Q2 2025 Calix Inc Earnings Call
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Operator: The question and answer session will follow the formal presentation.
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Operator: Please note this conference is being recorded.
Nancy Fazioli: I will now turn the conference over to Nancy Fazioli, VP of Investor Relations.
Operator: Thank you. You may begin.
Greetings, welcome to the kallik second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the former presentation. If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to, Nancy fazioli VP of investor relations. Thank you. You may begin.
Daryl: Thank you, Daryl.
Michael Weening: And good morning, everyone. Thank you for joining our second quarter 2025 earning Today on the call we have President and CEO Michael Weening and Chief Financial Officer Cory Sindelar.
Speaker Change: Thank you, Daryl and good morning everyone. Thank you for joining our second quarter 2025 earnings call.
Michael Weening: 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 also posted in the investor relations section of the Calix website.
Nancy Fazioli: Today's conference call will be available for webcast replay in the investor relations section of our website. Before I turn the call over to Michael for his opening remarks, I want to remind everyone that on this call we will refer to forward-looking statements. Including all statements the company will make about its future financial and operating performance, growth strategy, and market outlook, and that 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 2025 letter to stockholders.
Speaker Change: Today on the call, we have president and CEO Michael weaning, and Chief Financial Officer, Corey sindelar as a reminder. Yesterday, after the market closed callix issued, a news release which was furnished on a Form 8K, along with our stockholder letter and also posted in the investor relations section of the calls website.
Speaker Change: Today's conference call will be available for webcast Replay in the investor relations section of our website.
Speaker Change: Before I turn the call over to Michael, for his opening remarks, I want to remind everyone. That on this call, we will refer to forward-looking statements.
Speaker Change: Including all statements. The company will make about its future financial and operating performance growth strategy and Market Outlook. And that actual results May differ materially from those contemplated by these forward-looking statements,
Nancy Fazioli: and in the annual and quarterly reports filed with the SBA.
Nancy Fazioli: Calix assumes no obligation to update any forward-looking statements, which speak only as of their release. Also in this conference call, we will discuss both GAAP and non-GAAP financial Reconciliation of GAP to Non-GAP Measures is included in the second quarter 2025 letters document.
Speaker Change: Factors that could cause actual results and Trends to differ materially are set forth in the second quarter, 2025 letter to stockholders and in the annual and quarterly reports filed with the SEC.
Alex assumes. No obligation to update. Any forward-looking statements which speak only as of their respective date.
Michael Weening: Unless otherwise stated, all financial information referenced in this call will be not Thank you Nancy. As I stated in our last earnings call, the investments we made in 2024 to manage through the post-pandemic period are yielding results and the market is evolving as we predicted. Cory will cover our exceptional second quarter, which is a testament to our long-term strategy, our Calix team, the incredible customers we serve, and the partners who support us.
Also, in this conference call, we will discuss both gaap and non-gaap financial measures. The reconciliation of gaap to non-gaap measures is included in the second quarter of 2025 letters stockholders. Unless otherwise stated all financial information referenced in this call will be non-gaap
Michael Weaning: With that Michael, please go ahead.
Michael Weaning: Thank you, Nancy. As I stated in our last earnings, call the Investments. We made in 2024 to manage through the post-pandemic, period are yielding results and the market is evolving as we predicted.
Michael Weening: As I continue to state, the industry is at a crossroads. A broadband provider must decide if they will retain the legacy mindset of a speed-based network operator who tries to cost-cut their way to growth while being commoditized. As a home pass is not a measure of success, as it does not guarantee a revenue generating subscriber. While the successful broadband provider is the one that delivers incredible experiences across all segments, thereby establishing a brand that is loved by the communities they serve. The result is higher revenue-proof customer across all segments, residential, business, and municipality. Higher net promoter scores would shield customer loyalty and lower churn.
Speaker Change: Corey will cover our exceptional second quarter which is a testament to our long-term strategy, our collects team, the incredible customers, we serve, and the partners who support us.
Speaker Change: As I continued to State, the industry is at a Crossroads, a Broadband provider must decide. If they will retain the Legacy mindset of a speed-based network, operator, who tries to cost cut their way to growth. While being commoditized as a home pass, is not a measure of success. As it does not guarantee a revenue generating subscriber.
Speaker Change: While the successful Broadband provider is the 1 that delivers incredible experiences across all segments, thereby establishing a brand that is loved by the communities. They serve
Michael Weening: That experience-based success is what Calix enabled, as we always think, subscriber in, not network out. Our mindset is grounded in the experiences beyond the undifferentiated speed of a pipe via our unique Appliance-Based Platform, Cloud, and Managed Services model that helps our customers transform with the support of our industry-leading customer success. Our press releases frequently highlight our customer's ability to use differentiated experiences to deliver value for members and investors, as evidenced by a discussion I had with a medium sized customer last month. That customer launched SmartBiz in late 2024, and saw a 250% increase in revenue per small business subscriber by delivering a better experience.
Speaker Change: the result is higher Revenue per customer across all segments, residential business, and municipality higher, net promoter scores, which yield customer loyalty and lower churn.
Speaker Change: that experience based success is what calls enabled as we always think, subscriber in not Network out,
Speaker Change: Our mindset is grounded in the experiences beyond the undifferentiated speed of a pipe via our unique.
Speaker Change: Appliance based platform cloud and managed Services model that helps our customers transform with the support of our industry-leading. Customer success teams.
Speaker Change: Our press releases frequently highlight, our customers ability to use differentiated experiences to deliver value for members, and investors as evidenced by a discussion. I had with a medium-sized customer last month.
Michael Weening: Experiences are the future of broadband, and our platform is unique in that it can address residential, small business, MDU, and municipal needs with the same appliances, cloud, and managed services.
That customer launched. Smart Biz in late 2024 and saw a 250% increase in Revenue per small business subscriber by delivering a better experience.
Michael Weening: Which brings me to the second, even larger disruption that the world is paying attention to. Artificial Intelligence. Since late 2023, our team has believed that the long term impact of AI is significant and represented the next critical component of the Calix platform. More importantly, we have ensured that our teams do not underestimate the pace of change. This is not a normal technology curve. The pace of change in AI is staggering. The difference between short-term and long-term is going to be radically shorter than any technology before it. As evidenced by the fact that Netflix took a decade to get to 100 million subscribers, while Chat GPT took two months is now approaching a billion users.
Cloud and managed services.
Speaker Change: Which brings me to the second even larger disruption that the world is paying attention to.
Artificial intelligence.
Speaker Change: Since late 2023, our team has believed that the long-term impact of AI is significant and represented. The next critical component of the callus platform. More importantly, we have ensured that our teams do not underestimate the pace of change. This is not a normal technology curve. The pace of change in AI is staggering
Michael Weening: It is useful to note that both Netflix and Chat GPT stand on the shoulders of the platform known as the internet.
Speaker Change: The difference between short-term and long-term is going to be radically shorter than any technology before it as evidenced. By the fact that Netflix took a decade to get to 100 million subscribers. While Chachi BT took 2 months, is now approaching a billion users.
Michael Weening: Since 2007, we have been investing in our platform, cloud, and managed services to transform the entire broadband market. In 2016, we launched our second generation platform, which introduced several key components. to Operating Systems for Network and Premises Appliances that are abstracted from the chips and enable local applications with rich telemetry and policy management capabilities. We also introduced our Persona-based cloud and the Managed Services Model, which now serve residential, small business, MDU, and municipal use cases on the same appliance. We have invested more than 15 years and almost $2 billion into our platform. As of the second quarter, we have enabled 1,116 broadband providers to deliver a differentiated experience to ensure their brand is front and center as they delight the communities they serve, including a new large cloud customer who selected us in the quarter.
Speaker Change: It is useful to note that both Netflix and chat gbt stand on the shoulders of the platform known as the internet.
Since 2007, we have been investing in our platform.
Cloud and managed services to transform the entire Broadband Market.
in 2016, we launched our second generation platform, which was which introduced several key components
Speaker Change: To operating systems for network and premises appliances. There are abstracted from the chips, enable local applications with Rich Telemetry and policy management capabilities. We also introduced our Persona based cloud and the managed Services model which now, serve residential, small business MDU and municipal use cases on the same appliances.
Speaker Change: We have invested more than 15 years in almost 2 billion dollars into our platform.
Michael Weening: In late 2023, we recognized the emergence of AI would be an incredible opportunity to address the largest constraint that our customers face, the capacity to transform across operations, marketing and service. To meet that need, we began investing in our third generation of the platform, and in second quarter, it went into pre-production for a second half launch in 2025, beginning with the upcoming release of our third generation mobile application in August, Command IQ, which is a valuable brand portal to end subscribers. The third-generation Calix platform has three goals. First, we expand our platform, cloud, and managed services to allow us to meet the needs of local geographies through sovereign data.
