Calix - Q2 2024

Transcript

Operator (participant)

Greetings, everyone. Welcome to the Calix second quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the brief prepared remarks. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations. Sir, please go ahead.

Jim Fanucchi (VP of Investor Relations)

Thank you, Rob, and good morning, everyone. Thank you for joining our second quarter 2024 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, and was also posted in the investor relations section of the Calix website. Today's conference call will be available for webcast replay in the investor relations section of our website.

Before I turn the call over to Michael for his opening remarks, I want to remind everyone 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, 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 second quarter 2024 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 second quarter 2024 letter to stockholders.

Unless otherwise noted, all financial information referenced in 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 (CEO)

Thank you, Jim. Our results in the second quarter demonstrated the strength and execution of our strategy. Our platform, cloud, and managed services continue to enable our broadband customers to dominate their markets as they simplify their operations and go to market, innovate across the consumer, business, and municipal segments of the markets they serve, and grow the value for their members or investors, and in turn, to Calix. Once again, our unique broadband business model delivered record gross margin. Robust expansion of our platform, cloud, and managed services led to a sequential 9% increase in RPOs as BSPs continued to turn to Calix in the face of growing competition to win new subscribers through the ever-expanding capabilities of the Calix platform, cloud, and managed services.

As we have discussed, the market is crossing the chasm, and this is best evidenced by our landing footprint with 24 new BSP customers who started their business transformation with Calix in Q2, up from 10 in Q1. Our appliance business is settling into a new normal, where we see smaller orders and many, many more of them. This gives us the confidence to forecast a return to sequential quarterly revenue growth in Q3. Our momentum continues into Q3 as the team recently closed our largest platform, cloud, and managed services deal, setting a new record. With that, I'd like to turn it over to Cory to review our financial results for the first quarter. Cory?

Jim Fanucchi (VP of Investor Relations)

Thank you, Michael. The second quarter represented another quarter of deliberate and disciplined execution. We delivered revenue of $198 million, which was within the guidance range we provided in April. As we continue to navigate the crosswinds that are still prevalent in our industry, the continued growth in our platform, cloud, and managed services drove record non-GAAP gross margin of 55.1%. In the second quarter, we saw strong platform adoption, with 17 customers beginning their platform journey with us, 19 new cloud deployments, and 22 additional customers deploying a managed service for the first time. Remaining performance obligations, or RPOs, grew to $267 million at the end of the quarter. This is an increase of $22 million or 9% sequentially, and up $54 million or 25% year over year.

Furthermore, our current RPOs were $103 million, up 4% sequentially and up 28% year-over-year. As we've discussed before, the increases in RPO reflect new customer additions and the continued adoption of our platform offerings as our existing customers add new subscribers and expand their use of our platform, cloud, and managed services. As a result, we expect RPO will continue to grow. In the second quarter of 2024, non-GAAP operating expenses were $104 million, down $4 million from the prior quarter. The decrease is mostly attributable to lower outside services and professional fees.

As we have said before, our plan is to keep 2024 operating expenses, expense investments relatively consistent with 2023, as we believe this level of investment represents a great opportunity for us to grow our footprint ahead of the expected US government broadband investment. Our debt-free balance sheet and balance sheet metrics remain strong. At the end of the quarter, cash and investments were just over $261 million, representing a sequential increase of roughly $22 million. This was our 5th consecutive quarter of double-digit free cash flow. DSO was 38. Inventories were 2.8, down from 3.1 last quarter, as our component inventories increased. Excluding component inventory, our inventory turns would have been 3.7, and inventory deposits decreased by $60 million, bringing our total inventory deposit down to seventy million dollars.

Furthermore, we expect continued profitability, combined with working capital reduction, will result in consistent double-digit quarterly operating and free cash flow. Now, let's discuss revenue guidance for the third quarter. Based on the current ordering trends and new customer acquisitions, we believe the second quarter marks the bottom for 2024, and we will grow from here. For the third quarter of 2024, our revenue outlook is to be between $198 million and $204 million. In terms of BEAD, we've seen a lot of progress since our last call. As we sat here a quarter ago, only 1 state, Louisiana, had completed all 10 steps of the program. Today, there are 20 states and territories approved through all 10 steps, and they represent $12 billion of the $42 billion program.

