Q2 2026 Calix Inc Earnings Call

July 21, 2026

Speaker #1: Greetings, everyone, and welcome to the Calix second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the brief prepared remarks.

Operator: Greetings everyone, welcome to the Calix Q2 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the brief prepared remarks. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Fazioli, Vice President of Investor Relations. Nancy, please go ahead.

Nancy Fazioli: Greetings everyone, welcome to the Calix Q2 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the brief prepared remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Fazioli, Vice President of Investor Relations. Nancy, please go ahead.

Speaker #1: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Speaker #1: It is now my pleasure to introduce your host, Nancy Fazioli, Vice President of Investor Relations. Nancy, please go ahead.

Speaker #2: Thank you, Darryl, and good morning, everyone. Thank you for joining our second quarter 2026 earnings call. Today on the call, we have President and CEO Michael Weening, and Chief Financial Officer Cory Sindelar.

Nancy Fazioli: Thank you, Darryl, Good morning, everyone. Thank you for joining our Q2 2026 earnings call. Today on the call, we have President and CEO, Michael Weening, and Chief Financial Officer, Cory Sindelar. As a reminder, today after the market close, Calix issued a news release, which was furnished on a Form 8-K, along with our stockholder letter, was also posted in the investor relations section of the Calix website. Today's conference call will be available for webcast replay in the investor relations section of our website. 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, actual results may differ materially from those contemplated by these forward-looking statements.

Speaker #2: As a reminder, today, after the market close, Calix issued a news release which was furnished on a Form 8-K along with our stockholder letter and was also posted in the Investor Relations section of the Calix website.

Speaker #2: 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 outlooks, and that actual results may differ materially from those contemplated by these forward-looking statements.

Speaker #2: Factors that could cause actual results and trends to differ materially are set forth in the second quarter 2026 letter to stockholders, and in the annual and quarterly reports filed with the SEC.

Nancy Fazioli: Factors that could cause actual results and trends to differ materially are set forth in the Q2 2026 letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as to their respective dates. In this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the Q2 2026 letter to stockholders that was posted yesterday. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead.

Speaker #2: Calix assumes no obligation to update any forward-looking statements, which speak only as to their respective dates. Also, in this conference call, we will discuss both GAAP and non-GAAP financial measures; a reconciliation of GAAP to non-GAAP measures is included in the second quarter 2026 letter to stockholders that was posted yesterday.

Speaker #2: Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead.

Speaker #3: Thank you, Nancy. Much like the dot-com revolution before us, the AI revolution is changing how society functions, and we'll transform business models in every industry.

Michael Weening: Thank you, Nancy. Much like the dot-com revolution before it, the AI revolution is changing how society functions and will transform business models in every industry. The key difference between the dot-com era and the AI era is the rate of change. The AI rate of change is unprecedented, and those who move fast will lead the industry they serve. The second quarter was the beginning of Calix, the AI leader, as we began realizing the value of our 15-year investment through the first full quarter of our AI-native CalixOne platform being live. CalixOne has access to data, insights, and the ability to autonomously work through team member augmentation, improve operations, marketing, support, and subscriber experiences for our service provider customers, regardless of size.

Speaker #3: The key difference between the dot-com era and the AI era is the rate of change. The AI rate of change is unprecedented, and those who move fast will lead the industries they serve.

Speaker #3: The second quarter was the beginning of Calix, the AI leader. As we begin realizing the value of our 15-year investment through the first full quarter of our AI-native Calix One platform being live, Calix One is access to data, insights, and the ability to autonomously, or through team member augmentation, improve operations, marketing, support, and subscriber experiences for our service provider customers regardless of size.

Speaker #3: These expanding Calix One capabilities enable our customers to address the threat of broadband commoditization through differentiated experiences, resulting in winning new subscribers, growing revenue, and higher retention across the consumer, business, MDU, and municipal segments they serve, while improving operating costs with a predictable implementation of AI capabilities.

Michael Weening: These expanding CalixOne capabilities enable our customers to address the threat of broadband commoditization through differentiated experiences, resulting in winning new subscribers, growing revenue, higher retention across consumer, business, MDU, and the municipal segments they serve, while improving operating costs with a predictable implementation of AI capabilities. Customer interest in CalixOne exploded in Q2, driving record RPOs, record software and services revenue. While the strength of the platform was evidenced by the significant jump in software and service margin as we had all customers live. We also tripled the number of customers that signed up for Agent Workforce Cloud. More important is the makeup of those customers. They were not only the innovators who partner with Calix early in the product life cycle and are committed to the value that can be realized in their business model by being first to market.

Michael Weening: These expanding Calix One capabilities enable our customers to address the threat of broadband commoditization through differentiated experiences, resulting in winning new subscribers, growing revenue, higher retention across consumer, business, MDU, and the municipal segments they serve, while improving operating costs with a predictable implementation of AI capabilities. Customer interest in Calix One exploded in Q2, driving record RPOs, record software and services revenue. While the strength of the platform was evidenced by the significant jump in software and service margin as we had all customers live. We also tripled the number of customers that signed up for Agent Workforce Cloud. More important is the makeup of those customers. They were not only the innovators who partner with Calix early in the product life cycle and are committed to the value that can be realized in their business model by being first to market.

Speaker #3: Customer interest in Calix One exploded in Q2, driving record RPOs and record software and services revenue. The strength of the platform was evidenced by the significant jump in software and service margin as we had all customers live.

Speaker #3: We also tripled the number of customers that signed up for Agent Workforce Cloud. More important is the makeup of those customers. They were not only the innovators who partner with Calix early in the product lifecycle, and are committed to the value that can be realized in their business model by being first to market; the customers who signed up in Q2 spanned the entire adoption lifecycle.

Michael Weening: The customers who signed up in Q2 span the entire adoption life cycle. From early adopter, which is expected, to late majority, which signals a significant Agent Workforce Cloud-enabled shift across our base. The shift is that every business leader knows they must have an AI strategy or they will be at risk. The late majority adoption proves that CalixOne is a secure, trusted, and predictable approach for every customer to adopt AI. It is secure and trusted as we have invested 15 years into the platform and domain knowledge to meet our customers' needs. Since November 2023, we have evolved the platform to be AI-native while ensuring that our processes, culture, security, and governance expanded to meet the needs of the AI era for our customers.

Speaker #3: From early adopter, which is expected, to late majority, which signals a significant agent workforce cloud-enabled shift across our base. The shift is that every business leader knows they must have an AI strategy or they will be at risk.

Speaker #3: The late majority adoption proved that Calix One is a secure, trusted, and predictable approach for every customer to adopt AI. It is secure and trusted, as we have invested 15 years into the platform and domain knowledge to meet our customers' needs.

Speaker #3: Since November 2023, we have evolved the platform to be AI-native, while ensuring that our processes, culture, security, and governance have expanded to meet the needs of the AI era for our customers.

Speaker #3: It is predictable as our AI-native platform architecture allows us to use any AI model, and it is our belief that hardened open-source models meet our workflow, use case, and industry needs.

Michael Weening: It is predictable as our AI-native platform architecture allows us to use any AI model, and it is our belief that hardened open source models meet our workflow, use case, and industry needs. That means Calix has solved for the largest issue that is raging across all industries. How to use AI predictably as one cannot calculate an ROI on a cost that can quickly run out of control. In our architecture, we have eschewed tokens through hardened open source AI models and the acquisition of Pure Compute. CalixOne customers are adopting a platform that delivers AI capabilities that can be trusted, are secure, and are offered at a predictable cost, which will yield an ROI that will grow every month with their subscription as we acquire new subscribers, grow revenue, reduce churn, and lower operating costs through the power of Calix Agent Workforce Cloud.

Speaker #3: That means Calix has solved, for the largest issue that is raging across all industries, how to use AI predictably, as one cannot calculate an ROI on a cost that can quickly run out of control.

Speaker #3: In our architecture, we have a street tokens through hardened open-source AI models and the acquisition of pure compute. Calix One customers are adopting a platform that delivers AI capabilities that can be trusted, are secure, and are offered at a predictable cost, which will yield an ROI that will grow every month with their subscription as they acquire new subscribers, grow revenue, reduce churn, and lower operating costs through the power of Calix agent workforce cloud.

Speaker #3: At investor day, I shared a slide that showed our rate of innovation. On the first generation of our platform, our annual feature rate peaked at 181 in 2018.

Michael Weening: At Investor Day, I shared a slide that showed our rate of innovation. In 2018, our second-generation platform feature rates peaked at 918 in 2024. With the third generation of our platform launched, our customers can expect that our past innovation velocity will be quickly surpassed with Agent Workforce Cloud. Which brings me to the Calix team. This team continues to win awards as one of the best cultures in any industry, having outlined a subset of awards in the investor letter, including Fortune recognizing Calix in the 100 Best Companies to Work For list. The strength of this type of culture has never been more important. While AI is a powerful technology, it requires teams to get the most of it.

Speaker #3: Our second generation platform featured sorry, our second generation platform feature rate peaked at 918 in 2024. With the third generation of our platform launched, our customers can expect that our past innovation velocity will be quickly suppressed with agent workforce cloud.

Speaker #3: Which brings me to the Calix team. This team continues to win awards as one of the best cultures in any industry. Having outlined a subset of awards in the investor letter, including Fortune recognizing Calix on the 100 Best Companies to Work For list, the strength of this culture has never been more important.

Speaker #3: While AI is a powerful technology it requires teams to get the most of it. Our customer success organization will help our customers leverage agent workforce cloud to transform an inside Calix or leaders are taking a human-centric approach to AI to ensure that Calix transforms internally by understanding how we work so that we can identify those portions of our business that will benefit from it.

Michael Weening: Our customer success organization will help our customers leverage Agent Workforce Cloud to transform. Inside Calix, our leaders are taking a human-centric approach to AI to ensure that Calix transforms internally by understanding how we work so that we can agentify those portions of our business that will benefit from it. We are using AI to gain operating leverage across Calix. In summary, we are committed to transforming our customers and ourselves through the power of AI. With that, I'll turn it to Cory to cover the details of an amazing quarter. Cory?

Speaker #3: We are using AI to gain operating leverage across Calix. In summary, we are committed to transforming our customers and ourselves through the power of AI.

Speaker #3: With that, I'll turn it over to Cory to cover the details of an amazing quarter. Cory?

Speaker #2: Thank you, Michael. We saw continued strong and broad-based demand in the second quarter. Delivering record revenue of $293 million a 5% sequential increase and 21% year-over-year growth, exceeding our guidance range.

Cory Sindelar: Thank you, Michael. We saw continued strong and broad-based demand in Q2, delivering record revenue of $293 million, a 5% sequential increase, and 21% year-over-year growth exceeding our guidance range. Importantly, this quarter, we experienced a return to strong software growth. Software and service revenue grew to a record $50 million, up 7% sequentially and 16% year-over-year. As customers began to realize value from agentic workflows on Calix One. Last quarter, with the completion of our platform migration, we said our focus would pivot to agentifying our BSP customers and RPOs would accelerate-

Speaker #2: Importantly, this quarter we experienced a return to strong software growth. Software and services revenue grew to a record $50 million, up 7% sequentially and 16% year-over-year.

Speaker #2: As customers began to realize value from agentic workflows on Calix One last quarter, with the completion of our platform migration, we set our focus to pivot to agentifying our BSP customers.

Speaker #2: An RPOs would accelerate—I'm sorry, Cory.

Nancy Fazioli: I'm sorry. Cory, can I please pause you? Darryl, the operator, I understand from some of the people on the call that the call has been dropping. Could you please come on and let us know if we should restart the call?

Speaker #1: can I please pause you? Daryl, on the operator, I understand from some of the people on the call that the call has been dropping.

Speaker #1: Could you please come on and let us know if we should restart the call?

