Q1 2023 Calix Inc Earnings Call
Speaker 2: Greetings and welcome everyone to the CalX first quarter 2023 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. If you have any questions, please press star zero on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Finucchi, Vice President of Investor Relations. Sir, please go ahead.
Speaker 2: Thank you, Paul, and good morning, everyone. Thank you for joining our first quarter 2023 earnings call. Today on the call, we have President and CEO Michael Beening, Chief Financial Officer Corey Sindelar, and Chairman Carl Russo. As a reminder, yesterday after the market closed, Calix issued a news release which was furnished on a Form 8K along with our stockholder…
Speaker 2: 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 first quarter of the 2023 Letter to Stockholders.
Speaker 2: of gap to non- GAAP measures is included in the first quarter 2023 letter to stockholders. Unless 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 Michael. Michael, please go ahead. Thank you, Jim. As the Calix evolution continues, I want to start this call by sharing my view.
Speaker 3: on why Calix is performing in a very different manner than the market in general.
Speaker 3: three consecutive years of greater than 25% growth. And as Corey will share, raising annual guidance for 2023.
Speaker 3: Nine consecutive quarters of sequential growth.
Speaker 3: three consecutive quarters of gross margin expansion as supply headwinds abate.
Speaker 3: zero debt, and a pristine balance sheet which will see cash grow at an accelerated rate. These are clear indicators the CalX team is executing our strategy in a predictable and disciplined manner. More importantly, it is making it clear that CalX is alone in a new market.
Speaker 3: This new market is made up of broadband service providers who are building consolidated networks and efficient end-to-end operations that yield incredible markets. This new market has VSPs leveraging data and insights from our platform and clouds to build an entirely new business model.
Speaker 3: where they are the center of the home, the center of business, and the center of the community through the power of our managed services that grow revenue and customer satisfaction to record levels.
Speaker 3: DSPs continue to add subscribers and grow their business in Q1 through the power of the Calix Platform, Clouds, and Managed Services.
Speaker 3: The land and expand nature of our business was on full display in Q1 as we landed 11 new BSPs and expanded platform adoption as 38 BSPs adopted one or both of the revenue edge and the intelligent access edge.
Speaker 3: This brings the total number of BSPs deploying our platforms to 988.
Speaker 3: In Q1, 21 BSPs adopted one or more of our clouds, bringing the total number of cloud customers to 865.
Speaker 3: perhaps the most important evidence that this is a new market is the growth of BSPs deploying one or more of our eight managed services. In the first quarter 41 BSPs began differentiating their offerings by launching one or more of our managed services.
Speaker 3: This is the fastest pace in the last five quarters and brings the total number of BSPs of managed services to 334. On that note, I'll now hand it to Corey to expand on the Calix team's performance in Q1. Corey?
Speaker 3: is the fastest pace in the last five quarters and brings the total number of BSPs of managed services to 334. On that note, I'll now hand it to Corey to expand on the Calix team's performance in Q1. Corey? Thank you, Michael.
Speaker 2: CalX team executed well across the board as we delivered our ninth consecutive quarter of sequential revenue growth.
Speaker 2: with record quarterly revenue coming in at $250 billion.
Speaker 2: which was modestly above the high end of our guidance range.
Speaker 2: As we have said before, we believe our supply chain will normalize over the course of 2023.
Speaker 4: And so it did.
Speaker 2: vendors for the most part are meeting their delivery commitments.
Speaker 2: And we are starting to see lead times shorten.
Speaker 2: Consequently, this allowed us to continue to reduce our purchase commitments.
Speaker 2: to $306 million.
Speaker 5: which we're down $335 million from year end.
Speaker 5: And we expect our free cash flow to improve significantly as we invest less in inventory.
Speaker 5: The improving supply chain has also allowed us to reduce our meet times to customers.
Speaker 5: and to work with them to shrink their inventories as well.
Speaker 5: The consequence of this work was a sequential reduction in our revenue-of-edge system shipments.
Speaker 5: within our small customer segment.
Speaker 5: At the same time, our large and medium-sized customer segments increase.
Speaker 5: Specifically, we saw strength from a large platform customer.
