Q2 2024 Calix Inc Earnings Call
Operator: Greetings, everyone. Welcome to the Calix Second Quarter 2024 Earnings Conference Call. This time, all participants are in listen-only mode.
Calix: Greetings, everyone. Welcome to Calix's second quarter 2024 earnings conference call.
Operator: The question and answer session will follow the brief prepared remarks. If anyone should require operator assistance during today's 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.
Speaker Change: At this time, all participants are in listen-only mode. The question-and-answer session will follow the brief prepared remarks.
Speaker Change: If anyone should require operator's assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Jim Fanucchi: It's now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations. Sir, please go ahead.
Jim Fanucchi: Thank you, Rob. And good morning, everyone. Thank you for joining our second 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.
Jim Fanucchi: Thank you Rob and good morning everyone. Thank you for joining our second quarter 2024 earnings call. Today on the call we have President and CEO Michael Weening and Chief Financial Officer Cory Sindelar.
Speaker Change: 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.
Speaker Change: Today's conference call will be available for webcast replay in the investor relations section of our website.
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, 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 second quarter of 2020 forward-looking statements and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates.
Speaker Change: 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 the company will make about its future financial and operating performance.
Michael: Growth Strategy, Market Outlook, and Actual Results may differ materially from those contemplated by these forward-looking statements.
Speaker Change: Factors that could cause actual results and trends to differ materially are set forth in the second quarter 2020 for letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements which speak only as of their respective dates.
Jim Fanucchi: Also, on 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 second quarter 2024 letter to stockholders. Unless otherwise noted, all financial information referenced in this call will be non-GAAP. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead.
Speaker Change: Also on 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 second quarter of 2024 letter to stockholders, unless otherwise noted.
Speaker Change: All financial information referenced in this call will be not gapped. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead. Thank you, Jim. Our results in the second quarter demonstrated the strength and execution of our strategy.
Michael Weening: Thank you, Jim. Our results in the second quarter demonstrated the strength and execution of our strategy. Our platform, cloud, and managed services continue to enable our broadband customers to dominate their markets as they simplify their operations and go to market, innovate across the consumer, business, and municipal segments of the markets they serve, and grow the value for their members or investors, and, in turn, to Calix. Once again, our unique broadband business model delivered record gross margin.
Speaker Change: Our platform, cloud, and managed services continue to enable our broadband customers
Speaker Change: to dominate their markets as they simplify their operations and go to market.
Speaker Change: Innovate across the consumer, business, and municipal segments of the markets they serve and grow the value for their members or investors, and in turn, to Calix.
Speaker Change: Once again, our unique broadband business model delivered record gross margin.
Michael Weening: Robust expansion of our platform cloud and managed services led to a sequential 9% increase in RPOs as BSPs continue to turn to Calix in the face of growing competition to win new subscribers through the ever-expanding capabilities of the Calix platform cloud and managed services. As we have discussed, the market is crossing the chasm, and this is best evidenced by our landing footprint with 24 new BSP customers who started their business transformation with Calix in Q2, up from 10 in Q1. Our appliance business is settling into a new normal where we see smaller orders and many, many more of them.
Speaker Change: Robust expansion of our platform cloud and managed services.
Speaker Change: led to a sequential 9% increase in RPOs.
Speaker Change: as BSPs continue to turn to Calix in the face of growing competition to win new subscribers through the ever-expanding capabilities of the Calix platform, cloud, and managed services.
Speaker Change: As we have discussed, the market is crossing the chasm, and this is best evidenced by our landing footprint with 24 new BSP customers who started their business transformation with Calix in Q2, up from 10 in Q1.
Speaker Change: Our appliance business is settling into a new normal where we see smaller orders and many, many more of them.
Cory J. Sindelar: This gives us the confidence to forecast a return to sequential quarterly revenue growth in Q3. And our momentum continues in Q3, as the team recently closed our largest platform cloud and managed services deal, setting a new record. With that, I'd like to turn it over to Cory to review our financial results for the first quarter.
Speaker Change: This gives us the confidence to forecast a return to sequential quarterly revenue growth in Q3. And our momentum continues in Q3 as a team recently closed our largest platform cloud and managed services deal, setting a new record.
Speaker Change: With that, I'd like to turn it over to Cory to review our financial results for the first quarter. Cory? Thank you, Michael. The second quarter represented another quarter of deliberate and disciplined execution.
Cory J. Sindelar: Thank you, Michael. The second quarter represented another quarter of deliberate and disciplined execution. We delivered revenue of $198 million, which was within the guidance range we provided in April, as we continue to navigate the crosswinds that are still prevalent in our industry. The continued growth in our platform, cloud, and managed services drove record non-gastros margin of 55.1%. In the second quarter, we saw strong platform adoption with 17 customers beginning their platform journey with us, 19 new cloud deployments, and 22 additional customers deploying a managed service for the first time. Remaining performance obligations, or RPOs, grew to $267 million at the end of the quarter.
Corey: We delivered revenue of $198 million, which was within the guidance range we provided in April .
Corey: As we continue to navigate the crosswinds that are still prevalent in our industry, the continued growth in our platform, cloud, and managed services drove record non-gasprose margins of 55.1%.
Corey: In the second quarter we saw strong platform adoption with 17 customers beginning their platform journey with us.
Corey: 19 new cloud deployments and 22 additional customers deploying a managed service for the first time.
Corey: Remaining performance obligations, or RPOs, grew to $267 million at the end of the quarter. This is an increase of $22 million, or 9% sequentially, and up $54 million, or 25% year-over-year.
Cory J. Sindelar: This is an increase of $22 million, or 9% sequentially, and up $54 million, or 25% year-over-year. Furthermore, our current RPO was $103 million, up 4% sequentially and up 28% year over year. As we've discussed before, the increases in RPO reflect new customer additions and the continued adoption of our platform offerings as our existing customers add new subscribers and expand their use of our platform cloud and managed services. As a result, we expect RPO will continue to grow. In the second quarter of 2024, non-GAAP operating expenses were $104 million, down $4 million from the prior quarter.
Corey: Furthermore, our current RPOs.
Corey: were $103 million, up 4% sequentially and up 28% year-over-year.
Corey: As we've discussed before, the increases in RPO reflect new customer additions and the continued adoption of our platform offerings as our existing customers add new subscribers and expand their use of our platform cloud and managed services.
Corey: As a result, we expect RPO will continue to grow.
Speaker Change: In the second quarter of 2024, non-GAAP operating expenses were $104 million, down $4 million from the prior quarter. The decrease is mostly attributable to lower outside services and professional fees.
Cory J. Sindelar: The decrease is mostly attributable to lower outside services and professional fees. As we have said before, our plan is to keep 2024 operating expenses expenditure investments relatively consistent with 2023, as we believe this level of investment represents a great opportunity for us to grow our footprint ahead of the expected U.S. government broadband investment. Our debt-free balance sheet and balance sheet metrics remain strong. At the end of the quarter, cash and investments were just over $261 million, representing a sequential increase of roughly $22 million.
Speaker Change: As we have said before, our plan is to keep 2024 operating expenses—expense investments—relatively consistent with 2023, as we believe this level of investment represents a great opportunity for us to grow our footprint ahead of the expected U.S. government broadband investments.
Speaker Change: Our debt-free balance sheet and balance sheet metrics remain strong. At the end of the quarter, cash and investments were just over $261 million, representing a sequential increase of roughly $22 million.
Cory J. Sindelar: This was our fifth consecutive quarter of double-digit free cash flow. DSO is 38. Inventories were 2.8, down from 3.1 last quarter as our component inventories increased. Excluding component inventory, our inventory turns would have been 3.7. And inventory deposits decreased by $6 million, bringing our total inventory deposit down to $70 million.
Speaker Change: This was our fifth consecutive quarter of double-digit free cash flow.
Speaker Change: DSO is 38.
Speaker Change: Inventories were 2.8, down from 3.1 last quarter as our component inventory increased. Excluding component inventory, our inventory turns would have been 3.7.
Speaker Change: And inventory deposits decreased by $6 million, bringing our total inventory deposit down to $70 million.
Cory J. Sindelar: Furthermore, we expect continued profitability combined with working capital reduction will result in consistent double-digit quarterly operating and free cash flow. Now, let's discuss revenue gains for the third quarter. Based on the current ordering trend and new customer acquisitions, we believe the second quarter marks the bottom for 2024, and we will grow from here. For the third quarter of 2024, our revenue outlook is to be between $198 and $204 million. In terms of feed, we've seen a lot of progress since our last call. As we sat here a quarter ago, only one state, Louisiana, had completed all 10 steps of the program.
Speaker Change: Furthermore, we expect continued profitability combined with working capital reductions will result in consistent double-digit quarterly operating and free cash flow.
