Calix Inc

NYSE:CALX

Earnings Call Analysis

Revenue Edge Sees Dip, Steady Growth Expected

This quarter marks the third consecutive one where inventories of revenue edge products reduced, this time by approximately 6%. These reductions stem from shorter lead times which now stand between 12 to 14 weeks, allowing customers to lower their buffer stocks post-pandemic-induced supply chain adjustments. In terms of customer structure, the company did not have any customers accounting for over 10% of revenues during the quarter, and the distribution of large and medium-sized customers has remained stable compared to previous periods. Looking forward, the company anticipates a conservative continued sequential growth of 1% to 4% for the next few quarters until larger government funding becomes available.

Transformative Momentum Recognized in Key Product Lines

The company has embarked on a transformative journey, illustrating remarkable traction in its new product lines primarily targeting underserved segments. Newly initiated SmartBiz and SmartTown products have struck a chord with customers, identified as high-margin growth opportunities. SmartBiz, in particular, filled a substantial gap in the market by providing tailored solutions for small businesses, foregoing the complexity and poor margins of scaled-down enterprise technology. Commencing production in August, SmartBiz’s customer reception has soared, signaling a notable revenue opportunity enhanced by higher Average Selling Prices (ASPs). Similarly, SmartTown is gaining significant momentum as customers leverage the platform to ideate community-focused solutions, such as secure networks for first responders – initiatives that are receiving approval and engagement from local officials and communities.

Growth Expectations and Financial Projections

The discussion led to crystallizing financial outlooks that project a 1% to 4% sequential quarterly growth, albeit with a conservative approach favoring the lower end of the spectrum. This caution stems from uncertainties in government funding and how those flows will affect customer decisions. Taking a step back, high gross margins were highlighted in the third quarter, paving the way for a healthy gross margin in the fourth quarter, helped by the adoption of software and managed services. This trajectory influences the forward-looking guidance for 2024, which reaffirms a target model predicting an increase in gross margin by 100 to 200 basis points on a higher base exiting 2023.

A Strategic Focus on Margin and Cash Flow over Revenue

A clear and unyielding philosophy drives the company’s strategy – prioritizing margins and cash flow above chasing revenue. Management contends that their platform distinctly benefits both the company and the investors by fostering sustainable growth and offering higher returns. This approach underscores the leadership’s commitment to fostering strategic partnerships with service providers who value the company’s platform, indicating an interest in expanding the customer base from small to medium-sized companies without conceding profit margins for market share.

The Evolution of Product Branding

Addressing the notion of branding, the company acknowledged the evolution of their cloud products’ names, underscoring they are not mere cosmetic changes but reflective of enhanced capabilities and market positioning. The Marketing Cloud, for instance, is now considered the Engagement Cloud, a pivot representing its broader role in managing customer journeys across various interaction touchpoints. This transition aligns with the company's ambition to deepening customer engagement and providing value beyond the industry norms, emphasizing proactive and transparent value delivery to their clients.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, everyone, and welcome to the Calix Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations. Sir, please go ahead.

[Jim Fanucchi, executive]

Thank you, Cath, and good morning, everyone. Thank you for joining our third quarter 2023 earnings call.Today on the call, we have President and CEO, Michael Weening; and Chief Financial Officer, Cory Sindelar. As a reminder, yesterday, after the market closed, Calix issued a news release, which was furnished on a Form 8-K, along with our stockholder letter, which was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for a webcast replay in the Investor Relations section of our website.Before I turn the call over to Michael for his opening remarks, I want to remind everyone on this call, we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in the third quarter 2023 letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates.Also on this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the third quarter of 2023 letter to stockholders. Unless otherwise stated, all financial information referenced on this call will be non-GAAP.With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead.

