Calix Inc

NYSE:CALX

Earnings Call Transcript 2020-Q4

[Operator]

Greetings, and welcome to the Calix Fourth Quarter 2020 Earnings 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, this conference is being recorded.

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

[Tom Dinges, Director, Investor Relations]

Thank you, operator, and good morning, everyone. Thank you for joining our fourth quarter 2020 earnings call. Today on the call, we have CEO, Carl Russo; Chief Financial Officer, Cory Sindelar; and President and Chief Operating Officer, Michael Weening.

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 made available for audio replay in the Investor Relations section of the Calix website.

Before I turn the call over to Carl and Corey for their brief opening remarks, I 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 2020 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 & Chief Executive Officer]

Thanks, Tom. In a year of record achievements, it is only fitting that we closed the year with many new records in the fourth quarter. As we continue to ramp our all-platform company, we should expect to see more records set and as such, I will refrain from calling them out too often. However, in the fourth quarter, we achieved record revenue without a single 10% customer.

The diversity of our customer base is a clear indication of how far we have come in the pursuit of our all platform model. Calix cloud and software platforms enable service providers of all types and sizes to innovate and transform. Our customers utilize real-time data and insights to simplify their businesses and deliver experiences that excite their subscribers.

The resulting growth in subscriber acquisition, loyalty and revenue creates more value for their businesses and communities. We are resolute in our belief that if we help our customers build more value, they will enable us to build ours. While 2020 was an unanticipated and unusual year, we believe 2021 will be unusual in a different way.

I would like Cory to give you an understanding of how we are viewing 2021 from this early vantage point. Cory?

[Cory Sindelar, Chief Financial Officer]

Thanks, Carl. As Carl stated, 2020 was an unanticipated and unusual year. For Calix, it was a very strong year in many respects. And we believe 2021 will be another strong year, with customers continuing to adopt our all-platform offerings. At this time, we see our revenue growth for 2021 and at the upper end of our target financial model range of 5% to 10%. 2020 was not without its challenges, especially when it comes to our supply chain and logistics.

Over the course of 2020, the supply chain team outperformed, and you see that outperformance reflected in our results over the past several quarters. However, with recent shifts in lead times for a number of key components, along with logistical challenges related to shipping container and air freight availability, the likelihood that we can continue to outperform to the level we reported over the last several quarters has become more challenging.

The impact of this more challenging supply chain environment in 2021 will be most visible and pronounced on the gross margin line. We expect elevated expedite fees and increased shipping and logistic costs will weigh on our gross margin through the end of 2021. And just yesterday, we are informed by one of our key silicon providers of significant price increases.Given the constrained silicon supply chain, we expect to see more price increases from other vendors in the near future.

Our gross margin guidance for the first quarter of 2021 reflects all of these higher costs. Due to these higher costs, our target model gross margin improvement of 100 to 200 basis points per annum will be a challenge for us in 2021. Aside from these two updates, we have no further comments on our target financial model.

Let me turn it back over to Carl for his concluding remarks.

[Carl Russo, President & Chief Executive Officer]

Thanks, Cory. While we have been on a journey to reach this point, we are just getting started, and our people will continue to drive us forward. To fully realize our potential, we must continue to grow our talent and nurture our culture.

In recent months, Calix has received rewards for our diversity, our culture and our leadership. While I will continue as Chief Executive Officer, I am happy to announce that Michael Weening has been promoted to President and Chief Operating Officer. Teamed with Cory and Suzanne Tom, our General counsel, and over 800 of the industry's best talent, we are well positioned to execute on our potential.

While Cory has outlined some key challenges for 2021, we have the financial foundation to realize our vision, and we are committed to our mission. We rise every day, resolute in the knowledge that as our customers simplify, excite and grow so shall we.

With that, let us open the call for questions. Carol?

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of George Notter with Jefferies. Please proceed with your question.