Speaker Change: Now let's discuss run events for the third quarter.
Speaker Change: Based on the current ordering trends and new customer acquisitions, we believe the second quarter marks the bottom for 2024, and we will grow from here.
Speaker Change: For the third quarter of 2024, our revenue outlook is to be between $198 and $204 million.
Speaker Change: In terms of feed, we've seen a lot of progress since our last call. As we sat here a quarter ago, only one state, Louisiana, had completed all ten steps of the program.
Michael Weening: Today, there are 20 states and territories approved through All 10 Steps, and they represent $12 billion of the $42 billion program. While the approvals have accelerated, we believe that we will begin seeing orders in early 2025. In summary, Q2 represents a low point for revenue in 2024, and we will return to sequential quarterly revenue growth in Q3. We continue to add new BSP customers every quarter, which will, over time, support our growth objectives.
Speaker Change: Today, there are 20 states and territories approved through All 10 Steps, and they represent $12 billion of the $42 billion program.
Speaker Change: While the approvals have accelerated, we believe that we will begin seeing orders in early 2025.
Speaker Change: In summary, Q2 represents a low point for revenue in 2024.
Speaker Change: And we will return to sequential quarterly revenue growth in Q3.
Speaker Change: We continue to add new BSD customers every quarter, which over time will support our growth objectives. In addition, our platform cloud and managed services grows each quarter, driving our RPO and gross margin expansion.
Michael Weening: In addition, our platform cloud and managed services grow each quarter, driving our RPO and gross margin expansion. We have the most pristine balance sheet in the industry, which gives us the financial capacity to invest in our operations and expand our footprint as our industry crosses the chasm. Michael, back to you. Thanks, Cory.
Speaker Change: We have the most pristine balance sheet in the industry, which gives us the financial capacity to invest in our operations and expand our footprint as our industry crosses the chasm.
Michael Weening: Throughout Q2, I continued to meet with broadband customers and their investors, with the discussion remaining the same: how to win. The industry is under significant stress as legacy network operators face the disruption of increased competition and the expanding risk of commoditization as broadband speed disappears as a differentiator. This shift from speed to an experienced mindset is critical to our crossing the chasm from early adopters to winning the early majority, and it is accelerating.
Michael: My goal is back to you.
Michael: Thanks Cory. Throughout Q2 I continued to meet with broadband customers and their investors with the discussion remaining the same. How to win.
Speaker Change: The industry is under significant stress as legacy network operators face the disruption of increased competition and the expanding risk of commoditization as broadband speed disappears as a differentiator.
Speaker Change: This shift from speed to an experienced mindset is critical to our crossing the chasm from early adopters to winning the early majority, and it is accelerating.
Michael Weening: With 1,065 BSPs now deploying our platform, which grows every quarter, we continue to engage with prospects of all sizes to educate them on the power of the platform while supporting our existing customers as they expand their business model across consumer, business, and the communities they serve. It is a winning business model that is achieving incredible revenue, margin, cash flow, and customer satisfaction results every single day.
Speaker Change: With 1,065 BSPs now deploying our platform, which grows every quarter, we continue to engage with prospects of all sizes to educate them on the power of the platform while supporting our existing customers.
Speaker Change: as they expand their business model across consumer, business, and the communities they serve. It is the winning business model that is achieving incredible revenue, margin, cash flow, and customer satisfaction results every single day.
Jim Fanucchi: In closing, our confidence in returning to sequential quarterly revenue growth is driven by an expanding funnel of opportunities as our unique platform cloud and managed services model enables our customers. We have the financial strength and balance sheet that allows us to execute without distraction while maintaining a disciplined and steady hand on our operating expense investments that support our BSP customers as they win their markets, and together, we succeed for the long term.
Speaker Change: In closing, our confidence in returning to sequential quarterly revenue growth is driven by an expanding funnel of opportunities as our unique platform cloud and managed services model enables our customers to succeed.
Speaker Change: We have the financial strength and balance sheet that allows us to execute without distraction, while maintaining a disciplined and steady hand on our operating expense investments that support our DSP customers as they win their markets. And together, we succeed for the long term.
Jim Fanucchi: Jim, let's open the call for questions. Thanks, Michael. Rob, at this time, you can please open up the lines for questions. Thank you, Jim. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Jim, let's open the call for questions. Thanks, Michael. Rob, at this time, you can please open up the lines for questions.
Speaker Change: Thank you, Jim. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 if you would like to withdraw your question from the queue.
Speaker Change: For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment please while we poll for questions.
Operator: One moment, please, while we poll for questions. Thank you, and our first question comes from the line of Samik Chatterjee with J.P. Morgan. Please proceed with your question. Mr. Chatterjee, your line is open for questions. Pepsi on mute.
Speaker Change: Thank you. And our first question comes from the line of Samik Chatterjee with J.P. Morgan. Please proceed with your questions.
Speaker Change: Mr. Chatterjee, your line is open for questions.
Operator: Rob, let's go to the next one. We'll pull Sonic back into the rotation. Yes, thank you. The next question is from the line of Ryan Koontz with Niedermann Company. Please proceed with your question. Great. Thanks for having me on.
Speaker Change: The next question is from the line of Ryan Koontz with Niedermann Company. Please proceed with your questions.
Ryan Boyer Koontz: On the pressure on the large and medium customer cohort and the decline there, do you have an updated view of the drivers behind the, you know, the tight capital environment between interest rates and, you know, bead preparation? You know, how would you kind of characterize the top three drivers there among your largest? Well, I actually don't think it's a large customer phenomenon. I actually think it's across the entire base.
Ryan Boyer Koontz: Thanks for having me on. On the pressure on the large and medium customer cohort and the decline there, do you have an updated view of the drivers behind the tight capital environment between interest rates and
Ryan Boyer Koontz: How would you characterize the top three drivers there among your largest customer base?
Speaker Change: Well, I actually don't think it's a large customer phenomenon, I actually think it's across the entire base, and this goes back to what we've articulated in fourth quarter and first quarter, it remains the same. So the first one is, is that they're going through a decision-making process with regards to B. You've seen the complexity of that scenario, now it's making progress.
Michael Weening: And this goes back to what we've articulated in the fourth quarter and first quarter. It remains the same. So the first one is that they're going through a decision-making process with regard to B. You've seen the complexity of that scenario. Now it's making progress, and Cory can talk about that extensively. But as they go through that again, their planning teams are now focused on how they do those submissions. And then in the second half, a lot of that will finally come to light. And that's companies of all sizes, small, medium, and large. Right? That's the first one. The second one is that again, small, medium, and large.
Speaker Change: Cory can talk to that extensively, but as they go through that again, their planning teams are now focused on how do they do those submissions, and then in second half, a lot of that will finally come to clarity, and that's companies of all sizes, small, medium, and large, right? That's the first one.
Michael Weening: The second thing they're considering is that if they are an entity that has, you know, private equity backing or investors, the pervasively high interest rates and the increase in competition, which, again, we've forecasted for many years, have caused them to say, "Okay, should we slow down a little bit or reconsider our business model as we're not getting the loads that we need?" And so let's really pivot hard on our existing investments and win new subscribers. Which really comes down to the crossing the chasm part is that we really needed them.
Speaker Change: The second one is that, again, small, medium, and large, the second thing they're considering is that if they are an entity that has private equity backing or investors, the pervasively high interest rates.
Speaker Change: And the increase in competition, which again, we've forecasted for many years.
Speaker Change: has caused them to say
Speaker Change: Okay, should we slow down a little bit or contemplate our business model as we're not getting the loads that we need? And so let's really pivot hard into our existing investments and win new subscribers.
Speaker Change: which really comes down to the cross and the chasm part.
Michael Weening: You know, if I go back a year ago, a year ago, I was at US Telecom, which was a big CEO event. And a year ago, and the year before, I was the one who was a bit of a naysayer in that room, constantly saying the same thing that we said at our Connections event, which is that speed is going to commoditize. It's not a different
Speaker Change: is that we really needed them. You know, if I go back
Speaker Change: A year ago, a year ago, I was at US Telecom, which is a big CEO event.
Speaker Change: And a year ago, I was...
Speaker Change: And the year before, I was the one who was a bit of a naysayer in that room.
Speaker Change: Constantly saying the same thing that we've said at our Connections event, which is...
Michael Weening: Building fiber is not enough. You actually need to build a comprehensive business model to own the community. And as little as a year ago, especially with medium and large customers, they were dismissive. They'd say, no, I'm doing well enough.
Speaker Change: Speed is going to commoditize, it's not a differentiator, building fiber is not enough, you actually need to build a comprehensive business model to own the community. And as little as a year ago, especially with the medium and large customers,
Michael Weening: I keep going at it. Where our smaller customers were aggressively pivoting into that experience community-centric brand message. I was there again this summer, and frankly, they were all saying the same thing.
