Q1 2024 Calix Inc Earnings Call

Operator: Greetings, everyone, and welcome to the Calix First Quarter 2024 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 is being recorded. It is now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations. Sir, please go ahead.

Greetings, everyone and welcome to the Calix first quarter 2024 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 is being recorded it.

It is now my pleasure to introduce your host Jim Fanucchi, Vice President of Investor Relations. Sir. Please go ahead.

Jim Fanucchi: Thank you, Melissa. And good morning, everyone. Thank you for joining our first quarter 2024 earnings call. Today on the call, we have President and CEO Michael Weening and Chief Financial Officer Cory Sindelar. As a reminder, yesterday after the market closed, Calix issued a news release which was furnished on a form 8K along with our stockholder letter and was also 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 our website.

Yes.

Jim Fanucchi: Thank you Melissa and good morning, everyone. Thank you for joining our first quarter 'twenty 'twenty four earnings call today on the call, we have president and CEO, Michael <unk>, and Chief Financial Officer Cory Sindelar.

Jim Fanucchi: As a reminder, yesterday after the market close Calix issued a news release, which was furnished on a form 8-K, along with our stockholder letter and is also posted in the Investor Relations section of Calix website.

Jim Fanucchi: Today's conference call will be available for webcast replay in the Investor Relations section of our website before I turn the call over to Michael for his opening remarks, I want to remind everyone. On this call. We will refer to forward looking statements, including all statements that the company will make about its future financial and operating performance growth strategy and market outlook and <unk>.

Jim Fanucchi: Before I turn the call over to Michael for his opening remarks, I want to remind everyone on this call that 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 first quarter 2024 letter to stockholders and in the annual and quarterly reports filed with the SEC.

Jim Fanucchi: <unk> results may differ materially from those contemplated by these forward looking statements.

Jim Fanucchi: Factors that could cause actual results and trends to differ materially are set forth in the first quarter 'twenty 'twenty four letter to stockholders and in the annual and quarterly reports filed with the SEC.

Jim Fanucchi: Calix 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. Reconciliation of GAAP to non-GAAP measures is included in the first quarter 2024 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will not be GAAP adjusted. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead. Thank you, Jim. Our results from the first quarter demonstrated...

Jim Fanucchi: <unk> assumes no obligation to update any forward looking statements, which speak only as of their respective dates.

Jim Fanucchi: 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 first quarter 'twenty 'twenty four letter to stockholders unless otherwise stated all financial information referenced in this call will be non cat.

Jim Fanucchi: With that it is my pleasure to turn the call over to Mike Michael. Please go ahead. Thank you Jim.

Michael Edward Genovese: Our results in the first quarter demonstrated the continued execution and strength of our strategy.

Michael Weening: Our results in the first quarter demonstrated the continued execution and strength of our strategy. Our platform, cloud, and managed services are enabling our broadband customers to succeed against their competitors every day. Their success delivers value to their stakeholders and, in turn, to Calix. Our unique broadband business model delivered record gross margins as BSP's deployment of the Calix platform, cloud, and managed services continued unabated. However, our appliance business remains challenged in the same way the market is, with larger customers re-evaluating their Catholic customers. This trend continued into the second quarter, which we did not forecast.

Michael Edward Genovese: Platform cloud and managed services are enabling our ground broadband customers to succeed against their competitors. Every day. There is success delivers value to their stakeholders and in return counts.

Michael Edward Genovese: Our unique broadband business model delivered record gross margins as Bsp's deployment platform cloud and managed services continues unabated.

Michael Edward Genovese: Over our appliance business remains challenged in the same way in the markets with larger customers reevaluating their capex plans.

Michael Edward Genovese: This trend continued into the second quarter, which we did not forecast now that we understand this larger customer that customer dynamic we have adjusted our expectations Accordingly at.

Michael Weening: Now that we understand this larger customer dynamic, we have adjusted our expectations accordingly. At the same time, however, it has highlighted the ongoing strength of our smaller VSP customers. While growth in this set of customers is muted by new build indecision around beam, the business as usual part of their operations, completing existing network builds, and filling those networks by winning new subscribers remains robust. Leading Indicators from Infrastructure Vendors that Deploy Fiber, Combined with Breed Shoots in our Customer Base, lead us to forecast that the second quarter will be the lowest in our appliance revenue.

Michael Edward Genovese: At the same time, however, it highlighted the ongoing strength of our smaller ESP customers.

Michael Edward Genovese: While growth in this set of customers is muted by Newbuild indecision around b.

Michael Edward Genovese: The business as usual part of their operations completing existing network builds and filling those networks by winning new subscribers remains robust.

Michael Edward Genovese: Leading indicators from infrastructure vendors that deploy fiber combined with green shoots in our customer base lead us to forecast that the second quarter will be the bulk of our appliance revenue.

Michael Weening: Regarding BEADS, and as we have said, we believe revenue will begin in early 2025, and we will lead. Working with customers to help them win government funds is something that we have done for 15 years. Recently, you saw us create a partnership with industry-leading funding solution provider, Ready.net. This partnership enables us to leverage Ready.net's tools as part of our existing funding consulting program. Connecting our more than 1,600 Calix customers with a streamlined portal to apply for and win grant funds, secure capital, and adhere to public funding requirements.

Speaker Change: Regarding b and as we have said we believe revenue will begin in early 'twenty five and we will be.

Speaker Change: Working with customers to help them win government funds.

Speaker Change: Something that we have got for 15 years.

Recently, you saw us create a partnership with industry, leading funding solution provider Red Dot net.

Speaker Change: This partnership enables us to leverage ready botnets tools as part of our existing funding fund itself.

Speaker Change: Program.

Speaker Change: <unk> are more than 1600 college customers with a streamlined portal to apply for and win grant funds secured capital and adhere to public funding requirements.

Michael Weening: Earlier this month, we announced that 74% of federally funded BSPs use Calix for their broadband speed tests. This is a significant indicator of future success, as any BSP who receives government stimulus must routinely report back on the speeds they are delivering to their customers. This is a complicated undert- that we've made simple via our platform cloud and managed solutions. We expect that 74% figure to grow. While the largest government stimulus program is soon to be here, we've been actively landing new footprints as our consolidated network delivers the lowest cost per bit per mile infrastructure and up to 80% month reduction in operating expense, as demonstrated at Verizon.

Speaker Change: Earlier this month, we announced that 74% of federally funded bsp's used colleagues for their broadband speed test.

Speaker Change: This is a significant indicator of future success as any BSP received government stimulus must routinely report back on the speed they are delivering to their customers.

Speaker Change: This is a complicated undertaking that we've made simple via our platform cloud and managed solutions.

Speaker Change: We expect that 74% figure to grow.

Speaker Change: While the largest government stimulus program is soon to be here, we've been actively landing new footprint as our consolidated network delivers the lowest cost per bit per mile infrastructure and up to 80% months reduction in operating expense as demonstrated at Verizon.

Michael Weening: Unlike in times past when many new accounts were startups, the 10 new accounts recorded in the first quarter all came from existing service providers. We intend to maintain our aggressive stance in the market at this critical juncture. Finally, and most important, the wave of disruption is speeding up. Larger service providers are engaging in conversations with Calix to help them build a more valuable business by avoiding commoditizing. Two examples from the first weeks of Q2 include signing the largest cloud deal in our history and a larger service provider selecting smart bids. Bullets indicate that we are crossing the chasm in this disruption. With that, I'd like to turn it over to Cory to review our financial results for the quarter. Thank you, Mike.

Speaker Change: Unlike in times past when many new accounts were startups. The 10, new accounts recorded in the first quarter all came from existing service providers, we intend to maintain our aggressive stance in the market at this critical attached.

Speaker Change: Finally, and most importantly.

Speaker Change: The wave of disruption is speeding up larger service providers are engaging in conversations with colleagues to help them build a more valuable business by avoiding commoditization.