Speaker #4: I am here, and I have heard everything thus far.

Operator: I am here, and I have heard everything thus far.

Speaker #1: Okay. Apparently, those who are participating via webcast are having portions of the call drop. And I'm wondering if we should start the call once again.

Nancy Fazioli: Okay. Apparently, those who are participating via webcast, there were portions of the call that dropped, and I'm wondering if we should start the call once again.

Speaker #4: I can confirm as well that webcast has been stable and I've been spot-checking and I've heard as well through the webcast.

Operator: I can confirm as well that the webcast has been stable, and I've been spot-checking, and I have heard as well through the webcast.

Speaker #1: Okay. So you can confirm that the webcast is acceptable and there are no issues for the listeners?

Nancy Fazioli: Okay. You can confirm that the webcast is acceptable and there are no issues for the listeners?

Speaker #4: As far as I can tell, there are no issues.

Operator: As far as I can tell, there are no issues.

Speaker #1: Okay, apologies, Cory. You can go ahead and continue from where you left off.

Nancy Fazioli: Okay. Apologies, Cory. You can go ahead with where you were continuing.

Cory Sindelar: Importantly, this quarter, we experienced a return to strong software growth. Software and service revenue grew to a record $50 million, up 7% sequentially and 16% year-over-year. As customers began to realize value from agentic workflows on Calix One. Last quarter, with the completion of our platform migration, we said our focus would pivot to agentifying our BSP customers and RPOs would accelerate in H2 2026. Our customers moved faster than anticipated as we saw record RPOs of $386 million, up 3% sequentially and 11% year-over-year. Current RPOs were $162 million, up 3% sequentially and 21% year-over-year. Based on the strong momentum exiting Q2, we continue to expect RPO growth to accelerate in H2 of the year as we deliver additional agentic workflows and demonstrate the value of CalixOne.

Speaker #2: Importantly, this quarter we experienced a return to strong software growth. Software and service revenue grew to a record $50 million, up 7% sequentially and 16% year over year.

Speaker #2: As customers began to realize value from agentic workflows on Calix One, last quarter, with the completion of our platform migration, we set our focus would pivot to agentifying our BSP customers and RPOs would accelerate in the second half of 2026.

Speaker #2: Our customers moved faster than anticipated as we saw record RPOs of 386 million dollars up 3% sequentially and 11% year-over-year. Current RPOs were 162 million dollars up 3% sequentially and 21% year-over-year.

Speaker #2: Based on the strong momentum exiting the second quarter, we continue to expect RPO growth to accelerate in the second half of the year as we deliver additional agentic workflows and demonstrate the value of Calix One.

Speaker #2: Furthermore, as we discussed last quarter, we would be running on a single cloud infrastructure this quarter. As such, having garnered the corresponding cost reduction, and when combined with the agentic platform-driven demand, we yielded an 810-basis point sequential improvement in non-GAAP software and service gross margin.

Cory Sindelar: Furthermore, as we discussed last quarter, we would be running on a single cloud infrastructure this quarter. As such, having garnered the corresponding cost reduction and when combined with the agentic platform-driven demand, we yielded an 810 basis point sequential improvement in non-GAAP software and service gross margin. To give you a sense of the continued leverage in the model, I will break with precedence and say that we expect software and service gross margin to set a new record in Q3. As the AI leader in the broadband space, we are also focused on being the leader in human-centric AI deployment inside our own company. We demonstrated meaningful operating leverage in Q2 2026.

Speaker #2: And to give you a sense of the continued leverage in the model, I will break with precedence and say that we expect software and service gross margin to set a new record in the third quarter.

Speaker #2: As the AI leader in the broadband space, we are also focused on being the leader in human-centric AI deployment inside our own company. We demonstrated meaningful operating leverage in the second quarter of 2026.

Speaker #2: Non-GAAP operating expenses were approximately $122 million, or 42% of revenue, down from 45% in the prior quarter. This reflects both leverage in our growth model and early productivity gains from our human-centric AI investments.

Cory Sindelar: Non-GAAP operating expenses were approximately $122 million, or 42% of revenue, down from 45% in the prior quarter, reflecting both leverage in our growth model and early productivity gains from our human-centric AI investments, as well as lower incentive compensation and timing of certain expenses. Turning to appliances. Appliance revenue was a record $243 million, a 4% increase sequentially, and a 23% increase year over year. Non-GAAP appliance gross margin was 52.9%, representing a decrease of 460 basis points sequentially, and 170 basis points year over year due to higher memory costs, which was partially offset by memory surcharges. As a result of the above, non-GAAP net income was $31 million, or $0.47 per diluted share, above our guidance range. We generated free cash flow of approximately $12 million. Our balance sheet remains strong.

Speaker #2: As well as lower incentive compensation and timing of certain expenses. Turning to appliances, appliance revenue was a record $243 million, a 4% increase sequentially and a 23% increase year-over-year.

Speaker #2: Non-GAAP appliance gross margin was 52.9%, representing a decrease of 460 basis points sequentially and 170 basis points year-over-year, due to higher memory costs, which was partially offset by memory surcharges.

Speaker #2: As a result of the above, non-GAAP net income was $31 million, or $0.47 per diluted share, above our guidance range. And we generated free cash flow of approximately $12 million.

Speaker #2: Our balance sheet remained strong. We ended the quarter with cash and investments totaling $194 million, after deploying $69 million to repurchase 1.6 million shares.

Cory Sindelar: We ended the quarter with cash and investments totaling $194 million after deploying $69 million to repurchase 1.6 million shares. DSO was 42 days, and inventory turns were 2.7, reflecting deliberate investments in inventory to secure supply and meet continued strong demand. Turning to guidance. For Q3 2026, we expect revenue between $301 and 307 million, up 4% at the midpoint over the prior quarter. This reflects continued strong broad-based demand, even as customers are more tightly managing their own inventory in response to higher memory costs. For 2026, we expect annual revenue to grow at the higher end of the 15% to 20% growth range provided last quarter. Our Q3 non-GAAP gross margin guidance is 52% at the midpoint, reflecting higher memory cost impact.

Speaker #2: ESL was 42 days and inventory turns were 2.7, reflecting deliberate investments in inventory to secure supply and meet continued strong demand. Turning to guidance for the third quarter of 2026, we expect revenue between $301 and $307 million.

Speaker #2: Up 4% at the midpoint over the prior quarter. This reflects continued strong, broad-based demand, even as customers are more tightly managing their own inventory in response to higher memory costs.

Speaker #2: For 2026, we expect annual revenue to grow at the higher end of the 15% to 20% growth range provided last quarter. Our third quarter non-GAAP gross margin guidance is 52% at the midpoint, reflecting higher memory cost impact as we navigate this industry-wide exogenous event.

Cory Sindelar: As we navigate this industry-wide exogenous event, we remain focused on supply to ensure our customers can continue to meet strong subscriber demand, while we maintain a footprint-aggressive stance. As you are well aware, there are many inflationary cost pressures across all industries. In our space, memory cost represents the most extreme of these pressures. As we partner with our customers on surcharges, they value certainty. Certainty of costs, and most importantly, certainty of supply. Our surcharge program is structured to deliver exactly that. With the goal to recover the incremental memory costs without adding profit. This means over the long run, memory surcharges will be gross profit neutral while remaining a headwind to gross margin. Given the implementation of our memory surcharge program, we expect appliance gross margin will bottom in Q3 2026.

Speaker #2: We remain focused on supply to ensure our customers can continue to meet strong subscriber demand, while we maintain a footprint-aggressive stance. As you are well aware, there are many inflationary cost pressures across all industries.

Speaker #2: In our space, memory costs represent the most extreme of these pressures as we partner with our customers on surcharges. They value certainty—certainty of costs, and most importantly, certainty of supply.

Speaker #2: Our surcharge program is structured to deliver exactly that, with the goal to recover the incremental memory costs without adding profit. This means, over the long run, memory surcharges will be gross profit neutral while remaining a headwind to gross margin.

Speaker #2: Given the implementation of our memory surcharge program, we expect appliance gross margin will bottom in the third quarter of 2026. The third quarter non-GAAP operating expense guidance is $124.5 million at the midpoint, a sequential increase driven primarily by the timing of expense and higher incentive compensation, partly offset by continued productivity gains from our human-centric AI investments.

Cory Sindelar: The Q3 non-GAAP operating expense guidance is $124.5 million at the midpoint, a sequential increase driven primarily by the timing of expense and higher incentive compensation, partly offset by continued productivity gains from our human-centric AI investments. Michael, back to you.

Speaker #2: Michael, back to you.

Speaker #3: Thanks, Cory. In the last year, there has been much debate about AI agents and the effect they will have on customers and the markets they serve.

Michael Weening: Thanks, Cory. In the last year, there's been much debate about AI, agents, and the effect it will have on customers and the markets they serve. We believe that Calix is uniquely positioned to take advantage of the AI market opportunity in the broadband market, based on our 15-year investment in the Calix platform, and our work since November 2023 to evolve the platform and our processes for the opportunity ahead. Our customers all know they need AI, and we are best placed to deliver subscriber growth, revenue growth, churn reduction, and cost improvements with Agent Workforce Cloud in a trusted, secure, and predictable way. Predictability of AI costs is the biggest issue gaining AI adoption, our architecture has solved that problem for our customers.

Speaker #3: We believe that Calix is uniquely positioned to take advantage of the AI market opportunity in the broadband market based on our 15-year investment in the Calix platform and our work since November 2023 to evolve the platform and our processes for the opportunity ahead.

Speaker #3: Our customers all know they need AI, and we are best placed to deliver subscriber growth, revenue growth, churn reduction, and cost improvements with Agent Workforce Cloud in a trusted, secure, and predictable way.

Speaker #3: Predictability of AI costs is the biggest issue gaining AI adoption. And our architecture has solved that problem for our customers. Trusted, secure, and predictable costs is now possible for all customers regardless of size and we began to see the results of Calix 1 and agent workforce cloud in Q2.

Michael Weening: Trusted, secure, and predictable costs are now possible for all customers, regardless of size. We began to see the results of Calix One and Agent Workforce Cloud in Q2. Tripling Calix One contracts while delivering record RPOs and record software and service revenue is just a start. This is the beginning of Calix, the AI leader. Now that the platform is live and running, we are excited for the opportunity for our customers to grow in the markets they serve, and for our Calix team members as they leverage AI to transform how we do business and deliver operating leverage for our shareholders. Nancy, let's open the call for questions.

Speaker #3: Tripling Calix 1 contracts while delivering record RPOs and record software and service revenue is just the start. This is the beginning of Calix, the AI leader, and now that the platform is live and running, we are excited for the opportunity for our customers to grow in the markets they serve and for our Calix team members as they leverage AI to transform how we do business and deliver operating leverage for our shareholders.

Speaker #3: Nancy, let's open the call for questions.

Speaker #1: Carol, you can open the call for questions. Thank you.

Nancy Fazioli: Gerald, you can open the call for questions. Thank you.

Speaker #4: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.

Operator: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question has come from the line of Joseph Cardoso with J.P. Morgan. Please proceed with your questions.

Speaker #4: A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker #4: One moment, please, while we poll for your questions. Our first question has come from the line of Joe Cardoso with JP Morgan. Please proceed with your question.

Speaker #5: Hey. Hey, good morning and thanks for the questions here. For my first, if I may, I just wanted to touch on your expectations for gross margins to bottom here in the third quarter.

Joseph Cardoso: Good morning, and thanks for the questions here. For my first, if I may, I just wanted to touch on your expectations for gross margins to bottom here in Q3. Totally appreciate it's a difficult operating environment. I guess what's just driving the confidence here relative to calling the floor? Is it largely related to cycling past the grandfathered backlog relative to the surcharges, or are there other levers you're seeing relative to inventory, product redesign, et cetera, that's kind of driving your confidence here in terms of calling the floor in Q3? I have a follow-up. Thank you.