Speaker Change: They were dismissive. They were like, no, I'm doing well enough. I keep going at it. Where our smaller customers were aggressively pivoting into that experienced, community-centric brand message. I was there again this summer, and frankly, they were all saying the same thing. There was a ton of investors there, and they were all like,
Michael Weening: There were a ton of investors there, and they were all like, you know what? We've been building for the last three years. We're not getting the subscriber loads on our network that we thought we would. The competition is a lot higher than I expected, and I really need to be reconsidering my business model.
Speaker Change: You know what, we've been building for the last three years, we're not getting the subscriber loads on our network that we thought we would, the competition is a lot higher than I expected, and I really need to be contemplating my business model. And frankly, to us,
Cory J. Sindelar: And frankly, to us, this is the exact thing that we have been building our company for 13 years to build that opportunity. And it makes crossing the chasm, that crossing the chasm leap, easier because now they're under a ton of pressure, which is what I talked about in my opening, or anything that has to do with the sunrise. And Cory, the mention of the largest platform deal ever, was that included in your stated RPO for 2Q, or is that a 3Q?
Speaker Change: This is the exact thing that we have been building our company for for 13 years to build that opportunity and it makes us crossing the chasm leap easier because now they're under a ton of pressure, which is what I talked about in my opening remarks.
Speaker Change: or anything that I talked about that summarizes it.
Speaker Change: And Cory, the mention of the largest platform deal ever, was that included in your stated RPO for 2Q or is that a 3Q event?
Cory J. Sindelar: That is a new event, Ryan, that will be reflected in our Q3 RPO number. Well, to be clear, in the second quarter, we booked the largest platform and cloud deal in the company's history. And then, just before this call, we actually closed a larger deal. So set a new record for our cloud-based managed services, but that's a Q3 deal. Awesome, that's great.
Speaker Change: That is a new event, Ryan, that will be reflected in our Q3 RPO number. Well, to be clear, in second quarter, we booked the largest platform and cloud deal in the company's history in second quarter. And then...
Speaker Change: run up to this call, we actually closed a larger deal.
Speaker Change: So set a new record for our cloud-financed managed services. But that's a Q3 deal.
Cory J. Sindelar: And Cory, can you give us any color on the product mix and the quarter across, you know... Network versus CPE in general, like how has that trended in 2Q versus, say, the last 12 months? Yeah, in terms of our gross margin, what you're seeing is exactly kind of amplified for what Michael has just talked about. We're seeing operators spending less time building out new networks and working towards adding new subscribers to their networks, generating revenue and cash flows for them. And so we've seen a shift in our product mix towards premises, away from Appliance Revenue, on the network compliance side. I got it.
Corey: Awesome, that's great. And Cory, can you give us any color on the product mix in the quarter across, you know, network versus CPE in general? Like, how is that trended in 2Q versus, say, last 12 months?
Cory: Yeah, in terms of our gross margin, what you're seeing is exactly kind of amplifies what Michael has just talked about. We're seeing operators spending less time building out new networks.
Speaker Change: and working towards adding new subscribers to their networks, turning on revenue and cash flows for them. And so we've seen a shift in our product mix towards premises.
Cory J. Sindelar: So even though the hardware there has a lower gross margin, the higher software mix you're selling... more than makes up for it. That is spot on. All right, I'll get back in queue.
Speaker Change: away from Appliance Revenue.
Speaker Change: from the Network Compliance side.
Speaker Change: Got it. So even though the hardware there has got lower gross margin, the higher software makes your selling more than makes up for that.
Speaker Change: That is spot-on.
Speaker Change: Alright, I'll get back in queue. Thanks for the questions.
Samik Chatterjee: Thanks for the question. Thank you. Our next questions are from the line of Samik Chatterjee from J.P. Morgan. Please proceed with your questions.
Speaker Change: Thank you. Our next questions are from the line of Samik Chatterjee from J.P. Morgan. Please proceed with your questions.
Samik Chatterjee: Hi, thanks for letting me jump back on here.
Samik Chatterjee: I know, Michael, you mentioned BEID early on in the prepared remarks. Just wondering, we've seen some other suppliers start to talk about receiving BEID-related orders already, even though they ship out in 2025. Can you just address sort of where you are in terms of the timing?
Samik Chatterjee: I know, Michael, you mentioned about BEAD early on in the prepared remarks. Just wondering, we've seen some other suppliers start to talk about receiving BEAD-related orders already, even though they ship out in 2025. Can you just address, sort of,
Michael Weening: And I think the primary question for investors is how material BEID-related revenues can be for your model in 2025. Anything you can share on that front in terms of how to think about whether it should be revenues from sort of all 50-plus states, or should it be really a fraction of the geographies, just considering how the pace of approvals is? And I have a quick follow-up. Sure, happy to talk about that.
Speaker Change: Where you are in terms of the timing and I think the primary question for investors is how material
Speaker Change: can be related revenues be for your model in 2025 anything you can share on that front.
Speaker Change: in terms of how to think about whether it should be revenues from sort of all 50 plus states or should it be really a fraction of the geographies, just considering how the pace of approvals are. And I have a quick follow-up.
Cory J. Sindelar: And we, while there are others out there that are talking about orders and revenue starting this year, we've been consistent regarding our thoughts around B. We expect to start receiving orders in the first quarter of 2025. (Inaudible) Not necessarily revenue. We do not know what that ramp will be after we start receiving orders. We do know that 20 states have their Volume 2 proposals approved.
Speaker Change: Sure, happy to talk about that.
Speaker Change: And while there's others out there that are talking about orders and revenue starting this year, we've been consistent regarding our thoughts around B.
Speaker Change: We expect to start receiving orders in the first quarter of 2025.
Speaker Change: Orderly.
Speaker Change: Not necessarily revenue.
Speaker Change: We do not know what that ramp will be after we start receiving orders. We do know that 20 states have their Volume 2 proposals approved.
Cory J. Sindelar: And that represents 12 of the $42 billion. As you might recall from our last call, I suggested that as long as there were at least 10 to 15 states approved, we would get enough to actually start seeing an impact, a meaningful impact, in 2025. And so we're sitting here today with 20, so that's the good news, that there's certainly enough money now available for that program to have an impact in 2025.
Speaker Change: And that represents 12 of the 42 billion, so you might recall on our last call
Speaker Change: I suggested that as long as there were at least 10 to 15 states approved that we would get enough to actually start seeing an impact, a meaningful impact in 2025.
Speaker Change: And so we're sitting here today with 20, so that's the good news.
Speaker Change: That there's certainly enough money now available for that program to have an impact on 2025.
Cory J. Sindelar: But, you know, there are other steps that will follow, such as NTIA's approval of each state's broadband map subsequent to the challenge process. So they're circling more challenges to overcome as that program continues to roll out. That said, you know, we will do well as we have with every government program, large and small, for the last 20 years.
Speaker Change: But, you know, there's other steps that will follow, such as NTIA's approval of each state's broadband map, subsequent to the challenge process.
Speaker Change: So they're circling more.
Speaker Change: challenges to overcome as that program continues to roll out.
Speaker Change: That said, you know, we will do well as we have with every government program, large and small, for the last 20 years.
Michael Weening: The other question that I'm getting this morning from investors is, we've seen the lower mix of revenue from your large customers. Is there anything beyond sort of the cyclical headwinds in terms of market share with some of your large customers, just given the revenue decline you've seen with them on a year-over-year basis? Yeah, so in the quarter, it was actually better than we thought it would be.
Speaker Change: The, just the other question that I'm getting this morning from investors is we've seen the lower mix of revenue from your large customers
Speaker Change: Is there anything beyond sort of the cyclical headwinds in terms of market share with some of your large customers in just given the revenue decline you've seen with them on a year-over-year basis?
Speaker Change: Yeah, so in the quarter, it was actually better than we thought it would be, so it's better than feared.
Michael Weening: So it's better than we feared, so that was a positive and encouraging sign for us. The hold-back in our large median segment is a lot of reduction in capex spending as they're re-evaluating their priorities. But you might recall that we had talked about, we thought that large and medium segments would have a guess inside of Q2, and obviously, it did not, but it did better than we thought. So there's signs of them kind of coming out of those decisions that you can process and getting back on with their ordering programs. So we are encouraged by that.
Speaker Change: So that was a positive and encouraging sign for us. The hold back in our large-medium segment is a lot of reduction in CapEx spending as they're re-evaluating their priorities.
Speaker Change: But you might recall that we had talked about, we thought that large and medium segments would
Michael Weening: So I think that's a positive development. And if anything, the medium and large companies are actually starting to finally listen to the conversation which I talked about around the threats around quantization and actually how they have to change their business strategy. So in the second quarter, we closed a tier two that we've never done before, who used to be a big customer of ours but has not actually done anything with our cloud. And we closed with them on a go-to-market strategy around smart business. So how can they actually attack their very sizable small business base and win with a radically different experience?