[Michael Weening, executive]

Thank you, Jim.In the third quarter of 2023, the Calix team continued our track record of improved financial performance across 4 measurable objectives that we've outlined for investors. First, delivery of revenue growth continued as we achieved our 10th consecutive quarter of sequential growth while delivering record revenue. Our demand frontier remains strong as broadband service providers that we call BSPs continue to recognize that building fiber is not enough as speed as a go-to-market strategy will not win in the long term.Our ConneXions, our customer success and innovation conference held last week, we focused on how BSPs can transform their business with the grow your community playbook, which is their recipe for success as they take on the legacy and consumer giants. The playbook clearly lays out how a BSP can leverage the Calix platform and managed services to simplify, which yields the highest margins and the fastest time of the market, excite, which creates the subscriber experiences that yield the highest net promoter stores and grow for their investors, for their members, if they are cooperative and for the communities they serve.Second, gross margin expansion continued with our fifth consecutive quarter of margin growth, while we delivered record gross margin as strategically aligned BSPs continue to expand their use of the Calix platform and managed services to achieve their business and financial goals. Third, we executed disciplined operating expense management following the model outlined at the Investor Day and continue to invest fulsomely to take advantage of the once-in-a-generation growth opportunity ahead. Fourth, ongoing predictability continued as we met or exceeded the guidance that we laid out for investors in July.In the third quarter, I continue to invest a significant amount of time meeting with customers, prospects, partners and team members. I have just returned from our most successful ConneXions ever. Attendance set a new record at almost 3,000 attendees and the excitement in the room was possible as Calix is perfectly positioned to be the catalyst for the biggest disruption our industry has ever seen.Our mission and the disruption we are enabling is evidence on the main stage, which you can see on the videos at calix.com. Tombigbee Fiber shared how their cooperative leveraged the Calix platform and managed services to beat the industry's norm of a new broadband provider requiring 7 years to get to cash flow positive. They achieved cash flow positive in 2 and began generating 7-figure monthly profits in year 3. In addition, they launched Bark in 2 weeks for employees and subscribers to protect children from cyber bullying and deploy SmartTown to cover 9 football fields with a return on investment that was significantly higher than traditional advertisers. It is easy to see why their Net Promoter Score is 91.Hunter Communications shared their journey from serving businesses to serving the entire community by leveraging the end-to-end Calix platform and managed services such as SmartHome and SmartBiz. Our platform and managed services have enabled their team to lead their market, with average online reviews of 4.8 out of 5 when competitors are as low as 1.1, exceeding 30% take rates in only 18 months and growing revenue by 300% and EBITDA by 400%.United Fiber, founded in 1937 as an electric cooperative, shared how by leveraging the unique Calix broadband platform and growing managed services portfolio, they transform their economics. Broadband revenue has enabled them to freeze electric rate increases since 2015 and returned $9 million to members. They were told it would take 12 years to achieve cash flow positive and they did it in 4. They have continued that success growing to 32,000 subscribers across 45 communities. Through the quarter, our broadband platform continued to enhance our partner ecosystem that enables BSP success. Most notable, we announced a significant expansion of our partnership through a joint road map with NIST, the leading OSS, BSS and solution provider to roll broadband and electric cooperatives.Our ongoing focus on our purpose-driven culture, which kind of still the evolving to meet the needs of our team members, customers and partners remains a focal point and a key driver on why people want to join Calix. In the investor letter, we highlighted that the industry continues to acknowledge our culture and products through awards, such as the best Tech Culture from TMC and Calix Marketing Cloud winning a technology award for superior marketing insights and analysis. It remains a great time to be part of the Calix team as we continue to embrace the notion of constant improvement through our better, better, never best mindset. And our leadership team continues to believe that we're just getting started.Before I close, I'll turn it over to Cory to expand on the team's stellar performance in the third quarter. Cory?

[Cory Sindelar, executive]

Thank you, Michael.The Calix team again executed well across the board. And we delivered our 10th consecutive quarter of sequential revenue growth, with record quarterly revenue of $263.8 million. We also saw our fifth consecutive quarter of gross margin expansion with non-GAAP gross margin of 53.8%, an increase of 100 basis points from last quarter. This improvement in gross margin was due to the continued expansion of our platform and managed services, plus a small product shift to Intelligent Access Edge from Revenue EDGE and the sell-through of a lower amount of systems with excessively priced components.I'm also pleased to deliver -- that we delivered our second consecutive quarter of double-digit free cash flow. As we have said previously, the added benefit of our platform model is a low SKU count and component fungibility between SKUs. This allows us to better manage our inventory levels and have the right inventory at the right time to meet our customers' demand.During the third quarter, we saw continued improvement in component lead times, and our purchase commitments decreased by $27 million from the second quarter to $227 million. This is down $143 million after peaking a year ago at $370 million. As component lead times continue to normalize, we expect to see further reduction in purchase commitments and improvement in inventory turns and a reduction in supplier deposits. These reductions in working capital requirements, combined with sequential revenue growth, expanding gross margin and disciplined OpEx investment will result in significantly more free cash flow. We expect to continue to generate double-digit quarterly free cash flow and more than $100 million of free cash flow in 2024, further enhancing our already pristine balance sheet.Back to you, Michael.