Speaker #5: I totally appreciate that it's a difficult operating environment. I guess, what's driving the confidence here relative to calling the floor? Is it largely related to cycling past the grandfathered backlog relative to the surcharges?

Speaker #5: Or are there other levers you're seeing relative to inventory, product redesign, etc., that are kind of driving your confidence here in terms of calling the floor in Q3?

Speaker #5: And then I have a follow-up. Thank you.

Speaker #2: Yeah, Joseph, it is exactly as you outlined. It is the fact that we have grandfathered a certain portion of the backlog, and as we go through the next few quarters, that backlog as a percentage of the total will shrink.

Cory Sindelar: Joseph, it is exactly as you outlined. It is the fact that we have grandfathered a certain portion of the backlog. As we go through the next few quarters, that backlog as a percentage of the total will shrink. New orders are being, the surcharges are being assessed at our current cost structure. We're also adjusting those now on a monthly basis as opposed to a quarterly basis. Over time, we expect that gap to getting to gross profit neutral to improve. I should say that our goal for the whole surcharge program is to get to gross profit neutral. As we partnered with our customers this quarter to address these higher memory costs, it became clear that they value certainty of cost, and more importantly, certainty of supply.

Speaker #2: And so, new orders are being—the surcharges are being assessed at kind of our current cost structure. And we're also adjusting those now on a monthly basis as opposed to a quarterly basis.

Speaker #2: And so, over time, we expect that gap to getting to gross profit neutral to improve. And I should say that our goal for the whole surcharge bargain is to get to gross profit neutral.

Speaker #2: And as we partnered with our customers this quarter to address these higher memory costs, it became clear that they value certainty—certainty of costs and, more importantly, certainty of supply.

Speaker #2: And so we had to modify our program to address this. And so consequently, we did not raise prices on backlog for a second time.

Cory Sindelar: We had to modify our program to address this. Consequently, we did not raise prices on backlog for a second time. Meanwhile, new orders, we will adjust to reflect our actual costs and adjust it monthly instead of quarterly. As more revenue comes in from those new orders, the closer we come to being gross profit neutral. That's why I believe in Q3, we will bottom in the appliance gross margin.

Speaker #2: And meanwhile, for new orders, we will adjust to reflect our actual costs and adjust it monthly instead of quarterly. So as more revenue comes in from those new orders, the closer we come to being gross profit neutral.

Speaker #2: And that's why I believe in Q3 we will bottom in appliance gross margin.

Speaker #5: Yep. Got it. Makes sense, Cory. Thank you. And then maybe as my follow-up—you raised the full-year guide to the higher end of the range, which, if I take literally at the high end, implies a pretty solid sequential ramp here into, well, into the upcoming fourth quarter.

Joseph Cardoso: Nope. Got it. Makes sense, Cory. Thank you. Maybe as my follow-up, you raised the full year guide to the higher end of the range, which, if I take literally at the high end, implies a pretty solid sequential ramp here into the upcoming Q4. First, am I thinking about that correctly relative to how you're framing the exit rates for the year? If so, could you help us think through the drivers, given all the moving pieces? Obviously, you guys gone into detail around the new platform momentum. I believe BEAD should start flowing through here into Q4 in terms of a tailwind, and I'd assume some benefit from the surcharging pricing there.

Speaker #5: First, am I thinking about that correctly relative to how you're framing the exit rate for the year? And if so, could you help us think through the drivers given all the moving pieces?

Speaker #5: Obviously, you guys have gone into detail around the new platform momentum. I believe BEADs should start kind of flowing through here into the fourth quarter in terms of a tailwind.

Speaker #5: And I assume some benefit from the surcharging pricing there. So maybe just help us think through if I'm thinking about that framing, as well as maybe what are the drivers here in terms of the acceleration into the fourth quarter.

Joseph Cardoso: Maybe just help us think through, if I'm thinking about that framing, as well as maybe what are the drivers here in terms of the acceleration into Q4, or, well, I guess Q3 and Q4, but maybe what's implied in the guidance. Thank you.

Speaker #5: Well, I guess third and fourth quarter, but maybe what's implied in the guidance. Thank you.

Speaker #2: Yes, yes, yes, and yes, I think, is the answer to that. If we take a look at what we're seeing from our customers, the demand environment remains strong.

Cory Sindelar: Yes, yes, and yes, I think is what's the answer to that. If we take a look at what we're seeing from our customers, the demand environment remains strong. Understanding that we can see all of their activity through our clouds, even though we're seeing these higher surcharges and them changing their ordering patterns, the underlying demand environment remains very strong. That has not changed at all in this environment. If you think about it, the quickest ROI is adding a new subscriber to an existing network. It doesn't really matter what those higher memory costs are when it comes to connecting a new subscriber to their network, they're going to move, they're going to go ahead and buy that premises equipment and move forward. Number one is the underlying demand environment is strong.

Speaker #2: And understanding that, we can see all their activity through our clouds, even though we're seeing these higher surcharges and them changing their ordering patterns.

Speaker #2: The underlying demand environment remains very strong. So that has not changed at all in this environment. And if you think about it, the quickest return on investment is adding a new subscriber to an existing network.

Speaker #2: And it doesn't really matter what those higher memory costs are when it comes to connecting a new subscriber to their network. They're going to move they're going to go ahead and buy that premises equipment and move forward.

Speaker #2: So number one is the underlying demand environment is strong. Two, you saw a return to our software growth. Exiting the second quarter, the momentum is very high.

Cory Sindelar: Two, you saw a return to our software growth. Exiting Q2, the momentum is very high, so we reiterate the fact that we expect our software to continue to re-accelerate into the back half of the year. You're correct that we expect to have some BEAD revenue pick up in Q3 and Q4 as we exit the year. No real change in terms of that demand environment. Certainly, in the BEAD environment is extending a little bit in a lot of areas, but as it relates to the impact to revenue for us in H2, no changes in that environment. We're looking at a back half that is strong across the board. Let me contextualize with a couple customer interactions.

Speaker #2: And so we reiterate the fact that we expect our software to continue to reaccelerate into the back half of the year. And you're correct.

Speaker #2: We expect to have some BEAD revenue pick up in the third and fourth quarters. As we exit the year, there's no real change in terms of that demand environment.

Speaker #2: Certainly, the bead environment is expanding a little bit in a lot of areas, but it just relates to the impact to revenue for us in the second half.

Speaker #2: No changes in that environment. And so, we're looking at a back half that is strong across the board.

Speaker #3: Let me contextualize with a couple of customer interactions. I've been on the road quite a bit over the last quarter, talking to customers. And so, to Cory's point about adding a subscriber—it's a really salient point—because we've been saying this at all times: as organizations move through their build cycles, for example, when they come to the end of building fiber, their entire organization pivots away from being a really efficient construction company to: how do I become a really great sales and marketing organization that can win subscribers?

Michael Weening: Let me contextualize with a couple customer interactions.

Cory Sindelar: I've been on the road quite a bit over the last quarter talking to customers, so Cory's point about adding a subscriber, it's a really salient point because we've been saying this at all times, is that as organizations move through their build cycles, for example, they come to end of building fiber, their entire organization pivots away from being a really efficient construction company to how do I become a really great sales and marketing organization that can win subscribers. The first thing I would say is that I continue to hear that theme in a lot of places. In fact, I had one CEO conference and a panel I was on who basically said he could see the end of really the big builds in fiber for his company, and everything that he's thinking about is how do I add subscribers?

Michael Weening: I've been on the road quite a bit over the last quarter talking to customers, so Cory's point about adding a subscriber, it's a really salient point because we've been saying this at all times, is that as organizations move through their build cycles, for example, they come to end of building fiber, their entire organization pivots away from being a really efficient construction company to how do I become a really great sales and marketing organization that can win subscribers. The first thing I would say is that I continue to hear that theme in a lot of places. In fact, I had one CEO conference and a panel I was on who basically said he could see the end of really the big builds in fiber for his company, and everything that he's thinking about is how do I add subscribers?

Speaker #3: And so, the first thing I would say is that I continue to hear that theme in a lot of places. In fact, I had one CEO at a conference and a panel I was on who basically said he could see the end of really the big builds in fiber for his company.

Speaker #3: And everything that he's thinking about is how do I add subscribers? And for Calyx, that adding a subscriber means that we install a new subscriber, we provide new services, and we have an incredible strong revenue opportunity.

Cory Sindelar: For Calix, that adding of subscribers means that, we install a new subscriber, we provide new services, and we have an incredible strong revenue opportunity. Our customer success organization and the AI tools we're putting in place are really great at helping on the marketing side. The other side of it, though, as I said in my opening statement, which cannot be understated, is that we've cracked the code on how to make AI predictable. This means that customers all know I need AI. In fact, we as Calix, as we look at the change of how we get leverage out of our operating model and how do we transform our teams, we know we need AI. The biggest challenge that we have, frankly, is how do we do it in a predictable way?

Michael Weening: For Calix, that adding of subscribers means that, we install a new subscriber, we provide new services, and we have an incredible strong revenue opportunity. Our customer success organization and the AI tools we're putting in place are really great at helping on the marketing side. The other side of it, though, as I said in my opening statement, which cannot be understated, is that we've cracked the code on how to make AI predictable. This means that customers all know I need AI. In fact, we as Calix, as we look at the change of how we get leverage out of our operating model and how do we transform our teams, we know we need AI. The biggest challenge that we have, frankly, is how do we do it in a predictable way?

Speaker #3: And our customer success organization and the AI tools we're putting in place are really great at helping on the marketing side. The other side of it, though, as I said in my opening statement, which cannot be understated, is that we've cracked the code on how to make AI predictable.

Speaker #3: And this means that customers all know, "I need AI." And in fact, we as Calix, as we look at the change of how we get leverage out of our operating model and how we transform our teams, we know we need AI.

Speaker #3: The biggest challenge that we had, frankly, is how do we do it in a predictable way? And this predictability cannot be understated, where we believe that Calix will become the easy button because not only do we offer a predictable cost model—we had 25, 30 CEOs in our office a couple of weeks ago and we provided a very predictable roadmap over the coming quarters, where we show workflow by workflow.

Cory Sindelar: This predictability cannot be understated, where we believe that Calix will become the easy button because not only do we offer a predictable cost model

Michael Weening: This predictability cannot be understated, where we believe that Calix will become the easy button because not only do we offer a predictable cost model

Michael Weening: We had 25 to 30 CEOs in our office a couple weeks ago, we provided a very predictable roadmap over the coming quarters where we show workflow by workflow, here's how we're going to agentify their business, and where we see the payoff ROI and output. Frankly, those CEOs all left feeling incredibly enthusiastic about the opportunity to transform their teams and how AI will very clearly, with a strong ROI, change their business. That's just going to snowball as other companies see this implemented within their peer group, and then they adopt quickly too, because it's inevitable. You have to adopt it. It's just about what's the fastest path with the most predictability, and that's what we've cracked the code on.

Speaker #3: Here's how we're going to identify their business and where we see the payoff, ROI, and output. And frankly, those CEOs all left feeling incredibly enthusiastic about the opportunity to transform their teams.

Speaker #3: And how AI will very clearly, with a strong ROI, change their business. And that's just going to snowball as other companies see this implemented within their peer group, and then they adopt quickly too because it's inevitable.

Speaker #3: You have to adopt it. It's just about what's the fastest path with the most predictability, and that's what we've cracked the code on.

Joseph Cardoso: Thank you, Michael.

Speaker #5: Thank you, Michael. We appreciate it.

Nancy Fazioli: Thank you, Joe.

Nancy Fazioli: Very appreciate the call.