Speaker Change: Two examples from the first weeks of Q2 include signing the largest cloud deal in our history and our larger service provider selecting smart beds.

Speaker Change: Both are indicating that we are crossing the chasm and this disruption.

Speaker Change: I'd like to turn it over to Corey to review our financial results for the quarter.

Corey: Thank you Michael.

Cory J. Sindelar: The first quarter represented another quarter of deliberate and disciplined execution. We delivered revenue of $226.3 million, which was within the guidance range we provided in January. Against the crosswinds prevalent in our industry, the continued growth in our platform cloud and managed service drove a record non-gap gross margin of 54.9%. In the first quarter, we saw platform adoption with 18 customers beginning their platform journey with us, and 27 customers deploying a managed service for the first time.

Corey: The first quarter represented another quarter of deliberate and disciplined execution we.

Corey: We delivered revenue of $226 $3 million, which was within the guidance range. We provided in January.

Against the Crosswinds prevalent in our industry. The continued growth in our platform cloud and managed services drove record non-GAAP gross margin of 54, 9%.

Corey: In the first quarter, we saw platform adoption with 18 customers beginning their platform journey with us and.

Corey: 27 customers deploying a managed service for the first time.

Cory J. Sindelar: In the first quarter of 2024, non-GAAP operating expenses were $108.4 million, down $1.6 million from the prior quarter. The decrease is attributed to our Connections Event, which occurs each year in the fourth quarter. As we talked about in our last call, our plan is to keep 2024 operating expense investments relatively consistent with 2023, as we continue to believe that this level of investment represents a great opportunity for us to grow our footprint ahead of the U.S. government's broadband investment. Our debt-free balance sheet remains strong.

Corey: In the first quarter of 2024, non-GAAP operating expenses were $184 million down $1 6 million from the prior quarter. The decrease is attributed to our connections event.

Corey: Which occurs each year in the fourth quarter.

As we've talked about in our last call. Our plan is to keep 2020 for operating expense investments relatively consistent with 2023 as we continue to believe that this level of investment represents a great opportunity for us to grow our footprint ahead of the U S government broadband investment.

Corey: Our debt free balance sheet remains strong.

Cory J. Sindelar: At the end of the first quarter, cash and investments were nearly $240 million, representing a sequential increase of $19 million. This was our fourth consecutive quarter with double-digit free cash flow. During the first quarter, our supply chain continued to normalize. We exited Q1 with purchase commitments falling another $29 million from year-end to $147 million. Inventory deposits declined by $2 million, and our inventory terms were 3.1, down from 3.3 last quarter as our component inventory increased. Excluding component inventory, our inventory terms would have been greater than four or any of the above.

Corey: At the end of the first quarter cash and investments were nearly $240 million, representing a sequential increase of $19 million.

Corey: This was our fourth consecutive quarter of double digit free cash flow.

Corey: During the first quarter, our supply chain continued to normalize we exited Q1 with purchase commitments falling another $29 million from year end to $147 million inventory deposits declined by 2 million.

Corey: And our inventory turns were three one down from $3 three last quarter as our component inventory increased.

Excluding component inventory, our inventory turns would have been greater than before.

Corey: Furthermore.

Cory J. Sindelar: We expect these reductions in working capital requirements, combined with continued profitability, will result in consistent, quarterly, double-digit operating and free cash flow. During the first quarter, we repurchased $4 million of our common stock, bringing our total common stock purchases over the last year to $89 million. Our repurchase program remains in place, with approximately $110 million available at the end of the first quarter. Now, let's discuss our revenue guidance for the second quarter. As Michael has discussed...

We expect these reductions in working capital requirements combined with continued profitability will.

Corey: It will result in consistent quarterly double digit operating and free cash flow.

Corey: During the first quarter, we repurchased $4 million of our common stock, bringing our total common stock repurchases over the last year to $89 million.

Corey: Our repurchase program remains in place with approximately $110 million available at the end of the first quarter.

Corey: Now, let's discuss our revenue guidance for the second quarter as Michael has discussed.

Cory J. Sindelar: There currently are several crosswinds in our industry. As a result of these factors, our second quarter of 2024 outlook is for revenue to be between $197 million and $203 million. The forecasted decline in revenue from the first quarter is mostly due to the continued delay in purchasing decisions at a few of our medium and large customers. Looking out a bit further, we believe the June quarter will set the bottom for revenue as revenue from a few significant customers will have diminished to a point where there is limited downside risk.

Corey: There currently are several cross winds in our industry.

Corey: As a result of these factors our second quarter of 2024 outlook is for revenue to be between $197 million and $203 million.

Corey: The forecasted decline in revenue from the first quarter is mostly due to the continued delay.

Corey: <unk> decisions at a few of our medium and large customers.

Corey: Looking out a bit further we believe the June quarter will set the bottom for revenue as revenue from a few significant customers will have diminished to a point.

Corey: There is limited downside risk.

Cory J. Sindelar: When you combine the green shoots from our smaller customer with Footprint Expansion, we believe we will return to revenue growth. In summary, while crosswinds affect our top line in the near term, our platform, cloud, and managed services will continue to grow unabated and drive gross margin expansion, and with the industry's strongest balance sheet, we have the financial resources to invest in our operations and grow our footprint.

Corey: When you combine the green shoots from our smaller customer base with footprint expansion.

Corey: We believe we will return to revenue growth.

Corey: Okay.

Corey: In summary, while crosswinds affect our top line in the near term our platform cloud and managed services will continue to grow unabated and drive gross margin expansion.

Corey: And with the industry's strongest balance sheet.

Corey: Have the financial resources to invest in our operations and grow our footprint in advance of the U S government broadband investments.

Michael Weening: As I have shared, I meet with broadband customers and their investors constantly. It is clear they are understanding the disruption that faces legacy network operators, which is critical to our crossing the chasm from early adopters to winning an early majority. With more than 1,000 customers deploying our platform, it is no surprise that we are engaging with ever larger prospects who are interested in how our BSP customers are achieving their incredible revenue, margin, cash flow, and customer satisfaction results.

Michael: Michael back to you.

Michael: Thank you Corey.

Michael: As I have shared I meet with broadband customers and their investors constantly it is clear they are understanding the disruption that basis legacy network operators, which is critical to our crossing the chasm from early adopters to winning in the early majority.

Michael: With more than 1000 customers deploying our platform. It is no surprise that we are engaging with ever larger prospects, who are interested in how our BSP customers are achieving their incredible revenue margin cash flow and customer satisfaction results.

Michael Weening: The entire Calix team remains energized by the opportunity to expand our platform, cloud, and managed services business. At the same time, with more than 60 million new fiber connections forecasted in the next five years, we have a once-in-a-generation opportunity to land new network footprints and enable our BSP customers to win new subscribers, thereby filling those networks with an expanding portfolio of managed services. This will be supercharged by the BEAT funds that begin in 2025, while only one state has completed all 10 steps in the BEAT process. Forty-two other states have completed nine of the ten steps to begin funding.

Michael: The entire calix team remains energized by the opportunity to expand our platform cloud and managed services business at the same time with more than 60 million new fiber connections forecasted in the next five years, we have a once in a generation opportunity to land new network footprint and enable our DSP customers to win.

Michael: <unk> news when new subscribers, thereby filling those networks with an expanding portfolio of managed services.

Michael: This will be supercharged by the bead funds that begin in 'twenty five.

Michael: Only one state has completed all 10 steps in the bid process 42. Other states have completed nine of the 10 steps to begin funding in closing I want to reiterate that we are confident in our long term outlook, we have a talented and motivated team executing our strategy every day we.

Michael Weening: In closing, I want to reiterate that we are confident in our long-term outlook. We have a talented and motivated team executing our strategy every day. We have unique technology that positions us to surf this wave and take advantage of new network builds. We also have the financial strength and balance sheet that allows us to avoid any distractions. Therefore, we intend to keep a steady and disciplined hand on our operating expense investments as we maximize this opportunity and help our customers win. Jim, let's open the call to questions.