[Michael Weening, executive]

Thank you, Cory.With our unique platform and managed services model and a clear ability to innovate at a pace that has never been seen before in this industry, we remain excited about the opportunity ahead for Calix and are strategically aligned BSP customers and partners. They are leveraging our end-to-end platform, cloud and growing ecosystem of managed services to deliver offerings across residential, business, education and the communities they serve, growing market share and subscriber satisfaction, thereby delivering high margins and cash flows that are the envy of the industry. Backed by our unique broadband platform and managed services model and unmatched financial strength, we are uniquely positioned ahead of the tens of billions of stimulus dollars that is expected to positively impact the market over the many years to come. This is a once-in-generation opportunity, and we are just getting started.Jim, let's open the call for questions.

[Jim Fanucchi, executive]

Thanks, Michael.Cath, we're ready to open the call for Q&A.

[Operator]

[Operator Instructions] Our first question comes from George Notter from Jefferies.

[George Notter, analyst]

I wanted to ask about customer inventories. In the shareholder letter, I think you guys mentioned the Revenue EDGE products were down about 6% sequentially. Can you talk about how much -- I think this is actually the third quarter in a row where you guys have been bleeding down those inventories. But can you talk about how much inventory is left out there? And then also, when might you exhaust that customer inventory in terms of your attempts to bleed that down.

[Michael Weening, executive]

George, thanks for the call -- for the question. Sure. This is a function of lead times, right? So as lead times continue to come in, not only for us and our vendors but for our customers, they're continuing to manage down their buffers. And we've been seeing this from the beginning of the pandemic. We've been using the information that we have to help them with those inventory decisions. And so we did all of this while continuing our sequential growth in a predictable fashion. So we'll just continue to do it. It's hard to say where that will level out. But clearly, they're getting further along with managing to an appropriate buffer level given the -- inside the lead times that we're currently giving them.

[George Notter, analyst]

Got it. And then do you have a sense for how much that inventory might be? Could you talk about it in terms of weeks or months of inventory? What sense do you have for how much is out there?

[Michael Weening, executive]

So George, as a matter of their comfort level of where do they level out at and so I think this is one of those adjusting things that happen over time. Coming out of the pandemic can do supply chain crisis, they clearly had more inventory than they wanted. And as they get more supply certainty, they're going to adjust that down over time. So I can certainly understand why investors are sensitive to this issue, right? Because there's a lot of other companies out there reporting challenges, but nothing has changed in our business. We continue to use the information that we have available to us then manage these buffers and continue to meet their subscriber demand.

[George Notter, analyst]

Is it -- just a follow-on on that. Is it possible to give us a sense for where your lead times are now in terms of weeks or months in terms of product deliveries?

[Michael Weening, executive]

Yes. Our stated lead times are between 12 and 14 weeks right now.

[George Notter, analyst]

Great. Okay. And then I guess I can assume from the dynamic you guys are seeing. I assume the rate of consumption, obviously, you guys see when customers operationalize products in the network. But I guess the question here, I assume the consumption or people operationalizing products to the network, I assume that consumption is greater than your revenue run rate right now.

[Michael Weening, executive]

The consumption we keep on a weekly basis keeps going up every single week. So that's them growing at their rate of usage like deployment faster and faster every single week, and that's a factor of them winning. So as we continue to help those customers win in their markets and if you watch ConneXions, you'll see a myriad of customers presenting on stage. And what they talked about was not the legacy mindset of homes passed or the legacy mindset of get to 20% or 25% market share, they all talked about they are going to get to 60%, 70%, 80% market share and grow.There was one customer who was up on stage that said they're currently 32,000 subscribers and their target over the next 18 months was to go to 50,000. And so those are the factors that we're focused on, not burning down inventory but actually significantly growing their penetration in their market, their dominance of their markets, and then that will just take care of itself, which is what it's doing because it goes up every week.

