Calix Inc

NYSE:CALX

Earnings Call Transcript 2019-Q4

[Operator]

Greetings, and welcome to the Calix Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will following the presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Tom Dinges, Director of Investor Relations. Thank you. You may begin.

[Tom Dinges, Director of Investor Relations]

Thank you, operator, and good morning, everyone. Thank you for joining our fourth quarter 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, yesterday after the close of market, 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, we want to remind you that in this call, we 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 our fourth quarter 2019 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, President and Chief Executive Officer]

Thank you, Tom. We delivered strong results in the fourth quarter with revenue, gross margin and profit at the high-end of our guidance, all while achieving solid balance sheet metrics. It is clear the market is looking for our platforms to build the next generation CSPs and it is likewise clear that Calix team is executing with precision.

One noteworthy example of execution this quarter was the move of our entire ERP and IT infrastructure to the cloud. Even more exciting was our return to growth in the fourth quarter with a 4% year-over-year increase in revenue.

Our transformation to an all platform company providing cloud, software, systems and services to CSPs continued in the fourth quarter with solid bookings coming off our 2019 Connections Conference, our largest ever. There is a secular disruption moving through the communication service provider space and we have it right. We have the right platforms and the right services at the right time.

Some brief examples of our progress in the quarter were; adding 20 new customers of all sizes and types, which means we added over 100 new customers for the second year in a raw. Calix Cloud revenue in the quarter, more than tripled year-over-year and quadrupled for the full-year. The revenue ads solution leveraging Calix Cloud and AXOS systems came to market this quarter, bringing real time subscriber insights and new revenue-generating edge suites helping our customers to solve and support the rapidly growing management and security complexities of the smart, connected home.

AXOS every time leads the market, with over 75 10-gig PON deployments, and our customer success services are proving net worth in helping our customers achieve exceptional business outcomes. Helping our customers achieve their business outcomes when they deploy our platforms is core and central to our mission. Being a part of our customer success is very motivating for the entire Calix team and directly aligned with building value for Calix shareholders.

To further help you understand one important aspect of the transformation we are driving at Calix, we have included a revenue by customer segment breakdown in our stockholder letter. This will give you a better understanding of the headwinds we faced in the past, the diversification we have been pursuing throughout and the predictability driven by an increasingly in the broad customer base.

In retrospect, 2019 was a year of significant transformation for Calix. It is clear, we are positioned to ride the wave of secular disruption moving through the communications service provider marketplace. As the all platform leader, we intend 2020 to be a year of continued expansion of our platforms in the market as well as the year of revenue and profit growth. And to start it off, we are pleased to forecast double-digit year-over-year revenue growth for the first quarter.

With that, let's open the call for questions. Operator.

[Operator]

Thank you. [Operator Instructions]. Our first question comes from the line of Christian Schwab with Craig-Hallum. Please proceed with your question.

[Tyler Burmeister, Craig Hallum]

Hi, guys. This is Tyler on behalf of Christian Schwab. Thanks for letting me ask the questions. Congrats on a solid quarter. So, to break all your revenue by customer size is very helpful and appreciated. You can see the trend over the last couple of years moving away from some of your larger customers, I was hoping maybe you could talk about where you saw those number going in the medium to longer term, maybe over next year or few years.

[Carl Russo, President and Chief Executive Officer]

Thanks, Taylor and good morning. I think you will see that trend is continue that we are going to continue to diversify the base. We will likely see more growth in the small customers and less growth in the medium and large.

But, it is clearly going to moderate from where it has been over the past few years. That obviously kept up with that rate. We would be a 100% small customers and no medium or large. So, the numbers will simply force it to moderate, but I think you will see the trend continue for the next couple of years.

[Tyler Burmeister, Craig Hallum]

Great. Thanks. And then, you know, with a solid part here in kind of improving guidance. I was hoping you talk maybe longer-term, you are $600 million in the dollar kind of EPS target. I guess first if you could just reaffirm that. And then, if you could give any maybe timeline on how you guys see that and then maybe rank a couple of specific things that you are focused on to drive that type of growth over the next handful years? Thanks.