Michael: We have unique technology that positions us to serve this way and take advantage of new network builds we have the financial strength and balance sheet that allows us to avoid any distractions.

Michael: Therefore, we intend to keep a steady and disciplined hand on our operating expense investments as we maximize this opportunity and help our customers win Jim Let's open the call for questions. Thank you Michael Melissa. Please open the call for questions at this time.

Jim Fanucchi: Thank you, Michael. Melissa, please open the call for questions at this time.

Operator: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from Ryan Koontz with Needleman Company. Please proceed with your question.

Speaker Change: Thank you.

Speaker Change: I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.

Speaker Change: You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Our first question comes from the line of Ryan Koontz with Needham <unk> Company. Please proceed with your question.

Ryan Boyer Koontz: Great. Thanks for the question.

Ryan Boyer Koontz: Just on passenger customer segments, there a bit it looks like your tier threes are the smaller customers relatively stable here.

Ryan Boyer Koontz: Hey, thanks for the question. Just unpacking your customer segments there a bit. Looks like your tier threes are the smaller customers relatively stable here, uh... but the medium to large really hurting. How should we actually think about the trajectory of those segments going forward here into 2Q and then how do you think about them in the second half at this kind of early stage from a high level? Thanks.

Ryan Boyer Koontz: But the medium and large really hurting you how should we how should we think about the trajectory of those segments going forward here into <unk> and then how do you how do you think about them in the second half at this early stage from.

Speaker Change: From a high level. Thanks.

Speaker Change: Okay.

Speaker Change: Yes, thanks, Brian Thanks for the question.

Speaker Change:

Speaker Change: As we outlined in our letter, we're continuing to see green shoots coming out of the smaller customer base.

Speaker Change: The decline from Q1 to Q2 is really focused on those medium and large customers.

Michael Weening: Yeah, thanks, Ryan. Thanks for the question.

Speaker Change: Yes kind of put a point on it.

Michael Weening: As we outlined in our letter, we're continuing to see green shoots coming out of that smaller customer base, and the decline from Q1 to Q2 is really focused on those medium and large customers. You know, kind of to put a point on it.

That segment both of those segments in the fourth quarter were $77 million of revenue in the <unk>.

Speaker Change: First quarter, they turned out to be about 43.

Speaker Change: We didn't expect continued deterioration a quarter ago, but clearly they are still stuck in their capital planning processes.

Cory J. Sindelar: You know, that segment, those segments in the fourth quarter brought $77 million in revenue. In the first quarter, they turned out to be about 43. We didn't expect continued deterioration a quarter ago, but clearly they are still stuck in their capital planning processes, and we're now forecasting them to be halved again from that 43 level. So those segments really have not much further to go. And so we think at this point YQ2 is bottom, and we're confident that from here on out, we ought to be able to grow.

Speaker Change: And we're now forecasting that you have to get.

Speaker Change: From that 43 level.

Speaker Change: So those segments really has not much more to go and so we think at this point.

Speaker Change: While Q2 has bottomed.

Speaker Change: And we're confident that from here on out we ought to be able to grow.

Speaker Change: Got it thanks, Thanks Korean quick.

Speaker Change: Quick follow up if I could please on your.

Speaker Change: Your product mix here in terms of revenue hedge intelligent access edge should we think of that intelligent access edge as the trajectory for your new footprint gain I actually thought it might be a little worse than that and might see a kind of more of a mix toward sandlin and revenue hedge, but how should we interpret those to those.

Ryan Boyer Koontz: Got it. Thanks. Thanks, Cory.

Ryan Boyer Koontz: And a quick follow-up, if I could, please, on your product mix here in terms of revenue edge and intelligent access edge. Should we think of that intelligent access edge as the trajectory for your new footprint gain? I actually thought it might be a little worse than that and might see it kind of more of a mix toward selling and revenue edge. But you know, how should we interpret those two?

Speaker Change: Two product segments.

Speaker Change: Well so on the intelligent access edge that that's a mix of new network gains but also.

Speaker Change: Our existing customers filling out the network builds that they currently have and so as we said we saw some rales <unk> C to continue strengthen in our rural customers who are in the smaller segment to continue to build out those networks successfully and Thats why you see that under underpins strength.

Cory J. Sindelar: Well, so on the intelligent access edge, that's a mix of new network gains, but also, you know, our existing customers filling out the network builds that they currently have. And so, as we said, we saw some real, you know, continued strength in our rural customers who are in the smaller segment, who continue to build out those networks successfully. And that's why you see that underpinned strength.

Speaker Change: And I would say that as we go forward and you're starting to see those 60 million fiber lines start to get build out you are definitely going to see the intelligent access edge surge on the revenue side that is.

Speaker Change: Business as usual part of our business, where that's what they use to acquire new subscribers.

Speaker Change: So youre going to see that continue on and in fact as we we took to 10 customers last year last quarter.

Speaker Change: And therefore, those ones are generally in caps and grows where they're saying I have an existing fiber networks I'm worried about commoditization I need to differentiate my business and my markets and Calix is best positioned to do that.

Michael Weening: And I would say that as we go forward, and you start to see those 60 million fiber lines start to get built up, you're definitely going to see the intelligent access edge surge. On the revenue edge, that is the business as usual part of our business, where that's what they use to acquire new subscribers. And so you're going to see that continue on. And in fact, as we, you know, we took on 10 customers last year, last quarter, from and therefore, those ones are generally caps and growth where they're saying, I have an existing fiber network, I'm worried about commoditization, I need to differentiate my business in my markets, and Calix is best positioned to do that.

Speaker Change: No.

Speaker Change: Got it Michael So it's fair to say that.

Intel's access edge number includes a healthy component of <unk>.

Sell in fill in edge out from existing networks, but entirely new footprint is down much more than that.

Speaker Change: For sure and that's back to the end decision with regards to decision, making as they were.

Speaker Change: Work through do I invest my dry powder and the capital that I have in a new network build or a years.

Speaker Change: The funding that's now almost say six months or eight months out and beat funding and go after that instead of using my existing capital. So in the future you will definitely see a swing up on the network side as they begin to deploy those funds and we take footprint.

Ryan Boyer Koontz: All right, Michael, so it's fair to say that that intelligent access edge number includes a healthy component of... of, you know, sell-in, fill-in, edge-out from existing networks, but an entirely new footprint is down much more than...

Speaker Change: Got it great I'll pass it on from here. Thank you.

Thanks, Brian.

Speaker Change: Thank you. Our next question comes from the line of George Notter with Jefferies. Please proceed with your question.

George Charles Notter: Hi, guys. Thanks, so much I wanted to ask the bead question I think you said six to eight months out look I know the bead program is a little bit controversial in terms of the process and the potential.

Michael Weening: [inaudible]

Ryan Boyer Koontz: Got it. Great. I'll pass it on from here. Thank you.

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

George Charles Notter: Hi guys. Thanks so much.

George Charles Notter: I wanted to ask the bead question. I think you said six to eight months out. Look, I know the bead program is a little bit controversial in terms of the process and the potential for delays. Can you handicap, you know, the bead process?

George Charles Notter: For delays is there.

George Charles Notter: Can you handicap the bead process do you really think that the monies are flowing by yearend than the six eight months out or do you think it's.

Michael Weening: good question. We have in, you know, everybody's asking that question. And so, you know, over the last three years, others have been asserting that it would be coming earlier. We've been very consistent.

George Charles Notter: A program that has the potential to slip.

Speaker Change: It's a good question we have.

Speaker Change: You know everybody is asking that question so yes.

Speaker Change: For the last three years and.

Speaker Change: Others had been asserting that it would be coming earlier, we've been very consistent with regards to our views that would take significantly longer than.