Speaker #2: Thanks for the question.

Michael Weening: Thanks.

Joseph Cardoso: Thank you.

Speaker #1: Thank you.

Speaker #4: Thank you. Our next question has come from the line of Scott Searle with Roth Capital Partners. Please proceed with your questions.

Operator: Thank you. Our next question is coming from the line of Scott Searle with Roth Capital Partners. Please proceed with your questions.

Speaker #6: Hey, good morning. Thanks for taking the questions. Hey, Cory, maybe to just dive in quickly, the impact on the memory charges. In the third quarter, I'm wondering if you could quantify both the sales and EPS impact.

Scott Searle: Hey, good morning. Thanks for taking the questions. Hey, Cory, maybe to just dive in quickly, the impact on the memory charges in Q3. I'm wondering if you could quantify both the sales and EPS impact. It looks like just from a cursory glance that EPS would have bracketed or maybe even been higher if you had fully implemented memory surcharges across the board in Q3. Looking to the prior guidance from the Analyst Day for 2027, 2028, I wonder if you could give some early thoughts in terms of how are you progressing in terms of the comfort on the revenue outlook, and particularly on the OpEx front. Much lower in Q2. It sounds like you're going to be able to continue to leverage internal AI capabilities and efficiencies to carry that forward into the future.

Speaker #6: It looks like, just from a cursory glance, that EPS would have bracketed or maybe even been higher if you had fully implemented memory surcharges across the board in the third quarter.

Speaker #6: And then looking to the prior guidance from the analyst day for 27, 28, I wonder if you could give some early thoughts in terms of how are you progressing in terms of the comfort on the revenue outlook?

Speaker #6: And particularly on the opex front, much lower in the second quarter, it sounds like you're going to be able to continue to leverage internal AI capabilities and efficiencies to carry that forward into the future.

Speaker #6: So does the model start to change or accelerate a little bit for when we should start to see operating leverage?

Scott Searle: Does the model start to change or accelerate a little bit of when we should start to see operating leverage?

Speaker #2: Cory. So let's talk about that. We'll go ahead and talk about that first. So I think the revenue outlook is firming up. I think there are plenty of demand drivers as we look into 27, 28.

Michael Weening: Great. Let's talk about that. We'll go ahead and talk about that first. I think the revenue outlook is firming up. I think there are plenty of demand drivers as we look into 2027, 2028. Software is re-accelerating. The power of the agentic workflows is resonating with customers. We see that will continue to drive our software and our software gross margins higher. We've got a tailwind of BEAD that will happen at some point in 2027. In the meantime, customers are continuing to add subscribers. We're seeing no letup in terms of the demand environment. To reiterate our 15% growth targets for 2027, 2028, they're on track. In terms of the OpEx leverage, we are a leader in terms of the broadband space. We're obviously going to continue to be an AI leader in the human-centric deployment of AI inside of Calix.

Cory Sindelar: Great. Let's talk about that. We'll go ahead and talk about that first. I think the revenue outlook is firming up. I think there are plenty of demand drivers as we look into 2027, 2028. Software is re-accelerating. The power of the agentic workflows is resonating with customers. We see that will continue to drive our software and our software gross margins higher. We've got a tailwind of BEAD that will happen at some point in 2027. In the meantime, customers are continuing to add subscribers. We're seeing no letup in terms of the demand environment. To reiterate our 15% growth targets for 2027, 2028, they're on track. In terms of the OpEx leverage, we are a leader in terms of the broadband space. We're obviously going to continue to be an AI leader in the human-centric deployment of AI inside of Calix.

Speaker #2: Software is re-accelerating. The power of the agentic workflows is resonating with customers, and so we see that will continue to drive our software and our software gross margins higher.

Speaker #2: We've got the tailwind of BEAD, which will happen at some point in 2027. In the meantime, customers are continuing to add subscribers, so we're seeing no letup in terms of the demand environment.

Speaker #2: And so, to reiterate, our 15% growth targets for '27 and '28 are on track. In terms of opex leverage, we are a leader in the broadband space.

Speaker #2: We're obviously going to continue to be an AI leader in the human-centric deployment of AI inside of Calix. You're starting to see some evidence of that work in the quarter.

Michael Weening: You're starting to see some evidence of that work in the quarter. We expect more of that to come as we're committed to that as a strategy. I would say it's too early for us to accelerate that OpEx improvement, understand it's a keen focus inside the company to accelerate that. I'm not changing guidance at this point, which is we will drive OpEx at a lower rate than revenue growth next year, leading to operating leverage. We'll see what we can do to get to half or better, growing at half the rate of revenue or better. Leave that as a goal not a commitment.

Cory Sindelar: You're starting to see some evidence of that work in the quarter. We expect more of that to come as we're committed to that as a strategy. I would say it's too early for us to accelerate that OpEx improvement, understand it's a keen focus inside the company to accelerate that. I'm not changing guidance at this point, which is we will drive OpEx at a lower rate than revenue growth next year, leading to operating leverage. We'll see what we can do to get to half or better, growing at half the rate of revenue or better. Leave that as a goal not a commitment.

Speaker #2: We expect more of that to come, as we're committed to that as a strategy. I would say it's too early for us to accelerate that opex improvement.

Speaker #2: But understand it's a keen focus inside the company to accelerate that. But I'm not changing guidance at this point, which is we will drive opex at a lower rate than revenue growth next year, leading to operating leverage.

Speaker #2: And we'll see what we can do to get to half or better, growing at half the rate of revenue or better. Leave that as a goal, not a commitment.

Speaker #6: Oh, and Cory, just the memory impact—sales and EPS in the third quarter. That'd be helpful if you could provide some context. And Mike, if I could just quickly ask about the competitive landscape. There was a lot of talk throughout the second quarter about the Starlink impact, etc.

Scott Searle: Cory, just the memory impact sales and EPS in Q3, that would be helpful if you could provide some context. Mike, if I could just quickly, the competitive landscape, there was a lot of talk throughout Q2 about the Starlink impact, et cetera. I wonder if you could just update your thoughts in terms of, I will call it the terrestrial competitive landscape, and then throw in the satellite impact of how that is impacting your customers and what they are doing. Thanks.

Speaker #6: I'm wondering if you could just update your thoughts in terms of—I’ll call it—the terrestrial competitive landscape, and then throw in the satellite impact of how that's affecting your customers and what they're doing.

Speaker #6: Thanks.

Speaker #3: On the EPS side, Scott, essentially, it was a flip. We overperformed on EPS in the second quarter. And the impact on not changing surcharges on the backlog had an impact into the quarter, the third quarter.

Michael Weening: On the EPS side, Scott, essentially it was a flip, right? We overperformed on EPS in Q2, the impact on not changing surcharges on the backlog had an impact into the quarter, Q3. We picked up $0.05 in Q2. We lost $0.05 in Q3. For the year, we think we are EPS neutral. That was part of what we thought about in terms of partnering with our customers and trying to get through this event of higher memory costs. On the competitive landscape, especially fiber competitor versus fiber competitor, that changes market to market, town by town. Competition exists, and it really just depends on how many people are building in that market and what their offerings are.

Speaker #3: So we picked up a nickel in the second quarter. We lost a nickel in the third quarter. So for the year, we think we're EPS neutral.

Speaker #3: And that was part of what we thought about. In terms of partnering with our customers and trying to get through this event of higher memory cost.

Speaker #2: On the competitive landscape, terrestrially, fiber kind of competitor versus fiber competitor. That changes market to market town by town. So competition exists and it really just depends on how many people are building in that market and what they're offerings are.

Speaker #2: Our position remains the same is that if you're in a market and you deploy the full Calyx solution, you're going to be uniquely advantaged because of the fact that and again, this comes from a number of CEOs who have proven this theorem.

Michael Weening: Our position remains the same, is that if you are in a market and you deploy the full Calix solution, you are going to be uniquely advantaged because of the fact that, again, this comes from a number of CEOs who have proven this theorem over and over again. If you just are in market as a consumer broadband provider, you are at risk. If you are the broadband provider who takes the approach that we have built with our customers to being the dominant provider and the dominant brand in a town or in a location, you will destroy your competition because you are selling consumer, you are winning the businesses, you are in the MDUs.

Speaker #2: Over and over again, if you just are in market as a consumer broadband provider, you're at risk. If you are the broadband provider who takes the approach that we built with our customers to being the dominant provider with the dominant brand, in a town or in a location, you'll destroy your competition because you're selling consumer.

Speaker #2: You're winning the businesses, you're in the MDUs, and that entire footprint comes together to provide you roaming capabilities through SmartTown. That allows you to be the dominant brand with regards to talking to the PTA and the local school board around how you provide Wi-Fi roaming for all students who are underprivileged and who just want to have access to broadband to do homework.

Michael Weening: That entire footprint comes together to provide you roaming capabilities through SmartTown that allows you to be the dominant brand with regards to talking to the PTA and the local school board around how do you provide Wi-Fi roaming for all students who are underprivileged and who just want to have access to broadband to do homework. How do you provide roaming as an augmentation technology for police, fire, ambulance? They currently have their public safety radios, but they could be in areas where there is worse coverage, or they are using an iPhone that you have given them. Now whenever they actually hit your roaming network and where there is Wi-Fi coverage, police, fire, ambulance can actually have a faster speed and do better downloads on their iPhones and on the P25 radios.

Speaker #2: How do you provide roaming as an augmentation technology for police fire ambulance? They currently have their public safety radios. But they could be in areas where there's worse coverage or they're using an iPhone that you've given them.

Speaker #2: And now, whenever they actually hit your roaming network and where there's Wi-Fi coverage, police, fire, ambulance can actually have faster speeds and do better downloads on their iPhones and on the P25 radios.

Speaker #2: And all these things come together to you building great partnership with the mayor, with the head of parks and rec, with all these different groups, the fire chief, the police, the police chief.

Michael Weening: All these things come together to you building a great partnership with the mayor, with the head of parks and rec, with all these different groups, the fire chief, the police chief, and that allows you to become the dominant brand in your town. That brand dominance makes you local and helps you win subscribers. With regards to Starlink, as we've always been saying forever, the satellite providers, whether it's Starlink or Amazon, have a place. If you're in a super rural area where it's going to cost $500,000 to run a fiber, Starlink is a great option. If you're out on the boat, Starlink is a great option.

Speaker #2: And that allows you to become the dominant brand in your town. And that brand dominance makes you local and helps you win subscribers. With regards to Starlink, as we've always been saying forever, the satellite providers, whether it's Starlink or Amazon, have a place.

Speaker #2: So if you're in a super rural area, let's say it cost $500,000 to run a fiber, then Starlink is a great option. If you're out on the boat, Starlink is a great option.

Speaker #2: And so where it won't be an option is or where our customers know that if they lost the Starlink and they're in the town and they've got a fiber connection, then they need to really look inside their business and decide what's gone wrong.

Michael Weening: Where it won't be an option is, or where our customers know that if they lost the Starlink and they're in the town and they've got a fiber connection, they need to really look inside their business and decide what's gone wrong. Because no logical customer is going to pick a Starlink over a fiber. The capacity differences are astronomical. Fiber is going to destroy them from an experience point of view. If the service provider does a smart thing, and the smart thing, for example, is they have to offer outdoor Wi-Fi.

Speaker #2: Because no logical customer is going to pick Starlink over fiber. The capacity differences are astronomical, and so fiber is going to destroy them from an experience point of view.

Speaker #2: And if the service provider does the smart thing—and the smart thing, for example, is they have to offer outdoor Wi-Fi. And if you have an attach rate that's 40% on outdoor Wi-Fi, that customer is going to be wildly sticky, because you've now put Wi-Fi by the pool.

