seeing is that with this transformation of the market that we're creating in the past and I talked a lot about this as a connection at connections is that the big companies have the advantage. They no longer have that advantage is actually small and medium sized companies are smaller becoming medium they have a huge opportunity.
Because there is we've seen a massive democratization of the access to technology. That's what our platforms do in fact, I would argue that a small or medium customer will be significantly more agile in the marketplace versus a big company because all of the technology and innovation, we're bringing so as you look forward. This kind of goes back to the previous.
Question around recession roofing right. If there's a company that's just a pipe company and that's all that they offer in the market are college customer, we all run circles around them.
The second part of it to addressing your curation of experience and it's an interesting word to use a curation.
Actually to some extent represents what we do what we do is we talked about his connections we take what today is an over the top service or <unk> service and in the past the service provider had no opportunity to be part of that value chain because they added no value knowing they would just.
Hey, my value it and put it on my Bill that's not value right and what calix is done with our platforms. In this third phase is take any one of those services and we basically put it put it in what we call like foundry and we hardened it we put privacy support marketing insights all of these different capabilities.
Onto that service and convert it into a fully managed experience where it goes from do it myself to now the service provider can control everything have insights into it and offer it to the end subscriber whether that's a small business or home as a fully managed service where they add a lot of value.
And that is right for their brand, but it also completely transform the consumer experience and this is really the opportunity to date, they put that that infrastructure in place and now to your point you have it.
A huge laundry list of experiences, but more importantly, they understand that subscriber and can and really position the right ones for the right subscriber at the right time, So I would not call. It if youre using the word curation to dictate that it's a small number I would actually say no if youre, saying youre curated because of the fact that we do a lot of research.
With our customers on what should come to market and traded into a managed service, yes, but it doesn't get paid volume and as evidenced by US doing eight 910 and 11. This is just the beginning to be really clear our calix partners broadband service provider is going to completely dominate.
Their market because of the fact that their offerings are going to be unlike everybody else.
Perfect very helpful and by the way Mike I was I was going for what was behind door number two there in your description.
And just lastly.
I think I heard this correctly, but I just want to clarify Cory on the R&D front right. The target has been 30% of gross profit, even though you're spending below that that's still kind of a target that you're trying to work towards its just in a high growth environment, it's been difficult to get there. Thanks again guys great job on the corner.
Thank you Scott.
Thank you. Our next question comes from the line of Christian Schwab with Craig Hallum Capital. Please proceed with your question.
Hey, guys.
Congratulations on successfully on.
Many multi year transformation of <unk>.
Company.
Which a lot of us had her doubts along the path the journey that you would get.
Great.
And Michael Congrats to you on the opportunity to steer the ship corporate.
I don't have any other questions other than the statements they've all been asked thanks guys.
Thank you guys. Thanks Christian Christian let me use that as an opportunity to say thank you to you for hanging with us throughout and to all the analysts on the call.
It's taken a bit of patients, but it has been appreciated very much by us so thanks for saying that.
Thank you. Our next question comes from the line of Paul Silverstein with Cowen. Please proceed with your question.
Well, that's about I, almost feel guilty asking but I have to ask.
Yeah.
Almost.
Including helped Blue Sky is for you in your future.
What other than the obvious in terms of macro disappoints and it's so true company specific.
What do you worry the most about what could go wrong.
Could you.
Notwithstanding a fine you seem to be doing where could you be doing better.
Are you asking me are you asking Michael Dirty Rice.
I'm asking you whoever would like to actually respond to a question from you or Michael or both.
Well I went back never at a loss for words, so I'll answer it.
Yes.
From my perspective.
When you're functioning as we are focused on our customers' success as you've heard Michael I think very eloquently speak to just the curating opportunity and thinking through every day, how we're doing this.
The number one focus here is on execution.
Making sure that we grow at the rate that the opportunity is growing.
From a macro standpoint, I'm not trying.
<unk> colored glasses.
Yes.
To me this is very much about our execution I do not see it.
Major things that you can plan for.
If theres an outbreak of war or Theres, a common strike I mean, these are not things you could plan for.