[Operator]

Our next question comes from Ryan Koontz from Needham & Company.

[Ryan Koontz, analyst]

First of all, housekeeping. Did you have any 10% customers in the quarter? And within the larger customer sets, the medium and large, how would you explain kind of the spread of customers in there? And we obviously have 2 large customers, one in each segment. Are they still pretty dominant within those segments?

[Michael Weening, executive]

Ryan, thank you. So for your first question, no, we do not have any 10% customers inside the quarter. And the attribution of our large- and medium-sized customers is consistent with prior quarters. We saw continued strength in each of those customers into the third quarter.

[Ryan Koontz, analyst]

That's super helpful. And as far as this mix shift, we talked about with the Intelligent Access. How should investors think about that in terms of that mix shift? Is that primarily inventory-driven and that gives you a greater footprint in the -- in your customer base as you see a mix shift toward Access?

[Michael Weening, executive]

Yes, right. So remember, when we talked -- we were here last quarter, we talked about how we anticipated a shift into the Intelligent Access Edge as customers finish their seasonal network build. And obviously, how we're managing our business. That means we're going to have the opportunity there to manage customer buffers on the Revenue EDGE side. So it's exactly played out the way we thought it would. And as we look forward to the fourth quarter, it's going to kind of reverse back the other way. That seasonality will come back out, and you'll see the Revenue EDGE pick back up relative to Q3.As we say every single quarter, I wouldn't read anything in the mix, right? It goes up and down and mix is left, right. It goes up and down based upon customer requirements. There are nothing that you can read into mix that are indicative of the future because of the fact that it's just moving back and forth as we ship more to one customer who needs more of this. And another one needs more of that. One started one is in a southernly market and therefore can build through the winter. Another one can't because they're in Minnesota. So -- or in Canada. So nothing should be read in the mix in any way, shape or form.And then with regards to the inventory issues, why don't you talk about the DSOs. There's a question with regards to inventory issues, Go look at the DSOs, right, Cory?

[Cory Sindelar, executive]

Correct.

[Ryan Koontz, analyst]

Makes great sense.

[Operator]

Our next question comes from Samik Chatterjee from JPMorgan.

[Joseph Cardoso, analyst]

This is Joe Cardoso on for Samik. If I look across the platform expansion this quarter, we're seeing a bit of a slowdown on a relative basis when compared to your strong execution prior quarters. I guess, how are you or should we, I guess, be thinking about that? Is it more related to timing? Or are you seeing more prudent customer behavior in the current backdrop? Just curious to hear your thoughts on that front.And then maybe if I could just squeeze my second one. On the managed services front, that continues to come along as you think about your 9 offerings, where are you seeing the most traction today? And then as you think about the recent additions in the form of biz and town, how have those been tracking?

[Michael Weening, executive]