While the approvals have accelerated, we believe that we will begin seeing orders in 2025, early 2025. In summary, Q2 represents a low point for revenue in 2024, and we will return to sequential quarterly revenue growth in Q3. We continue to add new BSP customers every quarter, which over time will support our growth objectives. In addition, our platform, cloud, and managed services grows each quarter, driving our RPO and gross margin expansion. We have the most pristine balance sheet in the industry, which gives us the financial capacity to invest in our operation and expand our footprint as our industry crosses the chasm. Michael, back to you.

Michael Weening (CEO)

Thanks, Cory. Throughout Q2, I continued to meet with broadband customers and their investors, with the discussion remaining the same: how to win. The industry is under significant stress as legacy network operators face the disruption of increased competition and the expanding risk of commoditization as broadband speed disappears as a differentiator. This shift from speed to an experience mindset is critical to our crossing the chasm from early adopters to winning the early majority, and it is accelerating. With 1,065 BSPs now deploying our platform, which grows every quarter, we continue to engage with prospects of all sizes to educate them on the power of the platform while supporting our existing customers as they expand their business model across consumer, business, and the communities they serve.

It is the winning business model that is achieving incredible revenue, margin, cash flow, and customer satisfaction results every single day. In closing, our confidence in returning to sequential quarterly revenue growth is driven by an expanding funnel of opportunities as our unique platform, cloud, and managed services model enables our customers to succeed. We have the financial strength and balance sheet that allow us to execute without distraction while maintaining a disciplined and steady hand on our operating expense investments that support our BSP customers as they win their markets, and together, we succeed for the long term. Jim, let's open the call for questions.

Jim Fanucchi (VP of Investor Relations)

Thanks, Michael. Rob, at this time, you can please open up the lines for questions.

Operator (participant)

Thank you, Jim. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question, it comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your questions. Mr. Chatterjee, your line is open for questions. Perhaps you're on mute.

Jim Fanucchi (VP of Investor Relations)

Rob, let's go to the next one. We'll pull Samik back into the rotation.

Operator (participant)

Yes, thank you. The next question is from the line of Ryan Koontz with Needham & Company. Please proceed with your questions.

Ryan Koontz (Analyst)

Great, thanks for letting me on. On the pressure on the large and medium customer cohort and the decline there, do you have an updated view of the drivers behind the, you know, the tight capital environment in between interest rates and, you know, BEAD preparation? You know, how would you kind of characterize, you know, the top three drivers there among your largest customer base?

Michael Weening (CEO)

Well, I actually don't think it's a—it's a large customer phenomenon. I actually think it's across the entire base, and this goes back to what we've articulated in fourth quarter and first quarter. It remains the same. So the first one is that they're going through a decision-making process with regards to BEAD. You've seen the complexity of that scenario. Now it's making progress, and Cory can talk to that extensively. But as they go through that again, their planning teams are now focused on how do they do those submissions. And then in second half, a lot of that will finally come to clarity, and that's companies of all sizes, small, medium, and large, right? That's the first one. The second one is that, again, small, medium, and large, the second thing they're considering is that-...

If they are an entity that has, you know, private equity backing or investors, the pervasively high interest rates, and the increase in competition, which again, we forecasted for many years, has caused them to say, "Okay, should we slow down a little bit or contemplate our business model as we're not getting the loads that we need and that we need? And so let's really pivot hard into our existing investments and win new subscribers," which really comes down to the crossing the chasm part, is that we really needed them.

You know, if I go back a year ago, a year ago, I was at USTelecom, which was a big CEO event, and a year ago, I was—and the year before, I was the one who was a bit of a naysayer in that room, constantly saying the same thing that we said at our ConneXions event, which is: speed is going to commoditize. It's not a differentiator. Building fiber is not enough. You actually need to, need to build a comprehensive business model to own the community. And as little as a year ago, especially with the medium and large customers, they were dismissive. They were like, "No, I'm doing well enough. I keep going at it." Where our smaller customers were aggressively pivoting into that experienced community-centric brand message. I was there again this summer, and frankly, they were all saying the same thing.