Speaker Change: As of the second quarter, we have enabled 1,116 Broadband providers to deliver a differentiated experience to ensure their brand is front and center. As they Delight the community, they serve including a new large Cloud customer who selected Us in the quarter.
Speaker Change: In late 2023, we recognized the emergence of AI would be an incredible opportunity to address the largest constraints that our customers face the capacity to transform across operations marketing and service.
To meet that need we began investing in our third generation of the platform and in second quarter, it went into pre-production for a second half launched in 2025 beginning with the upcoming release of our third generation mobile application in August command IQ which is a valuable brand portal to end subscribers.
Speaker Change: The third generation collects platform has 3 goals.
Michael Weening: Second, we gained the ability to serve large customers with private classes. Last and most important, we evolve our platform architecture to speed our capabilities with agentic AI across our solutions to allow the Calix team to move from success advice that a customer may or may not implement to success advice enabled through execution capacity with a legion of Calix AI agents. While we remain the only organization in this industry with a substantial investment in customer success teams to support transformation, it does not overcome the very real capacity challenge that our customers face. For example, many leaders prioritize new installs over adding a new experience campaign, such as outdoor Wi-Fi.
Speaker Change: First, we expand our platform cloud and managed services to allow us to meet the needs of local geographies, through Sovereign data centers.
Speaker Change: Second, we gain the ability to serve large customers with private clouds.
Speaker Change: Last, and most important, we evolve our platform architecture to speed our capabilities with agentic AI across our solutions, to allow the Cal team to move from success advice that a customer may or may not Implement to success advice enabled. Through execution capacity with a legion of Cal AI agents.
Speaker Change: While we Remain, the only organization in this industry with a substantial investment in customer success teams to support transformation. It does not overcome overcome, the very real capacity challenge that our customers face.
Speaker Change: For example, many leaders, prioritize new installs, over adding a new experience campaign such as outdoor Wi-Fi.
Michael Weening: Despite the very real truth that this campaign could add $10 to $50 of incremental revenue per month per subscriber and is wildly sticky, which reduces churn. They do not have the marketing capacity to build an ex... Nor installer capacity as they have not embraced the high satisfaction driving self-install model. Agentic AI changes that as it will enable our customers to move faster, a force multiplier for action. Calix AI agents learning across our unique end-to-end platform and aligned with our customer success teams will allow a capacity-constrained customer to leap over the cap. Our fast-growing legion of agents will speed opportunities to simplify, which improves margin, innovate, which increases revenue and reduces churn, and grow to meet the financial goals of our customers, members, and investors.
despite the very real truth that this campaign could add 10 to 50 dollars of incremental Revenue per month, per subscriber and is wildly sticky which reduces churn
Speaker Change: They do not have the marketing capacity to build and execute the campaigns.
Speaker Change: Nor install our capacity as they have not embraced the high satisfaction driving self-install model.
Speaker Change: Agentic AI changes that as it will enable our customers to move faster a force multiplier for action.
Speaker Change: Talents, AI, agents learning across our unique end-to-end platform and align with our customer success, teams will allow a capacity, constraint customer to leap over the chasm.
Michael Weening: In short, more than 15 years of investment building a unique end-to-end platform does more than enable an incredible second quarter. We are poised to enable an industry-wide transformation that we have always envisioned for all broadband providers, regardless of size or geography. Platform-based, agentic AI will enable network operators to become experienced providers that dominate the markets they serve as the concept of customer success moves from advice that a BXP needs to prioritize and build capacity to implement to the push of a button by a BXP team member to approve the actions of a quickly expanding and evolving legion of Calix agents.
Speaker Change: Our fast growing Legion of Agents will speed opportunities to simplify which improves, margin innovate, which increases revenue and reduces churn and grow to meet the financial goals of our customers members and investors.
Speaker Change: Platform does more than enable an incredible, second quarter. We are poised to enable an industry-wide transformation that we have always envisioned for all, breathe and providers, regardless of size or geography.
Cory Sindelar: With that, I'll hand it over to Cory, who will cover our second quarter financial performance and third quarter outlook and ongoing investments to transform and lead the broadband industry. Ori over to you. Thank you, Michael. We saw a very strong and broad-based demand environment during the second quarter. which allowed us to deliver revenue of $242 million, which represented 10% sequential quarterly revenue growth. Our record RPOs grew 2% sequentially to $347 million and increased 30% year-over-year. Our current RPOs were $134 million, up 5% sequentially, and up 30% year over year. This metric is a strong indicator of the strength we are seeing from our platform cloud and managed services model.
Speaker Change: Platform-based, agentic AI will enable Network operators to become to experience providers. That dominate the markets. They serve as a concept of customer success. Moves from advice that a bxp needs to prioritize and build capacity to implement to the push of a button by a bxp. Team member to approve the actions of a quickly expanding and evolving Legion of Cal agents.
With that I'll hand it over to Corey who will cover our second quarter of financial performance and third quarter Outlook and ongoing Investments to transform and lead the Broadband industry or over to you.
Thank you, Michael. We saw a very we saw a very strong and broad-based demand environment during the second quarter.
Which allowed us to deliver revenue of 2 242 million which represented 10% sequential quarterly Revenue growth.
Speaker Change: Our record rpos through 2% sequentially to 347 million and increased 30% year-over-year.
We're 134 million up, 5% sequentially and up 30% year-over-year.
Cory Sindelar: This strength led to another quarter of record gross, non-gap gross margins of 56.8%. representing a 60-basis point sequential increase.
Is a strong indicator of the strength. We are seeing from our platform cloud and managed Services model.
Speaker Change: This strength led to another quarter of record, gross non-gaap, gross, margins of 56.8%.
Cory Sindelar: and is related to customer base. and our VXP customers. winning new subscribers as they continued the adoption of our platform. In the second quarter, we added 18 new BSP customers that were largely competitive takeaways as we continue to focus on landing new football.
Speaker Change: Representing a 60 basis, point sequential increase and is related to customer mix.
And our vxp, customers winning new subscribers, as they continued the adoption of our platform.
Speaker Change: In the second quarter we added 18, new BSB customers that were largely competitive takeaways as we continue to focus on Landing New footprints.
Cory Sindelar: Our balance sheet metrics remained outstanding. We marked our fifth year of quarterly free cash flow. and generated record free cash flow of $36 million in the quarter, our ninth consecutive quarter generating eight-digit free cash flow. We ended the second quarter with record cash and investments of $299 million, even after utilizing $33 million for share repurchases during the second quarter. DSO has a record 24 days, down 6 days sequentially, and down 14 days from a year ago. Inventory turns to 3.4, down from 3.6 in the first quarter.
Speaker Change: Our balance sheet metrics remained outstanding.
Speaker Change: We marked our fifth year of quarterly free cash flow.
Speaker Change: and generated record free cash flow of 36 million in the quarter, our 9th consecutive quarter, generating 8, digit free, cash flows,
Speaker Change: We ended the second quarter with record cash and Investments of 299 million even after utilizing 33 million for share repurchases. During the second quarter.
DSO was a record 24 days.
Speaker Change: Down 6 days sequentially and down 14 days from a year ago.
Inventory, turns with 3.4.
Cory Sindelar: As we noted last quarter, we have a diversified supply chain and manufacturing presence. The data and direct relationship we have with our customers. Combined with our strong balance sheet allows us to make intelligent investments in critical areas such as component inventory and incremental finished goods. thereby ensuring supply for our customers. So far this year, the impact by tariffs has been minimal. And if the situation in this dynamic environment changes, we will do our best to minimize the impact to our customers.
Speaker Change: Down from 3.6 in the first quarter.
Speaker Change: As we noted last quarter, we have a diversified supply chain and Manufacturing presence.
The data and direct relationship. We have with our customers combined, with our strong balance sheet allows us to make intelligent investments in critical areas, such as component inventory, and incremental finished goods.
Speaker Change: Thereby ensuring supply for our customers.
Speaker Change: so far this year, the impact by tariffs
Speaker Change: Has been minimal.
Speaker Change: And if the situation in this Dynamic environment changes, we will do our best to minimize the impact to our customers.
Cory Sindelar: Moving to guidance. Given the broad-based demand picture, we believe we can continue to grow sequentially, even with a big step up from this quarter.
Speaker Change: Moving to guidance.
Cory Sindelar: Specifically, for the third quarter of 2025, our revenue outlook is between $243 and $249 million, which at the midpoint would represent a 2% sequential increase in revenue. Our non-GAAP gross margin guidance at the midpoint would represent a slight increase from the second quarter and reflects our expectations regarding customer and product mix. For 2025, we anticipate annual gross margin improvement will be at the higher end of our target financial model of 100 to 200 basis and regarding non-GAAP operatings.
Given the broad-based, the demand picture, we believe we can continue to grow sequentially. Even with the big step up from this quarter,
Specifically, for the third quarter of 2025, our Revenue Outlook is between 243 and 249 million. Which at the midpoint would represent a 2% sequential increase in Revenue.