Right. So the first one on revenue. There's something that's out in the marketplace, and that's the Broadband Stimulus. And so we've been through many Broadband Stimulus programs for the last couple of decades. We're a 24-year-old company who is, as I said on stage at ConneXions founded in the United States. And over those 24 years, we did Broadband Stimulus, Connect America Fund, the Connect America Fund II, which was a surprise, the Rural Digital Opportunity Fund. And now there's 2 programs that are key to our customers and they're in the market. The first one is ACAM, the Alternative Connect America Cost Model, so that quickly 5x, which is an OpEx subsidy and is around a $20 billion program. And BEAD, which we've all talked about, which is a CapEx incentive that dwarfs all our previous programs around $42 billion.Both of these programs have significant fine print, and this is really important because this is what our customers are working through right now. With all the fine grid, they're looking through which is right for them because they have been told very clearly that they cannot participate in both. And if that's the case, having been through this before, our customers are going through this period of evaluation on how they're going to take advantage of these programs. And this time around, it's much more complex with massively larger dollars in place. So as we go through this, we are managing the business on a conservative side, 1% to 4%, continued sequential growth as is the case for our platform model for the next few quarters until we see that government funds flowing.Clearly, there's a tsunami of funds coming into this space in the near future. Look at those 2 programs, ACAM at $20 billion, BEAD at $42 billion and our customers just need to work through that. The good thing is we're right beside them. We've done over 450 consults, which are how do you engage with investors, how do you understand government funding, how do you participate in that funding. We help our customers do their submissions. We're right beside them. So as fast as it can happen, we will be right there to make it happen.And now as for the managed services, as I said in my opening remarks, if you watch the ConneXions sessions online, you'll see the excitement as we rapidly expand our business model. And across the entire business, we believe platform and managed services growth will continue unabated like at this massive case. And so -- and for us, to your question on SmartTown and SmartBiz, they actually went into production with customers in August. The excitement around SmartBiz product is incredible as the customers look at -- this is a high-margin opportunity to grow their business. And in most cases, they have no offering for this segment because people are taking enterprise class products, scaling it down to the baker, and that just doesn't work. So they look at this as a massive opportunity to grow margin and add value to the small business.And on the SmartTown side, customer after customer after customer is realizing how incredible an opportunity that is to support their community and the big announcement that we made in ConneXions is that we've made it so as part of their base licensing model that they can also expand SmartTown and create a secure network for all first responders, which, honestly, I would think that's one of the few things, most of the plot on stage. But as soon as I said that, there was a massive amount of applause because they care about their communities and they're super excited.So how am I with regard to growth trajectory? Well, in essence, both of those products became salable in August and they're flying. All I have to do when I was at ConneXions did say to a customer on SmartBiz, it allows you not to buy this other product, which I will go and name, and I can guarantee get a biz bump because they all want to not buy it. They want to buy us. And so great trajectory ahead.

[Operator]

Our next question comes from Michael Genovese from Rosenblatt Securities.

[Michael Genovese, analyst]

I guess can we talk about RPOs and maybe what your expectation for reacceleration in the year-over-year growth in RPOs, when we could see that? And what would drive that? Would it be adding more cloud customers or renewals of these 3-year contracts? Just comments on RPOs would be helpful.

[Michael Weening, executive]

Thanks, Mike. So like we said in the prior calls with RPO, if we go back and look at the last 2 years and try to analyze those trends, there's not a lot infer from Q1 and Q2 and 3. What you can infer is that your fourth quarter is the strongest quarter. So -- and so that's a function of 2 things, we think. We think that's largely due to the excitement coming off of ConneXions and the timing of when their fiscal calendars, their budgets are being set beginning of the calendar year because it's a combination of those 2 things. So if you go back in time, you tend to see a nice big bump in the fourth quarter. We have no reason to believe that won't continue here in this year. Certainly after all the level of excitement that we saw at ConneXions, and we certainly have more things on the truck to sell. So that's about all we can say about that, Mike.

[Michael Genovese, analyst]

Okay. Could you talk a little bit more about -- or talk a little bit about the sort of rebranding of the cloud products? I mean, I noticed the names were changed. Was there -- is there anything else behind that or just different names?

[Michael Weening, executive]