[George Notter, Jefferies]

Congratulations on the results, the guidance, the strength of the business. It's great to see. I guess my question was about ARDOF. Looking back, the reverse auction completed, we can see the list of winners, of course. I'm just wondering what your thoughts are on that list of winners with the mix of fiber to the prem versus fixed wireless versus satellite looks like?

And then obviously, there's a long-form application process a lot of these operators are going to go through. I'm just curious if there's any likelihood in your mind of dollars being re-awarded by the FCC through that process? And then any changes on your views on timing for ARDOF. So thanks a lot.

[Carl Russo, President & Chief Executive Officer]

That's quite the list of questions on just one subject, George, and good morning. So let's start with the first piece, which is the technologies that are being talked about as deployed against the $9 billion that was awarded.

If you do the math, roughly 9% of it went to satellite. A little under the remaining -- half of the remaining, so about 35% of it is tied to some form of fixed wireless, and then the larger portion is tied to fiber builders.

So how do we feel about that mix? Well, I think that mix speaks very well to rural deployments of broadband, depending upon how sparks or how dense the locations are, any one of those technologies might apply. So that's number one.

Number two. Just at a high level, as you know, $9 billion was awarded out of the more than $20 billion available, so very clearly, there was some very aggressive bidding. And so, there's a lot of funds that are still remaining to be let and there's no announcement yet as to how they will deploy those. So, let's focus on the $9 billion that was.

As you know, the long-form submissions, what's today? So actually, the long-form submissions are due end of this week. The solution details are a couple of weeks out on the long form, and then you have to defend your responses. And so will be interesting to see who passes muster on that, and ultimately, the funding starts July, August of this coming year.

From a timing standpoint, there's nothing that's changed in our guidance. We still believe this is a 2022 event. But now let's go back to your question, I think, which was sort of how do we feel about it. In short, we feel good. There's a number of folks, obviously, in the less that we know well. And we feel comfortable that we are well positioned, and some of them, we believe, have a very good chance of passing muster on those reviews.

But my overall message would be, I think, quite congruent with what we have said all along, which is, this is a 2022 event. There are a lot of steps to go through, and we've been through these before. So, let me stop there and see if that answers most of your questions.

[George Notter, Jefferies]

Yes, that's great, a very good perspective. I guess the other question I wanted to ask relative to just the market environment, obviously, we had the pandemic. You had this big surge in demand around that. I'm wondering, if as you look through your customers and you look at their subscriber additions, are those sub additions still coming in and driving your business? Are we seeing any waning of the sub additions? What's the demand-like and environment like for your customers? Thanks.

[Carl Russo, President & Chief Executive Officer]

Yes. My direct answer to your question would be its improving. We've said pretty consistently, as we get to this all platform model, we're just getting started. Ours is a land-and-expand model, as you know. And so part of what we were grappling with in 2020 was how much of this was a pull-forward versus how much of this was an uplift of our model and strategy? And obviously, we've now gotten comfortable with it being significantly an uplift.

You heard Cory in his comments say that we're getting comfortable now, not at 5%, which is where we were 91 days ago, but actually going towards the upper end of our 5% to 10% range, meaning closer to 10% growth. So I guess my overall answer would be that we are much more comfortable with the demand and our go-forward strategy. Cory, I don't know if you want to add any color to that?

[Cory Sindelar, Chief Financial Officer]

No. I think you've nailed it.

[Carl Russo, President & Chief Executive Officer]

George, does that answer to your question?

[George Notter, Jefferies]

It does.

[Operator]

[Operator Instructions] Our next question comes from the line of Paul Silverstein with Cowen. Please proceed with your question.

[Paul Silverstein, Cowen]

On the gross margin comment, you did 50.9% in 2020. Are you expecting that to go down in 2021 or just not to go up?

[Carl Russo, President & Chief Executive Officer]

I'm going to repeat what Cory said, and I'm going to ask Cory to make some comments. I think the overall tone of what Cory said was the $100 million to $200 million is going to be a challenge. My words would be, and we're up for it, but it's going to be a fight. But maybe there's some other admonishments for further detail, Cory, that you might want to add.