So this is very much about us executing on that path.
Together with for example, R&D investment and making sure that we meet the evolution right.
For innovation that our customers can uptake there's all these things, but they're very much inside of the domain.
What we have been doing and executing too.
I do not see any exogenous events.
That threatens us in that way.
Michael.
No I agree.
Focus for the executive team is actually.
Execution, and I think we've demonstrated over the last quarters.
<unk>.
And that we can execute and so we're doing a good job of bringing on new people. Our culture continues to evolve I would say one quick thing you worry about culture, but that's not how we think about it we actually think about culture is better better never batches.
Our cultural focus which means all these new people are actually a huge opportunity for us to be self reflective every single time and say have brought this from my old company you should think about this and constantly constantly changing as a leadership team changing his teammates so that we just keep getting better so no.
I think it's an exciting opportunity ahead in that better better never best also translates into the customer success environment with ideas coming from customers that you saw Michael elucidate on stage, how many of the ideas that we're working on would come from kernels of ideas from our customers.
And that's a really important point literally.
Every single one of the big announcements that we did and connections and there were a lot you would've seen all the announcements that we did last week every single one came to us from a customer I also stated on stage, where customers said to us in the leadership Advisory Board that I lead with 32 C. E. O is gms of all different sizes.
And one thing they said from IC side keep investing in customer success, which I announced we are expanding that team pretty significantly.
It's already the largest in the industry. It's just got a lot larger than the.
The other thing that we're doing as they say b our innovation engine.
So we are innovating with them based upon what they see in the market what we see in the market a lot of data oriented analysis to peg what are the right experiences that we bring in so there's a lot more opportunity ahead for them, which they are there's a great opportunity for us.
Okay.
Yeah.
Okay Alright.
Carl.
No.
Most doing my tremendous disdain for saying congratulations on conference calls.
My Goldman.
Good Christians tsunami.
Watching you all having gone from Milwaukee did not so long ago to where you are today, it's it's been fun to watch.
Well, we appreciate everybody being on a park plaza. Thank you. Thank you very much.
Thank you. Our next question comes from the line of.
Some with loop capital. Please proceed with your question.
Thank you I actually wanted to follow up on Paul's question.
And he really bid on the risks let me ask you what is the biggest opportunity ahead to kill it.
It seems like youre going to be focused on.
Partners and ecosystem.
Do I get a sense that this marketplace opportunity are you trying to become the Amazon the telco watershed or telecom working off an Amazon marketplace. It and how big do you think this time can be.
So given your question that we're going to close the call with this question is on our future and our evolution lawyers Michael.
So the opportunity I would actually see in the marketplace model is that is the wrong analogy. We've thought a lot about is actually what we do is we take.
Services their over the top with you why I and convert them into carrier hardened solutions that become managed where the service provider adds value. This is a very very very important distinction you can't just throw a bunch of things up and hope. They work you have to make them right for the service provider and the.
Yeah, well I can give it how do you handle security and privacy, we literally take these partners and educate them on how it service provider thinks about their subscriber the security. The workflow is the support all of those different elements and convert their product into a managed service. So it's a it's a significant.
Which means that we are a very active participant in it versus just throw it up and hope something works.
So is there a huge opportunity ahead that is the opportunity ahead, because we've also heard all these conversations about the infrastructure investments that are coming.
Thinking about what we're doing with regards to the revenue edge. It works on Amy infrastructure. So it doesn't matter what network. It is it doesn't matter what type of network revenue.
Revenue edge will work with everybody. So we intend on monetizing the entire market.
Thanks Rod.
Thank you, ladies and gentlemen, we've come to the end of our time for questions I'll turn the floor back to Mr for Nokia any final comments.
Thank you Melissa Alex leadership, all participated in a number of investor events and meetings during the fourth quarter information about these events, including dates and times for public webcast of management presentations will be posted in the events and presentations page of the Investor Relations section of Calix Com.
Once again, thank you to everyone on this call and on the webcast for your interest in Calix and for joining US today. This concludes our conference call have a good day everyone.
Goodbye.
This concludes today's conference call you may now disconnect your lines.