Speaker 5: and continued shipments to a recently acquired medium customer.
Speaker 5: which contributed to the intelligence access edge.
Speaker 4: record revenue in the first quarter.
Speaker 5: In some, our platform model provides us with a view of end-subscribed-it-demand, which enabled us to work with our BSP customers to optimize their inventories.
Speaker 5: This enables us to perform in a predictable manner and forecast what we expect will be our 10th consecutive quarter of sequential growth.
Speaker 5: Based on our first quarter revenue for overperformance and the expected sequential increase in our second quarter revenue, we currently believe our annual growth for 2023 will be between 15 and 20%.
Speaker 3: Back to you Michael. Thank you Corey. In closing, I will call your attention to two additional data points that further amplify that Calix is on a mission in a new market.
Speaker 3: First is the talent that we are attracting to our team. Industry leaders like John DeRocher who joined from Salesforce as the Chief Customer Officer.
Speaker 3: are joining because they are inspired by our purpose driven culture, which is enabling even the smallest broadband service fighter to simplify their business, excite their subscribers and grow their values, their members, their investors, and the communities they serve.
Speaker 3: Second is the fact that Calich was recognized by Comparably as the number one best place to work in the Bay Area.
Speaker 3: In addition, our sales, marketing, engineering, and HR teams were ranked top 20 globally because our team members are inspired every single day to help our BSP customers transform the communities they serve by empowering families, students, and local businesses to thrive. More than ever, I'm excited about the future of Calix.
Speaker 3: As Cory stated, we raised 2023 revenue guidance as we continue to execute you, make discipline and predictable fashion, supported by an enviable balance.
Speaker 3: I would like to thank our amazing customers for their partnership. It is their idea that are delivered every 91 days when we update our ever-expanding platform clouds and managed services.
Speaker 3: I would also like to thank our partners and talent team members for their continued support and dedication as we execute on this once and in generation opportunity.
Speaker 6: Jim, let's open the call for questions.
Speaker 3: Operator, let's move to Q&A.
Speaker 7: Thank you. We will now be conducting a question and answer session.
Speaker 7: If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker appointments, it may be necessary to pick up your handset before pressing the star two. One moment please while we call for questions.
Speaker 7: Thank you. Our first question is from Christian Schwab with Craig Howell. Please proceed with your question. Our next question is from
Speaker 2: Great, good morning guys. Well I guess first of all, you know, congrats that macroeconomic uncertainty hasn't significantly affected your customers' spending patterns like your peers. So congrats on the continued business transformation and a different value proposition.
Speaker 2: with that. Thank you, Fred. Yeah, you're welcome. With that, Cory, would we expect that you know, continued sequential revenue growth, you know, throughout the remainder of the calendar year from June ?
Speaker 5: The simple answer is yes, but I would mute your expectations. Obviously with the macro environment, that outlook in the second half of the year is murky.
Speaker 5: But our expectation is that yes we'll continue to grow but at a very small base.
Speaker 3: I'm just going to have one thing to add. I would add one thing to that Christian as he saw in the investor letter. Corey, Corey, clearly called that out and we've always said this is one of the transitions that we have gone because we are on a new machine in a new market and part of that is moving away from that legacy model which is highly cyclical and it's moving into a sequential business.
Speaker 2: Great. And then can give us a little bit of clarity on the large customer activity. You're revenue in the March quarter was the largest for greater than 2.5 million subs in years.
Speaker 2: Is this the beginning potentially of an inflection point? I ask that because we kind of saw the beginning of the inflection point in the medium based customers and over the last two years that went from a $35 million business to a $52 million business to almost $100 million.
Speaker 5: Yeah, Christian, thank you for highlighting what we've been saying. This is one of those things where technology adoption starts with small customers who work in a way large.
Speaker 5: In terms of what you've seen in the first quarter all to do our large customers, it was...
Speaker 5: the increase was with that one customer, there were an existing customer, and I think it's just kind of a lumpy delivery schedule associated with a large customer. I don't think it's an inflection point where you should expect continued growth from that one customer.
Speaker 8: Okay, that's fair. And then I know we started the year, you know.