Speaker Change: Our non-gaap gross margin guidance at the midpoint would represent a slight increase from the second quarter and reflects our expectations regarding customer and product mix.
For 2025, we anticipate annual, gross margin Improvement will be at the higher end of our Target. Financial model of 200, 100 from 1 from 100 200 basis points.
Cory Sindelar: We continue to restrain our Office Investors. until we are back into our target financial model. That said, we expect a slight increase in the third quarter as we make some incremental investments in sales and marketing. However, as a percentage of revenue, operating expenses will continue to decline as our revenue grows each quarter.
And regarding non-gaap operating expenses.
Speaker Change: We continue to restrain our Opex Investments, until we are back into our Target financial model.
That said, we expect a slight increase in the third quarter, as we make some incremental investments in sales and marketing.
Michael Weening: Michael, back to you. Thanks, Cory.
However, as a percentage of Revenue operating expenses will continue to decline as our Revenue grows each quarter.
Michael Weaning: Michael back to you.
Michael Weening: Nine years ago, I joined Calix because Carl Russo painted a vision where Calix would transform from a network system company into a platform company that would get ahead of the disruption he saw in 2007. The end of legacy network operators and the rise of broadband experience. With agentic AI on our unique end-to-end platform, an important piece falls in place. The ability to automate action to drive the success of our broadband experienced customers as they expand across residential, business, and municipal in the communities they serve.
I joined calls because Carl Russo painted a vision where kex would transform from a network. System company into a platform company that would get ahead of the disruption. He saw in 2007, the end of Legacy Network operators and the rise of broadband experience providers
Michael Weening: This next step will see Calix leverage our platform and more than 15 years of investment to evolve into an AI as a service platform company.
Michael Weening: I'm excited to lead the team forward at this truly amazing time.
Michael Weaning: With a genic AI, on our unique end-to-end platform, an important piece Falls in place. The ability to automate action to drive the success of our Broadband experience customers, as they expand across, residential business, am Municipal in the communities, they serve this next step, we'll see Cal's leverage our platform, and more than 15 years of investment to evolve into an AI as a service platform company.
Michael Weening: In closing, I'd like to thank our team, our customers, our partners and investors whose passion, grit over 15 years, trust and partnership have brought us to this exciting next stage in the Calix.
Michael Weaning: I'm excited to leave the team forward at this truly amazing time.
Nancy Fazioli: Nancy, let's open the call. Carol, we're ready to take some questions.
Michael Weaning: In closing, I'd like to thank our team, our customers, our partners, and investors whose passion grit over 15 years. Trust and partnership have brought us to this exciting. Next stage in the college Journey. Nancy, let's open the call.
Nancy Fazioli: Girl, we're ready to take some questions.
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Operator: One moment, please, while we poll for your questions.
Nancy Fazioli: Thank you. We will now be conducting. The question and answer session. We ask that you please let yourself to 1 question and 1 follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2. If you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keys 1 moment, please while we pull for your questions.
Scott Searle: Our first questions come from the line of Scott Searle with Roth Capital Partners. Please proceed with your question. Hey, good morning. Thanks for taking the questions. Great job on the quarter and the outlook. Hey, just a quick clarification. I'm not sure if I heard a normalized number as you reclassified one of the customers from a smaller to a larger customer. I wonder what the growth was sequentially for the smaller customers, you know, on an organic basis without that being adjusted. And then, Mike, maybe to dive in on the agentic front, I'm wondering if you could talk a little bit more detailed in terms of the impact from an OPEX standpoint.
Nancy Fazioli: Our first question is from the line of Scott, Sir with Roth, Capital Partners, please proceed with your questions.
Scott: Hey, good morning, thanks for taking the questions. Great job on the quarter and the Outlook, hey, just a quick clarification. I'm not sure if I heard a normalized number as you, reclassified 1 of the customers from a smaller to a larger customer, I wonder what the growth was, um, sequentially for the smaller customers, um, you know, on an organic basis without that was being adjusted. And then,
Scott Searle: I know when it sounds like you're going to keep that pretty constrained in the near term until you get to some target operating margin levels, but how do you expect cost to trend on that front? And the actual impact then from an ARPU standpoint as you start to look at the customer base and how you monetize that. I know it's going to come from improvements in general in terms of your efficiency, but, you know, in terms of rollout of new services and adoption, are we starting to think about ARPU levels from value-added services at a higher level as you start to implement agentic on a more broad-based basis?
Mike maybe to dive in on the agentic front. Um I'm wondering if you could talk a little bit more detailed in terms of the impact from an Opex standpoint. It sounds like you're going to keep that pretty constrained in the near term until you get to some Target operating margin levels.
Scott: But how do you expect cost to trend on that front and the actual impact? Then uh, from an rpu standpoint as you start to look at the customer base and how you monetize that, I know it's going to come from improvements in general in terms of your efficiency. But, you know, in terms of roll out of new services and adoption, are we starting to think about our pool levels? Uh, from value, added services at a higher level? As you start to implement agentic on a more broad-based basis.
Michael Weening: Yeah, Scott, we haven't really specified what that impact is. But, you know, it's mid single Now, with regards to, okay, you asked a lot of questions in there. So I'm going to, but I wrote them down, so I'll parse them out. So the first one is, is that you asked about what's the impact of cost? I'm assuming the question you're asking is, is internally, or are you asking the cost with regards to our investment in artificial? Yeah, sorry about that, Mike. Yeah, your investment, right, in terms of what's going to happen to your R&D and OPEX, does it start to require a little bit more of an inflection as you start to move down that path?
No, you do your first 1?
Speaker Change: Yes Scott uh we haven't really released bestiefy what that impact is. Um but you know it's it's mid single digits.
Speaker Change: Now with regards to okay, you asked a lot of questions in there so I'm going to but I wrote them down so I'll parse them out. So the first 1 is is that you asked about what's the impact of cost? I'm assuming the question you're asking is, is internally, or are you asking the cost with regards to our investment in artificial intelligence?
Michael Weening: Yeah, good point. Okay, good question.
Speaker Change: Yeah. Sorry about that Mike yeah, you your investment right in terms of what's going to happen to your R&D and Opex, does this start to require uh a little bit more of an inflection as you start to move down that path?
Michael Weening: So, so with regards to our investments, so we're, we have a model that we've identified, and Cory mentioned how we've constrained OPEX with regards to it, because until we get our revenue to a certain point, and Cory, I want you to take two seconds to remind all investors about our model with regards to R&D, it is 99% of gross profit. So, as we think about it, sure, there's gonna be opportunities where we have to go a little bit faster because the transformation, the rate of change that's going on with AI is something we've never seen before.
Speaker Change: Yeah, good point. Okay, good question. So so with regards to an investment, so we we're, we have a model that we've identified and Corey mentioned how we've constrained Opex with regards to it because until we get our Revenue to the certain point and and Corey, why don't you take 2 seconds remain on investors? About our model with regards to R&D? It is 29% of gross profit. Correct.
Michael Weening: But you have to understand that what we're doing with artificial intelligence is not a new thing that we plunk on top of a legacy, you know, as a legacy company, that we plunk it on top and hope that AI does something magic. You have to recognize the fact that this is the third generation of our platform. We are building on a significant strength that allows us to drop this capability in place and really accelerate what we're doing for our customers. And the best way to think about the times and how things are changing is that, you know, Carl started to vision this back in 2007, but it took us to 2019 to launch our, you know, and so we started to play with it.
Michael Weening: That was the first generation. Then in 2019, we launched the second generation. That basically took us over the last six years. And now we're going into the third generation, which has had a development cycle of like 18, 24 months. So the pace of change here, you can see that the investments over time that we have made are making us much more efficient at each subsequent state. And so as we look at this, it really drops onto our platform in a very unique way that allows us to help our customers monetize the opportunity. And that opportunity is transforming from a network operator into a broadband experience provider without investing a ton of capital.
So as we think about ensure there's going to be opportunities where we have to go a little bit faster because the transformation the rate of change is going on with AI is something we've never seen before. But you have to understand that what we're doing with artificial intelligence is not a new thing that we plunk on top of a legacy um you know as a legacy company that we plonk it on top and hope that AI does Something Magic. You have to recognize the fact that this is the third generation of our platform, we are building on a significant strength that allows us to drop this capability in place and really accelerate what we're doing for our customers and the best way to think about the times and how things are changing is that, you know, Carl started the business back in 2007, but it took us to 2019 to launch our, you know? And so we started to play with it. That was the first generation, then in 2019, we'd launched the second generation that basically took us over last 6 years. And now we're going into the third generation which has a
Speaker Change: Of like 1824 months. So the pace of change here, you can see that the the Investments over time that we have made are making us much more efficient at each subsequent state.