Speaker Change: And so I think that's a positive development. And if anything, you know, the medium and large are actually starting to finally listen around the conversation, which I talked about.
Speaker Change: around the threats around privatization and actually how they have to change their business strategy. So in second quarter, you know, we closed, there's a tier two that we've never done, you know, who used to be a big customer of ours.
Speaker Change: but have not actually done anything with our cloud. And we closed with them on a go-to-market strategy around smart business. So how to actually attack their very sizable small business base.
Michael Weening: And so, if anything, I would say that this is now our opportunity to grow. And you saw that represented by the 24 new logos that we added this quarter. Those are not new companies starting up. Those are wins for companies who want to change their business model and evolve and transform with Calix. Thank you.
Speaker Change: and win with a radically different experience. And so, if anything, I would say that this is now our share opportunity.
Speaker Change: to grow, and you saw that as represented by the 24 new logos that we added this quarter. Those are not new companies starting up. Those are wins for companies who want to change their business model and evolve and transform with Calix.
Speaker Change: Thank you. Thanks for taking my questions.
Samik Chatterjee: Thanks for taking my question. Our next question is from the line of George Notter with Jeffreys. Hi guys, thanks very much.
Speaker Change: Our next question is from the line of George Notter with Jeffries. Please receive your questions.
George Charles Notter: I wanted to ask about... You know, as we think about the impacts on the business, I think you guys have mentioned a number of things, certainly in the shareholder letter, certainly in recent quarters. But I'm wondering if you could kind of talk about, you know, what the biggest impacts are on the hardware side of the business right now. We've talked about delays in decision-making associated with BEAD and government funding.
George Charles Notter: Hi guys, thanks very much. I wanted to to ask about
Speaker Change: You know, as we think about the impacts on the business...
Speaker Change: I think you guys have mentioned a number of things.
Speaker Change: certainly in the shareholder letter, certainly in recent quarters, but I'm wondering if you could kind of talk about
Michael Weening: We've talked about, you know, customers adjusting lead times because of, you know, changing order levels because your lead times are shorter. We've talked about higher interest rates. We've talked about, you know, a shift towards, you know, adding subs versus core infrastructure. I guess I'm just wondering if there's, you know, kind of a map to, you know, what these different factors are in terms of, you know, how important they are.
Speaker Change: Adjusting order levels because your lead times are shorter. We've talked about higher interest rates. We've talked about, you know, a shift towards
Speaker Change: adding subs versus core infrastructure. I guess I'm just wondering if there's kind of a map to what these different factors are in terms of how important they are. Is there a rank order of issues here? How do you think about what's fundamentally going on here? Thanks.
Michael Weening: Is there a rank order of issues here? How do you think about, you know, what's fundamentally going on here? Thanks. Well, actually, George, you summarized them very clearly. If you want us to statically rank them, I would say that it depends on the company, and therefore, inside each company, they're going to be different.
Speaker Change: Well, actually, George, you summarized them very clearly.
Speaker Change: If you want us to staff rank them, I would say that it depends on the company and therefore inside each company they're going to be different. So let's cover off what you so succinctly and accurately covered.
Michael Weening: So, you know, let's cover off what you so succinctly and accurately covered, which is what we've been saying for multiple quarters since we started to see this in late 2023. So, the one with the decision making on these, as we've always stated, that government funding is going to take much longer than anticipated and, in the end, will be a much larger funding outpouring over time. So, you know, while it's a $42 billion program on these, it's actually at 25%. It's significantly larger.
Speaker Change: which is what we've been saying for multiple quarters since we started to see this and in late 2023.
Speaker Change: So the one with the decision making on these, as we've always stated, that government funding is going to take much longer than anticipated, and in the end will be a much larger funding outpouring over time.
Speaker Change: So, you know, while it's a $42 billion program, indeed, to actually add the 25%, it's significantly larger.
Michael Weening: You succinctly stated that lead times have them adjusting how they think about inventory because we actually dropped our lead times down. They're now at what is our new normal on the appliance side, which is why we're also comfortable with stating very clearly that we're going to return to sequential revenue growth because of the fact that, you know, our lead times are now where they are. The good thing about that is that I constantly get questions from customers that as they clear that first point in decision making, well, we have enough inventory to serve them. That question continues to get asked. I mean, I've probably answered it 10 times this quarter alone.
Speaker Change: We, you succinctly stated that Lead Times has them adjusting how they think about inventory because
Speaker Change: We actually dropped our lead times down. They're now at what is our new normal on the appliance side, which is why we're also comfortable with stating very clearly that we're going to return to the sequential revenue growth because of the fact that...
Speaker Change: You know, are we times are now where they are?
Speaker Change: The good thing in that is that I constantly get questions from customers that...
Speaker Change: As a clear first point on decision-making, will we have enough inventory to serve them? That question continues to get asked. I mean, I've probably answered it 10 times this quarter alone. And my response is the same, though, that we've given to investors also, which is that when we entered the pandemic and faced
Michael Weening: And my response is the same, though, that we've given to investors also, which is that when we entered the pandemic and faced a surge in demand, it was a significant issue because we had 3,200 SKUs. We're now counting around 200 SKUs. We have an incredible supply chain. We're optimized to meet any demand spikes. And so that's great. So we're in great shape there as that changes. And then the interest rates, you know. You succinctly covered interest rates.
Speaker Change: [inaudible]
Speaker Change: And then the interest rates, you know, you succinctly cover it off interest rates. If I'm a private equity investor...
Michael Weening: If I'm a private equity investor, they were investing with abandon through the pandemic, you know, if you had a, as I like to joke, if you had a false, you could raise $20 million and could spell broadband, and people were throwing money willy nilly. Now, what they're starting to do is take a step back and say, "wait a second, we've been at this now for two And in fact, what I'm seeing is that when I go into certain markets, I have more competition than I anticipated.
Speaker Change: They, you know, they were investing with abandon through, through the pandemic, you know, if you had a, as I like to joke, if you had a false, you could raise $20 million and could spell broadband, and people were throwing money willy nilly.
Speaker Change: Now, what they're starting to do is take a step back and say, wait a second.
Speaker Change: We've been at this now for two or three years, and the business model...
Speaker Change: show that I would be getting this amount of ramp, and I'm not achieving that ramp. And in fact, what I'm seeing is when I go into certain markets, I have more competition than I anticipated. But more importantly, the fundamental thesis at the beginning of the pandemic, which is
Michael Weening: But more importantly, the fundamental thesis at the beginning of the pandemic, which is build fiber and they will come and you will win, is actually fundamentally flawed, as we've been stating. So that and the fact that interest rates are higher are making some of them say, wait a second, I need you to go pivot all your attention back to, you know, it's great that you're a good construction company, and that's what a lot of broadband companies are, great construction companies, great network operators, but how are you going to market and sell and win that community and get, you know, do what Tom Bigby has done and get How are you going to do that?
Speaker Change: The point is that the idea that if you build fiber, and they will come and you will win is actually fundamentally flawed, again, which we've been stating. That, and the fact that interest rates are higher are having some of them say, wait a second,
Speaker Change: I need you to go pivot all your attention back to, you know, it's great that you're a good construction company.
Tom Bigby: And that's what a lot of broadband companies are, great construction companies, great network operators. But how are you going to market and sell and win that community and get, you know, do what Tom Bigby has done and get market share that's at 60% and an NPS of 92% and, you know, you
Tom Bigby: You know, shedding off incredible RPU, massive cash flow, and huge margins, or like Aloe's doing. How are you going to go do that? And so that not only illustrates that becomes a reason why they have the conversation.
Michael Weening: And so not only interest rates, that become a reason why they have the conversation, but it also is leading to these management teams coming under significant stress because their investors are saying, "where's the frigging money, right?" And that's great for us. I go back to US Telecom.
Tom Bigby: But it also is leading to these management teams coming under significant stress because their investors are saying where's the friggin money?
Tom Bigby: Right? And that's great for us. I go back to U.S. Telecom. When I was there a year ago, people were kind of, you know, yeah, yeah, whatever, Michael, whatever, what, Michael. But, you know, when I was there, this, this go-around
Michael Weening: When I was there a year ago, people were kind of, you know, yeah, yeah, whatever, Michael, whatever, Michael, but, you know, when I was there this time, there were many of them saying, hey, I'm working with Calix on this, I'm working with Calix on that, because I need to change my business model if I'm going to win. And that's what we've always stated, and it just becomes the impetus to actually have the conversation and realize that the pain's right there. So the interest rates, I would say, are just an impetus to have the conversation about your business model. You need to cross that chasm with us.