Michael Weening: So what's our view on it? We see it as 2020.

To arrive and then when it does arrive it's going to be a lot larger than people anticipate so what's our view on it as we see it as 2025.

Michael Weening: You know, in early 2025, we think that you'll start to see some trickles, and then it'll go from there. 2025 is the year.

Speaker Change: In early 2025, we think that you'll start to see some trickles and then go from there.

Cory J. Sindelar: Yeah, Ryan, you can see from the NTIA's website that they made some good progress in terms of getting states approved through Volume 1 or the challenge process. If you include the territories, you know, they went from 29 last quarter to 47.

Speaker Change: <unk> 2025 is the year.

Speaker Change: Yes, Brian you can see from the <unk> website.

Speaker Change: They made some good progress in terms of getting states.

Speaker Change: Approved through the volume on or the challenge process.

Speaker Change: Q <unk> territory.

Speaker Change: Went from 29 last quarter to 47.

Cory J. Sindelar: I would expect that the NGIA will start working more on Volume 2 and getting more states. But you're right, until you start seeing those states get approved, this plan can continue to slip. So, like with any government funds, that's where I'm continuing to watch that. I'm encouraged by what I saw happen in the last 90 days, and we'll see what the next 91 days are.

Speaker Change:

Speaker Change: I would expect that the NTIA will start working more on the volume to any more states approved but you're right. So you start seeing the states get approved.

Speaker Change: Continue to slip.

Speaker Change: Like any government funds, and that's where I'm continuing to watch that I'm encouraged by what I saw happened in the last 90 days.

Speaker Change: See what the next 91 days up range.

George Charles Notter: And then just as a follow-up, I think you guys were talking about the overhang associated with Bead. We talked about network planners kind of going offline as a result of the wait-for effect associated with BEAD.

Speaker Change: Got it and then just as a follow up I think you guys were talking about the overhang associated with bead.

Speaker Change: How many.

Speaker Change: We talked about kind of network planner is kind of going offline.

Speaker Change: As a result of the wait for effect associated with bead is that you talked about the strength in your <unk>.

Michael Weening: Is that... You talked about the strength in your smaller customers. Is that something that you're seeing right now in your smaller customer base, or is that something you're looking at more prospectively as the year goes on? Or how do you think about that effect and how it layers into your business timing-wise?

Speaker Change: Your smaller customers is that something that youre seeing right now in the smaller customer base or is that something youre looking at more prospectively as the year goes on or how do you think about that effect and how it layers into your business timing wise. Thanks.

Speaker Change: When we identified that in January of this year.

Michael Weening: When we identified that in January of this year, we stated that it would be this is going to be an impact through the first half. Right.

Speaker Change: We stated that it would be this is going to be any impact through first half right and so we saw that in Q1, and we see that in Q2.

Michael Weening: And so we saw that in Q1, and we see that in Q2. You see a profound impact on some of the larger ones. As they're working through this, with our existing customer base, they are still going through that decision-making process. So a portion of them have made a decision to not apply for B, but there are a portion of them that are continuing on or pursuing B. Therefore, that indecision continues, and you see it less in the smaller customers and more profound in the medium and large.

Speaker Change: You see a profound impact on some of the larger customers because they are working through this.

Speaker Change: With our existing customer base.

Speaker Change: Still are going through that decision, making process. So a portion of them are have made a decision to not apply for D. But there are a portion of them that are continuing on therefore pursuing me. Therefore that indecision continues and you see it lesser in the smaller customer and the smaller customers and more.

Speaker Change: Found in the medium and large.

Speaker Change: Great. Thank you.

Thank you. Our next question comes from the line of Samad Chatterji with J P. Morgan. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Samik Chatterjee with J.P. Morgan. Please proceed with your question.

Samik Chatterjee: Hi, good morning, Thanks for taking my questions.

Samik Chatterjee: I did jump on it but let's say if I. If you answer this please excuse me but.

Samik Chatterjee: But you did call out in one queue as well certain significant customers that were pausing spend. You are calling that out as a headwind in this release as well.

Samik Chatterjee: You did call out in <unk> as well as certain significant customers that we're proposing spend you are calling that out as a headwind in the.

Samik Chatterjee: Hum relief as well I'm just wondering when you look at the breadth of the customer is sort of.

Samik Chatterjee: I'm just wondering when you look at the breadth of the customers that are pausing, is that just expanding in terms of the breadth as you go into sort of the back end of the year? Is that really becoming sort of a more evident trend, or is it typically sort of remaining constrained to a few? I think you called out three significant customers last quarter that had paused. Is it remaining constrained to those? I'll have a follow-up. Cora, that's a great question.

Samik Chatterjee: <unk> is that just expanding and dumpster.

Samik Chatterjee: Brett as you go into sort of the backend of the yard is that really becoming sort of a more evident trend or it is typically set of remaining constrained to a few I think you had called out three significant customers last quarter that pause is it remaining constrained that those would have a follow up thank you.

Speaker Change: Okay. That's a great question for you to answer and identified that the shift from Q4 to Q2, and how we did not anticipate it continuing into the second quarter.

Michael Weening: Cory, that's a great question for you to answer and identify the shift from Q4 to Q2 and how we did not anticipate it continuing into the second quarter.

Speaker Change: Yes. It is.

Speaker Change: It is largely.

Speaker Change: Two customers.

Cory J. Sindelar: Yeah, it is, it is largely to customers that have continued to have. It's not a broadening. It's really more focused on those couple.

Speaker Change: Do you have.

Speaker Change: Delays in their capital.

Speaker Change: Decision and so it's.

Speaker Change: It's not a broadening.

Speaker Change: Really more focused on those those couple.

Cory J. Sindelar: And when you take a look at what they did, you know, we were at $77 billion in Q4 of last year. It's 43 in the current, and anticipated to be about half that in Q2. So, no, it's not broadening out. It's still tied to largely, predominantly, those two customers in particular.

Speaker Change: And when you take a look at what they did at.

Speaker Change: $77 million.

Speaker Change: Q4 of last year its 43 in the current.

Speaker Change: And anticipated to be about half that in Q2 so.

Speaker Change: No I don't it's not broadening out still tied to largely predominantly those two customers in particular.

Michael Weening: And that's why we feel confident in calling the bots. The small segment remains very robust.

Speaker Change: And that's why we feel confident in calling the bonds.

Speaker Change: Small size segment remains very robust we have demonstrated that and while they may have some pause in their decision, making they continue to expand out with their.

Cory J. Sindelar: We've demonstrated that, and while they may have some pause in their decision making, they continue to expand out with their initial or existing network builds and winning subscribers. We've seen green shoots in everything that we're doing. If you actually look at last year as inventory turns declined, We saw, obviously, our funnel decline in the same way, and we've also seen that turn around. Our funnel is now expanding, and you also see lead indicators from fiber builders like Dicom, who have called out that they're starting to see those green shoots, and they're also expanding. So, that's why we feel comfortable calling the bottom, and then in the second half, we'll start.

Speaker Change: Initial or with their existing network builds in and winning subscribers.

Speaker Change: You've seen.

Speaker Change: Green shoots and everything that we're doing if you actually look at.

Speaker Change: Last year as inventory turns declined.

Speaker Change: Obviously, our funnel decline in the same way and we've also seen that turnaround. Our funnel is now expanding and you also see lead indicators from fiber builders like Diamond icon, who called out that they are starting to see those green shoots and Theyre also expanding so that's why we feel comfortable call.

Speaker Change: The bottom end and then in the second half we'll start seeing the expansion.

Speaker Change: Got it okay.

Samik Chatterjee: And for my follow-up, one of the interesting things you highlighted in the shareholder letter is even as customers are, any insights on that? Because I would think that you would have a counterbalancing effect on the cloud platforms there. Thank you. That's a great question, Samik.