Michael Weening: So when you ask the question around, how does this monetize out? For our customers, it monetizes out in the form of, I am, you know, as I stated in my opening comments, I want to launch a new campaign, but I don't have the marketing capacity to even do it. And now all of a sudden this capability pops up in our cloud that allows our organization to go to one that was coaching our customers on how to do micro-based segmentation, how to build campaigns, how to win that new subscriber to push the button and the campaign launches.
Michael Weening: Not only does will the Agentica AI, you know, one agent will build up the segmentation, the next will then do propensity to buy, the next will select what are the right social media opportunities for them to advertise on, the next Agentica agent will use A2A to reach out into HubSpot and actually run the campaign, the next agent will grab the response back and then present it to the end user inside the broadband company and say, here was the campaign that we launched. And so in that scenario, we go from people are running for broadband, these broad-based campaigns to truly what we've always talked about, which is small micro-segmented campaigns that frankly were too difficult to run because if you run a really good marketing campaign in broadband, it should cost you dollars, not hundreds of thousands.
Speaker Change: And so, as we look at this, it really drops onto our platform in a very unique way that allows us to help our customers monetize the opportunity, and that opportunity is transforming from a network, operator into a Broadband experience provider without investing, a ton of capital. So when you ask the question around, how does this monetize out for our customers? It monetizes out in the form of I am, you know, as I stated in my opening comments, I I want to launch a new campaign but I don't have the marketing capacity to even do it. And now all of a sudden this capability pops up in our Cloud that allows our organization to go to 1 that was was coaching our customers on how to do microbase segmentation how to build campaigns, how to win that new subscriber to push the button and the campaign launches not only does will it? Um the agentic AI, you know 1 agent will build out the segmentation the next will then
Speaker Change: And do propensity to buy the next. We'll select what are the right, social media, um, opportunities for them to advertise on the next agentic agent. We'll use a to a, to reach out into HubSpot and actually run the campaign. The next agent will grab the the response back and, and then present it to the end to the um, end user inside the Broadband company. And say, here was the campaign that we launched.
Michael Weening: So for example, I should be able to micro-segment down to 50 or 75 customers and run a $3 social media campaign and get an ROI on that through upsell, cross-sell or net new subscribers. But then I wanna run thousands of those and that just doesn't scale because I can't hire the employees to do it. So when we talk about the monetization, this helps our customers radically transform how they operate today, which then, and as we've always stated, we only make money when our customers. And so it helps them do the things faster. They win more subscribers.
Speaker Change: And so in that scenario, we go from people who are running for Broadband. These broad-based campaigns to truly, what we've always talked about, which is small micro segmented campaigns that frankly were too difficult to run because if you run a really good marketing campaign in Broadband, it should cost you dollars, not hundreds of thousands. So for example, I should be able to micro segment down to 50 or 75 customers and run a 3 dollar, social media campaign and get an Roi on that through upsell crosselle or net new subscribers. But then I want to run thousands of those and that just doesn't scale because I can't hire the employees to do it. So, when we talk about the monetization, this helps our customers radically transform how they operate today. Which then, you know, and as we've always stated, we only make money when our customers make money.
Michael Weening: They sell it at a higher ARPU by doing higher attach and they cross sell and upsell. So all of these become force multipliers, which is something that Carl and I have frequently talked about. In fact, he sent me an article about two months ago and he talked about how private equity is shifting into looking at legacy businesses and investing and saying if I drop AI into that legacy business, can I get this massive multiplying impact on that business and in essence, finding undervalued assets using artificial intelligence to turn them into radically higher valued businesses. And frankly, that's been our thesis right from 15 years ago that broadband is undervalued, that it is a business model that is inelastic, that once they make the infrastructure investment, that there's a huge monetization opportunity on top of it.
Speaker Change: And so it helps them do the things as we, you know, faster, they win more subscribers, they sell it at a higher rpu by doing higher attachment. They cross sell upsell
Michael Weening: And what this allows us to do with the third generation of our platform is help our customers make a lot more money faster and crush their competition and we get a portion. So that's how it all comes out.
Speaker Change: So all of these become Force multipliers, which is, you know, something that Carl and I have frequently talked about, in fact he sent me an article about 2 months ago and we taught, he talked about how private Equity is shifting into looking at Legacy businesses and investing in saying if I drop AI into that Legacy business, can I get this massive multiplying impact on on that business and in, in essence, finding undervalued assets using artificial, artificial intelligence to turn them into radically higher valued, businesses and frankly that's been our thesis right from 15 years ago. That Broadband is undervalued. That it is a business model that, um, that is inelastic. That once they make the infrastructure investment that, there's a huge monetization opportunity on top of it. And what this allows us to do, with the third generation of our platform is help, our customers make a lot more money faster.
Speaker Change: And Crush their competition, and we get a portion of that.
Scott Searle: Hey, Mike, then just to follow up and I'll get back in the queue, you're accelerating your customers time to market in terms of their ability to deploy value added services and campaigns.
So that's how it all comes out.
Michael Weening: How quickly can that get deployed then in the customer base with the third generation platform? And when do we start to see that I guess ramping up as part of your current RPOs?
Michael Weening: Thanks. Yeah, so that's 2026. And the platform rolls out. As I said, it's in pre-production right now. We put it into pre-production in second quarter. We have the first component of that launching in August, which is our third generation mobile app, which actually there's multiple iterations of that. There's a consumer mobile app, there's a small business mobile app, and then there's installer. And, you know, a couple of weeks ago and walked them through, you know, where we're going with the mobile app, which is a brand portal, frankly, for customers. And they were blown away because all the things they've been looking for us to do, you know, are implemented in that mobile app.
Speaker Change: Hey, Mike, then just to to follow up and I'll get back in the queue. Um, your accelerating your customers time to market in terms of their ability to deploy value added services and campaigns, how quickly can that get deployed. Then in the customer base, with the third generation platform. And when do we start to see that? I guess ramping up as part of your current rpos? Thanks.
Michael Weening: But then on top of that, that becomes a portal upon which AI has been built. Unknown Speaker So we see that impact. 2026.
Michael Weening: And then the other part of that is, as I said, in my opening remarks, there's three facets to this. One is helping our existing customers succeed. There are two facets of our platform, which we have been very Thoughtful about what markets we expand to.
Speaker Change: Becomes a portal upon which AI has a profound impact on on the unsubscribe. So, we see that impacting through um, 2026 and then the other part of that is, as I said, in my opening remarks, there's 3 facets to, this 1 is helping our existing customers um succeed but they're too facets of our, our platform, which we have been very
Michael Weening: This evolution to this third generation also enables us to do project clouds for large customers and allows us to eliminate the geographic constraints that we have because privacy and data control and sovereignty of data has been a significant constraint with us with regards to our ability to go into new markets, and we will now be able to set up sovereign data centers.
Speaker Change: Thoughtful about what markets, we expand to this, uh, evolution of of to the third generation. Also enables us to do private clouds for large customers, and allows us to eliminate the geographic constraints that we have because privacy and data control. And sovereignty of data has been a significant constraint with us, with regards to our ability to go into new markets, and we will now be able to set up Sovereign data centers and eliminate that issue.
Speaker Change: As we go through 2026.
Unknown Executive: Long answers, short questions.
Speaker Change: Long answers. Short question, so thank you. Great job.
Samik Chatterjee: Our next questions come from the line of Samik Chatterjee with JPMorgan. Please proceed with your question. Hi, thanks for taking my questions and congrats on the quarter and the strong RPO. Maybe if I can start on the RPO growth that you had quite robust at 30%, but I'm just trying to sort of match this up relative to the revenue growth acceleration that you've had this quarter. The RPO growth, in fact, decimated modestly while still at a healthy level.
Speaker Change: Next caller. Thank you. Our next question is come from the line of Sumi chattery with JP Morgan. Please proceed with your questions.
Hi. Um, thanks for taking my questions and congrats on the quarter and the strong RPO, uh, maybe if I can start on the RPO growth that you had quite robust at 30%, but I'm just trying to, um, sort of match this up, uh, relative to the revenue growth acceleration that you've had this quarter. Um, the RPO growth in fact, this
Samik Chatterjee: Was there something different in terms of attach of platform services, etc., this quarter that would explain why the probably the RPO numbers are a bit lower compared to the last quarter while your revenue growth in essence is quite significantly better than the last quarter? And I will follow up. Thank you. Good morning.
Speaker Change: Did modestly while still at a healthy level. Was there something different in terms of attached of platform Services, Etc? This quarter that um, would explain why the probably the RPO numbers are a bit lower compared to the last quarter, while your Revenue growth. In essence is quite significantly better than the last quarter and have a follow-up. Thank you.