Speaker 8: You know, or you know started the year previously it kind of like a 10 to 15% growth rate now We're moving it up to you know a 15 to 20% growth rate and if we even get modest the question of growth from June You know, we're you know almost at that 20% range so what you know
Speaker 8: you know, was it just conservatism, you know, given the macroeconomic environment, you know, that the expectations have been exceeded or have you been positively surprised somewhere?
Speaker 5: As we said last quarter, our view of the annual growth rate is a combination of not so much demand before of our view of supply chain.
Speaker 5: And we saw that improve within the quarter. We built a little bit more inventory.
Speaker 5: We work through some issues and so consequently we're able to over perform in the set in the first quarter by a little bit. Give a little bit more confidence on where we're at with Q2. But I think at this point, you know, as the supply chain is expected to continue to normalize over 2023.
Speaker 5: the concern becomes the demand equation in the back half of the year. And so we're just taking a conservative view of what that might entail.
Speaker 8: But that being said, you know, demand continues to be strong. Great, and then my last question, you know, our objective of growing gross margins 100 to 200 basis points a year, you know, given, you know, given, you know, that lead times are finally short, becoming, you know, normalizing for like a better word.
Speaker 8: Do that give you...
Speaker 8: Should we be more encouraged that maybe we can start operating at a higher end of that 100 to 200 faces point range as the mix continues to improve and the supply chain costs, not only the costs of the chips procured, but the expedited fee, in some cases, to get them.
Speaker 5: In each of the last couple quarters, we've increased by about a quarter point. And so I think that rate will continue through the quarter. I don't think we're at a point where you're starting to see costs come down precipitously where you would see a faster than that rate expansion of gross margins.
Speaker 5: So, it's still early days. We're still normalizing.
Speaker 5: still early days, we're still normalizing.
Speaker 8: And so you'll better about it, but it's not at a point where I think it's an accelerated pace. Okay, great. No other questions. Thanks again.
Speaker 7: Thank you. Our next question is from George Nader with Geffries. Please proceed with your question.
Speaker 7: Thank you. Our next question is from George Nader with Geffries. Please refer to it with your question.
Speaker 7: Hi guys, thanks very much. I wanted to ask about the software play here. I noticed that RPOs were up about $7 million sequentially, which is one of the smaller sequential growth numbers you guys have put up in a while. Obviously, it captures just a portion of your software of business. I get that, but...
Speaker 7: And it can, you know, the customer ad look really good as you guys pointed out in the monologue and in the shareholder letter. I guess I'm just trying to better understand how you feel about the progress you're making in software at this point and this quarter in Q1 specifically.
Speaker 5: Hey, George, thanks for the question. We feel good about it. If you were to go back to the third quarter, we had a similar lower growth sequentially, and everybody was alarmed by that lower increase.
Speaker 5: And then fourth quarter came along and we blew past that number and everybody was like, oh, is this another reflection point? And we consistently said contract signings are won't be.
Speaker 5: And they go up and down. I mean, we anticipate our PO to increase the quaisley.
Speaker 3: going forward, but the rate at which it increases will vary from quarter to quarter. You know, and I'll add in, look, you know, I spend all of Q1 on the road, all except for two weeks I was with customers and conferences and CEOs and talking about their business.
Speaker 3: What's really great is that we continue to see that our message is landing very strongly within fact, because with one customer, like, she not a customer. Someone who in essence has refused to talk to us for 25 years. And with some of the things that are going on in the macroeconomic level, in fact, in that individual's case, they would have been working with regional banks.
Speaker 3: That's been their only source of funding for their business. When I heard me speak of the conference, we got into a conversation around how do you actually build out a different business model that allows you to attract a radically different type of investment? You know, whether it's private equity or family investors or whatever it is.
Speaker 3: And if you're just selling a dumb pipe, that's really hard as you mark this at the level, but if you're partnering with someone like Calleys. Not only are you marked, but it's going to be significantly higher from an operations point of view. But you're also have all these incremental ways to monetize that driver.
Speaker 3: and grow revenue for the long time, determine what does that mean? Well, that means that when you get that investment, if it's going to be at a higher valuation, they're going to be more apt to pay attention to you all these kind of things. So while RPO is one element of it, I would turn you heavily towards 38 customers adopting one or more of our platforms, 41 people.