[Cory Sindelar, Chief Financial Officer]

Yes, sure. Yes, Paul, so we think we will actually increase margins throughout the year, but at a much reduced rate. I mean in the last several years, we've been expanding margins at 500, 600 basis points. And we're saying, given the supply challenges and the constraints, it's going to be a fight all year long.

Just in the first three weeks of this year, it's been a much, much more difficult environment than 2020. We've seen freight costs go up across the board, whether it's boats, airs, it doesn't matter. The rates are going up. The component lead times are pushing out. And just most recently, we're starting to get price increases on our components.

So it's going to be a challenging year. And so, we're going to do our best to work through that. But you should not be anticipating seeing the consistent kind of growth we've had over the last couple of years, it's definitely going to slow, and it will be a real challenge to get 100, 200 basis points.

[Paul Silverstein, Cowen]

Cory, just to be clear, because there's a huge gap between 500 to 600 basis point improvement, which I don't think anyone was still expecting, and no improvement, but to be clear, you're saying even though 100 to 200 basis points would be a stretch, you're not expecting to drive 100 to 200? It's going to be something in the 10s of basis points? I'm just trying to get a sense for how much improvement, given the challenges that you've addressed?

[Cory Sindelar, Chief Financial Officer]

Yes. I'll just reiterate what we said, Paul, is that we still think we can grow between 100 and 200, albeit it will be a challenge. We're going to fight to get there.

[Carl Russo, President & Chief Executive Officer]

Yes. So let me add to that. Right now, we're trying to figure out how to hit our model. I think that's basically it, and we're up for the challenge. I'll say this. Thank heavens for a highly differentiated, highly valuable software platform business. That from a mix standpoint gives us the opportunity to go fight these headwinds. But I think Cory is characterizing it correctly, 100 to 200 basis points is our targeted model. We've got work to do, but we're not moving away from that model, Paul.

[Paul Silverstein, Cowen]

All right, I appreciate that. Two other quick questions, if I may.

[Carl Russo, President & Chief Executive Officer]

Yes, yes.

[Paul Silverstein, Cowen]

It's been a long time since non-U.S. mattered to your business. And while U.S. continues to drive the boat, you just had a second straight quarter of a $20-plus million revenue from non U.S. Is that primarily or entirely city fiber from the commentary in the CFO letter? It sounded like it was more than just one region. I think I saw reference to multiple regions. But can you give us any color on what's going on in non-U.S., most importantly? And looking forward, how we should think about growth from outside of the U.S. and what's going on there?

[Carl Russo, President & Chief Executive Officer]

You -- good question, Paul, and I understand why the numbers would cause -- would peak your interest. But there's really nothing unusual. It's our customers that are growing. As you know, we've aligned that business to our strategy, and our primary focus remains on North America. But to be blunt had soft to the international team because they're continuing to outperform. But there's no trend that you should draw from that.

[Paul Silverstein, Cowen]

Carl, I'm not trying to be argumentative here, but you just did $25 million plus, almost 26 million non-U.S., that was up from $23 million last quarter. You haven't done $20 million non-U.S., I think, ever. That's 2-plus x what you've been doing in the first half of the year. And so you say there's no change, that's -- I appreciate you saying it's better execution, but better execution normally doesn't drive 100-plus percent rough relative to the previous norm. Again, I'm not trying to give you our time, but I'm trying to understand what's going on.

[Carl Russo, President & Chief Executive Officer]

Well, I appreciate the preamble of your not trying to be argumentative. So let me return the favor. I'm not trying to be argumentative, but there's no -- what I said -- let me be clear, I don't want you to denote that there's any trend here that is being driven by us per se. The team is well focused, well aligned.