Speaker Change: My follow up one of the interesting things you highlighted in the shareholder letter was even as customers.

Speaker Change: Pausing some of the new nickel.

Speaker Change: <unk> moved on subscriber trends and monetization of those subscribers zoom, which leads me to think there should be more than Chris for your cloud platforms overall, but I know you've outlined that in Q2, you will continue to grow them, but what are you seeing in terms of trends that you're seeing in the accelerating trends just on account of custom.

Michael Weening: That's a great question Samik and a good insight, and in fact, it's exactly like that. I actually had a prospect who'd never done business with us last week use the following term. I appreciate it.

Speaker Change: Relying more on your foot those services in the meantime, as Nick will.

Speaker Change: So I mean any insights on that because I would think that you would have a counterbalancing effect.

Michael Weening: We did not have the time over the last three years during the pandemic to pour a cup of coffee, let alone consider a different business strategy. But with this pause, and some of the challenges that are going on in the industry, we actually took a step back. We started to look at you as an alternative. And through our conversation, we realized that you're not an alternative, that you're the choice that we should be making. Because you're not coming to us talking about building a dumb fiber network.

Speaker Change: Cloud platform. Thank you.

Speaker Change: That's a great question stomach and a good insight.

Speaker Change: And in fact, it's exactly like that actually had a prospect who has never done business with us last week use the following term.

Speaker Change: David.

Speaker Change: We did not have the time over the last three years through the pandemic to pour a cup of coffee, let alone consider a different business strategy, but through this pause in some of the challenges that are going on in the industry. We actually took a step back when we started to look at you as an alternative and through <unk>.

Speaker Change: Our conversation we realized that you are not an alternative.

Speaker Change: Joyce that we should be making because you're not coming to us talking about building a fiber network.

Michael Weening: What you're actually talking about is building out a diversified business strategy that is very comprehensive for the consumer, expands into small business, and has a vision to go into medium, and then, at the same time, differentiates the local brand with the community through assets like the smart cap. And so in this type of scenario, where they did not have that breathing room to even consider it, they now do. And this represents what we've been stating in Q2, Q4, and now in Q2 again, that this represents a massive opportunity to surge through that, demonstrate the value that we can have to their business, and set ourselves up for a decade to come.

Speaker Change: We're actually talking about is building out a diversified business strategy that is very comprehensive for the consumer expands into small business and has the vision to go into medium and then at the same time.

Speaker Change: Differentiates the local brand with the community through assets like smart.

Speaker Change: And so in this type of scenario, where they did not have that breathing room to even consider it they now do.

Speaker Change: This represents what we've been stating in Q2 Q4 and now in Q in Q2 again that this represents a massive opportunity to surge through that demonstrate the value that we can have to their business and set ourselves up for a decade to come and so that's why we're so enthusiastic about.

Michael Weening: And so that's why we're so enthusiastic about the pause that's happening in the market right now. It creates an opportunity for those customers to actually take the time to think and recognize that there's a big shift happening, and they have an opportunity to partner with Calix.

Speaker Change: The pause that's happening in the market right now it creates an opportunity with those customers to actually take the time to think.

Speaker Change: And recognize that there is a big shift happening and they have an opportunity to partner with calix.

Samik Chatterjee: Thank you. Thanks for taking my questions.

Speaker Change: Thank you thanks for taking my questions.

Operator: Thank you. Our next question comes from the line of Scott Wallace Searle with Roth MKM. Please proceed with your question.

Speaker Change: Thank you. Our next question comes from the line of Scott Wallace yearly with Roth. Please proceed with your question.

Scott Wallace Searle: Hey, good morning. Thanks for taking my questions. Hey, Mike, maybe just to quickly clarify a couple of things. Looking at the down quarter into June and the weakness in the medium and large customers, are they entirely the cause of the downward sequential move from the first quarter to the second quarter? Would that imply another, you know, 40, 50% sequential decline, similar to what we saw in the current March quarter? Or are you seeing some softening as well on the small business front?

Scott Wallace: Hey, good morning, Thanks for taking my questions, Hey, Mike maybe just to quickly clarify a couple of items looking at the down quarter into June and the weakness in the medium and large customers or are they entirely.

Scott Wallace: The cause of the downward sequential move from the first quarter and second quarter would imply another 40, 50% sequential decline.

Scott Wallace: Similar to what we saw in the current March quarter.

Scott Wallace: Are you seeing some softening as well on the small business front.

Scott Wallace Searle: And as we look into the second half of this year, I wanted to clarify that recovery, is it all small business driven? And when you say bead in early, I'm assuming that's the initial spending that you're talking about as opposed to awards. Just want to clarify that, and then I had a follow-up.

Scott Wallace: And as we look into the second half of this year wanted to clarify that recovery is it all small business driven and when you see bead in early 'twenty five I'm, assuming that's the initial spending that you're talking about as opposed to awards just want to clarify that and then I had a follow up.

Michael Weening: So Cory clearly stated that when revenue is declined from 77 to 43 in the medium-large and then we're anticipating it happening again in second quarter, that we fully attribute what's happening to that segment. And so, and then, as we stated in the investor letter, that, you know, our small segment continues to be strong. And then we look at, as they're going through this decision-making process, as I just stated, as a significant opportunity for us to actually surge in where they have the mindshare and the time to think, where they can consider us as an alternative and our business model, which in the end is crafting a cause, a chasm from us, moving from the really innovative folks like Allo and others who really get it and have already deployed and recognize that they want to build a different business to differentiate in their markets, to the network operators who are now starting to see the challenges and looking to fill that network.

Scott Wallace: So Corey clearly stated that when revenue has declined from 77 to <unk> 43 in the medium large and then we're anticipating having again in second quarter that we've fully attribute what is happening to that segment.

And then as we stated in the Investor letter.

Speaker Change: Got it.

Speaker Change: Our small segment continues to be strong and then we look at as they're going through this decision making process as I just stated as a significant opportunity for us to actually surgeon, where they have the mindshare in the time of the bank, where they can consider us as an alternative and our business model, which in the end as is.

Speaker Change: Crafting the cause of CASM from us moving from the really innovative folks like aloe and others, who really get it and have already deployed and recognized that they want to build a different business to differentiate in their markets. So the network operators are now starting to see the challenges and looking to fill out an hour. So so yes, it's attributed to medium and large.

Michael Weening: So, yes, it's attributed to medium and large. But no, we do not see a shortfall in the small.

Speaker Change: No we do not see a shortfall in the small in fact, we see them continuing to invest and grow.

Scott Wallace Searle: And yes, we're talking about not just awards but revenue. Page 25, Okay, great.

Speaker Change: And that will lead to strengthen in the second half I think I answered is and then the last question. Scott you asked about was PS.

Speaker Change: And yes, we're talking about.

Scott Wallace Searle: And if I could, just on the bead front, look, you're working with multiple customers right now in terms of facilitating their processes and obviously engaging with them. Is there a number in terms of the amount of requests that your customers have put in or some sort of magnitude to help us understand what that dollar amount could actually look like? And I was wondering if you would clarify the trickle-down effect in 25 and where you think this could peak out in terms of annual contribution from bead funding as we get into 26, 27, and beyond. Thanks.

Speaker Change: Not just awards, but but revenue beginning in 'twenty five.

Speaker Change: Okay, great and if I could just on the Beach front look you are working with multiple customers right now in terms of facilitating their process and obviously engaging with them is there a number in terms of the amount of requests that your customers have put in or some sort of magnitude help us understand what that dollar amount could actually.

Speaker Change: Look like and I was wondering if you would clarify trickle in 'twenty, five and where you think this could peak out in terms of annual contribution from <unk> funding as we get into 'twenty six 'twenty seven and beyond thanks.

Speaker Change: Yeah.