There was a ton of investors there, and they were all like, "You know what? We've been building for the last 3 years. We're not getting the subscriber loads on our networks that we thought we would. The competition is a lot higher than I expected, and I really need to be contemplating my business model." And frankly, to us, this is the exact thing that we have been building our company for, for 13 years, to build that opportunity, and it makes us Crossing the Chasm, that Crossing the Chasm leap easier because now they're under a ton of pressure, which is what I talked about in my opening remarks. Cory, anything to add?

No, that summarizes it.

Ryan Koontz (Analyst)

Cool. And Cory, the mention of the largest platform deal ever, is that, was that included in your stated RPO for 2Q, or is that a 3Q event?

Michael Weening (CEO)

That is a new event, Ryan, that'll be reflected in our Q3 RPO number. Well, to be clear, in second quarter, we booked the largest platform and cloud deal in the company's history in second quarter, and then, run up to this call, we actually closed a larger deal. So set a new record for our cloud managed services, but that's a Q3 deal.

Ryan Koontz (Analyst)

Awesome. That's great. And, Cory, can you give us any color on the product mix in the quarter across, you know, network versus CPE, in general? Like, how has that trended in 2Q versus, say, last 12 months?

Jim Fanucchi (VP of Investor Relations)

Yeah, margin. In terms of our gross margin, what you're seeing is exactly kind of amplified to what Michael has talked, just talked about. We're seeing operators spending less time building out new networks and working towards adding new subscribers to their networks, turning on revenue and cash flows for them. And so we've seen a shift in our product mix towards premises, away from appliance revenue, from the network compliance side.

Ryan Koontz (Analyst)

Got it. So even though the hardware there has got lower gross margin, the higher software mix you're selling, more than makes up for that.

Jim Fanucchi (VP of Investor Relations)

That is spot on.

Ryan Koontz (Analyst)

All right, I'll get back in queue. Thanks for the questions.

Operator (participant)

Thank you. Our next questions are from the line of Samik Chatterjee from JPMorgan. Please proceed with your questions.

Samik Chatterjee (Analyst)

Hi, thanks for letting me jump back on here. I know, Michael, you mentioned, you mentioned about BEAD early on in the prepared remarks. Just wondering, we've seen some other suppliers start to talk about receiving BEAD-related orders already, even though they ship out in 2025. Can you just address sort of where you are in terms of the timing? And, I think the primary question from investors is how material can BEAD-related revenues be for your model in 2025? Anything you can share on that front in terms of how to think about whether it should be revenues from sort of all 50 plus states, or should it be really a fraction of the geographies, just considering how the pace of approvals are? And I have a quick follow-up.

Michael Weening (CEO)

Sure. Happy to talk about that. And while there's others out there that are talking about orders and revenue starting this year, we've been consistent regarding our thoughts around BEAD. We expect to start receiving orders in the first quarter of 2025. Orders, not necessarily revenue. We do not know what that ramp will be after we start receiving orders. We do know that 20 states have their Volume Two proposals approved, and that represents 12 of the $42 billion. So you might recall on our last call, I suggested that as long as there was at least 10 to 15 states approved, that we would get enough to actually start seeing an impact, a meaningful impact in 2025. So we're sitting here today with 20.

So that's the good news, that there's certainly enough money now available for that program to have an impact on 2025. But, you know, there's other steps that will follow, such as NTIA's approval of each state's broadband map, subsequent to the challenge process. So there's certainly more challenges to overcome, you know, as that program continues to roll out. That said, you know, we will do well with BEAD, as we have with every government program, large and small, for the last 20 years.

Samik Chatterjee (Analyst)

Yeah, got it. The just the other question that I'm getting this morning from investors is, we've seen the lower mix of revenue from your large customers. Is there anything beyond sort of the cyclical headwinds in terms of market share with some of your large customers, in, just given the revenue decline you've seen with them on a year-over-year basis?

Michael Weening (CEO)

Yeah, so it, in the quarter, it was actually better than we thought it would be, so it's better than feared. So that was a positive and encouraging sign for us. The holdback in our large medium segment is a lot of reduction in CapEx spending as they're reevaluating their priorities. But you might recall that we had talked about we thought that large and medium segments would have a gap inside of Q2, and obviously it did not, and it did better than that we thought. So there are signs of them kind of coming out of those decision-making process and getting back on with their ordering programs. So we are encouraged by that. And so I think that's a positive development.