The trend that I think you're seeing more than anything else is the trend that we're seeing around the world because of the pandemic. And the fact is that's uplifting the business at some level. And I think we're seeing that overseas. But it's also the customer base that we thought hard to acquire from a land and standpoint is expanding.

So no, I don't think you're being argumentative. I think your interest is in the right area. But I'm just -- I want to make sure it's clear we are not -- there's nothing a priority that we are doing to drive that overtly. It is a team executing upon a more favorable backdrop. Our focus, first and foremost, is in North America.

[Paul Silverstein, Cowen]

All right, one last quick question for me, if I may. On the 85% of revenue that's coming from the smaller customers, 250,000, less, given that no one of those customers -- I can't imagine any one of them is more than 2% of your revenue, maybe not even that. And so it would take a macro event to move those customers meaningfully one way or the other. They just grew almost 70% on top of 40-plus percent growth in the preceding quarter.

Is that mostly a function of new subs? Is it mostly a function of additional services additional products that they're selling, whether edge, the newest product release, whatever, can you give us insight in terms of where those customers are at in terms of what's driving their revenue in terms of what's driving your revenue?

[Carl Russo, President & Chief Executive Officer]

Yes. I mean what's precisely exciting about it is there's nothing exciting about it. It's literally all categories. So it's existing customers, it's new customers joining us its existing customers that have come over to the platforms and now are expanding their subscribers. It is literally very broadly statistically distributed, even inside of what is a broad customer base.

And so there's literally no one thing that I would choose to highlight. I'll turn it over to Cory, and maybe Michael might want to add a little bit of comment on this as well. It is a broad base. But Cory, do you want to add, and then maybe, Michael?

[Cory Sindelar, Chief Financial Officer]

Yes. I think it's important to note, Paul, that part of the strength there is being driven across the base. We're starting to see our land and expand strategy take off. And so it's just -- we're seeing more people come back and as they're building out their networks. Seeing success and wanting to add to them.

[Carl Russo, President & Chief Executive Officer]

Michael?

[Michael Weening, President & Chief Operating Officer]

I think Carl and Cory said it well. We have a very diverse set of customers. We also have a very broad platform. If you actually look at the two platforms that we've been building and pursuing for over a decade, they're now -- they have now reached a level of completeness, which makes them incredibly attractive in the market at the right time.

And so customers who in the past may have only considered a part of our business as something to fill out their business needs are now looking at us to run their entire business or actually go across it and support the entire transformation of their business from their marketing organization all the way back to their access and everything they're doing from a subscriber experience point of view.

So when you're in that scenario where you have that wide breadth of capabilities, it means that we have many beachheads into the customers, as Cory stated, and the ability to expand those rapidly as we build those relationships and with our customer success organization, demonstrate over and over again, we put the customer first, and that if they partner with us, that in good times and bad, we will be there to make them successful.

[Carl Russo, President & Chief Executive Officer]

And you should hear from -- yes. And as you can hear from Michael's comment just to finish, we're just getting started. The opportunity is, we believe, quite large ahead of us. Thanks Paul.

[Operator]

Thank you. Our next question has come from the line of Rich Valera with Needham & Company. Please proceed with your question.

[Rich Valera, Needham & Company]

Let me add my congratulations to the Calix team on a very nice year. Carl, you had real strong new customer additions this quarter, I think 30, and it's been probably 1.5 years since you had a customer -- new customer count that high. Just wondering if there's anything specific you would attribute that to any changes in go-to-market that maybe would suggest this higher level going forward? Or is this more in sort of the normal quarter-to-quarter, maybe lumpiness as you might call it in, in terms of new customers added?

[Carl Russo, President & Chief Executive Officer]

The only quick comment I would make, Rich, is the following, and maybe Michael wants to add some color to this as well. In my view, when we all went virtual new the pandemic, you may remember us talking about. This is going to be interesting to try and figure out how to get new customers. Servicing your existing customers is one thing, trying to build new relationships with another. But I think the team has done an outstanding job of sort of breaking the code on how to function in this new virtual world. But I'll let Michael add some color to that, please.

