Calix Inc

NYSE:CALX

Earnings Call Transcript 2019-Q1

[Operator]

Greetings. Welcome to the Calix Q1 2019 Earnings Conference Call.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the conference over to your host Thom Dinges, Director of Investor Relations. Mr. Dinges, you may begin.

[Thomas Dinges, Director of IR]

Thank you, operator, and good afternoon, everyone. Thank you for joining our Q1 2019 earnings conference call. Today on the call, we have President and CEO, Carl Russo; as well as Chief Financial Officer, Cory Sindelar.

As a reminder, this morning we released our letter to stockholders in an 8-K filing as well as on the Investor Relations section of the Calix website. This conference call will be available for audio replay in the Investor Relations section of the Calix website.

Before we continue, I want to remind you that in this call, we'll refer to forward-looking statements, which include all statements we make about our future financial and operating performance, growth strategy and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in today's letter to stockholders and in our annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates.

Also on this conference call, we will discuss both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in our letter to stockholders. Unless otherwise stated on this call, we will reference non-GAAP measures.

With that, let me turn the call over to Carl. Carl?

[Carl Russo, CEO & President]

Thank you, Tom. Our pursuit of an all platform model to ride the wave of disruption moving through our industry continues in 2019. Our first quarter was a good one in every respect except one.

Bookings were in line with our plan delivering solid 7% year-over-year growth. Gross margin expanded by 380 basis points year-over-year. And now our pace of innovation continued unabated even as our investments were tightly controlled with OpEx declining more than 10% year-over-year.

The one aspect that did not go well is that one of our supply chain partners did not meet our needs nor did they meet their commitment. While they are improving, they are not yet at their committed production rate and we expect some dampening of revenue in the second quarter as a result. I am disappointed and I am sorry for the impact this has had on our customers, our employees and our stockholders.

What isn't dampening is the enthusiasm for our platforms. As of today, bookings are ahead of plan for the second quarter. This is exciting and a direct result of our customers seeing the value of our platforms. Some examples of the value derived by our customers are, marketing campaigns that are yielding ROIs greater than 50 times, increase take rates on marketing campaigns to 80%, increase service revenue by over 30% in the first year, reducing truck rolls by 30% within the first three months of deployment, reduced service technician interventions by 83%, reduced support call times by 50% and reduce OSSBS integration from 18 months the 10 weeks.

And these are just some of the benefits, we have already announced. Given these benefits, it is no surprise that in the first quarter another 25 new customers choose Calix to build their next generation service offerings. And we're just getting started. Stay tuned to hear more outstanding outcomes like these in the coming months.

In conclusion, we have it right. We have the right platforms and the right services at the right time and a temporary supply chain issue will not slow us down. With that, I strongly encourage each of you to download our stockholder letter and get all the details on the first quarter and a view into the future for Calix.

Let's open the call for questions. Operator?

[Operator]

At this time, we'll be conducting a question-answer session. [Operator Instructions] Our first question comes from George Notter, Jefferies. Please proceed with your question.

[George Notter, Jefferies]

Hi, guys. Thanks very much. I guess I wanted to go back to the supply chain issues and I read the letter certainly but I guess I'm wondering what the outlook is right now in terms of that manufacturing partner coming up to speed. Any more you could tell us about the nature of the supply chain problem would be great as well. I'm just trying to handicap kind of how and when we get pass this.

[Carl Russo, CEO & President]

First of all thanks for getting up early, George. I know this is probably not early for you, but I do appreciate it. We believe it will be largely in balance by the end of the quarter. That being said we have clearly dampened our revenue guidance for the quarter based upon what we perceived to be as these issues will not be complete.

So I mean if you're asking me for our ballpark, we think greater with this manufacturer, greater than 80% of it will sort of be there, but they still have quite a bit of work to do. Production is flowing. So let me give you at least the present tense statement.

There are production units flowing and we are in essence rationing them out to our customers to make sure that we keep them in deployment mode. But we're being very sensitive about shipping our inventory to if you will their inventory because if we do that we're not helping our other customers. What else can I tell you? Does that give you enough color at least to start and maybe you've got to give some.

[George Notter, Jefferies]

Yes sure. My assumption is that this is a new manufacturing partner that's outside of China that we're ramping for the first time. Is there something different or unusual about this program that surprised you in terms of the ability to ramp and get to volume. I guess I'm just trying to stand exactly what the precise issue was and then you know why we're going to get past that this quarter.

[Carl Russo, CEO & President]

So let's put this. So let me paint that picture back to where we started. As you know we've been slowly and deliberately reengineering our supply chain to fit our all platform model. And we have plans to continue that over the next couple of years when the US tariffs are imposed. We're now in a situation where you're dealing with a 10% threatening a 25% tariff. And so we made the decision to accelerate that reengineering we've moved to in essence two new vendors. We have three major vendors in our supply chain. We moved to two new ones in that process.

There is no magic here. So these are not new products being manufactured per say these are existing products that were simply being moved they were being moved to a world class manufacturer and they I mean to be blunt they simply did not execute. You know if I compare the risk of this versus the risk of eating the tariffs that that's a no brainer. This is the correct risk to take.

We went ahead and bought ahead on inventory. And we're counting on them to ramp late in the quarter and they got off to a late start. There's not much more to it. They are ramping now. And you know to be blunt, they are paying all of the expert fees and overages. So they understand what occurred. And they'll remedy it accordingly. But there's is no magic here.