Cory Sindelar: So it's worth reviewing, again, how RPOs work. So with regards to RPOs, when we sign a contract with a customer, we actually go through and we'll sign them up for a minimum. And I'm just going to use really simple numbers. So I sign them up for a minimum of 1,000 subscribers a month, and then they would sign up for a three-year contract. And let's say their growth is they actually do 1,500 subscribers, 1,600 subscribers, 1,700 subscribers. Those incremental six or 700 subscribers per month actually drop straight to revenue. They don't show up in RPOs until the customer comes up for renewal.
Cory Sindelar: So they can either renew at the end of that three-year contract, or if their growth is significant, as we saw in some of our lumpy RPO numbers where you see big jumps, where the customer would say, I want to renegotiate because I'm twice my volumes, therefore I would like a better per month subscriber charge. And so for us as a company, we're not going to push for a renewal because why would we not allow it just to drop for revenue? We're not focused just on driving RPO growth. So that negotiation of the contract is what then, you know, then they go to 2,000 subscribers as the minimum over three years, and that bumps up the RPO number.
Speaker Change: Uh, good morning. So it's worth reviewing again. How rpos work? So, with regards to rpos, um, we signed a contract with a customer, we actually go through and we'll sign them up for a minimum. So and I'm just going to use really simple numbers. So I signed them up for a minimum of a, a thousand subscribers a month and then they would sign up for a 3 year contract and let's say their their growth is, they actually do 1500 subscribers, 1,600 subscribers 1700 subscribers. Those incremental, 6 or 700 subscribers per month, actually dropped straight to revenue, they don't show up in rpos until the customer comes up for Renewal so they can either Renew at the end of that 3 year contract or if their growth is significant, as we saw in some of our lumpy RPO numbers where you see big jumps where the customer would say. Um, I I want to renege
Cory Sindelar: So that's why you see it's lumpy, but that also is why RPOs are a portion of the growth that we In the quarter, the acceleration that you saw really was on the appliance. As you know, a large number of legacy vendors in our industry have been challenged. We anticipated that this would present us with an opportunity to land new footprint. It happens. But what we didn't anticipate was the speed at which these new customers would want to roll out, you know, Calix supply. Okay, great.
Speaker Change: Negotiate because I'm twice my volumes. Therefore, I would like a a better per month. Um, subscriber charge, and so for us as a company, we're not going to push for a renewal because the, why would we not allow just to drop her Revenue? We're not focused just on driving RPO growth. Um, so that negotiation of the contract is what then, you know, then they go to 2,000 subscribers as the minimum, over 3 years and that bumps up the RPO number. So that's why you see, it's lumpy. But that also is why our pose are a portion of the growth that we see in our class.
Speaker Change: So yeah, sorry. Go ahead.
In the quarter, the acceleration that you saw or really was on the appliance side.
As you know, you know, a large number of Legacy vendors in our industry have been challenged.
Speaker Change: Uh we anticipated that this would be would present us an opportunity to land new footprint.
Speaker Change: and it has,
Speaker Change: um, but we did but we didn't anticipate was the speed at which these new customers would want to roll out, you know, Cal appliances.
Cory Sindelar: And maybe for my follow up, if I can get a quick update on the current supply situation that you have, I think you had updated us that you're looking to move the capacity supply capacity to Mexico. But what's been the progress on that front? Any updates? Yeah, I mean, at this point, we are, you know, knock on wood, in a stable environment. I do we are we are okay where we're at from a manufacturing process perspective. And so, you know, we'll continue to build that. It'll take time. So like we said, it'll take anywhere from nine to 18 months to complete having the capacity in multiple locations.
Speaker Change: Okay, great. Um, and maybe for my follow-up, if I can get a quick update on, um, the current Supply, um, situation that you have, I think you had updated us that you're looking to move the capacity Supply capacity to Mexico. Uh, but what's been the progress on that front? Any updates on that?
Speaker Change: Yeah. I mean at this point we are uh, you know, knocked on wood in a stable environment, right? And we we we are we are okay where we're at from a manufacturing process perspective.
Speaker Change: um,
Speaker Change: and so, you know, we'll continue to build that. It'll take time. So like we said, it'll take anywhere from 9 to, uh, 18 months to to complete having the capacity and, and multiple locations.
Cory Sindelar: But at the moment, there is no need to make any real changes. We're okay as it is. So unless something changes, you know, we're going to continue to do what we're doing with no real big modifications to our menu.
Speaker Change: Um, but at the moment, there is no need to make any real changes. Um, we're okay as it is.
Speaker Change: To our Manufacturing.
Cory Sindelar: Okay, great.
Speaker Change: Okay, thank you. Thanks for taking my questions.
Cory Sindelar: Thank you.
Michael Genovese: Our next question has come from the line of Michael Genovese with Rosenblatt Securities. Great, thanks. Good morning. Um, yeah, I just don't understand on this, this third generation platform. This is just a software update, correct? I mean, does the do the appliances change at all? Or do you just press a button and then everybody has the third generation platform? Yeah, I know it's exactly that. So it's a cloud upgrade. And like, it's a transformation of the architecture of the cloud. And yeah, everybody gets it, it actually goes back against all systems, where, you know, that's the value.
Thank you. Our next questions, come from the line of Michael genevese with rose and blast Securities. Please, proceed with your questions.
Michael Genevese: All right, great. Thanks. Good morning. Um, yeah, I just don't understand on this this third generation platform. Um, this is just a software update, correct? I mean, or does does the do the appliances, uh, change at all? Or do you just press the button and then everybody has the third generation platform?
Michael Weening: When I talked about the two operating systems, we have a network operating system that's unique in the industry, allows customers to virtualize their, you know, their network. So access, aggregation. Scriber Management, and other wider-edge functions into a single platform. And then we have our operating system that sits on top of a Wi-Fi appliance. but we're agnostic to the hardware.
Michael Genovese: So for sure it's Sounds good. And then the other two things I want to ask on quickly, last quarter, there was some, you know, pull-ins with a tier one customer, tier one category was strong this quarter. So was that customer better than you thought it would be in 2Q?
Speaker Change: That's exactly that. So it's a cloud upgrade and um, like it's a transformation of the architecture of the cloud and yeah, everybody gets it. It actually goes back against all systems where you know, that the value. When I talked about the 2 operation system, That's Unique in the industry, it allows customers to virtualize their, you know, their networks. So um, access aggregation, subscriber management and other provider Edge functions into a single platform. And then we have our operating system that sits on top of the Wi-Fi, Appliance. Um, but we're agnostic to the hardware. So for sure, it's just press a button.
Michael Genovese: And then I'll just ask my other question about Bede.
Michael Genovese: What's the confidence that Bede is going to be a, I mean, you know, obviously, at this point, I don't care at all, but I just want to get your opinion, you know, a confidence level that it will be a significant program to close the digital divide in this country or not, end up being that or not. Thank you.
Sounds good. Um and then the other key things I want to ask on quickly. Uh last quarter, there was some um you know Pullins with a tier 1 customer Tier 1 category was strong this quarter. So was that customer better than you? Thought it would be in 2q and um I mean I'll just ask my other question about bead. Um what's the
Confidence that beat is going to be a, I mean, you know, obviously at this point I don't care at all but but I just want to get your opinion. Um, you know, confidence level that it will be a significant uh, program to close the digital divide in this country or not end up being that or not. Thank you.
Unknown Executive: So on your first question. This concludes today's first question.
Speaker Change: uh,
Michael Weening: Oh, the tier one, the tier one, you know, it's not strength from that customer that it was largely reclassification from the small customer segment to the large customer So when you factor that in. You know, that was the actual. large customer strength in the first quarter is actually down So that's kind of. But you had the strength across the entire broad base that just kind of pulled that up, right, as customers continue to cross the chasm and add more subscribers, you know, that's broad base. We're seeing it across our customers.
Was his first question. Yeah. Oh is the Tier 1, the Tier 1. Uh, you know it is not strength from that customer, it was largely. Um,
Speaker Change: Reclassification from the small customer segments to the large customer segments.
Speaker Change: so, when you factor that in
you know, that was the actual
Speaker Change: large customer strength in the first quarter is actually down in the second quarter.
Um, so that's that's kind of predicted. But you had the strength to cross the entire broad base that just kind of pulled that up, right, as customers. Continue to cross the chasm and add more subscribers. You know, that's broad-based. So we're seeing it across our our customers.
Michael Weening: On the B thing, I learned early, so I can't really... Yeah, so in terms of B, there's really no update. It's still in a state of flux, as you know, they're going through a re-bidding process at the state level. You know, I'm not going to speculate on when that gets itself sorted out. I think it'll take time. What's important to know is that it's not in our numbers. And when it ever eventually happens, which is likely, you know, later than you think it's going to be, we'll do well.
Um second 1's beat on the beat thing early. So I yeah. So in terms of beat um there's really no update
Speaker Change: um it's still in the state of flux. As you know they're going through a re-bidding process at the state level. Um you know I'm not going to speculate on when that gets itself sorted out, I think it'll take time. What's important to know is that it's not in our numbers.