Michael Weening: No, we don't have a number affiliated with that. The only number that we will provide is that we've had, you know, well over 500 consultations where we've engaged with customers and helped them understand where the different funds are. That's not only BEAD, but it's also at the state level, that's tribal, all those different groups that we've been working with. I was at the tribal summit two weeks ago, you know, and there were hundreds and hundreds of tribal people there who are contemplating that government funding, which is directed at their markets.

Speaker Change: No. We don't have a number of affiliated with that then the only number that we wont provide as that we've had.

Speaker Change: Well over 500 consoles that we've engaged with customers and helping them understand where the different funds are and thats not only beat but it's also state level.

Speaker Change: Travel all of those different groups that we've been working with I was at the travel summit two.

Two weeks ago.

Speaker Change: And there were hundreds and hundreds of tribes there who are contemplating that government funding, which is directed at their markets. So I would just say that we are incredibly active as I put in the store we put in the shareholder letter.

Michael Weening: So I would just say that we are incredibly active, as I put in the shareholder letter. We also have partnered with Ready.net, who is very active with our customers and helps them understand where the BEAD funding is, how to pursue it, what the maps are, and where we see incremental value in that. As we've done with previous programs over the last 15 years, we see that as expanding beyond just the funding part of it, which is a great opportunity for us to partner with our customers on how they stay compliant over the long term through testing.

Speaker Change: We also have partnered with Red Dot net.

Speaker Change: Is very active with our customers and helping them understand where the b funding is how to pursue it maps are.

Speaker Change: And where we see incremental value and that is as we've done with previous programs over the last 15 years, we see that is expanding beyond just the funding part of it which is a great opportunity for us to partner with our customers into how did they stay compliant over the long term.

Speaker Change: Through the testing.

Michael Weening: Currently, as I stated earlier in my remarks, 74% of federally funded customers in the U.S. today use us for speed. That should be a very good indicator with regard to the capabilities that we provide a broadband service provider who pursues government funding on how to make it simple and successful.

Speaker Change: Currently as I stated earlier.

Speaker Change: Earlier in my remarks, 74% of federally funded customers in the U S. Today use us for speed test.

Speaker Change: That should be a very good indicator with regards to the capabilities that we provide a broadband service provider to preserve pursues government funding on how to make it simple and successful.

Operator: Thank you. Our next question comes from the line of Michael Genovese with Rosenblatt Securities. Please proceed with your question.

Speaker Change: Great. Thanks.

Speaker Change: Thank you. Our next question comes from the line of Michael Germany with Rosenblatt Securities. Please proceed with your question.

Michael Edward Genovese: Great, thanks. Thanks for the call.

Michael Edward Genovese: Great. Thanks.

Michael Edward Genovese: Thanks for all the points you're making, which are good. I just want to check first on a couple of more bare thesis points and just get your view on them. You know, first of all, at OFC, Cisco was talking about, you know, basically going after the medium customer market with, with pawn technology, you know, with a pawn card hanging off a router, similar to the Sienna solution. So just wanted to check if there's anything market share wise going on in the tier two market, or if this is all just, you know, customer valuation delays, as you spoke about.

Michael Edward Genovese: Thanks for the call. Thanks for all the points, you're making which are good I just wanted to check first on a couple of more.

Michael Edward Genovese: More bear thesis points and just get your view on them.

Michael Edward Genovese: First of all.

Michael Edward Genovese: At OFC Cisco was talking about.

Michael Edward Genovese: Basically going after the medium customer market with with.

Michael Edward Genovese: PON technology, you know with upon card hanging off of router similar to Seattle solution. So just wanted to check if there's anything market share why is going on in the tier two market or if this is all just.

Michael Edward Genovese: Customer evaluation delays as you spoke about.

Michael Weening: Uh, there is a competitive thing going on. We're taking the footprint. So that's what's going on. And so that being said, our acquisition of that footprint, like the 10 customers that we won, and

Michael Edward Genovese: Yeah.

Michael Edward Genovese: There is a competitive thing going on we're taking footprint.

Michael Edward Genovese: So that's that's what's going on.

Michael Edward Genovese: And so that being said our acquisition of that footprint like the 10 customers that we won in Q1. It takes time for them to actually earn through their previous inventory and make the transition as all those different elements and so those are the green shoots that we've been referring to.

Michael Weening: Great. Okay, and then on, you know, on that, the kind of tier, large, medium, small customer question, having to do with bead, you know, there's just been some people talking about how You know, and I don't know how they can predict this, but they are predicting that, you know, at the end of the day, you know, and I don't know if this is correct, but people are saying Deed might go more towards the large and the medium customers and less towards, the small customer base at the end of the day.

Michael Edward Genovese:

Speaker Change: With regards to other people coming into our market bring it on.

Speaker Change: Great.

Speaker Change: And then I'm off on that that's the kind of tier one large medium.

Speaker Change: Small customer question, having to do with BG.

Speaker Change: You know Theres just been some people talking about how.

Speaker Change: And I don't know how they can predict this but but but they are predicting that you know at the end of the day.

Speaker Change: And I don't know if this is correct, but people are saying deed might go more towards the large and medium customers and less towards.

Speaker Change: The small customer base at the end of the day and you know so I don't know where that that call is coming from or how people can say that you're working with all these customers are what's your confidence that your small customers, who make up 80% of your revenues are going to be winners in the in the bid process like where does that just.

Michael Weening: And you know, so I don't know where that call is coming from or how people could say that you're working with all these customers. What's your confidence that your, you know, small customers who make up 80% of your revenues are going to be winners in the B process? Like, where does that, you know, just sort of, come from?

Speaker Change: Sort of detail where that confidence comes from and any data points you can give us there. Thanks.

Michael Weening: Well, to be clear, though, we didn't say need was going to go to small customers. We said, actually, need was going to go to the market, small, medium, and large. We called out that our medium and large segment is down as they go through their decision-making process, but that should be an indicator that it should then swing back as they acquire that funding. With regard to who's going to win, all three segments are going to compete for that money aggressively.

To be clear, though b, we didn't save need is going to go to small customers. We said actually be just kind of go to the market small medium and large we called out that our medium and large segment is down as they go through their their decision, making process, but that should be an indicator that that should then swing back.

Speaker Change: They acquire that funding with regards to who's going to win all three segments are going to compete for that money aggressively but.

Michael Weening: But to be clear, BEAD is focused on really rural, underserved customers. And in fact, when I've engaged with the NTIA around this, they are aggressively trying to ensure that small service providers do participate and that it just doesn't go too big. Because if the small teams do not actually participate in B, that's gonna be bad for America. Why? Because they're the ones who actually invested in KnowWhere USA because they live there. They love their community, and they've done those investments with or without government funding, and the NTIA is reliant on them.

Speaker Change: But to be clear bead is focused on.

Speaker Change: And they're really rural underserved customers and in fact, when I engage with NTIA around this they are aggressively trying to ensure that small service providers do participate and then it just doesn't go to large because if the small teams do not actually parts.

Speaker Change: <unk>, that's going to be bad for America.

Speaker Change: Because they're the ones, who actually have invested in nowhere USA because they live there they love their community and they've done those investments with or without government funding and then and the NTIA as reliant on them continuing that community centric mindset to make very rural situations.

Michael Weening: [inaudible]

Michael Weening: So, anyone who says that it's just going to be one segment or another... I don't agree. We don't agree. It's going to be all three segments participating at different levels, and in all three segments. We have good relationships, and therefore, we'll be able to support them all.

Speaker Change: <unk> successful.

Speaker Change: So anyone who says that it's just going to be one segment or another.

Speaker Change: I don't agree we don't agree it's going to be all three segments participating at different levels.

Speaker Change: And in all three segments.

Speaker Change: We have good relationships and therefore, we'll be able to support them all.