Michael Weening: If you have an attach rate that's 40% on outdoor Wi-Fi, that customer is going to be wildly sticky because you've now put Wi-Fi by the pool, you got Wi-Fi by the backyard, by the garage, all those different places, and there's going to be no impetus, even if Starlink uses their significant capital availability to run this at a significant loss as we expect Amazon to do. That cheap offer will be beaten over by the fact that I have a great experience, I have incredible speeds, I have Wi-Fi everywhere I need it, I have virus protection that protects me every day, and hacking protection. Plus, when I go to the local parks, as my phone picks up and it wanders around town, why would I ever go anywhere else? Satellite has a place. It's that 5% to 10% of the market.

Speaker #2: You've got Wi-Fi by the backyard, by the garage—all those different places—and there's going to be no impetus, even if Starlink uses their significant capital availability to run this at a significant loss, as we expect Amazon to do.

Speaker #2: That cheap offer will be beaten over by the fact that I have a great experience. I have incredible speeds. I have Wi-Fi everywhere I need it.

Speaker #2: I have virus protection that protects me every day, and hacking protection. And therefore, plus, when I go to the local parks, as my phone picks up and it wanders around town, why would I ever go anywhere else?

Speaker #2: So satellite has a place. It's that 5 to 10 percent of the market. Beyond that, it really comes down to customer execution and they should crush them.

Michael Weening: Beyond that, it really comes down to customer execution, they should crush them.

Speaker #5: Thanks, Scott.

Scott Searle: Thanks.

Scott Searle: Thanks, Scott. Next operator.

Nancy Fazioli: Thanks, Scott. Next operator.

Speaker #6: Thank you. Our next question has come from the line of Christian Schwab with Craig Hellum. Please proceed with your questions.

Operator: Thank you. Our next question comes from the line of Christian Schwab with Craig-Hallum. Please proceed with your questions.

Speaker #7: Hey, great. Thank you. I just want to be clear on the no surcharges on backlog. It appears to me that customers certainty on pricing and the decision not to surcharge backlog was made sometime during Q2.

Christian Schwab: Hey, great. Thank you. I just want to be clear on the no surcharges on backlog. It appears to me that customer certainty on pricing and the decision not to surcharge backlog was made sometime during Q2, as gross margins now are implied a little bit different than the Analyst Day on the 23rd. In addition, we also bought a substantial amount of stock at higher prices than where we're going to open up this morning. Is that fair, or was that the plan all along?

Speaker #7: As gross margins now are implied a little bit differently than the analysts said in the 23rd. And in addition, we also bought a substantial amount of stock at higher prices than where we were going to open up this morning.

Speaker #7: Is that fair or was that the plan all along?

Speaker #2: No, Christian. It was not the plan all along. Our plan all along was to be to do cost recovery right. That was the plan we outlined at the start of it was to get to gross profit neutral.

Michael Weening: No, Christian, it was not the plan all along. Our plan all along was to do cost recovery. That was the plan we outlined at the start of it, was to get to gross profit neutral. As we partnered with our customers, it was important for them to have certainty around price. We've made a couple changes. Backlog was adjusted in Q2, where we implemented the surcharge from Q2. To say there's no surcharges on backlog is not an accurate statement. There are. What we said is we're not going to adjust it again as we move forward. We gave them that certainty because customers were upset about changing price after the fact. That was an acknowledgement of that in our partnering with them.

Cory Sindelar: No, Christian, it was not the plan all along. Our plan all along was to do cost recovery. That was the plan we outlined at the start of it, was to get to gross profit neutral. As we partnered with our customers, it was important for them to have certainty around price. We've made a couple changes. Backlog was adjusted in Q2, where we implemented the surcharge from Q2. To say there's no surcharges on backlog is not an accurate statement. There are. What we said is we're not going to adjust it again as we move forward. We gave them that certainty because customers were upset about changing price after the fact. That was an acknowledgement of that in our partnering with them.

Speaker #2: And as we partnered with our customers, it was important for them to have certainty around price. So we've made a couple of changes. So backlog was adjusted.

Speaker #2: In the second quarter, where we implemented the surcharge from the second quarter. So to say there's no surcharges on backlog is not an accurate statement.

Speaker #2: There are. What we said is we're not going to adjust it again as we move forward, right? So we gave them that certainty because customers were upset about changing the price after the fact.

Speaker #2: So that was an acknowledgement of that in our partnering with them. And so the second side of that is that we've gone to adjusting surcharge pricing on a monthly basis versus a quarterly basis.

Michael Weening: The second side of that is that we've gone to adjusting surcharge pricing on a monthly basis versus quarterly basis. Increase the frequency at which we have a chance to adjust the new orders coming in. That's what we've done. It had an impact to Q3 gross margins, but ultimately our goal has not changed, which was to maintain a gross profit neutral stance. Over time, we will narrow that gap.

Cory Sindelar: The second side of that is that we've gone to adjusting surcharge pricing on a monthly basis versus quarterly basis. Increase the frequency at which we have a chance to adjust the new orders coming in. That's what we've done. It had an impact to Q3 gross margins, but ultimately our goal has not changed, which was to maintain a gross profit neutral stance. Over time, we will narrow that gap.

Speaker #2: So that increased the frequency at which we have a chance to adjust the new orders coming in. And so that's what we've done. It had an impact to Q3 gross margins.

Speaker #2: But ultimately, our goal has not changed. Which was to maintain a gross profit neutral stance. And over time, we will narrow that gap.

Speaker #7: Yeah, okay. That's clear, thank you for that. And then on a go-forward basis, kind of reiterating the fact of 15% annual growth through '27 and '28 plus, if memory prices continue to increase and we have surcharges, that 15% is an organic number, correct?

Christian Schwab: Yeah. Okay. That's clear. Thank you for that. On a go-forward basis, kind of reiterating the fact of 15% annual growth through 2027 and 2028 plus. If memory prices continue to increase and we have surcharges, that 15% is an organic number, correct?

Michael Weening: Yeah.

Cory Sindelar: Yeah.

Christian Schwab: Of revenue growth.

Michael Weening: All our growth is organic. Are you saying it's inclusive of surcharge?

Cory Sindelar: All our growth is organic. Are you saying it's inclusive of surcharge?

Speaker #2: All our growth is organic. Are you saying it's inclusive of the surcharge?

Speaker #7: Right. Right. So as we get to this time next year, if memory prices continue to increase, then the top-line growth rate of the aggregate company should be, to some degree, greater than 15%—is my question.

Christian Schwab: Right. As we get to this time next year, if memory prices continue to increase, then the top-line growth rate of the aggregated company should be to some degree greater than 15% is my question.

Michael Weening: We'll see about that, right? At the end of the day, let's break that up between access and prem. On the premises side, I see no impact to the higher memory costs. As we talked about, as they bring on new subscribers, particularly in an existing built network, it's the greatest return on invested capital. They're going to do that regardless of whether there's incremental memory costs. On the access side, it's really driven by CapEx budgets. As you know, we are only just a small part of the overall rising cost environment, right? There are rising costs on fiber, labor, construction, fuel, et cetera. Our customers, as they look at their CapEx portion of the business, will reevaluate how much they actually spend. There can be actually demand destruction with higher costs as it relates to the CapEx.

Cory Sindelar: We'll see about that, right? At the end of the day, let's break that up between access and prem. On the premises side, I see no impact to the higher memory costs. As we talked about, as they bring on new subscribers, particularly in an existing built network, it's the greatest return on invested capital. They're going to do that regardless of whether there's incremental memory costs. On the access side, it's really driven by CapEx budgets. As you know, we are only just a small part of the overall rising cost environment, right? There are rising costs on fiber, labor, construction, fuel, et cetera. Our customers, as they look at their CapEx portion of the business, will reevaluate how much they actually spend. There can be actually demand destruction with higher costs as it relates to the CapEx.

Speaker #2: We'll see about that. Right. So at the end of the day, let's break that up between Access and Prem. On the Premises side, I see no impact to the higher memory costs.

Speaker #2: As we talked about, as they bring on new subscribers, particularly in an existing built network, it's their greatest return on invested capital. They're going to do that regardless of whether there's incremental memory costs.

Speaker #2: On the access side, it's really driven by CapEx budgets. And as you know, we are only just a small part of the overall rising cost environment.

Speaker #2: Right. There are rising costs on fiber, labor, construction, fuel, etc. And so our customers, as they look at their CapEx portion of the business, will reevaluate how much they actually spend.

Speaker #2: So there can be actually demand destruction with the higher costs as it relates to the capex. But fortunately for Calix is that the large majority of our revenue does come from the premises side.

Michael Weening: Fortunately for Calix is that the large majority of our revenue does come from the premises side, and access is a small part of the overall business. To say that all the surcharges is additive to our revenue growth rate would probably not be an accurate statement. Hopefully that helps.

Cory Sindelar: Fortunately for Calix is that the large majority of our revenue does come from the premises side, and access is a small part of the overall business. To say that all the surcharges is additive to our revenue growth rate would probably not be an accurate statement. Hopefully that helps.

Speaker #2: And access is a small part of the overall business. So to say that all the surcharges is additive to our revenue growth rate would probably not be an accurate statement.

Speaker #2: Hopefully, that helps.

Christian Schwab: That makes it very clear. Thank you for that. No other questions. Thanks, guys.

Speaker #7: That makes it very clear. Thank you for that. No other questions. Thanks, guys.

Speaker #5: Thanks, Christian. Next call, Daryl.

Nancy Fazioli: Thanks, Christian. Next caller.

Speaker #6: Thank you. Our next question has come from the line of George Notter with Wolf Research. Please proceed with your questions.

Operator: Thank you. Our next question has come from the line of George Notter with Wolfe Research. Please proceed with your questions.

Speaker #1: Hi, guys. Thanks very much. I just had some questions about the Agentic Workforce Cloud progress here. I know you guys made a decision to bundle that with the other cloud offerings and not really charge customers on an à la carte basis for that.

George Notter: Hi, guys. Thanks very much. I just had some questions about the Agent Workforce Cloud progress here. I know you guys made a decision to bundle that with the other cloud offerings and not really charge customers on an a la carte basis for that. I think the view was that you would monetize via increased subscriber penetration over time. I'm just curious, where are we now? You've got some early feedback, I presume. Do you feel like that's still the right decision to drive for increased subscriber penetration? Do you think that model is going to work well? What's the perspective, again, a few months into the agentic rollout? Thanks.

Speaker #1: And I think the view was that you would monetize via increased subscriber penetration over time. I'm just curious, where are we now? You've got some really feedback, I presume.

Speaker #1: Do you feel like that's still the right decision—to drive for increased subscriber penetration? Do you think that model is going to work well?

Speaker #1: What's the perspective? Again, just a few months into the agentic rollout. Thanks.

Speaker #2: Yeah, great question, George. If anything, yeah, we think that's 100% right. And if anything, actually, we're even more confident in that approach because what our customers want is—what we basically did was we took everything that was à la carte.

Michael Weening: Yeah, great question, George. If anything, yeah, we think that's 100% right. If anything, actually, we're even more confident in that approach because What we basically did was we took everything was a la carte. You would go and buy everything, like you'd buy one, two, or three of the clouds. You'd add on one of our smart components. You'd bundle it all together and you do it all bespoke, which meant that customers had a lot of complexity. On one side of it, our customers, when we actually hadn't an all-in, they would say, Well, I want to buy it a la carte. Then when you make it a la carte, they say it's too complex. By going down this approach, there's a couple reasons why this is right.

Speaker #2: So you would go and buy everything like you'd buy one of the one, two, or three of the clouds. You'd add on one of our smart components.

Speaker #2: You'd bundle it all together and you do it all bespoke, which meant that customers had a lot of complexity. So on one side of it, our customers, when we actually hadn't an all-in, they would say, well, I want to buy it à la carte.