Michael Weening: It's the same thing as we always say, I always quote Carl on this, right, our chairman, which is, it's always going to take way, way bloody longer than you ever thought it would. When it does arrive, it'll take longer to roll out, and it'll be bigger than you ever expected. We do believe that this program will go forward, but we don't have it in our numbers because it's a political program. And, you know, the good thing is, is that at its core, it's a bipartisan goal because the country is filled with red and blue states, right?
Speaker Change: And when it ever eventually happens, which is like, you know, later than you think it's going to be uh we'll do well liked by the way, it's the same thing. As we always say, I always quote Carl on this, right? Our chairman, which is it's always going to take way way bloody longer than you ever thought it would.
When it does arrive, it'll take longer to roll out and it'll be bigger than you ever expected. We do believe that this program will go forward, but we don't have it in our numbers because it's a political program.
Michael Weening: So, you know, those people who want to get elected or reelected in the midterms definitely want something to happen. But, you know, this process has been a bit more arduous than others. Although there's lots of people who would exactly as arduous as it was before. So, you know, the good thing it's not in our numbers, yes, it'll come at some point. that does, we'll be ready to, well, our customers will take advantage.
And you know, the good thing is, is that at at its core, it's a bipartisan golf because the country is filled with red and blue States, right? So, you know, those people who want to get elected or re-elected in the midterms uh definitely want something to happen but you know this process has been a bit more arduous than others. Although there's less people who would argue that this is exactly as arduous and as it as it was before. So you know the good thing is not in their numbers. Yes it will come at some point and
Michael Weening: to engage with them and support their rebid.
Speaker Change: And it does we'll be ready to will. Our customers will take advantage of it and we continue to engage with them in support their rebids
Speaker Change: great. Thanks so much.
George Notter: Thank you. Our next questions come from the line of George Notter with Wolf Research. Please proceed with your question. Hi, guys. Thanks very much. I just wanted to go back to the agentic AI discussion. I'm just curious about what elements of this are here to benefit the end subscribers. From what you've described, it sounds like it's more about operational benefits for the service provider. I'm wondering if there's also new offerings, new capabilities, new ARPU enhancing things for the end subscribers that drive this as well. Thanks.
Speaker Change: Thank you. Our next question is come from the line of George ner with wolf research, please proceed, with your questions.
Hi guys, thanks very much. Um, I just wanted to go back to the uh, agentic AI discussion. I'm just curious about um, what elements of this are here to benefit the end? Subscribe.
Michael Weening: Yeah, that was that was my initial statement is that the first iteration of this or the first component that drops into place is the mobile app. brand for the end subscriber. It's a brand portal for them, for our customers to get their brand out to the end subscriber. And within that, that's where a lot of these capabilities come in. will show up. The agentic AI capabilities for an end consumer subscriber are going to be around cyber capabilities. Enhancements with regards to performance and analysis of everything. by today, a better capability. We evolved from machine learning to agentic AI and you know, things like And, you know, I'm sitting by the pool, my laptop's not working so well, what's going on?
Speaker Change: Yeah, that was, that was my initial statement. Is that the first iteration of this, or the first component that drops into place is the mobile application, which is a brand for the end subscriber. It's a, it's a brand portal for them, um, for our customers to get their brand out to the end subscriber and within that, that's where a lot of these capability. New incremental capabilities will show up the agentic AI capabilities for an end. Consumer subscriber are going to be around cyber capabilities. Um,
Speaker Change: Enhancements with regards to Performance and Analysis of everything that's going on in the home by day. A a better capability. We evolved from machine learning to agentic Ai and you know, things like troubleshooting.
Michael Weening: And then it'll come back. So yeah, there's lots of opportunities.
Speaker Change: Hey, I'm you know, I'm sitting by the pool, all my laptop's not working so well, what's going on? And then it'll come back and identify it?
Michael Weening: And then it does, as I said, expands out into, there's really three elements to a broadband business. Innovation Drives New Subscribers Through New Capabilities at TRACK. I gave you the example where we had a customer put out smart biz and Unknown Executive, Samik Chatterjee, Jim Fanucchi, Michael Everett, Nancy Fazioli, Calix Page 1 of 8 Yes, there will be all kinds of customer.
Speaker Change: So, yeah, there's there's lots of opportunities and then it does, as I said, expands out into, there's really 3 elements to a Broadband business operations.
Which drives down, you know it which drives efficiencies and improved profitability um Innovation which drives new subscribers through. Um partnering. Sorry.
Speaker Change: Innovation, drives new subscribers through new capabilities, that attract new customers. And I gave you, the example where we had a customer put out smart Biz and, you know, they 2 and a half times Revenue was incredible right? For a subscriber. And so, yes, they'll be all kinds of customer facing subscriber facing and
Speaker Change: Have a customer in hand.
Michael Weening: And then just as a quick follow-up, was there any pull-forward, you think, from your customers around tariffs? I was just looking at just how strong the hardware business looked in the quarter, any benefits there? Thanks. No. Super. Thank you very much.
Speaker Change: Got it. And then just as a quick follow-up, um, was there any pull forward? You think from your customers around tariffs, I was just looking at just how strong the, um, the hardware business looked in the quarter. Any any benefits there? Thanks. No, no, no.
Michael Weening: We work closely with our customers with regards to, you know, like this concept of pull forward, we never should have used that word. What we do is we work really closely with our customers on how they manage their inventories and then we just move things around to help them. meet the demands of their subscribers. Great, thank you. Thank you.
Okay. Super, thank you very much. Appreciate our customers with regards to, um, you know, like this concept of pull forward.
Speaker Change: To use that word because it's not true. It's what we do is we, we work really closely with our customers on how they manage their inventories, and then we just move things around to help help them. Um,
Speaker Change: Meet the demands of their subscribers.
Thank you.
Christian Schwab: Our next questions come from the line of Christian Schwab with Craig Hallam. Please proceed with your question. Hey, first congrats on the better results in the material earnings leverage. My question has to do with, given the better than expected results here this year, as well as what appears to be improved visibility, as it relates to 2026, last year, you guys talked about being able to drive double digit top line growth. Should we assume that still is the expectation, given the better than expected results in the near term here in 2025? Yeah, that is correct. We still think we can drive a double digit growth.
Speaker Change: Thank you. Our next question is come from the line of Christian Schwab with Craig Hallam. Please proceed with your questions. Hey, uh, first, congrats on the better results in the material earnings leverage. Um, my my question has to do with given the better than expected results here this year, as well as what appears to be improved visibility, uh, as we look to 2026 last year, you guys talked about being able to drive, we'll double digit Topline growth. Um, should we assume that still is the expectation given the, uh, better than expected, uh, results in the near term here in 25.
Christian Schwab: all improving market. I'm going to prove you wrong, Archie. God, no, I got the gross margin point. Reiterating that.
Speaker Change: Yeah, that that, that is correct. We still think we can drive a, a double digit growth. Um, next year, while improving Market.
Speaker Change: And cash.
Christian Schwab: But my last question, then, if we move to the different layers of agentic AI applications and helping your customers over, now I understand it's kind of being rolled out here and kind of finalized throughout 2026, but on a multi-year, kind of CAGR basis, would you expect this to have a positive impact on your long-term growth rates? And if it does, could you give an aspirational expectation? No aspirational expectations, but yes, because as I stated, there's three elements to what agentic AI and our third generation platform. The first one is our existing base. It allows us to help them add new subscribers at a faster rate.
Speaker Change: Got no. I I I got I got the on the gross margin point, but thanks for reiterating that but my last question then as we move to a uh, the different layers of
Speaker Change: Of authentic AI, um, applications and helping your customers. Um, over. No, I understand it's going to be rolled out here and kind of finalized throughout 2026 but on a multi-year, um, kind of kegger basis. Would you expect this to have, uh,
Speaker Change: A positive impact on your long-term growth rates. And if it does, could you, uh, give an aspirational expectation.
Speaker Change: Uh no aspirational, um expectations but yes because as I stated there's 3 elements to what agentic Ai and our third generation platform do for cats.
Michael Weening: And as per the previous question, that comes out from a customer benefit in two ways. One, that they can radically improve operating costs and therefore their own margins. which is important. And then also Wendy's subscribers and selling at a higher. So that's the first part. So that's our existing base. See, we have strength in that base. But the other elements that I identified is that the growth of incremental segments, so, you know, we announced that we launched MDU, we have, you know, a goal to move medium sized business segments. And then agentic allows us to eliminate the geographic constraints that we have with regards to our clouds.
Speaker Change: The first 1 is our existing base. It allows us to help them add new subscribers at a faster rate. And you know as for the previous question that you know that comes out in from a customer benefit in 2 ways 1 that they can radically improve operating costs and therefore their own margins um which is important. And then also when you subscribers and sell them at a higher risk
Michael Weening: data sovereignty and privacy rules, and move into new markets. And then on top of that, we've never dealt with the very large in our industry, primarily because of the fact that, you know, while we want a large customer this quarter, who bought our existing business, we, you know, most of those actually have a different business model. And so part of the art, the evolution of our architecture in this third generation was also to allow private So those are 10. Fantastic.