Yeah, and if anything, you know, they're the medium and large are actually starting to finally listen around the conversation, which I talked about, around the threats around quantization and actually how they have to change their business strategy. So in the second quarter, you know, we closed with a Tier 2 that we've never done, you know, who used to be a big customer of ours, but has not actually done anything with our cloud, and we closed with them on a go-to-market strategy around smart business. So how to actually attack their very sizable small business base, and win with a radically different experience. And so if anything, I would say that this is now our share opportunity to grow, and you saw that as represented by the 24 new logos that we added this quarter. Those are not new companies starting up.

Those are wins for companies who want to change their business model and evolve and transform with Calix.

Samik Chatterjee (Analyst)

Okay. Thank you. Thanks for taking my questions.

Operator (participant)

Our next question is from the line of George Notter with Jefferies. Please proceed with your questions.

George Notter (Analyst)

Hi, guys. Thanks very much. I wanted to ask about, you know, as we think about the impacts on the business. I think you guys have mentioned a number of things, certainly in the shareholder letter, certainly in recent quarters. But I'm wondering if you could kind of talk about, you know, what the biggest impacts are on the hardware side of the business right now. We've talked about delays in decision-making associated with BEAD and government funding. You've talked about, you know, customers adjusting lead times because of adjusting order levels because your lead times are shorter. We've talked about higher interest rates. We've talked about, you know, a shift towards, you know, adding subs versus core infrastructure.

I guess I'm just wondering if there's, you know, kind of a map to, you know, what these different factors are in terms of, you know, how important they are. Is there a rank order of issues here, or how do you think about, you know, what's fundamentally going on here? Thanks.

Michael Weening (CEO)

Well, actually, George, you summarized them very clearly. If you want us to staff rank them, I would say that it depends on the company, and, and therefore, inside each company, they're gonna be different. So, you know, let's, let's cover off what you so succinctly and accurately covered, which is what we've been saying for multiple quarters since we started to see this in, in late 2023. So the one was the, the decision making on BEAD, and we're, as we've always stated, that government funding is gonna take much longer than anticipated, and in the end, will be a much larger funding outpouring over time. So, you know, while it's a $42 billion program on BEAD, it's actually added 25%, it's significantly larger.

You succinctly stated that lead times has them adjusting how they think about inventory, because we actually dropped our lead times down. They're now at what is our new normal on the appliance side, which is why we're also comfortable with stating very clearly that we're gonna return to the sequential revenue growth because of the fact that, you know, our lead times are now where they are. The good thing in that is that I constantly get questions from customers that, as they clear that first point on decision making, we have enough inventory to serve them?

That question continues to get asked to me, like, I, I've probably answered it 10 times this quarter alone, and my response is the same, though, that we've given to investors also, which is that when we entered the pandemic and faced a surge in demand, it was a significant issue because we had 3,200 SKUs. We're now down around 200 SKUs. We have an incredible supply chain. We're optimized to meet any demand spikes, and so that's great. So we're in great shape there, as that changes. And then the interest rates, you know, you succinctly covered off interest rates. If I'm a private equity investor, they, you know, they were investing with abandon through, through the pandemic. You know, if you had a...

As I like to joke, if you had a pulse, you could raise $20 million, and could spell broadband, and people were throwing money willy-nilly. Now what they're starting to do is take a step back and say, "Wait a second, we've been at this now for two or three years, and the business model showed that I would be getting this amount of ramp, and I'm not achieving that ramp. And in fact, what I'm seeing is when I go into certain markets, I have more competition than I anticipated." But more importantly, the fundamental thesis at the beginning of the pandemic, which is build fiber and they will come and you will win, is actually fundamentally flawed, again, which we've been stating.

So that and the fact that interest rates are higher, are having some of them say, "Wait a second, I need you to go pivot all your attention back to, you know, it's great that you're a good construction company," and that's what a lot of broadband companies are, great construction companies, great network operators. But how are you gonna market and sell and win that community and get, you know, do what Tombigbee has done and get market share that's at 60% and an NPS of 92, and, you know, shedding off incredible ARPU, massive cash flow and huge margins, or like ALLO's doing? How are you gonna go do that?