Speaker #2: And then, when you make it à la carte, they say it's too complex. So, by going down this approach, there are a couple of reasons why this is right.

Speaker #2: The first one is that you can't actually deploy AI effectively unless you're across the entire enterprise. So if you look at the three functions in a business—operations, marketing, and then everything that you're doing around service, so call center and field support—every time you interact with a customer, it requires all three of those elements to come together in a workflow to deliver an outcome.

Michael Weening: The first one is that you can't actually deploy AI effectively unless you're across the entire enterprise. If you look at the three functions in a business, operations, marketing, and then everything that you're doing around service, so call center and field support, every time you interact with a customer, it requires all three of those elements to come together in a workflow to deliver an outcome. At the first level, we believe that this had to happen because you have to have everything. That wasn't really a choice, so we went forward with that, and that's what we did. That's the first part of it.

Speaker #2: So at the first level, we believe that this has to happen because you have to have everything. So that wasn't really a choice. So we went forward with that and that's what we did.

Speaker #2: So that's the first part of it. The second part of it is now that we've been in market for a full quarter, our customers really know that they have to do AI and this provides them with a very clear approach to actually transform their business.

Michael Weening: The second part of it is now that we've been in market for a full quarter, our customers really know that they have to do AI, and this provides them with a very clear approach to actually transform their business. What happens is, whether or not, like if I want to change my marketing team, I may or may not be ready to change it at this moment in time. I now know that I have the agentic workflows that allow me to improve marketing when I am ready, and I'm ready to couple implementing AI in marketing with a change of my team. This also makes it so that our customers can go at the pace that they require. The third part of it is our greatest growth driver is when customers add subscribers.

Speaker #2: Because what happens is, whether or not I want to change my marketing team, I may or may not be ready to change it at this moment in time.

Speaker #2: But I now know that I have the agentic workflows that allow me to improve marketing when I am ready and I'm ready to couple implementing AI in marketing with a change of my team.

Speaker #2: And so, this also makes it so that our customers can go at the pace that they require. And then the third part of it is our greatest growth driver is when customers add subscribers.

Speaker #2: Making a few incremental pennies on top of a subscriber is not really the growth area, but when they, as we said, go from $1 to $10 per subscriber, they add a new subscriber, and we go from zero to great cash flow.

Michael Weening: Making a few incremental pennies on top of a subscriber is not really the growth area. As we said, we're $1 to $10 per subscriber. They add a new subscriber, we go from zero to great cash flow, and as you saw with that our margins are going back to where they were before, and we're going to achieve incredible software and cloud margins. That means that that's going to be at a very, very profitable rate.

Speaker #2: And as you saw with that, our margins are going back to where they were before, and we're going to achieve incredible software and cloud margins. That means that that's going to be at a very, very profitable rate.

Speaker #2: And so which brings me to the last point is it's very predictable for our customers and frankly, it's now that we've had a full quarter, it's very predictable for us.

Michael Weening: Which brings me to the last point is it's very predictable for our customers, and frankly, it's now that we've had a full quarter, it's very predictable for us. We can deploy AI in a highly predictable way, and our intent is not to just win a little bit here and there, but as you saw by the tripling of the cloud contracts, our intent is to roll up the market, and we have become, and this will be proven with every press release that starts flowing out like crazy, which are customer success stories, that we are the easy button for AI, and for our path to winning more subscribers, increasing revenue per subscriber, and then reducing churn, which is how they grow.

Speaker #2: So we can deploy AI in a highly predictable way and our intent is not to just win a little bit here and there, but as you saw by the tripling of the cloud contracts, our intent is to roll up the market and we have become and this will be proven with every press release, that starts flowing out like crazy, which our customer success stories that we are the easy button for AI and for a path to winning more subscribers increasing revenue per subscriber and then reducing churn, which is how they grow.

Speaker #1: Got it. And then, just as a quick follow-up to that, do you have metrics or any perspective now on customers that are actually using the agentic feature?

George Notter: Got it. Just as a quick follow-on to that, do you have metrics or any perspective now on customers that are actually using the agentic feature? What's the feedback look like there? Thanks a lot.

Speaker #1: What's the feedback look like there? Thanks a lot.

Michael Weening: It's good. We just started rolling out the workflows, we're starting to see the productivity numbers. It's a good question. We're now in the process with our success organization of going through and doing clear measured ROI with customers. Everyone sees the value of it, but have I measured the ROI? We know it's there. It's just about actually getting the physical measurements done, which takes time because, hey, I know what it costs me today. What does that workflow and that process cost me 90 days from now, is what we're focused on measuring. What you're going to see through the quarter, through Q3, and as we ramp up for connections in Q4, you're going to start seeing a lot of workflows as we get that data, which allows us to share with customers.

Speaker #2: It's good, but we just started rolling out the workflows. And so we're starting to see the productivity numbers. We are now to it's a good question.

Speaker #2: We're now in the process, with our success organization, of going through and doing clear, measured ROI with customers. So everyone sees the value of it, but have I measured the ROI?

Speaker #2: We know it's there. It's just about actually getting the physical measurements done. Which takes time because hey, I know what it cost me today.

Speaker #2: What does that workflow and that process cost me 90 days from now is what we're focused on measuring. And so what you're going to see through the quarter, through Q3, and as we ramp up for connections in Q4, you're going to see us start seeing a lot of workflows as we get that data, which allows us to share with customers.

Speaker #2: That's what our press releases are focused on, is that a customer who sees a return on investment of that agentic workflow, whether it's 10% or 70%, we'll start seeing those shared out in press releases at a rapid rate.

Michael Weening: That's what our press releases are focused on, is that a customer who sees a return on investment of that agentic workflow, whether it's 10% or 70%, we'll start seeing those shared out in press releases at a rapid rate through the end of the summer and into the early fall.

Speaker #2: Through the end of the summer and into the early fall.

Speaker #1: Thank you.

George Notter: Thank you.

Speaker #3: Thanks, George. Next caller.

Nancy Fazioli: Thanks, George. Next call.

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

Speaker #4: Thank you. Thank you. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Speaker #5: Hey, good morning. And you mentioned a return to record gross margins. On the software side, which I think prior were maybe 66%, so-called 67% plus.

Tim Savageaux: Hey, good morning. You mentioned a return to record gross margins on the software side, which I think prior were maybe 66%, so call it 67-plus. I guess my question to start with, and I have a follow-up, is where can that gross margin go? I think we have discussed the potential for that to have a seven in front of it at some point in the future. I'd be interested in your expectations for the trajectory of software and services margins a little bit farther out, and whether there's a ceiling that we should be thinking of, or how to think about that. Thanks.

Speaker #5: I guess my question to start with—and I have a follow-up—is, where can that gross margin go? I think we have discussed the potential for that to have a 7 in front of it at some point in the future, but I'd be interested in your expectations for the trajectory of software and services margins a little bit farther out, and whether there's a ceiling that we should be thinking of or how to think about that.

Speaker #5: Thanks.

Speaker #2: Thanks, Tim. We clearly see a pathway to have a 7 on the front of it. So we'll continue that mark. Ultimately, where it asymptotes to is a little bit of uncertain because it depends on some of our approach related to large customers.

Michael Weening: Thanks, Tim. We clearly see a pathway to have a seven on the front of it, so we'll continue that march. Ultimately, where it asymptotes to is a little bit of uncertainty, because it depends on some of our approach related to large customers. We could actually end up in a situation where we are driving a lot more software revenue at incredibly high gross margins, and especially with private clouds. If we're doing a private instance on a large customer, the margin in that environment is 100 points. It's hard to say how fast that'll accelerate or where it asymptotes out to, but 70 is in sight. We'll just see ultimately where it asymptotes out to. There's a lot of headroom still left to go on expanding that software and services gross margin. 70 is just a way station on to where it ultimately ends up.

Speaker #2: We could actually end up in a situation where we are driving a lot more software revenue at incredibly high gross margins. And especially with private clouds, if we're doing a private instance on a large customer, the margin in that environment is 100 points.

Speaker #2: So it's hard to say kind of how fast that'll accelerate or where it asymptotes out to. But 70s in sight, and we'll just see ultimately where it asymptotes out to.

Speaker #2: But there's a lot of headroom still left to go on expanding that software and services gross margin. 70 is just a weigh station onto where it ultimately ends up.

Speaker #5: Great. And over on the appliance side, I guess was my next question. Which was, it seems like you're looking for that to bottom and maybe tick up a bit in Q4.

Tim Savageaux: Great. Over on the appliance side, I guess, was my next question, which was, it seems like you're looking for that to bottom and maybe tick up a bit in Q4. Again, the broader question, I don't know that you're ready to guide here, but is it reasonable to expect appliance gross margins to make their way back, I don't know, to the low to mid-50s by the end of 2027? What sort of slope should we be looking at there?

Speaker #5: But again, kind of the broader question, and I don't know that you're ready to guide here, but is it reasonable to expect appliance gross margins to make their way back, I don't know, to the low to mid-50s by the end of '27, I guess, or what sort of slope should we be looking at there?

Speaker #2: Well, Tim, I would love to tell you what that looks like. But if you could tell me what memory costs are going to do, then I could probably help you triangulate on that.

Michael Weening: Well, Tim, I would love to tell you what that looks like, but if you could tell me what memory costs are going to do, then I could probably help you triangulate on that. If you believe the hyperscalers and their capital deployment, I think that next year will be harder than this year. That's only if you believe those CapEx numbers. As soon as you break on those CapEx numbers, it changes the entire pricing dynamic. It's hard to say. All I know is we've put together a program which over time will get us to a gross profit neutral stance. Regardless of what those surcharges are, we're going to continue to march to that path, and we'll just see what ultimately happens next year as it relates to memory costs. That's the best we can do at this point. Thanks, Tim.

Speaker #2: But if you believe the hyperscalers and their capital deployment, I think that next year will be harder than this year. But that's only if you believe those CapEx numbers.

Speaker #2: And as soon as you break on those capex numbers, it changes the entire pricing dynamic. So it's hard to say. So all I know is we've put together a program, which over time will get us to a gross profit neutral stance.

Speaker #2: And so kind of regardless of what those surcharges are, we're going to continue to march to that path. And we'll just see what ultimately happens next year as it relates to memory costs.

Speaker #2: And that's the best we can do at this point. Thanks, Tim.

Speaker #5: Great. Thanks.

Tim Savageaux: Great. Thanks.

Speaker #3: Thanks, Tim.

Nancy Fazioli: Thanks, Tim.

Speaker #4: Thank you. Our next question is our next question is coming from the line of Michael Genevese with Rosenblatt Securities. Please proceed with your questions.

Operator: Thank you.

Nancy Fazioli: Next question.

Operator: Our next question has come from the line of Michael Genovese with Rosenblatt Securities. Please proceed with your questions.

Speaker #6: Great. Thanks. I guess given where we are with Calix One's rollout and that's just started, and you've kind of got visibility to that driving and acceleration, I guess if we just tie that into RPO, my question would be, sort of, is there a way to kind of say how many quarters in a row you think RPO could accelerate from here given the visibility that you do have to the Calix One acceleration and going out to more and more customers?

Michael Genovese: Great. Thanks. I guess given where we are with some Calix One's rollout, and that's just started, and you've kind of got visibility to that driving an acceleration. I guess if we just tie that into RPO, my question would be, is there a way to say how many quarters in a row you think RPO could accelerate from here, given the visibility that you do have to the Calix One acceleration and going out to more and more customers? Should we just think about RPO going up through the end of the calendar year? I know RPO is usually tougher seasonally in the H1 of the year. Is there reasons to think it would also be accelerating in early 2027 as well?

Speaker #6: Should we just think about RPO going up through the end of the calendar year, or I know RPO is usually tougher seasonally in the first half of the year.