Speaker Change: On top of that, we've never dealt with the very large in our industry primarily because of the fact that you know while we want a large customer of this quarter. Um who bought our existing business. We you know most of those actually have a different business model. And so part of the rear um the evolution of our architecture in this third generation was also to allow private instances the companies. So those are Tam expansions
Michael Weening: And then if I could sneak in one last question, your commentary about security and software and cloud and being in a position to expand, you know, into international markets with a stronger presence. Can you just elaborate on what that means? Does that mean that you would expect over time to have a stronger presence in, say, Europe, for example, than you currently have? I guess that wasn't clear to me. I'm sorry. Yes. So, the constraint that we have is that if you look at the rules with regards to, you know, data sovereignty is something that most governments have a lot, you know, care a lot about, right?
Speaker Change: Fantastic. And then if I could speak in 1, last question, you commentary about, um, security and software, and cloud, and, and being, uh, in a position to expand, um, you know, inter International markets, uh, with with the stronger. Uh, presence. Can you just, uh, elaborate on what that means is? That means, uh, that you, you would expect over time to have a, a stronger presence and say Europe for example than you currently have. Uh I guess that was a clear to me, I'm sorry.
Speaker Change: Yes.
Speaker Change: So the constraint that we have is that if you look at the rules with regards to, you know, data sovereignty is something that most governments have a lot, you know.
Michael Weening: And if we look at some of the polarization of what's going on politically across the world, you know, one could, I think, safely hypothesize that data privacy and sovereignty is going to become more and more important by company or by And so in the past, we've had two data centers, one in the United States. Go to Beadaholique.com for all of your beading supplies needs! You know, one in the United States and one in Canada, which is CERB. that we now have the capability. Third Generation Platform. leveraging our cloud partner to set up instances in a local level by country, if necessary.
Michael Weening: Not necessarily in the EU, although if there's fragmentation in the EU, that might become possible. But, you know, we looked at this, this whole conversation with regards to where do we go with this back? Unknown Speaker He started with, he looked at the United States, which is a very state based. We hypothesized out that, hey, what would happen if every state started to put data privacy rules in place and wanted sovereignty in a state? which is not. know, that could happen. And so we we we started down this path in 2023. $1.5 billion to make this happen.
Speaker Change: Care a lot about, right? And if we look at some of the polarization of what's going on politically across the world, you know, 1 kid, I think safely, hypothesized that data privacy and and sovereignty is going to become more and more important by company or by country. And so, in the past we've, we've had 2 Data Centers, 1 in the United States, 2 Data instances, I guess they're not truly just data centers but you know, 1 in the United States and and 1 in Canada, which is served like UK and that places like that. We now have the capability with this third generation platform to leveraging our Cloud partner to set up instances in a local level by country if necessary. So, you know, not necessarily in the EU, although, if there's fragmentation in the EU that might become possible. But, you know, we looked at this, this whole conversation with regards to, where do we go with this back in late 2023, he started with, we looked at the United States, which is a very state-based country and we hypothetically
Speaker Change: Sized out that, hey, what would happen if every state started to put data privacy rules in place and wanted sovereignty in a state?
Michael Weening: We can set it up in the EU, we can set it up... Unknown Executive, Samik Chatterjee, Jim Fanucchi, Michael Everett, Nancy Fazioli, Michael Weening, Great. Thank you. Congrats again. No other questions. Thank Thank you. Our next questions come from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question. Hey, good morning, and my congrats on the results and outlook as well. A question about some specific customer segments, you know, even correcting for the reclass, you know, your large carrier revenue is up pretty good over what you saw. last year. And that's true on the medium side as well.
Speaker Change: You know, which is not frankly. Um you know that could happen. And so we we we started down this path in 2023 investing almost 100 million dollars to make this happen and um, that's the point of this. So, you know, we can set it up in the EU, we can set it up in
Speaker Change: Middle Eastern country. Um, and not have to worry about the data privacy that has frankly held us back in a lot of markets.
Speaker Change: And now is the time.
Speaker Change: Great. Uh, thank you. Uh congrats again. No other questions. Thanks.
Speaker Change: Thank you. Our next question is come from the line of Tim civago with Northland, Capital markets, please proceed with your questions.
Tim Civago: Hey, good morning and my congrats on the results. Um, and Outlook as well.
Tim Civago: Good question about some specific customer segments. Um,
You know, even correcting for the reclass, you know, your large carrier revenue is up pretty good over what you saw.
Tim Savageaux: And I wanted to kind of get your view on a couple dynamics driving that. We heard from Verizon yesterday that they're, you know, ramping up their fiber bill per the plan. And I assume that's part of it. And also have a really second half loaded CapEx plan for the year. Of course, Citi Fiber just raised a bunch of money. I assume that's part of what's driving your dynamics near-term. I wonder how both of those situations might affect your outlook for the second half. It seems like there's a lot of tailwinds there in those categories, and I'd be interested in your thoughts.
Tim Civago: Last year um and that that's true on the medium side as well. And I wanted to kind of get your view on a couple Dynamics. Driving that
Tim Civago: When we heard from Verizon yesterday that they're, you know, ramping up their fiber Bill per the plan and I assume that's part of it. And also have a really second half, loaded capex plan for the year.
Tim Civago: Of course City fiber just raised a bunch of money. I assume that's part of what's driving, your Dynamics near-term.
Tim Civago: I I wonder how both of those situations might affect your outlook for the second half. It seems like there's a lot of Tailwinds there in those categories, and I'd be interested in your thoughts.
Michael Weening: Yeah, Tim, you know, we're not going to get down into the customer specific details of what's going to be happening at each level. Again, I'll come back to The demand environment we're seeing is broad-based. So you're seeing a strength across the board. The revenue from those large customers that you've seen rise in Citi Fiber and so forth are inherently lumpy, and they come back and forth, and so we won't comment on kind of the quarter-to-quarter fluctuation. Broad based. And you know, with this large step up in the second quarter, we can continue to grow sequentially from here.
Tim Civago: Yeah. Tim uh you know we're not going to get down into the customer specific details of what's going to happen in each level. Um again I'll come back to the demand environment. We're seeing is broad-based.
Tim Civago: Uh, so what you're seeing is strength across the board.
Tim Civago: Um,
Tim Civago: the revenue from
Tim Civago: those large customers that you've seen Verizon City Fibers and so forth are inherently lumpy and they come back and forth and so um we don't comment on kind of the quarter to quarter of fluctuations
Tim Civago: um,
Michael Weening: So And with regards to demand, I'm going to go back to The smart broadband provider is making bets on who are their partners that are going to walk them through the significant disruption that the entire every industry faces. You know, the power of what's going to happen with artificial intelligence is frankly under This is going to you know, there's a there's a great TED talk on YouTube with Swartz, the Google CEO, the ex-Google CEO, and Schmidt, and he basically talks about how everybody's been hyping it up, but it's massively underhyped. The impact of what's about to happen over the next couple of years is frankly larger than industrialization.
Tim Civago: Broad-based and even with this large step up with the sex second quarter we can continue to grow sequentially from here. So um it's not relying on either of those 2 customers in.
Tim Civago: and with regards to demand, I'm going to go back to, um,
the, the smart Broadband provider is making bets on who are their partners that are going to walk them through this significant disruption. That the entire every industry faces,
Tim Civago: you know, the, the power of what's going to happen with artificial intelligence is frankly, underhyped
Michael Weening: There's not a facet of society that's not going to be impacted in some way. It's profound. And anyone who thinks that, you know, that it's kind of status quo is completely wrong. And the winners and the losers are going to be completely different. In fact, the ones who we think as winners in, you know, which AI models. are not the ones that are going to be the future. And that's kind of what we actually really have to think about is that, who are the companies? And back to that hypothesis, that article that I talked about a little bit earlier that Carl and I were talking about is that there's these private investors out there who are looking at legacy companies and saying, who are the companies who are poised to take a legacy industry or an infrastructure play that has a certain valuation, pop AI on top of that, execute effectively?
Tim Civago: This is going to, you know, there's a there's a great Ted Talk on YouTube with, um, sorts the, the Google C, the X Google CEO and sorry Smith. Yeah and Schmidt. And he basically talks about how everybody's been hyping it up, but it's massively underhyped this the the impact of what's about to happen over the next couple of years, is frankly larger than industrialization.
Tim Civago: There's not a facet of society, that's not going to be impacted in some way shape or form.
Tim Civago: It's profound and anyone who thinks that, you know, that it's kind of status quo is completely wrong.
Tim Civago: Um, and the winners and the losers are going to be completely different.