Tom Bigby: There were many of them saying, Hey, I'm working with Calix on this, I'm working with Calix on that, because I need to change my business model if I'm going to win.
Tom Bigby: And that's what we've always stated, and it just becomes the impetus to actually have the conversation and realize that the pain is right there. So the interest rates, I would say, are just an impetus to having the conversation that your business model needs to change.
Michael Weening: And then, you know, and that led to the very succinct thing, so I think your third point and that your subs versus infrastructure are, in essence, the same thing. Because if you're winning a shed load of subs, like Aloe is, or Tom Vickie is, or many of our other customers are, who cares about interest rates? Because your margins are so strong, your take rates are so high, and your return on invested capital is so massive.
Tom Bigby: Right? You need to cross that chasm with us.
Speaker Change: And then, you know, and that, which then led to the very succinct thing, so I think your third point, and then your subs versus infrastructure, those in essence are the same thing. Because if you're, if you're winning a shed load of subs...
Speaker Change: Like Aloe is, or Tom Vickie is, or many of our other customers are, who cares about interest rates? Because your margins are so strong, your take rates are so high, your return on invested capital is so massive.
Michael Weening: You don't care. If it was a 20% interest rate, you'd still be investing because your market share is yielding a huge return on investment. And so it's difficult for us to rank it other than, say, George.
Speaker Change: You don't care. If it was a 20% interest rate, you'd still be investing because your market share is yielding a huge return on investment. And so, it's difficult for us to stack rank it other than, say, George.
Michael Weening: All, you're spot on, and it just depends on the customer. And so, you know, and I go back to, well, you know, the quarter's ads. 24 network operators decided to become broadband service providers this quarter.
Speaker Change: All, you're spot-on.
George Charles Notter: And it just depends on the customer.
Speaker Change: And so, you know, when I go back to, well, you know, the quarter's ads, 24 network operators decided to become broadband service providers this quarter. Twenty-four.
Michael Weening: And these are not new companies; these are ones that are deciding that, you know what? I'm going to partner with Calix to actually change my business. [inaudible] That is, that's the market, that's the industry. Got it. And then just one quick one.
Speaker Change: And these are not new companies, these are ones that are deciding that, you know what, I'm going to partner with Calix to actually change my business model.
Speaker Change: And so, that is, that's the market, that's the industry.
George Charles Notter: On lead times, was there more reduction in lead times this quarter versus last quarter? Or have we been at a stasis on lead times all year? And what are we not? You know, we've been in a consistent environment many times this year. And it's... 12-14 weeks. Thank you very much. Great place to hang out.
Speaker Change: Got it. And then just one quick one. On lead times, was there more reduction in lead times this quarter versus last quarter or have we been at a stasis on lead times, you know, all year?
Speaker Change: And what are we on?
Speaker Change: You know, we've been consistent with our meeting times this year, and it's 12 to 14 weeks.
Speaker Change: Thank you very much.
Michael Weening: Thank you. Thank you. Our next question is from the line of Scott Searle with Roth Capital Partners. Please continue with your question. Hey, good morning, guys.
Speaker Change: Thank you. Our next question is from the line of Scott Searle with Roth Capital Partners. Please receive your questions.
Scott Wallace Searle: Thanks for taking my questions. It's nice to see the bottom put in for the second quarter, and we're looking for sequential growth as we go into the back half of the year. Maybe quickly to just hit on a couple of share questions, Mike. It sounds like you're gaining share within the tier twos. I was wondering if you could address that. And then, more specifically, as we look to beat, I know you guys have been working in a consultative manner with many of these.
Scott Wallace Searle: Hey, good morning guys. Thanks for taking my questions. Nice to see the bottom put in for the second quarter and looking for sequential growth as we go into the back half of the year.
Scott Wallace Searle: I'm wondering if you have some early thoughts in terms of what you think the share is going to look like between Tier 1, 2s, and 3s as BEAD funding starts to roll out in 2025. Clearly, you guys would be better positioned with the Tier 3s and Tier 2s, but I'm kind of wondering what your thought process is there in terms of the share gains that they might have within those categories. Lots of complex questions there, so the first one is, with regard to share, the way we think about market share is actually the customers that we're aligned with, whether or not they're taking share. And one of the best examples of that this quarter would be that we had a small customer who grew to become a medium customer. Why?
Speaker Change: Hey, maybe quickly to just hit on a couple of share questions, Mike. It sounds like you're gaining share within the Tier 2s. I was wondering if you could address that. And then more specifically, as we look to BEAT, I know you guys have been working in a constant, you know, consulting with many of these.
Speaker Change: I'm wondering if you have some early thoughts in terms of...
Speaker Change: What do you think share is going to look like between Tier 1s, 2s, and 3s as BEAT funding starts to roll the market in 2025? Clearly you guys would be better positioned with the Tier 3s and Tier 2s, but I'm kind of wondering what your thought process is there in terms of the share gains that they might have within those categories.
Speaker Change: So...
Speaker Change: Thank you. Bye.
Speaker Change: soon.
Speaker Change: Couple complex questions in there. So the first one is with regards to share the way we think about market share is actually
Speaker Change: The customers that we're aligned with, whether or not they're taking share.
Speaker Change: And one of the best examples of that this quarter would be that we had a small customer who grew to a medium customer.
Michael Weening: Because they're taking, they're actually adding subscribers, they're growing their business, and they're winning in the market that they serve. So when we think about market share, we think of it that way. And then on adding subs, one of the things that we talked about, tier two actually went to our small business solution. The way this goes back to the underlying business strategy that we've always articulated, which is that we're uniquely positioned in that we have this very diverse platform that allows us to find a beachhead into a customer and then demonstrate to them what success looks like.
Speaker Change: Thank you.
Speaker Change: Because they're thinking, they're actually adding subs, they're growing their business, and they're winning in the market that they serve. So, when we think about market share, we think of it that way. And then...
Speaker Change: on, you know, adding subs.
Speaker Change: [inaudible]
Speaker Change: One of the things that we talked about that Tier 2 actually went to our small business solution
Speaker Change: The way this goes back to the underlying business strategy that we've always articulated, which is, we're uniquely positioned in that we have this very diverse platform that allows us to find a beachhead into a customer and then demonstrate to them what success looks like.
Michael Weening: So with that one, they are coming under pressure with regard to, I need to improve ARPU, I need to slow churn, I need to grow revenue, and that's why they chose our small business solution. And once the small business solution goes into that customer, now the entire platform's in. So we've hooked into their back office, we've hooked into their business processes, and it's easy for them to continue to expand as they see success.
Speaker Change: So with that one, they, you know, they were, are coming under pressure with regards to I need to improve ARPU, I need to slow churn, I need to grow revenue, and that's why they chose our small business solution. And once the small business solution goes into that customer,
Speaker Change: who, you know, now the entire platform's in. So we've hooked into their back office, we've hooked into their business processes, and it's easy for them to continue to expand as they see success.
Michael Weening: So the key thing about gaining share for us is that once we garner that beachhead, like we have in tier two with small business, we then flood our customer success team into it to help that customer transform their go-to-market strategy, win a whole bunch of new small business customers, and then hopefully, expand with us over time. With regard to BEAT consulting, you know, the way that our BEAT process is radically different from most others.
Speaker Change: So, the key thing about gaining share for us is that once we garner that beachhead like we have in that tier two with small business, we then flood our customer success team into it to help that customer transform their go-to-market strategy.
Speaker Change: win a whole bunch of new small business customers and then hopefully expand with us over time.
Speaker Change: With regards to Beach Consulting...
Speaker Change: You know, the way that our beat process is radically different than most others.
Michael Weening: You saw that in Q1 when we announced the relationship with Ready.net, who has incredible cloud and software tools to help broadband service providers actually understand BEAT, and so we're hand in glove. So while others are, you know, like Corey said, touting, hey, I got some orders in, I got some orders in, we're actually sitting down beside them, putting in their BEAT submissions, helping them articulate it. We've got a team, a big team of people who do it, plus our Ready partnership, to ensure that we are side by side in planning with them, not only in how to win and how they pitch the local state office, but then also what the implications are in terms of timeline. And that's through the second half; we'll get clearer and clearer.
Speaker Change: You saw that in Q1 when we announced the relationship with Ready.net.
Speaker Change: who has incredible cloud and software tools to help broadband service providers actually understand me.
Speaker Change: And so we're hand-in-glove. So while others are, you know, Cory said, touting, hey, I got some orders in, I got some orders in. We're actually sitting down beside them, putting in their BEAT submissions, helping them articulate it. We've got a team, a big team of people who do it, plus our Ready partnership.