And so, not only interest rates, that becomes a reason why they have the conversation, but it also is leading to these management teams coming under significant stress because their investors are saying, "Where's the freaking money?" Right? And that's great for us. I go back to USTelecom. When I was there a year ago, people were kind of, you know, "Yeah, yeah, whatever, Michael. Whatever, what, Michael." But, you know, when I was there, this go around, there were many of them saying, "Hey, I'm working with Calix on this, I'm working with Calix on that, because I need to change my business model if I'm going to win." And that's what we've always stated, and it just becomes the impetus to actually have the conversation and realize that the pain's right there.

So the interest rates, I would say, are just an impetus to having the conversation, your business model needs to change, right? You need to cross that chasm with us. And then, you know, and that, which then led to the very succinct thing. So I think your third point, and then your subs versus infrastructure, those in essence, are the same thing. Because if you're winning a shed load of subs, like ALLO is, or Tombigbee is, or many of our other customers are, who cares about interest rates? 'Cause your margins are so strong, your take rates are so high, your return on invested capital is so massive, you don't care. If it was a 20% interest rate, you'd still be investing because your market share is yielding a huge return on investment.

And so it's difficult for us to stack rank it other than say, George, all-- you're spot on, and it just depends on the customer. And so, you know, and I go back to, well, you know, the quarter's adds, right? 24 network operators decided to become broadband service providers this quarter. 24. And that's a-- and these are not new, new companies. This is a-- these are ones that are deciding that, you know what? I'm gonna partner with Calix to actually change my business model. And so that is-- that's the market, that's the industry.

George Notter (Analyst)

Got it. And then just one quick one. On lead times, was there more reduction in lead times this quarter versus last quarter, or have we been at a stasis on lead times, you know, all year? And what are lead times?

Michael Weening (CEO)

Yeah, we've been consistent with our lead times this year, and it's 12-14 weeks.

George Notter (Analyst)

Great. Okay. Thank you very much.

Michael Weening (CEO)

Great place right now.

Operator (participant)

Thank you. Our next question is from the line of Scott Searle with ROTH MKM. Please proceed with your questions.

Scott Searle (Analyst)

Hey, good morning, guys. Thanks for taking my questions. Nice to see the bottom put in for the second quarter and looking for sequential growth as we go into the back half of the year. Hey, maybe quickly to just hit on a couple of share questions, Mike. It sounds like you're gaining share within the Tier 2s. I was wondering if you could address that. And then more specifically, as we look to BEAD, I know you guys have been working in a consulting with many of these BEAD requests. I'm wondering if you have some early thoughts in terms of what you think share is gonna look like between Tier 1, 2s, and 3s, as BEAD funding starts to roll the market in 2025.

Clearly, you guys would be better positioned with the Tier threes and Tier twos, but I'm kind of wondering what your thought process is there in terms of the share gains that they might have within those categories.

Michael Weening (CEO)

So, a couple complex questions in there. So the first one is, with regards to share, the way we think about market share is actually the customers that we're aligned with, whether or not they're taking share. And one of the best examples of that this quarter would be that we had a small customer who grew to a medium customer. Why? Because they're actually adding subs, they're growing their business, and they're winning in the markets that they serve. So when we think about market share, we think of it that way. And then, on, on, you know, adding subs, you know, one of the things that you talked about the tier two that actually went to our small business solution.

This goes back to the underlying business strategy that we've always articulated, which is, we're uniquely positioned in that we have this very diverse platform that allows us to find a beachhead into a customer, and then demonstrate to them what success looks like. So with that one, they, you know, they are coming under pressure with regards to, "I need to improve ARPU, I need to slow churn, I need to grow revenue," and that's why they chose our small business solution. And once the small business solution goes into that customer, who, you know, now the entire platform's in. So we've hooked into their back office, we've hooked into their business processes, and it's easy for them to continue to expand as they see success.

So the key thing about gaining share for us is that once we garner that beachhead, like we have in that Tier 2 with small business, we then flood our customer success team into it to help that customer transform their go-to-market strategy, win a whole bunch of new small business customers, and then hopefully expand with us over time. With regards to BEAD consulting, you know, the way that our BEAD process is radically different than most others. You saw that in Q1 when we announced the relationship with Ready.net, who has incredible cloud and software tools to help broadband service providers actually understand BEAD. And so we're hand in glove. So while others are, you know, Cory said, touting, "Hey, I got some orders in.