Speaker 3: starting on the maintenance services journey. We continue to see, and I would say that if anything, this whole dumb box mindset is actually really gonna go to the side as customers really understand how much value you can bring to their business. So I'm really excited about it. It just follow up on that.
Speaker 7: If I look at the differential between managed services, adoption, just in terms of numbers of customers and CalX Cloud, obviously there's still a really big gap there. I get it. It's a land and expand strategy, but maybe talk about what the sticking points are with customers in terms of adopting those managed services.
Speaker 3: from becoming a legacy provider, entering this new market and becoming a broadband service provider, it has a radically different position within the home business and the community. You know, it's a journey, right? And so, if you've been a business for 25 years, the only thing you're used to is your construction company. You actually operate a network, and then as long as you exist, you get customers and speeds, the only thing that you ever talk about.
Speaker 3: you upsell people, right? So Cory is my installer. He can say, let's get them out. By the way, do you have children? Would you like to do parental controls, all those kind of things? If they completely different market, they completely different mindset. So I would say if you think about that journey, we're the one taking them on that journey. And that's why it's just...
Speaker 3: that's what teams do and that's why we continue to invest. So I wouldn't, you know, be concerned in any way, shape or form, other than this is the beginning. And this is something we've been saying when everyone of these calls rage, right? You know, look at managed services. And even that number at $334, you know, you should be pushing on it saying, you know, well, how is, what about underneath the back? Because there's these managed services.
Speaker 3: today we've announced 11 so there's a massive expansion even inside of that right so there's all these different ways to grow and look if we can put up these kind of numbers and project higher for 2023 with this early stage of where we are in this market you should be very excited about the future.
Speaker 5: Great. Thank you very much, guys. Thanks George. Our next question is from Ryan Coons with Needham & Company. Please proceed with your question.
Speaker 8: Good morning. Thanks for the question and great execution on the quarter, obviously. We're drawing the small and medium kind of customer set down market. And as you think about that, driving growth through the rest of this year, I wonder if you could reflect on your conservatism around growth there. And...
Speaker 9: areas or in how are the kind of subsidy trends working their way through the processes from art off and the ARPA funds which you've seen a lot of announcements ablaked. Thank you.
Speaker 3: Sure, well, so, you know, I'll proactively ask funding because someone's going to ask that question. So, you know, like there's, there's times of investment in the coming of the market as we said over and over again with the garbage private equity and, you know, family funds investing in these incredible businesses, you know, KKR recently purchased one in the tax area. You see everybody coming in.
Speaker 3: they're going on right and then with regard to the deployment you know we can get into the whole immigration thing with the job market still strong so to your point on hiring people yeah I was with a customer the other day and they literally at any point in time have 1100 open jobs.
Speaker 3: $1,100. If you look at the job that I can use, I believe last month was $330, and then the month before was $600, and then the month before was $100,000, the job market is really strong. There is no recession. So, you know, they have to hire good people, they have to train them, and they have to bring forward. By the way, if you're looking for a job that fans 70 grams, someone else who's a splice a bike rider.
Speaker 3: like out of school so there's lots of opportunity but yeah those are you know normal headwinds but they're positive headwinds because the economy is so strong
Speaker 9: That's great, Michael. Thank you. In terms of the product mix there, it sounds like it was a great quarter for access sales. That's great to hear that footprint going out. I assume the kind of softer revenue edge is mostly from customers. customers.
Speaker 5: That correct. Yeah, I like mine for better remarks said.
Speaker 5: With the normalization of the supply chain, we started seeing the lead times pulling. That's not quite allowed us to reduce our lead times to customers. And so we've been working with our customers to help reduce their inventory levels.
Speaker 5: They can become more capital attention. So they can start taking down the rim and do it less than less than you see. So not obviously concerned about it.
Speaker 5: obviously by our second quarter guidance that we gave, obviously we're seeing another sequential quarter. So there's obviously no air pocket behind this reduction in supply chain or reduction in promise systems. See if we can't help.