Speaker Change: to ensure that we are side-by-side in planning with them not only in how to win and how they pitch the local state office
Speaker Change: [inaudible]
Michael Weening: With regards to who's going to win Tier 1, Tier 2, Tier 3, the reality is that one of the things you've heard a lot of grousing about is that if this program was actually centralized in Washington, D.C., and everything was through a single office centrally, By having this as a state-by-state, territory-by-territory program, the ones who are advantaged are the ones who are local. And you hear that in the, when I'm out in the, you know, speaking to the different groups, you hear a lot of that, is that as these are state-run projects, they really want companies who care about the local state, whether that's a for-profit or a cooperative, to actually be that voice in that office and win the money, because they know that they're not in it just to kind of scarf up a bunch of money and pad a P&L like other programs have in the past.
Speaker Change: The reality isn't one of the things you've heard a lot of grossing about.
Speaker Change: is that if this program was actually centralized in Washington, D.C. and everything was through a single office...
Speaker Change: centrally, then the bigger companies would definitely have a significant advantage because they'd be able to do what they do well and they'd put a massive lobbying arm into D.C. and they could influence outcomes.
Speaker Change: By having this as a state-by-state, territory-by-territory program, the ones who are advantaged are the ones who are local. And you hear that in the, when I'm out in the, you know, speaking to the different groups, you hear a lot of that, is that as these are state-run projects,
Speaker Change: They really want companies who care about the local state, whether that's a for-profit or a cooperative, to actually be that voice in that office and win the money.
Speaker Change: Because they know that they're not in it just to kind of scarf up a bunch of money and pad a P&L like other programs have in the past. They're actually, they care about the community, they're in the community, they're in the state, and they're there for the long term.
Michael Weening: They're actually, they care about the community, they're in the community, they're in the state, and they're there for the long term. And so while that has definitely been one of the reasons why you've seen a slowdown in the B process, at the same time, I think that very democratic process, which has been diffused over to the different states, is really powerful, and frankly, I think it advantages the companies that care about the state. So, Scott, just to amplify one thing about Michael, you know, BEAD is just a single program. Yes, it's a big one, but there are lots of government programs out there, and a lot of state money.
Speaker Change: And so, while that has definitely been one of the reasons where you've seen a slowdown in the BEAD process, at the same time, I think that very democratic process
Speaker Change: and that's been diffused out to the different states is really powerful and frankly I think it advantages the companies that care about the state.
Speaker Change: Scott, just sort of amplify one thing on Michael.
Scott Wallace Searle: You know, BEAT is just a single program. Yes, it's a big one, but there are lots of government programs out there, a lot of state money.
Cory J. Sindelar: Our customers do very well, and Calix does very well as a result, and has done so for the last 20 years. And taking advantage of these government programs, we're going to do just fine with this BEAD one as well. That's it.
Speaker Change: Our customers do very well, and Calix does very well as a result, and have so for the last 20 years of taking advantage of these government programs. We're going to do just fine with this P1 as well.
Scott Wallace Searle: So, not to put words in your mouth, but it sounds like your customers, disproportionately to their current broadband share, should participate pretty well in being in other programs going forward. Is that correct? That's true, Ryan. And indeed, in particular, you've got to think again. These are hard locations, right? These are the most rural parts of the country.
Speaker Change: That's it. So not to put words in your mouth, but it sounds like your customers, disproportionately to their current broadband share, should participate pretty well in being in other programs going forward. Is that correct?
Ben: That's true, Ryan, and in Beacon in particular, you've got to think, Ben, these are hard locations, right? These are the most rural parts of the country.
Cory J. Sindelar: And so these are the ones that are done last. And so it's going to be somebody with a community-minded perspective willing to make those investments to go after those hard-to-get locations. So we think that'll disproportionately lead smaller football players to go after those locations. Great. And lastly, if I could, on a follow-up, you know, I think last quarter you talked about, right, certainly 24 is a transition year, but it seemed like there were enough green shoots that, at 25, you'd be shaping up to get back into the targeted 10 to 15 percent growth range.
Ben: And so these are the ones that are done last.
Ben: And so it's going to be somebody with a community-minded...
Speaker Change: perspective, willing to make those investments to go after those hard-to-get locations. So we think that'll disproportionately lead to the smaller football players to go after those locations.
Speaker Change: Great. And last, if I could, on a follow-up.
Speaker Change: You know, I think last quarter you talked about, right, certainly 24 is a transition year, but it seemed like there was enough green shoots that...
Speaker Change: 25 you'd be shaping up to get back into the targeted 10 to 15 percent growth range. I'm wondering if you could update your thoughts on that front and also kind of fold bead into the conversation. Cory you said look if we get you know 10 to 15 states
Cory J. Sindelar: I'm wondering if you could update your thoughts on that front and also kind of fold BEAD into the conversation. Cory, you said, look, if we get, you know, 10 to 15 states or territories, you'd be feeling pretty good about the BEAD contribution into 2025. Now we're at 20 states. You've got another 36 states that have completed nine out of 10 steps.
Corey: or territories, you'd be feeling pretty good about the BEAD contribution into 2025. Now we're at 20 states. You've got another 36 states that have completed nine out of 10 steps. So by the time we have this call.
Scott Wallace Searle: So by the time we have this call in the October timeframe, you could have doubled that number. So I'm kind of wondering how BEAD kind of layers into that thought process for growth in 25. Thanks.
Speaker Change: In the October time frame, you know, you could have double that number. So I'm kind of wondering how BEAD kind of layers into that thought process for growth in 25. Thanks.
Cory J. Sindelar: Thanks, Scott. What we're seeing here on the applied side is that we're establishing a new normal, where our smaller orders are seeing smaller order sizes but many, many more of them. There's a healthy trend with us planting new footprints, as evidenced by the 24 new customers. When you combine that with the robust demand for our platform cloud and managed services, as noted by the 9% sequential growth and the signing of our largest 5G 11 this quarter in Q3.
Speaker Change: Thanks Scott. What we're seeing here on the applied side is that you're establishing a new normal where our smaller orders, you know, seeing smaller order sizes but many many more of them.
Speaker Change: There's a healthy trend with us landing new footprint as evidenced by the 24 new customers.
Speaker Change: When you combine that with the robust demand of our platform cloud and managed services, as noted by the 9% sequential growth,
Speaker Change: And the signing of our largest cloud deal ever this quarter, in Q3, I think what you're seeing is we've put the bottom in and now we're going to return to that sequential revenue growth.
Cory J. Sindelar: Yeah, I think we're, I think what you're seeing is we've put the bottom in, and we're going to return to that sequential revenue growth. What you're poking at is what that quarterly growth rate look like from here on out. I think we're going to take a very pragmatic view about it, given the fact that we've had the last few quarters on the employment side, and so we will be cautious going forward.
Speaker Change: What you're poking at is, what does that quarterly growth rate look like from here on out?
Speaker Change: I think we're going to take a very pragmatic view about it, given the fact that we've had the last few quarters on the employment side, and so we will be cautious going forward.
Speaker Change: I think if we look out at the next several quarters, we had talked about a quarterly growth rate of, you know, 1 to 5 percent.
Cory J. Sindelar: I think if we look out for the next several quarters, we talked about a quarterly growth rate of, you know, 1 to 5 percent. We'll be at the lower end of that range here for the next several quarters.
Speaker Change: We'll be at that lower end of that range here for the next several quarters.
Cory J. Sindelar: And as we progress through 2025, as we start seeing contributions from customer acquisition, as we see the large and medium customers continue to return, as we start seeing some of the bead shipments, not just orders, but shipments. We will move to, let's call it, the middle of that range by the end of 2025.
Speaker Change: And as we progress through 2025,
Speaker Change: As we start seeing contributions from the customer acquisitions.
Speaker Change: As we see the large and medium customers continue to return back, as we start seeing some of the bead shipments, not just orders, but shipments.
Speaker Change: We will move to, let's call it, the middle of that range by the end of 2025. And so there'll be a general progression there as those revenue streams layer into this bottom that we're creating right now.
Michael Weening: And so there'll be a general progression there as those revenue streams layer into this bottom that we're creating right now. Yeah, a good example of that would be, you know, we won a really incredible customer in Q2 last year. They were at the upper end of small, definitely a crossover in the medium, and they're an innovator with a huge amount of money behind them. But it took them some time to actually migrate their way over to Calix.
Speaker Change: And a good example of that would be, you know, we won a...
Speaker Change: Really incredible customer in Q2 last year.
Speaker Change: They were at the upper end of small, will definitely cross over in the medium. And they are an innovator with a huge amount of money behind them.
Speaker Change: But it took them some time to actually migrate their way over to Calix.
Michael Weening: You know, they had to get rid of some of their existing inventory, those different elements, and Q2 was the first time we started to see, actually, Q2 this year, you know, a year later, doing all that work with them, was where we finally started to see the orders fly. So, you know, the key thing in all of this is that, you know, we can have a short-term view of chasing this, but we're actually, as we stated, on and on, you know, every single time.