I got some orders in," we're actually sitting down beside them, putting in their BEAD submissions, helping them articulate it. We've got a team, a big team of people who do it, plus our Ready partnership, to ensure that we are side by side in planning with them, not only in how to win and how they pitch the local state office, but then also what the implications are on timeline. And that, through the second half, will get clearer and clearer.

With regards to who's gonna win Tier One, Tier Two, Tier Three, the reality is that one of the things you've heard a lot of grousing about is that if this program was actually centralized in Washington, D.C., and everything was through a single office centrally, then the bigger companies would definitely have a significant advantage because they'd be able to do what they do well, and they'd put a massive lobbying arm into D.C., and they could influence outcomes. By having this as a state-by-state, territory-by-territory program, the ones who are advantaged are the ones who are local. And you hear that in the...

When I'm out in the, you know, speaking to the different groups, you hear a lot of that, is that as these are state-run projects, they really want companies who care about the local state, whether that's a for-profit or a cooperative, to actually be that voice in that office and win the money. Because they know that they're not in it just to kind of scarf up a bunch of money and pad a P&L, like other programs have in the past. They're actually, they care about the community, they're in the community, they're in the state, and they're there for the long term.

And so while that has definitely been one of the reasons where you've seen a slowdown in the BEAD process, at the same time, I think that very democratic process, and that that's been diffused out to the different states, is really powerful. And frankly, I think it advantages both the companies that care about the state.

Scott Searle (Analyst)

So, Mike, bottom line there-

Jim Fanucchi (VP of Investor Relations)

Just follow up.

Scott Searle (Analyst)

Oh.

Jim Fanucchi (VP of Investor Relations)

Scott, just to amplify one thing on Michael. You know, BEAD is just a single program. Yes, it's a big one, but there are lots of government programs out there, a lot of state money. Our customers do very well, and Calix does very well as a result, and has so for the last 20 years of taking advantage of these government programs. We're gonna do just fine with this BEAD one as well.

Scott Searle (Analyst)

Got you. So not to put words in your mouth, but it sounds like your customers, disproportionately to their current broadband share, should participate pretty well in BEAD and other programs going forward. Is that correct?

Michael Weening (CEO)

That is, that's true, Ryan, and in BEAD, in particular, you gotta think, again, these are hard locations, right? These are the most rural parts of the country. And so these are the ones that are done last. And so it's gonna be somebody with a community-minded perspective, willing to make those investments to go after those hard-to-get locations. So, we think that'll disproportionately lead to the smaller players to go after those locations.

Scott Searle (Analyst)

Great. And last, if I could, on a follow-up, you know, I think last quarter you talked about, right, certainly 2024 is a transition year, but it seemed like there was enough green shoots that 2025 you'd be shaping up to get back into the targeted 10%-15% growth range. I'm wondering if you could update your thoughts on that front, and also kind of fold BEAD into the conversation. Cory, you said, look, if we get, you know, 10-15 states or territories, you'd be feeling pretty good about the BEAD contribution into 2025. Now we're at 20 states. You've got another 36 states that have completed 9 out of 10 steps. So by the time we have this call in the October timeframe, you know, you could have double that number.

So I'm kind of wondering how BEAD kind of layers into that thought process for growth in 2025? Thanks.

Michael Weening (CEO)

Thanks, thanks, Scott. What we're seeing here on the appliance side is that we're establishing a new normal, where our smaller orders, you know, seeing smaller order sizes, but many, many more of them. There's a healthy trend with us landing new footprint, as evidenced by the 24 new customers. When you combine that with the robust demand of our platform, cloud and managed services, as noted by the 9% sequential growth, and the signing of our largest cloud deal ever this quarter, in Q3, you know, I think we're. I think what you're seeing is we've put the bottom in, and, and we're gonna return to that sequential revenue growth. What you're, what you're poking at is, what does that quarterly growth rate look like from here on out?

I think we're gonna take a very pragmatic view about it, given the fact that we've had the last few quarters on the appliance side, and so we will be cautious going forward. I think as we look out at the next several quarters, we had talked about a quarterly growth rate of, you know, 1%-5%. We'll be at that lower end of that range here for the next several quarters. And as we progress through 2025, as we start seeing contributions from the customer acquisitions, as we see the large and medium customers continue to return back, as we start seeing some of the BEAD shipments, not just orders, but shipments, we will move to, let's call it, the middle of that range by the end of 2025.