No. So as we announced on main stage, we announced why we did it. And the reason why we did it is because one of the things that our customers said to us is that Marketing Cloud is say calling it Marketing Cloud is too limited. And they were right because the Marketing Cloud infers that you're just selling something to somebody, right? When in fact, what we're doing with Marketing Cloud, Marketing Cloud is, as the new name indicates, it's the engagement engine. It's an engagement engine around all interactions. And this is really important as you -- we evolve into more customer journeys. And a customer journey incorporates all the different elements from the acquiring the customer at the very beginning to retaining the customer and then to growing and also through that life cycle through that entire journey or life cycle, ensuring that at all times, you're engaged with them around what's happening.So for example, let's say, excavator knocks out -- rips up your fiber because they cut off a lot, right? That is where Engagement Cloud will become engaged. They'll send it will actually run as the campaigns and the text messages to the customer, and they'll say, "Hey, we're out for 30 minutes because an excavator ripped up the fiber, which happens shockingly a lot pay sell of the signs." And it's all around how do you engage with that customer.The other part of it, and this is the big shift is that one of the things we've been talking with customers, and I'm a huge believer in this is that when you're doing good things for an end subscriber, doing things and just hoping that they know you do good things is a really bad strategy. You actually have to constantly remind them. So Cory was my customer. I would say, "Hey, Cory, this month, we stopped a cyber bullying attack. We saw it with Bark. We stopped this many viruses, this much phishing, all these different things, you had these speeds, you were doing all this kind of stuff." So Cory takes brainstorming others, "Oh, I never even knew you were doing that for me." So that in the future, if a bad thing happens, consider it that you're making goodwill investments in the bank and that if a bad thing happens when you're withdrawing from that bank account, but there's a huge balance to drop from and the customer is less have to be angry return because they've been reminded nonstop for 4 years that their experience has been incredible. So that's the mentality. That last part is really the key element around why we did it and call it Engagement Cloud.On the Service Cloud, we just moved it from support, which again suggests that it's just a call center supporting scenario, where we really think of it as much more than just support. It's actually everything we're doing around field service, dispatching but also having the technician do upsell, cross-sell or in their home. So it's how do you service the customer end-to-end versus just supporting them if they have a onetime problem. So no, the naming was consciously debated over 2 years with which is about a change is going to the dentist. But we finally got to the right name with our customers and internally, and that's what we aligned it to. And frankly, it better reflects the future of those clouds.

[Michael Genovese, analyst]

Great. That's helpful. I have -- I don't mind -- I hope you don't mind I have a couple of more questions, hopefully quick. Just kind of -- great. So I mean, could you -- I haven't heard any type of reiteration of the forward guide for 2024 on this call. So I wanted to ask about the expectations for growth in 2024?

[Cory Sindelar, executive]

Yes, Mike. Michael said in his last response, that we believe for next year, we're going to manage this business given the indecision by our customers around government funding to the lower end of 1% to 4% sequential quarterly growth. So we're going to be targeting 1% to 4% sequential growth. That's the target for next year. And -- but the key thing from us is you're going to see sequential growth.

[Michael Genovese, analyst]

That's the guidance for each quarter is 1% to 4% sequentially?

[Cory Sindelar, executive]

Yes. And it will be at the lower end of that range until we see the government funding starting to flow.

[Michael Genovese, analyst]

Okay. Great. And then last question is just -- you gave us the lead times now. What were they before COVID and all the supply chain issues? Were they similar to now? Or were they different?

[Michael Weening, executive]

No, they were 16. They ranged between 10 and 16 -- prior to pandemic, they ranged between 10 and 16 weeks depending on the component, like the components that were included in it. And so you have some simpler chipsets, you have more complex chipset. So it was in around the range that we're currently in.

[Cory Sindelar, executive]

So our lead time for inventory purchases and so it was a little bit tighter window than that might.

[Operator]

Our next question comes from Tim Savageaux from Northland Capital Markets.

[Timothy Savageaux, analyst]

And I guess I'd ask this question in the context of both Q4 and given your comments there about expectations for next year, so you've seen some nice sequential increases in gross margin thus far this year, including in Q3 despite some pretty modest sequential growth and despite weakness in Revenue EDGE and I don't know if that really matters from a mix standpoint. But as you look in Q4, you've got that kind of flattening out a bit. And I wonder since we're talking about '24, what sort of gross margin trajectory you might expect to go along with that? So a couple of different questions about both Q4 dynamics on gross margin and next year and to what extent that's impacted by the level of revenue growth?

[Michael Weening, executive]

Yes. So the scenario we outlined last quarter is playing out the way we expected. So we saw higher gross margins in the third quarter, driven by continued expansion of our platform and managed services that shift from Revenue EDGE to Intelligent Access Edge, they finished up their network builds and bleeding off some of that components that we paid in the spot market. So we're getting to the end of that. In the fourth quarter, the same dynamics are at work. We're going to see continued adoption of our software and platforms that will help on the margin line. We'll see a shift backwards, back to Revenue EDGE away from Intelligent Access Edge as that seasonality dissipates. And then we're going to see the continued runoff of those excess components. And so we're going to be -- we obviously took the guidance up a little bit for the fourth quarter. So those onetime charges will now behind us in the rearview mirror as we exit the year. That obviously sets us up at a higher base going into 2024. And so for 2024, we're going to reaffirm our long-term target model of 100 to 200 basis points on a higher base coming out of 2023.