Michael Edward Genovese: Okay, great. And then, finally, for me, you know, just looking past this, you know, as we get to 2025, you know, I know it's early to give an outlook beyond, you know, one quarter or one year. But do you think that, you know, we could get back to a 10 to 15% type of growth rate in 2025? Or do you think we'll be ramping up to that in sort of the first half of 2025 and maybe don't get there until, you know, 2026 on a full year basis? Just, you know, the long-term kind of annual growth rate starting in 2025. How are you thinking about that? We did that consistently for four years.

Speaker Change: Okay, Great and then and then finally for me just looking past this.

Speaker Change: We get to 2025 I know, it's early to give an outlook for beyond you know one quarter or one year.

Speaker Change: But do you think that you.

Speaker Change: We can get back to a 10% to 15% type of growth rate in 'twenty five or do you think would be ramping towards that in sort of the first half of 'twenty five and maybe you don't get there until until you know 2026 on a full year basis, just the long term kind of annual growth rate starting in 2025.

Speaker Change: Are you thinking about it.

Speaker Change: We do that consistently for four years and we you know we expect that once we get through this peculiar indecision face that.

Michael Weening: We did that consistently for four years, and we expect that once we get through this peculiar indecision phase, we will get back to that. And as I stated in my opening remarks, the first thing I said was that the fundamental underlying underpinnings of this business, which are our platform cloud and managed services, remain strong. That's best evidenced by the fact that we have cash flow, and margins continue to grow. Customers understand.

Speaker Change: We will get back to that and as I stated.

Speaker Change: In my opening remarks first thing I've stated is that the fundamental underlying.

Speaker Change: Underpinnings of this business, which is our platform cloud and managed services remains strong as best evidenced by the fact that we've got cash flow margins continue to grow customers understand.

Michael Weening: And this indecision period, as I stated, is an opportunity for them to take a deep breath, consider their future, and what they want to do over the next five to ten years, as opposed to just what's in front of them. And this creates the opportunity to have a very different conversation around how you build a higher-value business for your stakeholders, which can be members if you're a cooperative or shareholders if you're for profit. And this represents an opportunity for us to take a footprint, which will then yield fruit in 2025.

Speaker Change: This indecision period as I stated as an opportunity for them take a deep breath consider their future on what do they want to do over the next five to 10 years.

Speaker Change: As opposed to just whats in front of them and this creates the opportunity to have a very different conversation around how do you build a higher value business for your stakeholders, which can be members, if you're a cooperative or shareholders if fear for profit.

Speaker Change: This represents an opportunity for us to take full package, which will then yield in 2025.

Great. Thanks very much.

Operator: Thank you. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Speaker Change: Okay.

Speaker Change: Thank you. Our next question comes from the line of Tim <unk> with Northland Capital markets. Please proceed with your question.

Timothy Paul Savageaux: Hi, good morning. I have a couple questions. And Michael, you hit on this briefly, but I want to go back to your green shoot commentary and see whether you had any more color on that was really, and I had another question about revisiting the kind of the share gain efforts that were discussed on the last call. You seem to conflate those two. And, you know, are there any other signs of, you know, positive activity throughout the customer base? A small, medium, or large that you would refer to as green shoots, or is it really? your efforts to gain a share.

Tim: Hi, good morning couple of questions.

Tim: And Michael you hit on this briefly but I wanted to go back to your Green shoot commentary and see whether you had any more color on that was really.

Tim: And then I had another question about revisiting kind of the share gain efforts that were discussed on the last call you.

Tim: You seem to conflate those two and you know or are there any other signs of pause of that.

Activity throughout the customer base.

Tim: Small medium or large that you referred to are green shoots or is it really.

Tim: Your efforts to gain share.

Michael Weening: Well, as we, you know, when you go back during the pandemic, our lead times were as high as 18. During that situation, we had deep insight into what a PSP was doing.

Speaker Change: Well so.

Speaker Change: As you know when you go back during the pandemic are our lead times were as high as 18 months.

Speaker Change: During that situation, we had deep insight into what <unk> was doing.

Speaker Change: Through.

Because they actually have to give us their orders and therefore, the pipeline with affiliated with that and over time as we've gone through that over the last over the last few years, you've seen basically lead times go down two from six quarters down to in essence, a single quarter and therefore logically you would also see the pipeline.

Michael Weening: We have seen lead times go down from six quarters down to, in essence, a single quarter. And therefore, logically, you would also see the pipeline affiliated with that also shift. And we're now at a place where things are stabilized, and we are back to actually seeing, from a Green Shoes point of view, significant pipeline growth, which gives us confidence in what's gonna happen in the second half. At the same time, we continue to take our footprint, as evidenced by, I talked about a larger customer selecting us with Smart Business.

Speaker Change: With that also shifts and we're now at a place where things have stabilized.

Speaker Change: We are back to actually seeing green shoots point of view significant pipeline growth, which gives us confidence in what's going to happen in second half.

Speaker Change: At the same time, we continue to take footprint as evidenced by I talked about larger customers selecting us with smart business. That's a significant win that's a brand new business.

Michael Weening: That's a significant win. That's a brand new business. And us closing, not in Q1, but in Q2, in the first two weeks of the quarter, we closed our biggest cloud deal in the company's history. And so, you know, I go through those points, the pipeline growing, and this represents a significant opportunity and gives us confidence in the second half.

Speaker Change: In us closing not in Q1, but in Q2 and the first few weeks of the quarter, we closed our biggest cloud deal in the company's history.

Speaker Change: And so I.

Speaker Change: I'll go through those points.

Speaker Change: The pipeline growing the strong closing the largest cloud deal and then a larger customer selecting us to actually go after their small business market, which is in essence brand new business for us.

Speaker Change: This represents a significant.

Speaker Change: Opportunity and gives us confidence in the second half.

Timothy Paul Savageaux: Great. And kind of following along from that, even, you know, what's been maybe notable here in the last couple of quarters is that even with the rip lines, you've seen gross margins continue to tick up. I imagine there's a mixed aspect of that with the appliance business. I guess a couple of things, you know, as that perhaps recovers into the second half, what sort of impact do you expect it to have on the gross margin side?

Speaker Change: Okay.

Speaker Change: Great and kind of following along from that even whats been maybe notable here in the last couple of quarters is that even with the revenue.

Speaker Change: <unk> gross margins.

Speaker Change: Continue to tick up I imagine, there's a mix aspect of that with the appliance business.

Speaker Change: And.

Speaker Change: I guess, a couple of quarters as that perhaps recovers into the second half what sort of impact do you do you expect it to have on the gross margin side.

Timothy Paul Savageaux: Which is, you know, could it blunt that sequential growth with hardware coming back? Or do you expect to see continued steady increases in gross margin throughout the year from, you know, greater software and service revenue? Yeah, great question, Jim.

Speaker Change: Which is it could it blunt that sequential growth with hardware coming back or do you expect to see continued steady increases in gross margin throughout the year from greater software and service revenue.

Cory J. Sindelar: Yeah, great question, Jim. As we said throughout, our platform cloud and managed services business is continuing to grow as our customers continue to take share and add new subscribers. And so you've seen that persist and will continue to do so. As the new network builds, come back.

Speaker Change: Yes, great question Tim.

Speaker Change: As we said throughout.

Speaker Change: Our platform cloud and managed services business is continuing to grow as our customers continue to take share and add new subscribers.

Speaker Change: And so you've seen that.

Speaker Change: Persist and we will continue to do so.

Speaker Change: As the network New network builds come back.

Cory J. Sindelar: You know, what you'll ultimately see is a shift in product back to more access, which has a higher gross margin. So, you won't necessarily see a decline in gross margins. I think you'll see the progression continue. The rate at which it changes from quarter to quarter will vary depending on those mixed results. So, you know, for example, in the second quarter, the margin expansion is less than what it was in the first quarter. And it has to do with a lot of the products swinging back to the premises side in the second quarter. Inevitably, we think the margin will continue to progress.

Speaker Change: What you will ultimately see is a shift in product back to more access which has higher gross margins.