[George Notter, Jefferies]

Okay. Got it. And then just in terms of the allocation of product to customers I guess I was surprised to hear you say that or commentary about 25 new customers in the quarter. Does it make sense to be marketing the new customers given these supply chain constraints right now, I guess I'm just wondering how you're allocating product across the customer base right now and fulfilling the demand.

[Carl Russo, CEO & President]

Well, remember we have a set of products that don't have hardware associated with it. So again, it absolutely makes sense for us to continue our marketing effort than the demand for what we are offering is in the market. And so for sure we are going to continue to market and grow the business.

If this was an unconstrained problem, then I think the answer to your question would be probably no. But it's not an unconstrained problem. It's a matter of a number of weeks behind the initial ramp that they are committed to. And so again we believe we'll be largely through it in this quarter. Don't know that we would make no pause in that.

[George Notter, Jefferies]

Okay. Thank you very much I appreciate the commentary.

[Carl Russo, CEO & President]

Thanks George.

[Operator]

Our next question comes from Christian Schwab, Craig Hallum. Please proceed with your question.

[Tyler Burmeister, Craig Hallum]

This is Tyler on for Christian. Thanks for taking quick question. So you stated in the letter that you expected to reach supply demand equilibrium in Q3. It looked like the shortfall to your demand was about 15 million Q1. I was wondering, I guess first what was the all the shortfall to demand, revenues in Q2. And then do you expect there ever to be made up in the second half or is this kind of lost revenue and then. We'll return to kind of a normal level in the Q3, Q4.

[Carl Russo, CEO & President]

Yeah. So I'm not sure I would characterize the shortfall in demand in Q2 much more than saying that it was significant, but not enormous. And look we expect over time that demand to be fulfilled in the second half.

[Tyler Burmeister, Craig Hallum]

All right. That works. That's all for me. Thanks guys.

[Carl Russo, CEO & President]

Thanks Tyler.

[Operator]

[Operator Instructions] Our next question comes from Tim Stelqua, Northland Capital. Please proceed with your question.

[Tim Stelqua, Northland Capital]

Good morning. A couple quick couple of questions for me. There's a comment on the letter to the extent of larger customers we're stronger for you in Q1 many medium sized customers a bit weaker. I think there's probably some reference to the Windstream they're kind of being in that category.

And I wonder if those that come in applies to bookings or revenue or both. And what do you how you could characterize kind of your 10% customer situation and whether you might have had any new ones in the quarter having referenced you know strength to your kind of customer deploying next gen access networks.

[Carl Russo, CEO & President]

Thanks Tim. So. So let me see if I can address your question by segments. So let's go let's go to the headwinds First does the headwinds in their legs. So those are the publicly traded wireline companies have continued into the first quarter. And so we are planning the our likes to be down this year excuse me.

Obviously you had Windstream as bankruptcy announcements consolidated recently eliminated their dividend. You hear themes of the leveraging from Consolidated and from CenturyLink so we expect them as a group to be down on the larger customers. We're continuing to see very positive momentum.

We did not have a new 10% customer but it is a significant customer to be sure. And I will stand on my earlier comment that they will be a 10% customer any given quarter this year. As you are probably aware following their earnings announcements they are quite robustly committed to delivering their one fiber network an intelligent edge network over these next couple of years so they continue unabated but is that sort of shape for you. What's going on.

[Tim Stelqua, Northland Capital]

It does and maybe I can add to that whether you've seen any initial ramp with UK customer or what your sort of expertise expectations are for that project rolling out through to the year and I have one follow up.

[Carl Russo, CEO & President]

Yeah that has started but it's the early days. That's correct. You on your follow up Tim

[Tim Stelqua, Northland Capital]

Okay well and this is kind of going back to your wealth to Verizon really. I mean obviously in addition to one fiber there are clearly in the vanguard in terms of 5-0 out and you know I wonder if he could discuss both there and I'd say more generally as you look at market opportunities the extent to which some of the you know fiber access front haul back haul type infrastructure opportunities for you are beginning to converge with carrier 5G plans in any way or not?

[Carl Russo, CEO & President]

I think you're actually in your question phrased it correctly. I think you have a technology leader that's always been an engineering oriented company and Horizon that's out in front of what's going on in this market. So there's no question that technologies converge and we'll be deployed as such. But I think we are still in very, very early days of this next wave of deployments.

So I think 99% of what's going to happen in 5G is in front of us not obviously behind us. If your question is one of timing I think this is another 5 to 10 year build and I think you're seeing Verizon lead that pack. Does that help shape it for you.

[Tim Stelqua, Northland Capital]

It does. Thanks very much.

[Carl Russo, CEO & President]

Thanks Dan

[Operator]

[Operator Instructions] There are no further questions at this time and that will now turn the call back over to Tom Dinges is for closing remarks.

[Thomas Dinges, Director of IR]

Thank you, operator. Calyx Management we'll be participating in a number of investor conferences during the second quarter of 2019. Information about these future investor events is posted on the Events and Presentations page of the Investor Relations section of calico. Once again thank you to everyone on this call and on the webcast for your interest at Calyx and thank you for joining us today. This concludes our conference call. Goodbye for now.

[Operator]

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