[Operator]

Our next question comes from Greg Mesniaeff from WestPark Capital.

[Greg Mesniaeff, analyst]

Given the visibility you have on the fourth quarter and on '24 and given the shift that we've started to see from the smaller customer base to the midsized customer base, do you see that trend continuing into the fourth quarter into 2024? And assuming it does, how does that alter the pricing and the competitive dynamics of your products in the marketplace?

[Michael Weening, executive]

So it doesn't. And yes, it will continue. Yes. All these disruptions start from small to the larger customers, and we've said that for many, many years now, and you're going to continue to see that trend. We're going to continue to see the medium segment grow. It's going to grow from customers that finally move up into that category from the small and the ones that are existing there are going to continue to grow, and we may see some further expansion in terms of others here to adopting the model as we move forward.But I want to be really clear from a philosophy point of view, like really clear. We don't chase revenue. We do not. So we are -- our goals as a leadership team on behalf of our investors are to grow margin and drive cash flow. Because those are the outcomes that investors value in this market and has become really clear between who are the winners and the losers and the platform market will make our investors a winner. And so what we won't be doing is sacrificing margins to win revenue. That's not what we do. Right from the get-go, everything has been focused on finding strategically aligned broadband service providers who understand the value of our platform and are willing to pay for it because they make a shed load more money when they use our platform.And so what's going to happen and this is already happening is that those bigger customers are starting to see if they watch main stage and saw United Fiber, Tombigbee Fiber, ALLO, all these other companies talking about how they're achieving market share is at north of 60%, NPSs that would make Apple jealous and huge margins that allow them to be cash flow positive at 1/3 of the time that others take. And so they start to realize that what's the difference between me as a big company and the Calix customer, one thing. They're using our platform, and that platform differentiates them in the market. And so as they start to hurt from our customers, bringing them the pain, they'll start to realize that they need to actually align or die. So that's where we're going to go.

[Operator]

Our next question comes from Scott Searle from Roth MKM.

[Scott Searle, analyst]

Nice quarter and a difficult macro backdrop. Mike, maybe to dive in on some of the managed services side. It seems like there's slightly momentum building around some of the potentially larger opportunities, specifically SmartBiz, which has been incubating for a while, seems to have a lot higher revenue opportunity attached to it and the recently announced SmartMDU as well. It seems like it's pretty intriguing in terms of the revenue opportunity guys. I was wondering if you could provide a little bit more color in terms of how we should think about success within those marketplaces? How does that ramp up? And what does that business model really look like as we get out into mid-2024 in the back half of next year?

[Michael Weening, executive]