Speaker #6: Is there any reason to think it would also be accelerating in early '27 as well?

Speaker #2: Yeah, it's going to accelerate for sure because if you think about the year that we've had, right? So, Q1 was a hamper to sales because of the fact that we were in the process of converting 1,200 customers from the previous platform to the new platform, and it was highly disruptive.

Michael Weening: Yeah. It's going to accelerate for sure, because if you think about the year that we've had, right? Q1 was a hamper to sales because of the fact that we were in the process of converting 1,200 customers from the previous platform to the new platform, and it was highly disruptive. While we had exactly zero subscribers go down, we had some challenges with regards to some of our workflows, frankly on customer implementations. As one would expect, that's a disruption to sales because the sales teams then are working with customers and helping them get through that. We crossed that at the end of March, which then meant Q2, while there was some cleanup that had to be done and the product team was turning off the old system, the majority of the effort got to, okay, where's the value?

Speaker #2: While we had exactly zero subscribers go down, we had some challenges with regards to some of our workflows on, frankly, on customer implementations. And so as one would expect, that's a disruption to sales because the sales teams then are working with customers and helping them get through that.

Speaker #2: We crossed that at the end of March, which then meant Q2, while there was some cleanup that had to be done and the product team was turning off the old system, the majority of the effort got to, okay, where's the value?

Speaker #2: So we got customers back on track, and then we started to have the conversation around, okay, well, what's this going to deliver? And customers are asking the same thing.

Michael Weening: We got customers back on track, and then we started to have the conversation around, okay, well, what's this going to deliver? Customers are asking the same thing. What's in it for me? Why did we do this? You saw the impact. The impact was a tripling of contracts. I made a really important point in my comments and in the letter, and that is with regards to what were the types of customers who bought Agent Workforce Cloud contracts. Very different. In the past, we would normally go into this cycle. Q2 would've been, you have the innovators and the early adopters who are jumping all over it. Why? Because they believe in Calix. They know the business value that we offer. They're trying to change and improve how they run the business. They're trying to get ahead of it, right?

Speaker #2: What's it in for me? Why did we do this? And you saw the impact. The impact was a tripling of contracts. And I made a really important point in my comments and in the letter.

Speaker #2: And that is with regards to what were the types of customers who bought agent workforce cloud contracts. Very different. In the past, we would normally go into this cycle.

Speaker #2: Q2 would have been—you have the innovators and the early adopters who are jumping all over it. Why? Because they believe in Calix. They know the business value that we offer.

Speaker #2: They're trying to change and improve how they run the business. They're trying to get ahead of it, right? While the middle majority, late majority in the laggards all sit on the sidelines and say, I'll tell you what, when you come with ROIs like the great question George asked, show me the ROIs, but I want to see 30 of them before I actually buy.

Michael Weening: While the middle majority, late majority, and the laggers all sit on the sidelines and say, I'll tell you what, when you come with ROIs, like the great question George asked. Show me the ROIs, but I want to see 30 of them before I actually buy, because I'm a suspenders and belt decision-maker. That was the traditional cycle, which bluntly I've been living with as a leader inside Calix since the day I started, across 10 years in May. That's been probably the biggest gating element in our business. This cycle was radically different. We actually had a customer who I have personally been trying to close for almost a decade on Smart Home. A decade.

Speaker #2: Because I'm a suspenders and belt decision maker. And that was the traditional cycle, which bluntly I've been living with as a leader inside Calix since the day I started.

Speaker #2: I crossed 10 years in May. And that's been probably the biggest gating element in our business. This cycle was radically different. We actually had a customer who I have personally been trying to close for almost a decade on smart home.

Speaker #2: A decade. I have called on that leader more times than I can count, trying to convince him to transform his business and actually deploy our virus protection, malware, and all the capabilities of what we're doing with smart home.

Michael Weening: I have called on that leader more times than I can count, trying to convince him to transform his business and actually deploy our virus protection and malware and all the capabilities of what we're doing with Smart Home, and I'm a really good sales leader, and we could not get him over the line. That customer, who would then be called a late majority in our traditional, if you take what we learned in Marketing 101 in university, he would be in the late majority. He signed up for Calix Cloud and in fact, asked us to extend the contract beyond our normal three-year term. Why? Because he knows that artificial intelligence is a non-negotiable. This is not a nice-to-have. This is not, I provide my customers fiber, and I would like to differentiate my value proposition by adding virus protection or malware.

Speaker #2: And I'm a really good sales leader. And we could not get him over the line. That customer who would then be called a late majority in our traditional if you take what we learned in marketing 101 in university, he would be in the late majority.

Speaker #2: He signed up for Calix Cloud, and in fact, asked us to extend the contract beyond our normal three-year term. Why? Because he knows that artificial intelligence is now non-negotiable.

Speaker #2: This is not a nice-to-have. This is not, "I provide my customers fiber and I would like to differentiate my value proposition by adding virus protection and malware."

Speaker #2: This is everybody on the planet needs to deploy AI in their business or they're screwed. They are going to get crushed by the competitor that does it.

Michael Weening: This is everybody on the planet needs to deploy AI in their business or they're screwed. They are going to get crushed by the competitor that does it. It is that level of pressure. Every CEO is under that same pressure. I need to sit in front of my board, and it doesn't matter if my board is sophisticated or unsophisticated, they all know that when I come to the next board meeting, the only question I need to be asking is: Where's your AI plan, and how faster is it going to drive results? We did this in a predictable way. We have become the easy button if they want to deploy AI effectively because we have a 15-year track record of demonstrating that we can be trusted by our customers, that we do it in a secure manner.

Speaker #2: It is that level of pressure, and every CEO is under that same pressure. I need to sit in front of my board, and it doesn't matter if my board is sophisticated or unsophisticated.

Speaker #2: They're all know that when I come to the next board meeting, the only question I need to be asking is, where's your AI plan and how fast is it going to drive results?

Speaker #2: We did this in a predictable way. We have become the easy button if they want to deploy AI effectively, because we have a 15-year track record of demonstrating that we can be trusted by our customers.

Speaker #2: That we do it in a secure manner. And by the way, the scariest thing about AI is how dangerous it can be from a trust and security point of view.

Michael Weening: By the way, the scariest thing about AI is how dangerous it can be from a trust and security point of view. Last, we do it predictably. This predictability, I cannot understate how important this is. It is going to be a huge inhibitor on deployment for companies who cannot provide their solutions in a predictable way. I can tell you inside Calix, it is stopping a bunch of our AI projects because without the predictability with regards to what is AI going to cost, and with the craziness of tokens, it's very hard when a team comes and says, "I'd like to do this $100,000 project to implement AI to change this element of my business.

Speaker #2: And last, we do it predictably. And this predictability I cannot understate how important this is. It is going to be a huge inhibitor on deployment for companies who cannot provide their solutions in a predictable way.

Speaker #2: And I can tell you inside Calix, it is stopping a bunch of our AI projects. Because with out the predictability with regards to what is AI going to cost from and with the craziness of tokens, it's very hard to when a team comes and says, I'd like to do this $100,000 project, to implement AI, to change this element of my business.

Speaker #2: Oh, by the way, it's $100,000 to do the workflow and people transformation. But I estimate that the token cost is going to be this, though it could be 30 times as much.

Michael Weening: Oh, by the way, it's $100,000 to do the workflow and people transformation, but I estimate that the token cost is going to be this, but it could be 30 times as much, I really don't know, which means am I losing money or am I actually getting a ROI? I will tell you that in a specific example, we currently use Copilot with all of our employees. We have a cohort proposal in front of us. Over my dead body am I going to approve that when it's all token-based.

Speaker #2: I really don't know. Which means am I losing money or am I actually getting a return on investment? And I will tell you, that specific example, we currently use Copilot with all of our employees.

Speaker #2: We have a cowork proposal in front of us. And over my dead body am I going to approve that when it's all token-based. And frankly, we looked at our pilot project, and the costs are through the roof.

Michael Weening: Frankly, we looked at our pilot project and the costs are through the roof, and the ROI is nowhere to be seen other than, "Hey, my employee actually did a bunch of stuff better." If I can't see what the headcount gains are or the productivity gains, it's just like. Because employees are throwing everything and the kitchen sink into the AI engine, hoping that their job will get easier. Our predictability in the form of cost, but also we sat down with our 1,200 customers. We know there are billions of workflows they're running, and we know what can be agentified easily and what cannot, which leads to a quick ROI, means that our customer velocity is going to go through the roof. Especially as, again, back to what George said, great question, which is, where's the ROI?

Speaker #2: And the ROI is nowhere to be seen other than hey, my employee actually did a bunch of stuff better if I can't see what the headcount gains are or the productivity gains.

Speaker #2: It's just like and because employees are throwing everything in the kitchen sink into the AI engine, hoping that their job will get easier. So our predictability in the form of cost, but also we sat down with our 1,200 customers, we know they're billions of workflows they're running.

Speaker #2: And we know what can be identified easily and what cannot, which leads to a quick ROI. That means our customer velocity is going to go through the roof.

Speaker #2: Especially as, again, back to what George said—a great question—which is, where's the ROI? Well, I've got a customer success army that I talk to every single day.

Michael Weening: Well, I've got a customer success army that I talk to every single day, and they know that their number one mandate is find out what the current KPI is, implement the workflow, and get the change in KPI so that we know we can basically say, "You implement this workflow, here's your ROI." The power that we are going to bring into the broadband market is unmatched because we have access to their customer's data in a trusted way. We have access to all of their billions and billions of workflows, and we are the best place to actually turn those into AI workflows at a rapid rate. That's why we spent two and a half years building it out so that we can now. We went slow.

Speaker #2: And they know that they're number one mandate is find out what the current KPI is, implement the workflow, and get the change in KPI.

Speaker #2: So that we know we can basically say, you implement this workflow, here's your ROI. And the power that we're going to bring into the broadband market is unmatched because we have access to our customers' data in a trusted way.

Speaker #2: We have access to all of their billions and billions of workflows, and we are the best place to actually turn those into AI workflows at a rapid rate.

Speaker #2: And that's why we spent two and a half years building it out, so that we can now—we went slow. And believe me, it was painful.

Michael Weening: Believe me, it was painful to actually go slow because everybody's going AI, AI, our product officer was under constant pressure from me saying, "Get that shit out. Get it out." Right? He refused to because he knew that if we did this in an unpredictable way, then the AI would start hallucinating and would do a horrible job. Everything that we're doing is trusted, secure, and more importantly, predictable, not only from a business outcome point of view, which is the delivery of the ROI. They know that if they turn that workflow on, they're going to get this output and this improvement. Also from a cost point of view, which was the architecture that Shane and his team brilliantly implemented, which allows us to use hard and open source and eliminate tokens. All these things come together.

Speaker #2: To actually go slow. Because everybody's going AI, AI, AI. And our product officer was under constant pressure from me saying, get that shit out.

Speaker #2: Get it out. Right? But he refused to because he knew that if we did this in an unpredictable way, then the AIs would start hallucinating and would do a horrible job.

Speaker #2: So everything that we're doing is trusted, secure, and more importantly, predictable. Not only from a business outcome point of view, which is a delivery of the ROI, so they know that if they turn that ROI that workflow on, they're going to get this output.

Speaker #2: And this improvement, but also from a cost point of view, was the architecture that Shane and his team brilliantly implemented, which allows us to use hardware and open source and eliminate tokens.

Speaker #2: And so all these things come together a long way of saying, heck yeah, let's go make money. For our customers and then in turn for ourselves and our investors.

Michael Weening: A long way of saying, "Heck yeah, let's go make money for our customers, and then in turn, for ourselves and our investors.

Speaker #1: Great. Awesome. Just thanks for all that. Last question just to follow up quickly. Just it just does seem like the third quarter guides sequentially.