[Michael Weening, President & Chief Operating Officer]

Since I joined Calix 4.5 years ago, we were a virtual culture other than our -- maybe our research and development organization, some G&A functions. For the most part, everybody was virtual, and while our sales and marketing organizations, we spend a lot of time on the road, those initial forays into work from anywhere in the form of we adopted video technology 4.5 years ago, all of our calls were video conferences, all those types of things, that actually really prepared us to enter into the pandemic and not miss a beat.

We have been looking at each other's faces on web cameras, like I said, for 4.5 years. And so as we went to this next step with customers and had to serve them in a different way, our digital marketing, which was very strong, but also the way we engaged with each other was just something that we extended to our customers. And so we had lots of customers who weren't used to it. So they had to learn how to use Microsoft Teams and Zoom and go to meeting and things like that. We actually ended up spending a lot of time coaching customers on how to be successful in those types of scenarios.

And so for us, it's just that where others would see a significant dip in productivity as they try to work their way through this hard transition. For us, it wasn't a hard transition. It was who we were. And so that turned into a competitive benefit. So with regards to how many we'll add on a quarterly basis, there's -- that's quarter-to-quarter other than we're engaging with a lot of new customers. And we'll see

[Rich Valera, Needham & Company]

That's helpful. I appreciate that perspective. And then Cory, a follow-up for you on the guidance for this year, and I know you're not guiding necessarily beyond the first quarter, but it seems like there'll still be some pretty unusual dynamics there where the first quarter is going to benefit from revenue that was effectively pushed out of the fourth quarter, likely changing the typical seasonal pattern. So just wondering how we should think about the quarterly profile of the year, given that Q1 kind of got an artificial boost that may boost it sort of seasonally above where it would normally be? And if you still think you're going to have that kind of supply constraint on revenue in Q1 that would flow into Q2? Or should -- maybe we'd be thinking about Q2 is maybe actually being sequentially down from Q1?

[Cory Sindelar, Chief Financial Officer]

A great, great question, Rich, and I think you've nailed exactly what's going on in terms of that dynamic. We clearly have been working towards a higher inventory level. We told you that we would make up a lot of it by the end of the first quarter. You're starting to see that in terms of our balance sheet. Inventory grew by more than $10 million in the fourth quarter. A lot of that was getting some material on boats.

So we're going to make up and shift some of that backlog in the first quarter. So obviously, Q1 is benefiting from that pull -- push out from Q4 into Q1. And with the guidance that we provided in our opening remarks, we're setting the expectation that we think we're at the high end of our range. So call that somewhere under $600 million. If we're doing $150 million on the front end, with that kind of guidance that means there's got to be a dip somewhere along the line.

And so yes, I think Q2 goes down. And then Q4 at this point, looks extremely challenging. We just had a lead time for our complex silicon go from 32 weeks out to 50 weeks. So that's going to present some challenges for us in the fourth quarter in terms of supply. We're not looking -- we're going to go work on that. That's out there, and so we're concerned about it. So this year, it's going to be much, much more of the same, more we're supply-constrained than in terms of the demand supply equation, we're going to be constrained on the supply side.

[Carl Russo, President & Chief Executive Officer]

Well, I want to just amplify what Cory just said on one point. What you heard him say was 50-week lead time, which means as we sit here today, we're done for the year on supply with some of our vendors. We're literally planning Q1 of next year. So this is going to be an unusual year, the exact opposite of last year.

[Operator]

Thank you. Our next question is come from the line of Christian Schwab with Craig-Hallum. Please proceed with your question.

[Christian Schwab, Craig-Hallum]

Great, guys. I just have one quick question. As you guys look at your upper end of revenue plan for '21, it just elaborate further by revenue by customer size. Is that just a continuation of land and expand and continue to grow with your small customer size? Or are you anticipating some type of recovery from your large customer base?