Speaker 3: I'll just add one comment in that, that, you know, again, back to this whole concept of we're in a new market and we are in a different company and everyone needs to start thinking about it as a different company in a different market. Part of that is we understand exactly either deployment rates. We understand everything they're doing. We know how much inventory they have and therefore the key words that you heard from Corey.
Speaker 3: was actually working with and managed. In no way shape or form is anything a surprise to us because we generally are now seeing if they're having a problem beforehand and that's what our customer success are, I mean, it's poor. They pop in and they say, hey, you know, we go, we say, what, are your deployments are slowing? What's going on? Oh, it's because I can't get my permits fast enough or I'm struggling. We then subsequently go on top of that and we look at, for example, every time they
Speaker 9: Super helpful, Michael. And just a quick question, a quick follow up on RPO queries. Was there any, didn't quite see the release of the numbers of current versus total RPO in the letter? Was there any mixed shift at all in current versus total RPO in the quarter?
Speaker 6: No, Ryan. Nothing confidential. Got it. That's all I have. Thanks.
Speaker 6: Thanks, Ryan. Our next question is from Sahad Najan with Loop Capital. Please proceed with your question. Hey, good morning. Thank you for taking my question. Cory, Michael, let me start with the current model a little bit differently given your...
Speaker 6: shift in how you disclose numbers. And the way I'm thinking about is average revenue for BSB. If I look at it, I see a trend starting 3Q202 where you really started to kind of see a ramp in, or I guess growth in average revenue for broadband.
Speaker 6: your average revenue per BSP and then how should we be thinking about it in the second half of this year as it normalizes against the top comp.
Speaker 5: Okay, from Fahad, I guess I'm not exactly following your line of question.
Speaker 6: Yeah, maybe I take your revenue and I divide that by total broad bench service providers that you disclose and I see a trend of average revenue per B.
Speaker 6: And I see that the average revenue per BST is growing considerably over like the starting second half of 2022. Is there anything that is?
Speaker 6: the average revenue per BST is growing considerably or like the starting second half of 2022. Is there anything that is, I guess?
driving that step-point-sitting improvement. Yeah, fine. So, bye. I would actually say that, you know, I understand what you're trying to do. I would not read anything into it. So, for example, you know, our definition of a small service writer is from zero subscribers to 250,000 subscribers, right? If that customer who has 250,000 subscribers,
If they're actually a really good, executing Caledict customer, their market share is about 60%, so they have significantly more home-to-path. If they're actually early stages of their deployment, those 250,000 subscribers could only be 25% market share on a broader, you know, goal, right? And...
So as you go and use that logic, I think there's a plot to it. The other part of it is that $250,000 a hundred dollars a month means that that's a $300 million dollar company. So there's all kinds of ways you can parse it. I just don't know if that's the right thing and Cory would like to take that question off mine and explore it to see if there's, yeah, if we can understand more, I think about it.
But with regards to our business, you know, large customer small customers again small customer can be a 300 million dollar, you know business so there's all kinds of variables in there and it's lumpy and all the different elements so I would say no but Corey will take it off line. Thank you. God I appreciate that.
But if I was going through the proxy fileings and I noticed that your...
I get the order is more than the order of what point should be belly and give you significant visibility. Can you just maybe talk about the momentum in order? Certainly. No, we have time to your. Thank you. Thank you. We don't talk about that.
I guess the order is more than the order of what point should be belly and give you significant visibility. Can you just maybe talk about the momentum in order? Certainly. No, we don't talk about that. Thank you. Thank you. We don't talk about that. I'll pass it on. Thank you. Thank you.
Demand is strong. Thank you. Our next question is from Tim Savageau with Northland Capital Markets. Please proceed with your question. Thank you.
Good morning and congrats on the quarter. Well hopefully you do talk about cash logo. That's my question. How are you? Okay. And you saw a nice increase in cash on the quarter and I know. Yeah.
I've been talking to you guys previously and I think Corey mentioned some purchase commitments coming down. Do you still anticipate there to be a significant positive impact on cash flow from both obviously ongoing operations? But this...
kind of balance sheet impact, kind of maybe review how that works and what your expectations are.
Any comments on capital allocation, given the strength and casual on the balance sheet, and especially where the stock is?
on capital allocation, given the strength and casual on the balance sheet, and especially where the stock is. Thanks. Thanks, Jim.