Michael Genovese: Great. Awesome. Thanks for all that. Last question, just to follow up quickly. It just does seem like the Q3 guide sequentially is a little bit below historical. I guess I'm asking, specifically on BEAD, was there any kind of change from the H2 of the year into the H1 of 2025? Or any other reason that's kind of holding back specifically the Q3 guide from being a little bit higher?

Speaker #1: Is a little bit below historical. And so I'm just I just guess I'm asking specifically on Bead, was there any kind of change from the second half of the year into the first half of next year?

Speaker #1: Or any other reason that's kind of holding back specifically the third quarter guide from being a little bit higher?

Speaker #2: No. No. I look at the third quarter guide and it's in line with what we outlined in terms of expectations for the year. In fact, moving to the higher end of our guidance range that we provided last quarter.

Michael Weening: No. I look at the Q3 guide, it's in line with what we outlined in terms of expectations for the year. In fact, moving to the higher end of our guidance range that we provided last quarter. I think on the underlying, everything is tracking according to our plans.

Speaker #2: So I think on the revenue line, everything is tracking according to our plan.

Speaker #1: Great. All right. Perfect. Thank you so much.

Michael Genovese: Great. All right. Perfect. Thank you so much.

Speaker #3: Thanks, Mike. Operator will take the last question.

Nancy Fazioli: Thanks, Mike. Operator, we'll take that last question.

Speaker #4: Thank you so much. Our last questions will come from the line of Ryan Koontz with Needham & Company. Please proceed with your questions.

Operator: Thank you so much. Our last questions will come from the line of Ryan Koontz with Needham & Company. Please proceed with your questions.

Speaker #5: Great, thanks. Maybe just to start with some housekeeping: I know you're not reporting on customer tiers here, but could you give us any color that you saw across your different segments there?

Ryan Koontz: Great. Thanks. Maybe just start with some housekeeping. I know you're not reporting on customer tiers here, but could you give us any color that you saw across your different segments there and maybe the source of your 12% customer concentration in the quarter, and update on any new Tier 1 engagements that may be looking at your private cloud options? Thanks.

Speaker #5: And maybe the source of your 12% customer concentration in the quarter. Update on any new tier one engagements that may be looking at your private cloud options?

Speaker #5: Thanks.

Speaker #2: Yeah, Ryan. Yeah, we're not going to provide any kind of color on customer breakdown or mix. And the 12% customer in the quarter—we're not at liberty to disclose who that is.

Michael Weening: Yeah, Ryan. We're not going to provide any color on customer breakdown on mix. The 12% customer in the quarter, we're not at liberty to disclose who that is. The expectation is, yes, they were a 10% customer in the quarter, but they likely will not be a 10% customer for the year. Kind of understand that it was a blip in the quarter, and you wouldn't expect to see that happen again. On customer engagement, I kind of gave a lot of color in my last answer with regards to what the engagements are like. That goes across the board. That's all sizes of the customers. The contracts that we closed in the quarter were actually, the majority of them were smaller customers, which is pretty normal. You see that, but we're broadly engaged in sales cycles across all customer sizes.

Cory Sindelar: Yeah, Ryan. We're not going to provide any color on customer breakdown on mix. The 12% customer in the quarter, we're not at liberty to disclose who that is. The expectation is, yes, they were a 10% customer in the quarter, but they likely will not be a 10% customer for the year. Kind of understand that it was a blip in the quarter, and you wouldn't expect to see that happen again. On customer engagement, I kind of gave a lot of color in my last answer with regards to what the engagements are like. That goes across the board. That's all sizes of the customers. The contracts that we closed in the quarter were actually, the majority of them were smaller customers, which is pretty normal. You see that, but we're broadly engaged in sales cycles across all customer sizes.

Speaker #2: But the expectation is, yes, they were a 10% customer in the quarter, but they likely will not be a 10% customer for the year.

Speaker #2: So kind of understand that it was a blip in the quarter and you wouldn't expect to see that happen again. And then on customer engagement, I kind of gave a lot of color in my last answer with regards to what the engagements are like.

Speaker #2: And that goes across the board. That's all sizes of customers. The contracts that we closed in the quarter, we're actually the majority of them were smaller customers, which is pretty normal.

Speaker #2: You see that? But we're broadly engaged in sales cycles across all customer sizes. And the great thing now is that we're back to selling, because we're done with a two-and-a-half-year implementation.

Michael Weening: The great thing now is that we're back to selling because we're done. With larger customers, they have longer deal cycles. On a larger customer, you're 12 to 24 months on a deal cycle. We're now deep into it, and more importantly, we're not talking about PowerPoints, we're actually showing things. Great momentum.

Cory Sindelar: The great thing now is that we're back to selling because we're done. With larger customers, they have longer deal cycles. On a larger customer, you're 12 to 24 months on a deal cycle. We're now deep into it, and more importantly, we're not talking about PowerPoints, we're actually showing things. Great momentum.

Speaker #2: And we can actually demo it and show it. So, with larger customers, they have longer deal cycles. So the average for a large customer is 12 to 24 months on a deal cycle.

Speaker #2: So we're now deep into it. And more importantly, we're not talking about PowerPoints. We're actually showing things. So great momentum.

Speaker #5: Makes sense. And then maybe on your RPOs, you talked about expecting acceleration there. We did see a divergence in Q2 between current picking up and kind of that long-term not growing as much.

Ryan Koontz: Makes sense. Maybe on your RPOs, you talked about expecting acceleration there. We did see a divergence in Q2 between current picking up and that long-term not growing as much. Can you maybe expand on that in terms of long-term RPO expectations going forward? Do you think that'll normalize going forward as you get some renewals?

Speaker #5: Can you maybe expand on that in terms of the long-term RPO expectations going forward? Do you think that'll kind of normalize as you get some renewals?

Speaker #2: Yeah, Ryan, it's always a function of the tail on those RPOs and subject to customers coming back up for renewal. My expectation is that with the Calix One contracts, we'll see an early renewal cycle.

Michael Weening: Yeah, Ryan, it's always a function of the tail on those RPOs and subject to customers coming back up for renewal. My expectation is that with the Calix ONE contracts, we'll see an early renewal cycle. You will probably see that total RPO growth will continue. Obviously, the current RPOs of Calix ONE eliminates the effect of the shrinking renewal, the tail coming in. Strengthening the current RPOs is really what you want to focus in on. That being said, with the power of the Calix ONE platform, I would expect customers of all sizes to renew their contracts early to move on to the platform. I think you're going to see total RPOs grow.

Cory Sindelar: Yeah, Ryan, it's always a function of the tail on those RPOs and subject to customers coming back up for renewal. My expectation is that with the Calix ONE contracts, we'll see an early renewal cycle. You will probably see that total RPO growth will continue. Obviously, the current RPOs of Calix ONE eliminates the effect of the shrinking renewal, the tail coming in. Strengthening the current RPOs is really what you want to focus in on. That being said, with the power of the Calix ONE platform, I would expect customers of all sizes to renew their contracts early to move on to the platform. I think you're going to see total RPOs grow.

Speaker #2: So you will probably see that total RPO growth will continue, but obviously the current RPOs of one kind of eliminates the effect of the shrinking renewal, the tail coming in.

Speaker #2: So, strengthening the current RPOs is really what you want to focus in on. That being said, with the power of the Calix One platform, I would expect customers of all sizes to renew their contracts early to move on to the platform.

Speaker #2: And so I think you're going to see total RPOs grow.

Speaker #5: Makes sense. Great. And then maybe lastly on you talked about token costs and your use of open source and you've migrated to GCP. Maybe expand on that a little bit in terms of how you compare competitively with other options with your open source approach?

Ryan Koontz: Makes sense. Great. Then maybe lastly on, you talked about token costs and your use of open source, and you've migrated to GCP. Can you maybe expand on that a little bit in terms of how you compare competitively with other options with your open source approach?

Speaker #2: Well, other options than what regard?

Michael Weening: What other options in what regard?

Cory Sindelar: What other options in what regard?

Speaker #5: Well, just if you would implement this on a kind of an off-the-shelf frontier model or something like this. I mean, what type of cost savings are you seeing relative to?

Ryan Koontz: Well, just if you would implement this on an off-the-shelf frontier model or something like this, what type of cost savings are you seeing relative to-

Speaker #2: So, again, let's talk about that. Right. Okay. I get what you're saying. So, when a company goes and uses our customer intelligence and decides to build it in a bespoke manner, right, that's the first thing. The challenge that they have is that they also are now entering into software life cycles.

Michael Weening: Okay, let's talk about that. Right. Okay, I get what you are saying. When a company goes and uses artificial intelligence and decides to build it in a bespoke manner, right? That is the first thing is that the challenge that they have is that they also are now entering into software life cycles, and they need to consider that. With regards to us using a frontier model or using our hardened open source, the difference is that we do not really see the gains of it. If you compare the gap between what is a frontier model and what is an open source model, it is a very small gap, especially if you look at the workloads that we are doing. We are not asking this system to go and code a new back office system or do incredibly crazy things.

Cory Sindelar: Okay, let's talk about that. Right. Okay, I get what you are saying. When a company goes and uses artificial intelligence and decides to build it in a bespoke manner, right? That is the first thing is that the challenge that they have is that they also are now entering into software life cycles, and they need to consider that. With regards to us using a frontier model or using our hardened open source, the difference is that we do not really see the gains of it. If you compare the gap between what is a frontier model and what is an open source model, it is a very small gap, especially if you look at the workloads that we are doing. We are not asking this system to go and code a new back office system or do incredibly crazy things.

Speaker #2: And so they need to consider that. With regard to us using a frontier model or using our hardened open source, the difference is that we don't really feel we can see the gains from it.

Speaker #2: So, if you compare the gap between what is a frontier model and what is an open source model, it's a very small gap, especially if you look at the workflows that we're doing.

Speaker #2: We're not asking this system to go and code a new back office system or do incredibly crazy things. We're asking it to take what is a well-defined workflow, a well-defined context that exists in our knowledge layer, and then apply that workflow with agents to execute against clearly defined boundaries and drive great outcomes.

Michael Weening: We are asking it to take what is a well-defined workflow, well-defined context that exists in our knowledge layer, then apply that workflow with agents to execute against clearly defined boundaries, and drive great outcomes. Our use cases, our workflows, and the models that we are going after, actually, they lend themselves perfectly to this approach. I do not need to paint you flying on a unicorn over a mountain and make it look 3D authentic, right? This is not the use case. Yeah, it is highly applicable.

Cory Sindelar: We are asking it to take what is a well-defined workflow, well-defined context that exists in our knowledge layer, then apply that workflow with agents to execute against clearly defined boundaries, and drive great outcomes. Our use cases, our workflows, and the models that we are going after, actually, they lend themselves perfectly to this approach. I do not need to paint you flying on a unicorn over a mountain and make it look 3D authentic, right? This is not the use case. Yeah, it is highly applicable.

Speaker #2: And so our use cases, our workflows, and the models that we're going after actually they lend themselves perfectly to this approach. So I don't need to paint you flying on a unicorn over a mountain.

Speaker #2: I make it look 3D authentic, right? This is not the use case. So, yeah, it's highly applicable.

Speaker #5: Thanks so much.

Ryan Koontz: Thanks so much.

Speaker #3: Thanks, Ryan. And thank you, Darryl.

Nancy Fazioli: Thanks, Ryan. Thank you, Darryl.

Speaker #2: Thank you, Ryan.

Michael Weening: Thank you, Ryan.

Speaker #3: We can close the call.

Nancy Fazioli: We can close the call.

Speaker #1: Thank you so much, everyone. This now concludes today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Operator: Thank you so much, everyone. This does now conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Nancy Fazioli: Thank you.

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