[Carl Russo, President & Chief Executive Officer]

So Christian, let me just -- I'll give you a quick answer. You know from Q4 that we didn't have any 10% customers. And part of that reason was our largest customer had a turn down on their CapEx approach in Q4. We expect that to recover but to be honest, we may actually go this entire year without a 10% customer.

And as Cory and poor me, the other day when we were chatting, CenturyLink in 2020 was actually an 11% customer for the entire year. So we are growing up and around where we think we're going to continue to grow and small and in medium, I think we'll grow in large, but I don't know that any one of them will be a 10% customer going forward. Does that help?

[Christian Schwab, Craig-Hallum]

That's extremely helpful.

[Operator]

[Operator Instructions] Our next question is come from the line of Tim Savageaux of Northland Capital. Please proceed with your question.

[Tim Savageaux, Northland Capital]

Congratulations on the results. A couple of different questions here, I first want to focus on some of the gross margin discussion. And Cory, I don't know if you've kind of estimated -- you mentioned several factors that were providing headwinds. I wonder, in the aggregate, can you give us an estimate of the kind of impact there. It doesn't seem like we could look at Q1 coming down from Q4 as apples-to-apples, given the seasonality in revenue, but I wonder if you might take a swing at kind of aggregating all those issues in terms of basis point maybe headwind on gross margins, and whether you can quantify the magnitude of this price increase that you faced.

[Cory Sindelar, Chief Financial Officer]

Thanks, Tim. Thanks for the question. So the direct answer is I probably could, but I'm not going to. We have indicated in the letter, we have kind of arranged those kind of in size of significance. You can kind of take that and use that as a benchmark in terms of those impacts. So mix being first and then followed by the expedites and shipping costs and the other stuff related to increased outcomes. So you can take a look at our letter for some guidance in terms of size of impact in that regard.

[Tim Savageaux, Northland Capital]

Okay. And well, I guess, if that same dynamic would extend for the year, to what extent -- and this sort of gets to Carl's comments about one of my questions was, would you think you have a 10% customer in '21? It sounds like it could be no. And I assume one factor driving the strength in gross margins is a higher mix of smaller customers where, in theory, your pricing dynamics are probably better and adoption of new platforms is probably stronger. Do you expect that customer mix to change markedly as you kind of stabilize around this $150 million quarter revenue level for the year? I imagine Q4 would be on the high end of what you'd expect the small customer contribution to be. Do you expect that to normalize a bit as another potential gross margin headwind?

[Carl Russo, President & Chief Executive Officer]

I think the normalization has been continuing as you've seen the distribution, you've asked that question before, and I said, there's a limit for this at some point when this number gets to be 100%. I don't think we ever get there. We obviously have a set of healthy large customers, a growing set of medium ones.

But again, the land and expand is really driven by the product set that has high value. And so, for sure, the mix of customers' matters, but what's going to drive it in the future is the mix of our platforms. And so obviously, part of what you're hearing us say is, we don't have the margin picture sorted out yet.

But one of the ways we deal with the margin picture is, if the product mix continues to drive towards platforms that helps us fight these headwinds. I will say this, I'm very thankful to be where we are and not to be Calix 1.0 as a box company. Because then there's no cover for these kinds of price increases from vendors. And I think everybody is well aware of what's going on in the silicon space. This is going to be a final year long.

[Tim Savageaux, Northland Capital]

And final question for me, kind of higher level. I mean, obviously, you've had a pretty extraordinary year. From a share price perspective, from a cash generation perspective, balance sheet's obviously very strong, as is your market cap and currency. Given all those factors, the strategic thoughts do come to mind. I wonder if you can update us as you sit here in early '21 on whether a more aggressive approach to M&A might be warranted, given the currencies that you have at your disposal.

[Carl Russo, President & Chief Executive Officer]

In my career, when this happens, strategic hallucinations occur. And people start thinking, we need to go buy things. I want to be as clear as I can be. As you've heard me say, we believe we are perfectly positioned in front of not one but two disruptions, that we have the right platforms at the right time and the right offerings. The right process is the right culture. The opportunity cost of us taking any attention away from that is extremely high, and there's nothing better to run an attention than to do an acquisition.