So yes, over the course of last year, we used a lot of our cash from operations to buy inventory.
And now as we are getting to a plateau, you can see that the range at which we're investing in inventory is slowing.
Consequently, that's going to free off profitability of the company into additional free cash flow.
And so we are expecting it to be progressed to 2023, an increase, a significant increase relative to where we've been of more cash.
Over time, we had expect our inventory to normalize, to start coming back to where we were pre-pandemic.
not only free of additional cash, but that's still a ways away. We leave times to come back in, and when they were, then that'll make that trend happen.
In terms of the capital allocation, you know, it's a process that we have that we look at every quarter. And as we think about our cash, you know, there's an opportunity cost with use of our cash.
Our decision to allocate capital can relate to its opportunity costs.
Our decision to allocate capital relates to its opportunity costs. Cash that.
could be used to operate a growing business comes out of very high opportunity cost. Cash for a strategic investments would come then at a high opportunity cost.
Cash beyond those categories would be at a lower opportunity cost and as we generate more incremental cash, the opportunity cost goes down. In other words, the price of which we're willing to do the device shares goes up as we accumulate more cash.
How great their attempt to follow. Any...
Any updated quantification on, you know, I think you talked about before, I don't know, tens of millions coming up about the cheap, but, you know, as we see here, any updates on that are we still in the same range in terms of incremental free cash. Ya alla prawda.
Yes, to my expectable starting double just double digit cash generation Double digit billions yes
We're going to start seeing double digit cash generation. Double digit billions. Yes. Thanks very much.
Thank you. Our next question is from Greg Mesnial with West Park County. Please proceed with your question. Yes, thank you and congrats on the print.
Last couple of quarters, your op-x levels were running a little hot. I thought, and I was wondering, as we look beyond the guidance he gave for the June quarter, what should we kind of be modeling as far as op-x levels? Do you foresee continued? Uh. What's that?
investment in sales and marketing, or do you see those OPEX levels starting to moderate in the second half of the year? Thanks.
Yes, thank you. I would give you the same council that I would give you every quarter, which is that we're going to continue to invest, according to our target financial model. Now, we have an deviated from that. You can see in the quarter that we were a little bit higher on the interior size, a little bit less than the GNA.
toward target financial model.
So specifically every area will grow according to the law. Yeah, and I'll go on to that. How about that? Look, we're in a new market.
It's the beginning of that new market. It's a once in a generation opportunity. In fact, you know new markets don't happen and not once in a generation opportunity and For us Invest in that thing through our models Folsomely is actually the team doing their jobs as leaders and making sure that we draw organic growth in this new market
have our connections, user group event, and obviously sales of market will take up by a incremental percentage of work.
Connections user group event. And obviously sales and marketing will take up by an incremental percent in the fourth quarter.
Got it. Thank you for that. And just to quickly recap, you had mentioned earlier in answering a question that regarding the broadband stimulus roadmap that you're basically it's taking longer but should be bigger at the end of the day. Is that right?
And just to quickly recap, you had mentioned earlier in answering a question that regarding the broadband stimulus roadmap that you're basically taking longer but should be bigger at the end of the day. Is that right? Great.
Thank you. Thank you. Our next question is from Michael Jennerby with Rosenblatt Security. Please pursue your question.
Great, thanks. I guess, first of all, on gross margins, there was a little bit of upside in the first quarter, a little bit of upside in the second quarter outlook. I'm assuming that with a mixed shift to infrastructure, that's...
that's probably a mix shift to intelligent access edge. That's probably a function of supply chain. But I wanted to check with you if that's right, or if we're also seeing the business model, the mix shift to software, cloud, recurring revenue, driving the gross margin. How do you think about that for the first time?
I expect that that will continue to normalize, meaning...
I think we'll go back to more prime shouldn't in the back half of the year. And I think it's just a lumpiness related to a couple of large customers in terms of when they want to take the delivery of their systems. You've seen this in the past, you know, when you got a customer a year, wanted to get all their equipment and to put it in the warehouse at the end of the year.