Speaker Change: You know, they had to get rid of some of their existing inventory, those different elements.
Speaker Change: And Q2 is the first time we started to see, actually Q2 this year, you know, a year later doing all that work with them is where we finally started to see the orders fly. So, you know, the key thing in all of this is that...
Speaker Change: You know, we can have a short-term view of chase this, but we're actually, as we've stated, on and on, you know, every single time. Our whole goal is to use this disruptive time whenever, when things are popping up, falling apart, or the disruption's happening.
Michael Weening: Our whole goal is to use this disruptive time whenever, when things are popping, falling apart, where the disruption's happening, to cross that chasm, win a whole bunch of new customers, and then basically set in place by winning those beachheads, as I mentioned, with that Tier 2. So that becomes the beginning of an expansion of the footprint of an entire new customer. And so this footprint attack that we're on will not, you know, yield results in this quarter or next quarter, although we have hit the bottom, and we're going to now go sequentially.
Speaker Change: To cross that chasm, win a whole bunch of new customers, and then basically set in place by winning those beachheads, as I mentioned with that Tier 2, so that becomes the beginning of an expansion of the footprint of an entire new customer.
Speaker Change: And so, this footprint attack that we're on...
Speaker Change: will not, you know, has not yielded in this quarter or next quarter, although we have hit the bottom and we're going to now go sequentially. But we're laying those early green shoots in net new accounts to win for the long term.
Michael Weening: But we're laying those early green shoots in net new accounts to win for the long term. And that's what our entire leadership team, our entire field team, is what they're focused on. We're thinking about, you know, 2025 and 2026. Like, you know, the work that we're doing right now will pay off in a huge way. Again, it's evidenced by the number of logos that we've won this quarter.
Speaker Change: And that's what our entire leadership team, our entire field team, is what they're focused on, is we're thinking about, you know, 2025 and 2026, like, you know, the work that we're doing right now will pay off in a huge way, again, as evidenced by the amount of logos that we went over this quarter.
Speaker Change: Great, thank you.
Timothy Paul Savageaux: Great, thank you. Our next question is from the line of Tim Savage with Northland Capital Markets. Hey, good morning.
Speaker Change #101: Our next question is from the line of Tim Savage with Northland Capital Markets. Please proceed with your questions.
Timothy Paul Savageaux: I wanted to stay with Bede for a second here, as this opportunity maybe comes into greater view or greater focus with the approvals that we've seen. When I understand the kind of mechanics from a customer standpoint, I wonder if you, you know, have any updated thinking on what B could mean to the company just from an overall revenue opportunity standpoint. Right, we've got a $40 billion program where there are, I guess the grantees are supposed to bring some money to the table as well, so maybe that's even a little bigger.
Timothy Paul Savageaux: Hey, good morning. I wanted to stay with Bede for a second here. As this opportunity maybe comes into greater view or greater focus,
Speaker Change #101: with the approvals that we've seen.
Speaker Change #103: And I understand the kind of mechanics from a customer standpoint. I wonder if you
Speaker Change: you know have any updated thinking on
Speaker Change: You know what B could mean to the company just from an overall revenue opportunity standpoint
Speaker Change #106: We've got a $40 billion program where there's...
Speaker Change: I guess the grantees are supposed to bring some money to the table as well, so maybe that's even a little bigger.
Timothy Paul Savageaux: I think you guys have talked about kind of a high single-digit percentage exposure from a kind of access infrastructure and network standpoint, but, You know, when we get, you know, rolling up to something, you know, up to something significant with deeds, what do you think that could mean to Calix from a revenue perspective on an annual basis? So Tim, that's a great question, and I think it'll be a significant number. You've laid out the math, right? So it's a $42 million program. There's a 25% chance of that happening.
Speaker Change #100: I think you guys have talked about kind of a high single-digit percentage exposure from a...
Speaker Change #100: kind of access infrastructure and
Speaker Change #100: From a network standpoint, but...
Speaker Change #105: You know, what do you, when we get, you know, rolling up to something, you know, up to something significant with DEED, what do you think that could mean to Calix from a revenue perspective on an annual basis?
Speaker Change #105: So Tim, that's a great question, and I think it'll be a significant number, you've laid out the math, right? So it's a $42 million program, there's a 25% match.
Cory J. Sindelar: So you're looking at over $50 billion of capital being put to work. It'll be over a 5, 6, 7, 8 year time frame, and we're going to start seeing the beginning of that in 2025.
Speaker Change #102: So you're looking at over 50 billion dollars of capital being put to work.
Speaker Change #102: It'll be over a 5, 6, 7, 8 year time frame.
Speaker Change #102: And we're going to start seeing the beginning of that in 2025, so I think it'll take some time to get rolling in full steam.
Cory J. Sindelar: So I think it'll take some time to get rolling in full steam. You know, our expected amount that Calix can serve is about 8% of that number. So you take 8% of 50, you know, so it's a very large amount of money that'll come over the next, you know, 5, 6, 7, 8 years. And so you can kind of put your own kind of ramp on it when it gets to full steam.
Speaker Change #102: You know, our expected amount that Calix can serve is about 8% of that number.
Speaker Change #102: So you take 8% of 50, you know, so it's a very large amount of money that'll come over the next, you know, 5, 6, 7, 8 years.
Speaker Change #102: And so you kind of put your own kind of ramp on it to when it gets to that full steam.
Cory J. Sindelar: And I think we'll just do very well. If past experience with these government programs is any indication and the bias towards smaller service providers serving those rural areas is any indication, Calix will get more than its fair share of those processes. Great. Thanks. I'm sorry, but I could follow up.
Speaker Change #102: And I think we'll just do very well if it's past experience on these government programs is any indication and the bias towards smaller service providers serving those rural areas is any indication Calix will get its fair share of those proceeds.
Speaker Change #107: Great. Thanks. I'm sorry, if I could follow up.
Timothy Paul Savageaux: Trying to combine a couple of things here, but really starting with the new large cloud order that you mentioned, if you had any color on that with regard to kind of type or size of service provider, you know, new or current customer. And I guess I ask that in the broader context of the UPTIC and RPOs. And, you know, A, it sounds like, given your earlier comment, you said maybe expect that to continue, with this new order contributing, but, you know, if we look at the drivers of RPOs.
Speaker Change #108: Try to combine a couple of things here but really starting with the the new large cloud order that you mentioned if you had any color on that with regard to kind of type or size of service provider you know new or current customer
Speaker Change #108: And I guess I ask that in a broader context of the UPTIC and RPOs.
Speaker Change #109: And, you know, A, it sounds like, given your earlier comment, you said maybe expect that to continue.
Speaker Change #110: with this new order contributing, but if we look at the drivers of RPOs,
Timothy Paul Savageaux: You know, it seems to me it's probably three, you know, big, big, I won't say one-off, but big orders like that. New customers, which you mentioned, and also the shift in current customers towards additional platforms. Of those three factors, I guess, how did you see that play out in Q2 with the increase in RPOs, and what would you expect in Q3?
Speaker Change #111: It seems to me it's probably three big, I won't say one-off, but big orders like that. New customers, which you mentioned, and also the shift in current customers towards additional platforms.
Speaker Change #112: Of those three factors, I guess, how did you see that play out in Q2 with the increase in RPOs and what would you expect in Q3?
Cory J. Sindelar: Yeah, so as it relates to the RPO of those factors you outlined, it's consistent with what we've been saying. The number one factor for the increase in RPO is going to be the subscriber additions that our customers are adding. All right, so they're out there taking share, and growing their footprint. The second one is that they expand your use cases and the amount of our products that we offer. So they're expanding the actual platform, cloud-advantaged services. And the last contributor is new customer acquisition. It takes them a while to build up.
Speaker Change #113: Yeah, so as it relates to the RPO of those factors you outlined, it's consistent with what we've been saying.
Speaker Change #114: The number one factor for the increase in RPO is going to be the subscriber additions that our customers are adding.
Speaker Change #115: All right, so they're out there taking share, growing their footprint.
Speaker Change #115: The second one is they expand your use cases and the amount of our products that we offer. So they're expanding the actual platform, cloud-advantaged services. And the last contributor is new customer acquisition. It takes them a while to build up to it.
Cory J. Sindelar: And so this large contract was an existing customer. It was a renewal. Thank you to existing customers and in Q3. You get further down the stream, and when they come back in, they've grown their footprint over the last three years to a much larger size. And so when they renew that contract for the next three years on that larger base, it just tends to grow. So this is what you're seeing as these contracts come up.
Speaker Change #115: And so this large contract with an existing customer, it was a renewal.
Speaker Change #115: In Q2 and in Q3, existing customers.