So we are absolutely focused on the growth of our business. And to be perfectly blunt, Michael's promotion at this time is built around a team that's been, frankly, executing with excellence. And Michael has been a core and key part of that. And I want to make sure that we continue that execution going forward. So, we are very focused on simply executing on the model. So thanks for asking, Tim, so that I could make it clear.

[Tim Savageaux, Northland Capital]

My pleasure. Congrats again.

[Carl Russo, President & Chief Executive Officer]

Thanks, Tim.

[Operator]

Thank you. Our next question is comes from the line of Paul Silverstein with Cowen. Please proceed with your question.

[Paul Silverstein, Cowen]

First off, how much revenue -- can you quantify how much revenue you think you're not going to be able to realize because of the supply logistics situation?

[Carl Russo, President & Chief Executive Officer]

No.

[Paul Silverstein, Cowen]

No, you can't quantify? Or no, you don't want to share.

[Carl Russo, President & Chief Executive Officer]

It would be the latter.

[Paul Silverstein, Cowen]

Can you -- I assume you're talking about a meaningful amount of revenue that you will not -- that you don't think you're going to be able to ship?

[Carl Russo, President & Chief Executive Officer]

Yes. I mean, look, the qualification is the same thing you've heard for the last two, almost three quarters four from us, not fall, unfortunately. We believe we can continue to drive demand. Supply is a challenge. And so there's some level of supply constraint that's being factored into what Cory said as we look out at 2021.

And it's sort of not a hard thing at some level because if you have 50-week lead times, your supply is sort of set. So to ask us what amount would be is I can't forecast demand that far out. If you're asking, could you do more if you could get more supply? I think the answer to that right now would be a yes.

[Paul Silverstein, Cowen]

All right. Secondly, call normally once sea services track products with a four to eight quarter thereabout lag, I recognize the complexion of your services has been changing from lower value, lower margin to higher value. Two questions here. One, should we expect services revenue growth to increase, albeit on a time like basis given the significant increase in our product revenue and margins have been going up in services, where can they get to? Where do you think they'll arrive at from a steady state perspective and when?

[Carl Russo, President & Chief Executive Officer]

Yes. So in actuality, you'll notice that services -- so first, let me answer the revenue question. Services will march programmatically, and I think they're now at a place where they'll probably track overall revenues. I don't think the percentage of total revenue will shift too much.

On the margin question, I'm glad you asked it because there's actually news there. And the news is, if you look at Q4, you'll notice our margins actually tracked ahead of sort of the programmatic growth that's been going on. You should expect our services margins actually in the first two quarters of next year to go down. They'll stay in the 30s, but they're going to go down.

And the reason is, you heard Michael allude to it in his comments, customer success is very important to us to help our customers achieve their business outcomes, and we actually fell behind our customer success hiring as we're ramping. And we expect to make additional investments in customer success in Q1 and Q2, and then it will go back to programmatic growth.

So, we'll be in the low 30s and then starting to grow back again. Where can services get to over the long-term? In the 40s, possibly in the 50s, they won't go much higher than that because we're going to continue to invest in the success of our customers. But if they stay proportionately where they are as a portion of revenue, that lower than corporate average gross margin doesn't have a particularly heavily weighted effect.

Does that paint a picture for you?

[Paul Silverstein, Cowen]

I appreciate it.

[Operator]

There are no further questions at this time. I would like to hand the call back over to Tom for any closing comments.

[Tom Dinges, Director, Investor Relations]

Thank you, operator. Additional information about future investor events will be posted on the Events and Presentations page of the Investor Relations section of calix.com.

Once again, thank you to everyone on this call and on the webcast for your interest in Calix, and thank you for joining us today. This concludes our conference call.

Goodbye for now.