It's just a normal process with large customers on the timing of shipments, but over time, we just continue up into the last, but it can be something on how we get there. I just, to be clear, a shift to revenue edge in the future should have more positive growth margin expectations. I mean, we're setting more power for going to work in, you know, currently. Is that correct?
For sure when you're looking at the managed services and anything that attaches on top of it, for sure. That's the greatest portion of the reoccurring revenue comes on Prime Systems. And then you know finally I mean a lot of good questions were asked on the conference call already but you know I wanted to ask about the
the new customers in quarter, you know, falling to 11. You know, you think that there's a macro reason for fewer new customers and obviously the expand part of the model is working really, really well. But as we look to the rest of the year on the land part, should we think about, you know, this lower number being the new normal, or do you think that we could go back to?
what we saw last year or the year before. Yeah, it is a good question. So remember, in that number, there's two component parts to that. The first is it could be a existing service provider who's actually now recognized that they need to create a new business and they're joining Calisabeth at first time, right? Or it could be someone actually.
starting a broadband service provider, which is something that we've seen a lot of over the last couple years. And clearly with the rise in interest rates, that has made the hurdle for someone to acquire capital to start a brand new company harder. And so we noticed that's happening in the market for sure. What's interesting though, is that the ones who did
get capitalized. Our analysis is that they're getting a lot more capital than we anticipated, and they're going to be more successful over the long term because they built into their business model, this significant higher margin model affiliated with CalX and everything they were doing from a platform and the end services point of view. And so their investors are saying, hey, let's go big. And so, you know, what will it be long term and see? Right. And actually, you know, my very last question is I just wanted to check, is Carl in the room? Is he on the call?
He is in the corner. He's in the corner. Yeah. He's doing his best to not speak, Mike, but I do appreciate the shout out. Okay. Well, great. Congratulations on the performance.
He is in the corner. He's doing his best to not speak, Mike, but I do appreciate the shout-out. Okay. Well, great. Congratulations on the performance. Thank you. Thanks for the questions.
Thank you. Our next question is from Scott with Roth MKM. Please proceed with your question. Hey, good morning. Nice job on the quarter and thanks for taking my questions. Hey, for starters, could you just talk a little bit about linearity in the quarter? You know, what you've seen through the first quarter and kind of early parts of the second quarter here. I've probably seen a this twice.
On the small customer front, taking a little bit of a pause seems like it's a managed inventory reduction on your part. Are we through that? Do we start to see a sequential increase back within the small customer base into the June quarter and beyond it and then a couple of follow ups? Sure. Let's start off with your linearity question. The linearity was good in the quarter. You could see that in the fact that the DSOs are down.
taking a little bit of a pause seems like it's a managed inventory reduction on your part. Are we through that? Do we start to see a sequential increase back within the small customer base into the June quarter and beyond and then I had a couple of follow-ups. Sure let's start off with your linearity question. Linearity was good in the quarter. You could see that in the fact that the DSOs are down.
So that was a very positive trend as it continued and as it relates to second party questions Scott was really not the right one. Small cost of the story you know really in the end. When Earth
Yeah, so it likely continues into the second quarter, but obviously it's something we're not very much worried about because you're showing the substantial increase in revenue quarter on quarter. And so there's going to be a little bit of that as we continue to normalize the business.
Gotcha. And if I could, you know, mic from a high level when you're in discussions with your current customers right now, how are they thinking about their build out plans in terms of footprint expansion versus harvesting within the existing footprint as we kind of look at, you know, the second half of this year and maybe early thoughts on 24. And then also in terms of the revenue-edged side of the equation, how should we be thinking about...
The incremental services and adoption of those services, I know you give numbers in terms of how many customers have adopted one service or more. But I'm wondering if there are some other metrics or ideas that you could help us see into in terms of penetration of multiple services, part gets on that front from customers and the velocity on that front. I know we get an RPR.
you're seeing that from some of the big ones, too, with interest, you know, we see this all the time with large public legacy service providers. As interest rates increase, they're actually pulling back on CapEx because their margins are declining and this is the way for them to fund it. So they just, they slow down and our customers are seeing this as an incremental opportunity, right? Hey, they were going to go build out of this town. Now they're going to do it even fast here.
and we went through 10 different markets that they're looking at towns and we they have profiled out of the competitors where and a number of those places were legacies and they were saying let's go to the joint plan to actually attack those legacy providers and take share and where should we be staggering and we helped them identify who we thought was weakest and best place to go.