[Carl Russo, President and Chief Executive Officer]

Actually, I will call your attention to the stockholder letter. In the stockholder letter, we have in fact removed that guidance long-term and have encouraged everyone to attend our Analyst Meeting, which we are going to hold on March 4th, I think it is Tom, Wednesday, March 4th, at which time we will be updating it. So, that sort of removes the rest of your question I think unfortunately.

[Tyler Burmeister, Craig Hallum]

Okay, that is a good update. We will look forward to that. That is all for me. Thanks guys.

[Carl Russo, President and Chief Executive Officer]

Thanks, Taylor.

[Operator]

Thank you. [Operator Instructions]. Our next question comes from the line of Fahad Najam with Cowen & Company. Please proceed with your question.

[Fahad Najam, Cowen & Company]

Good morning, Carl. A question on your comment about adding a 100 new customers and as I look at your sales and marketing spend, it has been pretty consistent. I'm trying to understand, what is the leverage in the model, how can you continue to grow 100 new accounts without increasing substantial amount of sales and marketing. Can you just speak to the leverage in the model that you have and should we - I know you said, you expect a number of small customers to moderate, but in terms of the leverage, is there any incremental spend that you need to incur from here or should we expect some moderation in sales and marketing spend going forward?

[Carl Russo, President and Chief Executive Officer]

Actually, let me take it back to last quarter, where we actually discussed it, you may remember. Me saying that you are going to start to see us now start to invest in the business from an OpEx standpoint that we believe that the trough of revenue was behind us that we would start to grow. And inside of that, you should expect to see us being relatively disciplined as we have been on R&D and on G&A and that we would drive to absolute numbers and if you look at our models, it will be pretty clear where those absolute numbers are.

But, we will start to invest in sales and marketing, and have it grow, basically at the rate of revenue growth. So, we expect R&D and G&A to stay roughly flat on an absolute number basis, but on a percentage basis, we intend to invest in sales and marketing and have already begun those investments. Does that change a frontier for you, Fahad?

[Fahad Najam, Cowen & Company]

It does. Thank you. If I may ask one more question on, you mentioned in your shareholder letter that gross margin benefited from lower hardware unit sales. I know you are going to give your long-term guidance in March, Investor Day, but in terms of in the past we used to focus on price declines and ESPs were the primary driver in gross margin. How should we be thinking about ESPs impacting your software margins?

[Carl Russo, President and Chief Executive Officer]

You shouldn't, in my opinion. The biggest driver of our margins will be a mixed shift in our products market from and form red ocean to blue ocean from hardware to software. And so, as you see the mix of more software platforms going out the door, they are obviously at a considerably higher number than corporate average gross margins. And so, the margin shift that we have messaged consistently will be driven purely by the go forward growth of the platform business, nothing more in my opinion.

On any given quarter, I think I would try to caution everyone be careful, because there is lots of noisy little implications in it. But as a long-term trends, it is sure, we are ramping the front end of that business and that ties back to your first question, which is we intend to make those investments in sales and marketing to do precisely that.

[Fahad Najam, Cowen & Company]

Got it. Thank you. If I can ask one last question, on a big picture, in terms of the competitive dynamics, you know, while they are facing consistent pressure from the EUS, any change in the competitive dynamics that you have noticed over the last 90 days?

[Carl Russo, President and Chief Executive Officer]

None.

[Fahad Najam, Cowen & Company]

Alright. Thank you so much. That is all from my end.

[Carl Russo, President and Chief Executive Officer]

Thank Fahad.

[Operator]

Thank you. [Operator Instructions]. Our next question comes from the line of Tim Savageaux with Northland. Please proceed with your question.

[Tim Savageaux, Northland]

Hi. Good morning. A couple of questions and congrats on the solid results.

[Carl Russo, President and Chief Executive Officer]

Good morning, Tim.

[Tim Savageaux, Northland]

And I know you are working pretty real time with your new breakout on the customer side, but if you look at the small customer metrics in particular, kind of Q4 year-over-year, it looks like you saw very strong growth in that vertical over 20%. Am I getting that right, is there some sort of acceleration going on there, I wonder if you could talk about kind of growth dynamics among your smaller customer vertical?