Speaker Change #115: You get to further down the stream and when they come back in they've grown their footprint over the last three years to a much larger size and so when they renew that contract for the next three years on that larger base it just tends to grow.
Cory J. Sindelar: So that's the biggest genesis of it, not only did they take more of our platforms, but it was the size of the base that they're applying that contract over. So let me expand on that. So I want to use these two deals as explicit examples of the land and expand strategy. So the biggest deal we've ever done in Q, you know, we had a record deal in Q2, and as Cory said, that was a net new deal with a customer committed over time. Why did they do that?
Speaker Change #115: So this is what you're seeing as these contracts come up, so that's the biggest genesis of it is not only do they take more of our platforms, but it's the size of base that they're applying that contract over. So let me expand out on that. So I want to use these two deals.
Speaker Change #115: as explicit examples of
Speaker Change #115: The Land and Expand strategy.
Speaker Change #115: Right.
Speaker Change #115: So, the biggest deal we've ever done in Q, you know, that we, we had a record deal in Q2, and as Cory said, that was...
Corey: and that new deal that a customer committed over time.
Michael Weening: They've been working with us for a long time, they've been adding subscribers, they see the value of the platform, and then they made a pretty significant commitment to us over the long term. But their previous cloud contracts were tiny, right? The one that we closed last week was the same idea, where it was essentially like a pay-as-you-go, working together, laying out the business model, identifying what the opportunity was, and then as that customer enjoyed significant success, we re-upped it into a massive contract.
Corey: Why did they do that? They've been working with us for a long while, they've been adding subscribers, they see the value of the platform, and then they made a pretty significant commitment to us over the long term.
Speaker Change #116: But their previous cloud contacts were tiny.
Speaker Change #116: The one that we closed last week.
Speaker Change #116: was the same idea, where it was essentially like a pay-as-you-go working together, laying out the business model, identifying what the opportunity is, and then as that that customer enjoyed significant success, we re-upped it into a massive contract.
Michael Weening: And so that's what you have to think about the way that we do things. Sometimes we say, hey, we added a new customer, and, you know, like that small business customer, the commitment wasn't significant. But the commitment was significant mentally because they went after ours, they landed our platform in their business, and now we're going to help them transform how they win small businesses. And what will happen is that, once we demonstrate that they add a ton of subscribers, they'll go, hey, we want a better price. Therefore, we understand our volumes, and let's actually do a proper contract. And boom, you have another record.
Speaker Change #116: And so that's what you have to think about on the way that we do these.
Speaker Change #116: Like that small business customer, the commitment wasn't significant, but the commitment was significant mentally because they landed our platform into their business, and now we're going to help them transform how they win small businesses.
Speaker Change #116: And what will happen is...
Speaker Change #116: That will then lead to...
Speaker Change #116: At some point in the, once we demonstrate that they add a ton of subs.
Speaker Change #116: They'll go, hey, we want a better price, therefore we understand our volumes, and let's actually do a proper contract, and boom, you have another record contract. And so this business requires patience.
Michael Weening: And so this business requires patience. This business requires consistency. This business requires us sitting beside our customers, their CEOs, and their leadership teams, helping them win. And we're the only ones doing it, frankly. No one else is.
Speaker Change #116: This business requires consistency. This business requires us sitting beside our customers, their CEOs and their leadership teams, helping them win.
Timothy Paul Savageaux: Everyone else is popping into the office and saying, "Here's the PO, buy my box, you know; I'll see you in a little while. We're going to win because our customers are going to win. I appreciate all that color and... Lots of them for me, and you mentioned that the large and medium segments were, you know, less weak than you anticipated, I think probably close to down 20% versus 50. You know, conversely, that implies some weakness among the smaller carriers that maybe you didn't expect, and I know there's the shifting of the Carrier classification there, which likely has some impact, but I wonder if you can, you know... Give us a little more color on that dynamic amongst the smaller carriers and what you saw there.
Speaker Change #116: And we're the only ones doing it, frankly.
Speaker Change #116: No one else is. Everyone else is popping into the office and saying here's the PO, buy my box, you know, I'll see you in a little while.
Speaker Change #116: We're going to win, because our customers are going to win.
Speaker Change #117: But I appreciate all that color and...
Speaker Change #118: last one for me and you mentioned
Speaker Change #119: that, you know, the large and medium segments were, you know...
Speaker Change #120: less weak than you anticipated, I think probably close to down 20% versus 50. You know, conversely, that implies some weakness among the smaller carriers that maybe you didn't expect. And I know there's the shifting of the...
Speaker Change #121: Terrier classification there likely has some impact, but I wonder if you can, you know...
Speaker Change #122: Give us a little more color on that dynamic amongst the smaller carriers and what you saw there.
Timothy Paul Savageaux: And that's it for me, thanks. Yeah, you bet. The lower appliance revenue from our smaller customer segment is really from the normalizing of orders due to our shortened lead times and creating that base for what we're seeing as the new normal.
Speaker Change #123: And that's it for me, thanks.
Speaker Change #124: Yeah, you bet. The lower appliance revenue from our smaller customer segment is really from the normalizing of orders due to our shortened lead times.
Speaker Change #124: and creating that base for what we're seeing as the new normal.
Speaker Change #124: Thanks.
Cory J. Sindelar: Thanks. Thank you. Our next question is from the line of Christian Schwab with Craig Halum Capital. I'm pleased to see you with your question. Hey, great.
Speaker Change #125: Thank you. Our next question is from the line of Christian Schwab with Craig Hanlon Capital. Please receive your questions.
Christian David Schwab: I think we all understand, you know, by this point, the platform sales process of your company and the competitive advantage you have there, but, in reality, when we go back to Bede, on our map, you have a little bit over 2,100 different service providers in the Tier 2, Tier 3, Tier 4 category. And so when that feed money is released, obviously, you'll have an expanded opportunity for customer dialogue on the platform.
Christian David Schwab: Hey, great.
Speaker Change #127: Just, I think we all understand, you know, by this point, the platform sales process of...
Christian David Schwab: of your company and the competitive advantage you have there.
Speaker Change #128: In reality, when we go back to Bede, right, on our map, you have...
Speaker Change #129: a little bit over 2,100 different service providers.
Speaker Change #129: in the tier two, tier three, tier four category. And so when that feed money is released, obviously you'll have an expanded opportunity for customer dialogue on a platform. But just as far as feeds and feeds,
Christian David Schwab: But just as far as speeds and feeds, equipment, right? You should, over time, as that money is rolled out and deployed, regardless of whether they buy your platform software... You should see a material increase in equipment orders, shouldn't you?
Speaker Change #129: Equipment.
Speaker Change #130: Right? You should, over time, as that money is rolled out and deployed, regardless of whether they buy your platform software, you should see a material increase in equipment orders, shouldn't you?
Michael Weening: Yes, that's true, Christian. But more importantly, I understand that that hardware is the ability for us then to follow that up with the premise, and our So we look at BEAT as kind of an acceleration to be able to pull forward our platform cloud and managed services model. So while there will be an increase in hardware or appliance revenue, the real, real positive is the fact that it pulls forward our business model. Yeah, understood. I just wanted to make sure I was thinking about it correctly.
Speaker Change #130: Yes, that's true, Christian, but more importantly, understand that that hardware is the ability for us then to follow that up with the premises and our...
Speaker Change #130: Platform Cloud and Managed Services.
Speaker Change #130: So we look at BEAT as kind of an acceleration to be able to pull forward our platform cloud and managed services model. So while there will be an increase in hardware or appliance revenue, the real, real positive is the fact that it pulls forward.
Speaker Change #130: Our business model.
Speaker Change #133: Yeah, understood. I just wanted to make sure I was thinking about it correct. That's it. Thank you.
Christian David Schwab: That's it. Thank you. Thank you. We've reached the end of the question and answer session, and I'll turn the call over to Jim Fanucchi for closing remarks. Thank you, Rob. Calix will participate in several investor events during the third 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 website.
Speaker Change #130: Thank you. We've reached the end of the question and answer session, and I'll turn the call over to Jim Fanucchi for closing remarks.
Jim Fanucchi: Thank you, Rob. Calix will participate in several investor events during the third quarter and information about these events, including the dates and times and publicly available webcasts, will be posted on the events and presentations page for our investor relations.
Jim Fanucchi: Once again, thank you to everyone on this call and webcast for your interest in Calix and for joining us. This concludes our conference call. Have a good day. Thank you. Thank you for everyone's participation today. You may now disconnect your lines at this time.
Speaker Change #131: Once again, thank you to everyone on this call and webcast for your interesting knowledge and for joining us.
Speaker Change #132: This concludes our conference call. Have a good day.
Speaker Change #131: Thank you. Thank you for everyone's participation today. You may now disconnect your lines at this time.