And so there'll be a general progression there as those revenue streams layer into this bottom that we're creating right now. Yeah, and a good example of that would be, you know, we won a really incredible customer in Q2 last year. They were at the upper range of small, will definitely cross over into medium, and they are an innovator with a huge amount of money behind them. But it took them some time to actually migrate their way over to Calix. You know, they had to get rid of some of their existing inventory, those different elements. And Q2 is the first time we started to see, actually, Q2 this year, you know, a year later, doing all that work with them, is where we finally started to see the orders fly.

So you know, the key thing in all of this is that you know, we can have a short-term view of chasing this, but we're actually, as we stated on and on, you know, every single time, our whole goal is to use this disruptive time when things are popping, falling apart or the disruption happening, to cross that chasm, win a whole bunch of new customers, and then basically set in place by winning those beachheads, as I mentioned, with that tier two, so that that becomes the beginning of an expansion of the footprint in an entirely new customer. And so this footprint attack that we're on will not, you know, has not yielded in this quarter or next quarter, although we have hit the bottom, and we're gonna now grow sequentially.

But we're laying those early roots, green shoots in net new accounts to win for the long term. And that's what our entire leadership team, our entire field team, is what they're focused on, is we're thinking about, you know, 2025 and 2026. Like, you know, the work that we're doing right now will pay off in a huge way, again, as evidenced by the amount of logos that we won over this quarter.

Jim Fanucchi (VP of Investor Relations)

Great. Thank you.

Operator (participant)

Our next question is from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your questions.

Tim Savageaux (Analyst)

Hey, good morning. I wanted to stay with BEAD for a second here. As this opportunity, you know, maybe comes into greater view or greater focus with the approvals that we've seen, and I understand the kind of mechanics from a customer standpoint, I wonder if you've, you know, have any updated thinking on, you know, what BEAD could mean to the company just from an overall revenue opportunity standpoint, right? We've got a, you know, $40 billion program where there's, you know, I guess, the grantees are supposed to bring some money to the table as well, so maybe that's even a little bigger. I think you guys have talked about kind of a high single-digit % exposure from a kind of access, infrastructure, and network standpoint.

You know, when we get, you know, rolling up to something, you know, up to something significant with BEAD, what do you think that could mean to Calix from a revenue perspective on an annual basis?

Michael Weening (CEO)

So Tim, that's a great question, and I think it'll be a significant number. You've laid out the math, right? So it's a $42 billion program. There's a 25% match, so you're looking at over $50 billion of capital being put to work. It'll be over a 5-8-year timeframe, and we're gonna start seeing the beginning of that in 2025. So I think it'll take some time to get rolling and full steam. You know, our expected amount that Calix can serve is about 8% of that number. So you take 8% of 50, you know, so it's a very large amount of money that'll come over the next 5-8 years.

And so you can kind of put your own kind of ramp on it to when it gets to that full steam. And I think we'll just do very well. If the past experience on these government programs is any indication, and the bias towards smaller service providers serving those rural areas is any indication, Calix will get its more than its fair share of those proceeds.

Tim Savageaux (Analyst)

Great. Thanks. I'm sorry, but if I could follow up, try to combine a couple of things here, but really starting with the new large cloud order that you mentioned, if you had any color on that with regard to kind of type or size of service provider, you know, new or current customer. And I guess I ask that in a broader context of the uptick in RPOs.... And, you know, it sounds like, given your earlier comment, you said maybe expect that to continue with this new order contributing. But, you know, if we look at the drivers of RPOs, you know, it seems to me it's probably three, you know, big, I won't say one-off, but big orders like that. New customers, which you mentioned, and also the shift in current customers towards additional platforms.

You know, of those three factors, I guess, how did you see that play out in Q2 with the increase in RPOs, and what would you expect in Q3?

Michael Weening (CEO)

Yeah. So as it relates to the RPO of those factors you outlined, it's consistent with what we've been saying. The number one factor for the increase in RPO is gonna be the subscriber additions that our customers are adding. All right, so they're out there taking share, growing their footprint. The second one is they expand their use cases and the amount of our products that we offer, so they're expanding the actual platform, cloud advantage services. And the last contributor is new customer acquisition. It takes them a while to build up to it. And so this large contract was an existing customer. It was a renewal.