Speaker Change: So you won't see necessarily a decline in gross margins I think you'll see that progression continue the rate at which it changes from quarter to quarter will vary depending on those mixes.

Speaker Change: So for example in the second quarter.

Speaker Change: The margin expansion is less than what it was the first quarter and it has to do with a lot of the product swinging back to the premises side.

Speaker Change: And then in the second quarter.

Speaker Change: So.

Speaker Change: And inevitably we think the margin will continue to progress.

Speaker Change: And I don't think you should think that ill pause because new network builds being decided.

Speaker Change: Hey, thanks very much.

Operator: Thank you. Our next question comes from the line of Christian Schwab with Craig Hallam Capital Group. Please proceed with your question.

Speaker Change: Yeah.

Speaker Change: Thank you. Our next question comes from the line of Christian Schwab with Craig Hallum Capital Group. Please proceed with your question.

Christian David Schwab: Great. Hey, Cory, how long before the two large customers get back to 70-some million from 20 million?

Great Hey, Cory how long before the two large customers get back to 77 million from $20 million.

Speaker Change: Okay.

Cory J. Sindelar: That's a great question. You know, I'm not going to call that one. Obviously, last quarter, I was surprised by, you know, I thought they would get to where they would make some decisions, wasn't anticipating the decline that we saw, so I'm not going to dare to go out on a limb and say when that will recover. We know it will recover at some point.

Cory J. Sindelar: That's a great question.

Cory J. Sindelar: I'm not going to call that one obviously last quarter I was surprised by.

Cory J. Sindelar: Thought they would get to where you know where they would make some decisions.

I wasn't anticipating the decline that we saw so.

Cory J. Sindelar: Yes, im not going to dare to go out and off limits say when that will recover back.

Cory J. Sindelar: We know it will recover at some point.

Cory J. Sindelar: Don't know when.

Christian David Schwab: Okay, so I mean, we haven't made 200 million in revenue in over two years, right?

Cory J. Sindelar: Okay.

Cory J. Sindelar: I mean, we haven't done $200 million in revenue and over two years.

Christian David Schwab: And we're going to keep spending, you know, almost $110 million. I'm sorry, what was I? You haven't done quarterly revenue approaching $200 million in two years? We did 265 in the fourth quarter. We did 225, 226 in Q1. Yeah, in Q1 of 22, you had $202 million, and this quarter you're guiding for $200 million at the midpoint. It doesn't matter. You saw it coming.

Cory J. Sindelar: Right.

Cory J. Sindelar: To keep.

Cory J. Sindelar: Keep spend then you know almost 110 again.

Speaker Change: Alright, well thank you.

Speaker Change: You haven't done quarterly revenue approaching $200 million in two years.

Speaker Change: We did two five in the fourth quarter, we did 225 26 in Q1.

Speaker Change: Yeah, Q1 of 'twenty, two year 202 million and this this quarter, you're guiding to $200 million at the midpoint.

Speaker Change: Dan we did.

Speaker Change: Multiple corridors.

Christian David Schwab: We did it in multiple quarters. We did 226. We haven't done 200 yet. So sad. Go back roughly two minutes. You can look at it. The point is, your op-ex is, you know..., significantly higher. Right? And I know we're going to invest for growth, but, you know, we talked about a trickle of beads starting at the beginning of the 25th, and we have no idea when the large customers are coming back. How long do you hold this heavy OPEX on a quarterly basis?

Speaker Change: We haven't done 200.

Speaker Change: Was that two years.

Dan: Yeah, Okay, sorry, roughly two vials I understand what youre, saying.

You can look at it.

Dan: The point is is your Opex as you know.

Dan: Significantly higher right.

Dan: And I know, we're going to invest for growth right.

Dan: You know, we talked about a trickle of need starting in the beginning of the 25, but we have no idea where the large customers are coming back.

Dan: How long do you hold.

Dan: The opex on a quarterly basis.

Michael Weening: We understand that there are 60 million new fibers in that line coming. We also recognize, as we've identified for you, and you see, that the fundamental business model is actually a growing margin, and therefore it is strong. Customers are delaying for the very first time their decision-making, and they've got the time, as I stated, as it was so eloquently put to me last week, where I couldn't actually have the time to pour coffee, and now I'm willing to entertain these conversations.

Dan: We understand that there are 60 million new fiber in that lines coming.

Dan: We also recognized as we've identified for you that and you see it as a fundamental business model is actually growing margin and therefore it is strong customers are delaying for the very first time their decision, making and they've got the time as I stated. It was so eloquently put to me last week, where I can actually I couldn't ask.

Dan: Actually I have the time to for coffee and now I'm willing to entertain these conversations at this point in time, we will continue our opex investment because this is our opportunity to expand footprint as never before.

Michael Weening: At this point in time, we will continue our OPEX investment because this is our opportunity to expand our footprint like never before, ahead of one of the largest investments from the government in history, and to do anything but what we're doing would be wrong. And with our board, our chairman, and our leadership team, we are confident in the opportunity to grow, and it's going to yield significant returns. We are investing to win.

Dan: Ahead of one of the largest investments from the government in history.

Dan: And to do anything, but what we're doing.

Dan: It would be.

Dan: Rob.

Speaker Change: Yeah, and with our board, our chairman and our leadership team, we are confident in the opportunity to grow and that's going to yield significant.

Speaker Change: Returns.

Speaker Change: We are investing to win.

Christian David Schwab: My last question is, with recent expectations for 2024, and a once-in-a-generational-lifetime opportunity indeed, and large customers who are significantly underspending, shouldn't the target growth rate for fiscal year 25 be 20% or substantially higher than that? On top of that,

Speaker Change: Understood. Thank you my last question is with recent expectations where 2024.

Speaker Change: And once in a generation of lifetime at speed.

Speaker Change: And large customers who are significantly under spending.

Speaker Change: Shouldnt the target growth rate for fiscal year, 'twenty, five b, 20% are substantially higher than that.

Michael Weening: Possibly. Possibly

Speaker Change: On the top line.

Speaker Change: But possibly possibly.

Michael Weening: That's why we're coming quick from 2020. That's why we stated that we see this 2024 as this odd decision, this oddity. And, you know, to your point, over the last four years, we've delivered four years of 20% growth, and we see a return to growth in 2025. And we're working on it right now. We see the green shoots and all those different elements. So we're not calling 25 at this point, but we were just asked in the previous question, Do we see a return of 10 to 15? Yes,

Speaker Change: That's why we're quite comfortable in 'twenty. That's why we stated that that we see this 2024 is this odd to see this oddity.

Speaker Change: And to your point over the last four years, we've delivered four years of 20% growth.

Speaker Change: And we see a return to growth in 2025.

Speaker Change: And we're working that right now we see the green shoots and all those different elements. So we're not calling 'twenty five at this point.

Speaker Change: We were just asked in the previous question do we see the return of 10 to 15.

Speaker Change: Yes.

Christian David Schwab: Okay, great. No other questions. Thank you.

Speaker Change: Okay, great no other questions. Thank you.

Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Fanucchi for any final comments. Thank you, Melissa.

Speaker Change: Thank you Christian.

Christian David Schwab: Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Fanucchi for any final comments.

Fanucchi: Thank you Melissa we.

Jim Fanucchi: We will participate in several investor events during the second quarter, and information about these events, including the dates and times and publicly available webcasts, will be posted on the events and presentations page of our investor relations section of calix.com. Once again, we want to thank everyone on this call and webcast for their interest in Calix and for joining us, and this concludes our conference call. Have a great day.

Fanucchi: We will participate in several investor events during the second quarter and information about these events, including the dates and times and publicly available webcast will be posted on the events and presentations page of our Investor Relations section of Calix Dot com. Once again, we want to thank everyone on this call and webcast for your interest in Calix for joining US. This concludes our conference.

Speaker Change: Call have a great day.

Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.