I'm growing there existing business. This goes back to the whole customer success discussion. The whole point of our business model is that land and expand. And that permeates over to the customer's business model in that there are land and expand also. In the past, all they ever did was they would sell a pipe and that's it.
And then I would hope that I would monetize and generally that means that over time they're under pressure because someone else throws a cheap price whatever it is. Now their whole business model is I land in the home or the business. I'm selling all these incremental services. I expand my margin and my revenue inside that account. But I also make it wickedly sticky so that if somebody comes and throws legacy provider.
is only speed throws in some cheap price. The customer is going to say, no, I've got all these great services coming from 4A to broadband company. I'm not even going to consider that cheap price because the service is so incredible. And by the way, my MPS is 75, so these customers are incredibly loyal. So that grow is absolutely front of mind. And that I guess comes to the core of what we're doing in this new market.
It is a new market with a new business model and we're teaching these customers how to transform their businesses and disrupt the legacy companies. Now with regards to your question on incremental metrics beyond RPO, we consider that competitive and no, you can just assume that again, we have a growing customer success army that spent every.
single day helping our customers use best practices and insights and understanding what works and what doesn't segment data all these different elements to grow their business. Hey Mike, maybe just to quickly follow up in terms of your commentary of the changing landscape and enabling deep
you know, the thought leaders. But for the broadband light, is there an epiphany ongoing here that it's driving more conversations with them on that front, or is that something that takes longer? No, well, I don't know if it's an epiphany. I'd say it's your normal product adoption curve. You always start with the innovators who are those thought leaders, then you follow up as the market matures. And if you look at our press,
thought that way is not at some point and we can have a different
realization and say, oh my gosh, the whole market's changed. It's a new business model. And there's this once in a generation opportunity for me to grow my business in all kinds of different ways. But clearly the only person that, or the only company that I can do that with is Callis. And so I wouldn't say it's like a chanting customer having to do with any of that. Maybe it's not how it's given, perhaps this would help me to do it in my own home.
Everyone has different abilities at different times. And we're out moving up and we'll come into the right and that's just going to continue. And that's why we never oppress or educate. And lastly, if I could, on the managed services front, I think you're up to eight now that have officially been launched. But I was wondering if you could talk a little bit about the pipeline, the level of interest and what you guys are waiting through there if there are any targets that we should be thinking about.
and maybe quickly like an update on things like smart business. Thanks. Well, it's early days and as we said, as evidenced by the fact that there's 334, I would think you'd look at the, we added 41, that's great. So if you're point on when they add the epiphany, well those 41 decided that that's the right time to get into starting to explore managed services. And again, and...
you know, what's the pipeline? It depends on the customer, right? I was with one CEO , you know, last week and he had an incredible go-to-market. He's got all his build plans in place. He's really focused on operational efficiency and customer satisfaction. And this first go-to-market with a clear recognition that as he lands, then he will be able to expand in those existing markets over time. So...
You know, what's the uptake on these services? It really depends on the customer and where they are in their market needs. Someone who's very mature is adopting, I would say, more managed services to differentiate. Somebody who's just building out is going to be in a different mindset. And with regards to all the managed services, look, they're unique. This is a new market. We have a new business model. And what we've done with small business and smart town.
have never been done before and they're super exciting. And so, our customers, if they're deciding, hey, you know what, it's not the right time for me today, maybe six months, maybe a year from now, everybody's talking about it. That's what we do.
Great, thanks so much. Nice job on the quarter. Thanks, Jack. No further questions at this time. I'd like to hand the floor back over to Jim Tanuki, for any clothing comments.
Thank you, Paul. CalX leadership will participate in several investor events during the second quarter. Information about these events, including dates and times, and publicly available webcasts will be posted on the events and presentations page of the Investor Relations section of our website. Once again, thank you to everyone on this call of webcast for your interest in CalX and for joining us today. That concludes our conference call. Have a great day.
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