[Carl Russo, President and Chief Executive Officer]

Yes. I would be careful to say acceleration, because that implies a curve as appose to a line. I think you are going to see continuous programmatic growth across the whole company. But as I messaged earlier to Tyler's question, probably more rapid growth in the smaller sets, and that is due to a number of reasons, which we have messaged before, a part of it being the capital formation that we are seeing. And part of it that we are also seeing relates to government funding as well.

[Tim Savageaux, Northland]

Okay. Well, I just want to try and to get some - the math is the math here right, it was 59% last year and 71% this year in terms of your concentration. I mean, with that degree of growth since Q4 what is implied for Q1. But it seems like double-digit growth for the year in 2020 for that small customer vertical, given that type of performance in Q4 might be a reasonable expectation. I don't want to jump the gun on the Analyst Day. But, I wonder if you have any sort of comments around that kind of point.

[Carl Russo, President and Chief Executive Officer]

Let me add, let's not jump the gun on the Analyst Day, number one. Number two, to your point could possibly be double-digit growth in that segment. But, we are not going to forecast growth by segments, because at the end of the day we are focused on the overall business.

So, I mean, your math could be right, it may not be right, Tim. Keep in mind that, as we continue on the platform model, the platform model has very different growth attributes to it, which is much more into a software business, where you are landing a customer and expanding as oppose to the nature of the box business that Calix 1.0 was in, which is as you know a book ship revenue in the quarter, lumpy business, right. They have very different models. They have very different revenue shapes. Does that make sense?

[Tim Savageaux, Northland]

It does. And, I guess moving across well first let's stick with Q4 results, you did see some strength in international revenues in the quarter. I wonder is the CityFibre ramp was a part of that and what sort of expectations you might have for that ramp going forward?

[Carl Russo, President and Chief Executive Officer]

It certainly was part of it. But, as we have talked about before, the international business has been honed and focused and is actually behaving quite well. So it is not attributable to any one customer.

[Tim Savageaux, Northland]

Okay. And, you had commented earlier that you expect absolute operating expenses to remain sort of flattish along with some degree of revenue growth. I wonder if you could talk about the dynamics you expect to be driving gross margins throughout the year. You obviously saw a little bit of upside here in the quarter, guiding for kind of a similar range with revenues down seasonally in Q1. But it seems like given the increasing software content of the all platform business that we should expect some increases in gross margins, as we go throughout the year.

[Carl Russo, President and Chief Executive Officer]

So, I want to go back and break that question up into two part first of all, so that I don't miss-communicate on the operating expense side to be clear. On G&A and on R&D, we expect to hold those in an absolute way to a number. And you can look at our history, you can pretty much extrapolate what that number is.

On sales and marketing, we are going to invest as revenue grows. So, we are going to continue to invest in our growth from the sales and marketing standpoint. So, I want to make sure you understand the three different lines on OpEx, okay?

[Tim Savageaux, Northland]

Yes. Got that and I covered that one.

[Carl Russo, President and Chief Executive Officer]

Okay. Cool. On the gross margin side, to your point, there is no question if gross margin will expand overtime, with the only caveat being in any given quarter, you can have noise in them due to mix or other pieces. The other piece that I would say contain, I hope everybody understands is that as the software business grows and some of our older traditional products slowly decline, there are clean up items, et cetera in any hardware business that you are doing that can inject noise at any time in a quarter. So, I want to be careful about anybody drawing a straight-line through quarter-by-quarter, because there is likely going to be ups and downs on a quarterly basis, while over the long-term there is no question it is going to go up.

[Tim Savageaux, Northland]

Got it. Thanks very much. I will pass it.

[Carl Russo, President and Chief Executive Officer]

Okay. Thanks, Tim.

[Operator]

Thank you. [Operator Instructions] There are no further questions at this time, I would like to turn the call back over to Mr. Dinges for any closing remarks.

[Tom Dinges, Director of Investor Relations]

Thank you operator. Calix will host its 2020 Investor Day on March 4th 2020, in San Jose. Information about this and other future events, we posted on the events and presentation’s page in the Investor Relations section of calix.com. once again thank you to everyone on this call and those on the webcast for your interest in Calix and thank you for joining us today. This concludes our conference call. Good bye for now.