Well, so SmartBiz has taken off like crazy. And the reason why is because it -- our customers when they want to identify this opportunity, the way that they were dealing with small businesses is really had went out in 2 ways. One, they did nothing, either than provide a wireless router and a connection, which is very little value from small business; or two, they were taking enterprise-class technologies that are very complex and require an IT organization, installing them into the small business, which meant that, first of all, they make no margin. It was like crafting hardware margins for them as a resale of hardware into the baker. But more importantly, when that hardware went down at the baker didn't have an IT organization, they meant significant operating costs because they would have to support it. So there's been a significant gap in the marketplace. And so we closed it.And yes, you're right, moments around SmartBiz now that they went into production in August in our 23.3 release, which is the second week of August, it went into production. And every single customer is like super stops because they're like you just -- you've nailed a massive gap in the market. And we have -- as I announced at ConneXions, we have a number of small expansions that allow them to do things like cover Marina, covering an RV park, those different things, it's pretty great.And then on the ASP side, yes, it's significantly higher. And so that's a great growth opportunity. But the way that we deal with that higher ASP, as you'll remember, when we talk to you, is that we think about the opportunity, which is $1 to $10 a month, and then we blend that into the $1 to $10 because small businesses in any market are going to be between 5% and 10% of the subscribers. So that's the first one.On SmartTown, look, SmartTown is like Bark. I would say Bark will have a significant momentum and SmartTown because those are our customers doing the right things for their community and what they drag is everything else because the customer realizes that we have uniquely positioned them to position their brand up against the legacy giant in a way that no one else is. So for example, with SmartTown, they go and they sit down with the mayor and say, and the superintendent of schools and say, let's make it so that children can roam around town and have broadband and close the digital divide whenever they do homework or by the way, Mr. Mayor or Mrs. Mayor, would you like it so that the first responders who have an iPhone that you're paying a mobile carrier for a lot of data charges, would you actually like them to be on a secure network and let their laptop be on a secure network so that you can have this opportunity to offload that, reduce your cost, partner with us, and that builds a great relationship with the community.And I was very blunt on stage. The way a customer described what we're doing with first responders and the reason why our leadership team instantaneously decided to include that as part of their ongoing subscription charges with us as opposed to an incremental charge with first responders is because we do believe that will stabilize. And the story the customer said was, in a lot of rural America, there is no 5G cell phone service, as we know, logically to install a cell phone tower, whether it's in a large city or in rural America, costs the same amount, $250,000 to $400,000 per tower, right? And so if you're go putting in a small town of 2,000 or 3,000 people, it's not going to reach out to that far.And so what happens is the story he told was we frequently will have an ambulance or a police officer, drive down the street, lose cell phone service, and they're trying to find someone who crash their motorcycle in a ditch or they're driving up to a farm for a 911 call to save a life because someone have a heart attack and they have no cell phone service. They have to go and grab the land line and phone in.And what's going to happen with our customers when they turn this on, is that, that police officer looking for that motorcyclists going to have connectivity as they go through when their cell phone service drop. And when they drive up to that farm that has no cell phone service, they're going to connect securely over that fiber back into the back office and then be fully connected so that they can save that life. And so if you think about the significant magnitude of those changes that we implemented, that represents a huge opportunity for our customers to basically eliminate the big soulless giants you do not care about rural America. So yes, pretty excited.

[Scott Searle, analyst]

And maybe to just follow up my second question. In terms of the outlook, it sounds like you're continuing to reiterate the long-term guidance of 10% to 15%, albeit towards the lower end of that range in '24 where I think consensus expectations are in combination with improvements in the gross margin of another 100 to 200 basis of a higher number in 2023 than originally expected. On top of that, though, I'm hearing you talk more and more about BEAD, whereas historically, I think the company had indicated, hey, look, don't have too big on government programs that are unreliable, the timing can slip, et cetera.But it seems like that's coming more and more into the conversation more visible now given where these programs are in terms of deploying the capital. And it sounds like with 450 consults, you guys have a significant exposure on that front. So I guess in terms of looking at '24 and going into '25, it sounds like we should be looking for an inflection as we get into late '24 or '25 as you start to get more visibility on the BEAD front and other programs in terms of subsidies and rollouts. So am I thinking about that the wrong way? Or how should we be thinking about that longer-term picture?

[Michael Weening, executive]

By the way, you literally took the words out of my mouth. So you're thinking about it exactly right. So we're managing the business on the conservative side to the 1% to 4% sequential growth quarter-on-quarter as we work with our customers as they make that complex decision, do they do ACAM or BEAD. It's an either or, and this has led to a lot of conversations. And as you said, there is a tsunami of money coming, and we're deeply embedded with our customers. As I also stated, we've already done 450 consultations on funding and ACAM and BEAD, helping our customers understand which is the decision they should make and how do they go after that $65 billion worth of funding, which is I can't see any other word, but tsunami that's coming down the path. So your statement of seeing an inflection point in the latter part of 2024, early part of 2025, perfectly stated, and that's exactly how you should think. Meanwhile, we will continue to manage through it at a conservative level through '24 as our customers make those decisions and off we go.

[Operator]

This concludes our question-and-answer session. I would like to turn the floor back over to Jim Fanucchi for closing comments.

[Jim Fanucchi, executive]

Thank you, Cath.Calix leadership will participate in several investor events during the fourth quarter, both in person and virtually. Information about these events, including the dates and times and publicly available webcast will be posted on the Events and Presentations page of our website at calix.com.Once again, thank you, everyone, on this call and webcast for your interest in Calix, and for joining us today. This does conclude our conference call. Have a great day.

[Operator]

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