Tim Savageaux (Analyst)

In Q2.

Michael Weening (CEO)

In Q2 and in Q3, existing customers. And you get further down the stream, and when they come back in, they've grown their footprint over the last three years to a much larger size. And so when they renew that contract for the next three years on that larger base, it just tends to grow. So this is what you're seeing as these contracts come up. So that's the biggest genesis of it, is not only do they take more of our platforms, but it's the size of base that they're applying that contract over. So and let me expand out on that. So I wanna use these two deals as explicit examples of the land and expand strategy, right?

So the biggest deal we've ever done in Q2, you know, that we had a record deal in Q2, and as Cory said, that was a net new deal where the customer committed over time. Why did they do that? They've been working with us for a long while. They've been adding subscribers. They see the value of the platform, and then they made a pretty significant commitment to us over the long term. But their previous cloud contracts were tiny, right? The one that we closed last week was the same idea, where it was essentially like a pay-as-you-go, working together, laying out the business model, identifying what the opportunity is, and then as that customer enjoyed significant success, we re-upped it into a massive contract. And so that's what you have to think about on the way that we do these.

Sometimes we say, "Hey, we added a new customer," and, you know, like that small business customer, the commitment wasn't significant. But the commitment was significant mentally because they went after our... They landed our platform into their business, and now we're gonna help them transform how they win small businesses. And what will happen is, that will then lead to, at some point, once we demonstrate that they add a ton of subs, they'll go, "Hey, we want a better price. Therefore, we understand our volumes, and let's actually do a proper contract." And boom, you have another record contract. And so this business requires patience. This business requires consistency. This business requires us sitting beside our customers, their CEOs and their leadership teams, helping them win, and we're the only ones doing it, frankly. No one else is.

Everyone else is popping into the office and saying, "Here's a PO, buy my box. You know, I'll see you in a little while." We're gonna win because our customers are gonna win.

Tim Savageaux (Analyst)

I appreciate all that color, and last one for me. And you mentioned that, you know, the large and medium segments were, you know, less weak than you anticipated, I think probably close to down 20% versus 50. You know, conversely, that implies some weakness among the smaller carriers that maybe you didn't expect. And I know there's the shifting of the carrier classification there likely has some impact. But I wonder if you can, you know, give us a little more color on that dynamic amongst the smaller carriers and what you saw there. And that's it for me. Thanks.

Michael Weening (CEO)

Yeah, you bet. The lower appliance revenue from our smaller customer segment is really from the normalizing of orders due to our shortened lead times and creating that base for what we're seeing as the new normal.

Tim Savageaux (Analyst)

Great. Thanks.

Operator (participant)

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

Christian Schwab (Analyst)

Hey, great. I think we all understand, you know, by this point, the platform sales process of your company and the competitive advantage you have there. But in reality, when we go back to BEAD, right? On our math, you have a little bit over 2,100 different service providers in the Tier 2, Tier 3, Tier 4 category. And so when that BEAD money is released, obviously you'll have an expanded opportunity for customer dialogue on a platform. But just as far as BEAD and CPE equipment, right, you should, over time, as that money is rolled out and deployed, regardless of whether they buy your platform software, see a material increase in equipment orders, shouldn't you?

Michael Weening (CEO)

Yes, that, that is true, Christian. But more importantly, understand that that hardware is, is the ability for us then to follow that up with the premises and our platform cloud and managed services. So we look at BEAD as kind of an acceleration to be able to pull forward our our platform, cloud, and managed services model. So while there will be an increase in hardware or appliance revenue, the real, real positive is the fact that it pulls forward our business model.

Christian Schwab (Analyst)

Yep, understood. I just wanted to make sure I was thinking about it correct. That's it. Thank you.

Operator (participant)

Thank you. We've reached the end of the question and answer session. Now I'll turn the call over to Jim Fanucchi for closing remarks.

Michael Weening (CEO)

Thank you, Rob. Calix will participate in several investor events during the third quarter, and information about these events, including the dates and times and publicly available webcast, will be posted on the Events and Presentations page of our Investor Relations website. Once again, thank you to everyone on this call and webcast for your interest in Calix and for joining us. This concludes our conference call. Have a good day.

Operator (participant)

Thank you. Thank you for everyone's participation today. You may now disconnect your lines at this time.