Michael Weening: Because in the end, there's so much BS out there. It's about execution, because there's so much hype and nonsense. It's about those who can execute through this opportunity. And those are going to be the winners. And when we had the 30 plus CEOs together, we finally unveiled to them exactly what And there was a collective sigh of relief, frankly, as they left, because they were all, you know, they were all reading carefully about what's going on with the genomic AI and they're saying, do I need to go build this out myself? Who are the right partners?
Tim Civago: In fact, the ones who we think is Winners and you know, which AI models I'm buying today, um, are not the ones that are going to be the future and that's kind of what we actually really have to think about is that who are the companies and back to that hypothesis that that article that I I talked about a little bit earlier the Carl and we're talking about is that there are these there's these private investors investors out there who are looking at Legacy companies and saying, who are the companies who are poised to take you know, a legacy industry or an infrastructure play, that has a certain valuation poppy on top of that execute effectively because in the end there's so much BS out there. It's about execution because there's so much hype in nonsense. It's about those who can execute through this opportunity and those are going to be the winners and in, in when we have the 30 plus CEOs together, we, we finally unveiled to them exactly what we're doing.
Tim Civago: and,
Michael Weening: And what they all left with was Calix has it got? And the platform that we have bet on, the second generation platform since 2019 has been the right bet. It's helped us grow our business. But this is this next one is so transformative that I need to be at the forefront or I'm worried that my company is not going to succeed. And they all left, like I said, with that collective sigh of relief saying, wow. Calix has gone. And we got this. And we're uniquely positioned because we've been doing it for 15 years. So when you want to talk about demand, you know, this isn't something that we woke up and said, hey, on our crappy boxes, we should go pop an AI engine on it and see if it can do some autonomous networking.
Tim Civago: There was a collective sigh of relief, frankly, as they left because they were all, you know, they were all reading carefully about what's going on with the gentic AI and they're saying, do I need to go build this out? Myself who are the right partners and what they all left with was,
Alex: Alex has got this.
Alex: And the platform that we have that on the second generation platforms is 2019 is been the right bet. It's helped us grow our business. But this is this next 1 is so transformative that I need to be at the Forefront or I'm worried that my company's not going to be succeed and they all left. Like I said with that Collective sigh of relief saying wow.
Michael Weening: This is a, you know, we systematically rebuilt everything that we do from a platform, top to bottom, starting in 2019, with the launch of our two years. And over the last 18 to 24 months, we've invested significantly to update that architecture for AI. So with regards to where growth is going, I have to be really explicit. This is what I joined nine years ago for. do this, and it's all been building up to this. And as I said, with regards to where the growth opportunities are, we're no longer just in our existing businesses, and the constraints that we had with regards to geography, sovereignty, and size of customer, frankly, who will demand a dedicated instance inside their own private cloud are no longer going to be constrained.
Alex: Um Cal has got this and we got this and we're uniquely positioned because we've been doing it for 15 years. So when you want to talk about demand you know this isn't something that we woke up and said hey on our crafty boxes we should go pop in AI engine on it and see if it can do some autonomous networking.
This is a, you know, we systematically rebuilt. Everything that we do from a platform top to bottom starting in 2019 with the launch of our 2 operating systems. We've evolved on it for 6 years and over the last 18 to 24 months we've invested significantly to update that architecture for AI.
so with regards to where growth is going, have to be really explicit, this is what I joined 9 years ago for
To do this. And it's all been building up to this point. And as I said with regards to where the growth opportunities are, we're no longer just in our existing businesses and that constraints that we had with regards to geography, sovereignty and size, of customer, frankly who will demand a dedicated instance inside their own private cloud.
Tim Savageaux: And so, with regards to where demand's going. This is the next big step for us. Thank you, Tim. Okay.
Alex: Are no, are no longer going to be constraints.
Alex: and so, with regards to where demands go on,
This is the next big step for us.
Alex: so,
Michael Weening: If I can just do a quick follow-up here. Michael, I think you mentioned I don't know if it was a large cloud win with a large customer or Unknown Speaker I think you mentioned a new win. I'd love to get some more color on that. Is this a net new customer? Whatever you can tell us. Unknown Speaker Yes, net new customer who's very large, very large. a very large customer. And so and they, they became a cloud only Unknown Speaker This is great. They didn't, you know, they haven't been buying our other technology and they bought our cloud.
Speaker Change: Thank you. Tim. If I can just do a quick follow-up here.
um,
Speaker Change: Michael, I think you mentioned,
Speaker Change: I don't know if it was a large Cloud win with a 2 large customer or a
Speaker Change: Brand new large customer I think you mentioned a new win. I'd love to get some more color on that and knew this is a net, new customer, you know, whatever you can tell. Thanks yeah, it's net. New customer who's very large, very large. Um,
Speaker Change: Uh, very large customer and so and they they became a cloud-only customer.
Ryan Koontz: So for us, I think that's a, that's our, you know, second generation platform, but they know where we're going. And I think that's a good indicator of what's coming. Okay. Thanks. Thank you. Our next questions come from the line of Ryan Koontz with Needham and Company. Please proceed with your question. Thanks, just to clarify what Tim was asking about there, this large customer win is not related to the reclassification. Small to large, you talked about, or is it? no comment. Okay, fair. The, you know, great gross margins here, and especially with the strength of market in medium and large.
Speaker Change: Are, you know, second generation platform but they know where we're going.
Speaker Change: And I think that's a good indicator of what's coming.
Speaker Change: Okay, thanks.
Speaker Change: Thank you. Our next question is come from the line of Ryan coops with Neiman Company. Please proceed with your questions.
Speaker Change: Great, thanks. Um, just to clarify what Tim was asking about their this large customer win is not related to the reclassification of small to large. You talked about or is it
Speaker Change: Uh, no comment.
Speaker Change: Okay, fair. Um,
The uh, and the, you know, Greg gross margins here. Um and especially with the strength up Market in medium and large. Um
Cory Sindelar: What are the mechanics behind that, Cory, in terms of your continued gross margin expansion? Is this purely software mix, anything going on in terms of hardware mix that we should be aware of driving margin? Yeah, it is primarily just the continued adoption of the platforms and the growth that you're seeing there, and a little bit of favorability on customer mix. And lastly, you know, great, great DSOs there. Sounds like the quarter was done practically before you started. On the small customer growth rate, they're maybe a little below expectations from investors. Do you expect that to improve as we go through the second half of the year?
Speaker Change: You know, uh, obviously a strong Appliance shipping, uh, quarter 2. So, um, you know what, what, what are the mechanics behind that Corey in terms of your continued? Gross margin expansion, is this purely software mix? Um, anything going on, in terms of, uh, Hardware mix, we should be aware of uh, driving driving margins.
Speaker Change: Yeah, it is primarily just the continued adoption of the platforms and the growth that you're seeing there and uh a little bit of favorability on customer mix.
Cory Sindelar: Small customer cohort, at least on an organic basis? For sure. I mean, again, my comments are that the demand is broad based and we're seeing strength all across the board. And so even with the reclassification of one small customer to large. had the impact of still growing quarter. I'll be at a more muted rate, but still, it's growing and it's broad. Got it. All right. Great. Thanks. Thank you.
Speaker Change: Got it and uh lastly, you know, great, great dso's, their sounds like the quarter was done practically before you started um, on the small uh, customer uh, growth rate there. Maybe a little uh, below expectations from investors. Um, do you expect that to improve as we go through the second half of the year?
Speaker Change: Small customer cohort at least on organic basis.
Speaker Change: Yeah for for sure. I mean again my comments are the demands brought base and we're seeing strength across the board and so um even with the reclassification of 1 small customer to large.
Speaker Change: Um, you know, it had the had the impact of still growing quarter on quarter albeit at a more muted rate. But but still it's growing and it's broad-based.
Got it. All right. Great thanks. That's all I've got.
Speaker Change: Thank you. Thank you, Ron.
Nancy Fazioli: This now concludes our question and answer session. I would like to turn the floor back over to Nancy Fazioli for closing. Thank you, Daryl. Calix will participate in several investor events during the third quarter. Information about these events, including dates and times and publicly available webcasts, will be posted on the events and presentations page of the Investor Relations section of Calix. 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. Ladies and gentlemen, thank you for your participation.
Thank you. This is now concludes our question and answer session. I would like to turn the floor back over to Nancy fazioli, for closing comments.
Speaker Change: Thank you. Daryl cousin. Participate in several investor events during the third quarter information about these events, including dates and times, and publicly available webcasts will be posted on the events and presentations page of the investor relations section of cows.com. Once again, thank you to everyone on this call and webcast for your interest in cows and for joining us, this concludes our conference call have a good day.
Operator: This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.
Thank you, ladies and gentlemen, thank you for your participation. This does conclude today's teleconference, please disconnect your lines at this time and have a wonderful day.