Calix - Earnings Call - Q3 2020

Transcript

Speaker 0

Greetings. Welcome to the Calix Third Quarter twenty twenty Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

At this time, I'll now turn the conference over to Tom Dinges, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining our third quarter twenty twenty earnings call. Today on the call, we have President and CEO, Carl Russo and Chief Financial Officer, Cory Sindelar. Also joining us today is Executive Vice President and Chief Operating Officer, Michael Weining. As a reminder, yesterday, after the close of market, we released our letter to stockholders in an eight ks 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 Calyxt 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 third quarter twenty twenty 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 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 Karl. Karl?

Speaker 2

Thank you, Tom. As we said last quarter, for Calix, the future is sooner and so it continues. The third quarter reinforced our view that the pandemic has accelerated the secular disruption moving through the communications industry while also creating additional demand resulting from the expansion of capacity to meet immediate subscriber needs. These two effects combined to drive strong bookings in the quarter. While component lead time challenges remain, our supply chain team outperformed in the quarter, which enabled us to deliver results significantly above the high end of our guidance.

The third quarter also marked a milestone in our history. Building Calix initially as a broadband access system provider to wireless services and then building the new Calix as an all platform provider of software systems and services to CSPs of all types has been a challenging journey. What kept us motivated throughout was our vision of a new and better service provider business model built on these platforms. And we were certain that once achieved, the Calix business model would be similarly enhanced. While it is still early days in this transformation, the effects of our new business clearly showed through this quarter as we delivered all time record quarterly revenue of $151,000,000 all time record quarterly corporate gross margins of 51.5% all time record quarterly systems gross margins of 52.6% and all time record net income of $25,000,000 or $0.40 per share.

Clearly, our future is now. To reiterate, we are just getting started as the trends are continuing in the current quarter with our strong guidance for the fourth quarter representing a balance between strong demand and continuing component supply challenges. And we step up into the fourth quarter from the strongest financial foundation in our history. There is a growing class of service providers building new business models on top of a unified access infrastructure. These service providers deliver superior subscriber experience and do so at the lowest cost.

They are aggressive and growing their subscriber base and they are attracting capital. And we are excited to host them along with 21 new customers added in the quarter at our Annual Connections Conference in full virtual mode this coming week. With that, let us open the call for questions. Rob?

Speaker 0

Thank you. We'll now be conducting a question and answer session. You. Thank you. Our first question is from the line of George Notter with Jefferies.

Please proceed with your question.

Speaker 3

Hi guys, thank you very much and congratulations on the strong results. I wanted to maybe start out by asking about the pull forward effect. I think you mentioned in the press release that obviously work from home is driving some real strong demand and certainly pulling forward demand from future periods. Any sense for how much that effect might be? And also it certainly doesn't seem to be in your Q4 guidance.

Is that pull forward effect something you'd expect to see maybe in 2021? I guess I'm just trying to understand the dynamic there.

Speaker 2

George, I want to make sure I heard the last part. Did you say it wasn't in the Q4 guidance or is in the Q4 guidance?

Speaker 3

Well, mean, Q4 guidance looks extremely strong also. And I guess,

Speaker 2

Okay.

Speaker 3

But by I guess the implication here is that at some point there's an air pocket out in the future as you satisfy that demand. Guess kind of wondering what that dynamic looks like.

Speaker 2

Okay. Sorry, I wanted to make sure I understood. So, our sense of the mix is that it's still part of both. Part of it is we're accelerating our all platform model and part of it is just a demand pull forward. We see it continuing into Q4, and we are getting more comfortable that this is a new level of demand for the company.

And you can see that reflected in our guidance on OpEx. As you may remember, last quarter and the quarter before, we spoke to the fact that we were going to under run OpEx because of our concerns over how much of this was a pull forward. So we're getting more comfortable that there's a new level of demand here, and more comfortable that there won't be a negative growth air pocket after that. So let me stop there and see if that shapes the frontier for you to ask another question.

Speaker 0

Yes, that's great.

Speaker 3

And I guess, just as a follow-up on that, what is it about your business that makes you confident that, this is indeed a new level of demand? I mean, certainly the new customers, I would imagine play into that. But is there something else you're seeing in your order book or conversations with customers that kind of reinforce the the idea that we're at a new level?

Speaker 2

So the answer is, you know, obviously, part of this is an outcrop of what we've spoken to for many quarters. One is, obviously from a product standpoint, rotating to more and more of a platform model, changes the visibility in a number of dimensions. The second piece, as you've seen in this quarter, is a continuation of the diversification of the customer base. And as you know, it's not a deliberate pursuit of diversification. It's merely the outcropping of where the more aggressive service providers are.

I would also call out that as you look forward off of the base that we just established, our largest customer this quarter was again CenturyLink at some 12% of revenue. I will tell you it is likely that in Q4 we have no 10% customers, in the quarter. And so it's all of those things put together. And then I think if you combine that with frankly what we believe to be the best direct selling engine, in the industry, it gives us a lot of visibility into how customers are thinking. Got it.

Great. Very good. Thank you very much. George, thanks.

Speaker 0

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

Speaker 4

Carl, with respect to the base of 1,000 plus smaller customers, those customers that are 250,000 subscribers or less, there was a huge step up in growth from that customer base. I trust those customers are the primary and the bulk of the revenue you're doing with your software based platforms. Can you confirm that, first off? And then I've got a couple of questions tied to that.

Speaker 2

The answer is yes.

Speaker 4

All right. That I think you said in the shareholder letter that customer base was up 53 year over year in the quarter. What is it the same response you have for George in terms of what would that those customers not be 76% of revenue? I trust it's the same response in terms of that huge step up from the prior. You had strong growth prior to this quarter, but not 50 plus percent from that customer base.

Speaker 2

We're going to continue to see the diversity occur. But if you really want to micro parse the numbers, you'll notice that there was also growth in the medium size as well. So, as we've discussed in the past, disruptions typically happen small customers first up to large. And I think we're slowly but surely seeing that progression, keeping in mind that as we've said, this is a multi decade disruption. But clearly the customer base is growing and not only are we growing with smaller customers, those smaller customers are they themselves growing their subscribers.

And we're beginning to see the signs in the medium sized space as well.

Speaker 4

Alright. And I'll I'll ask you the next question which I asked every quarter. We're now a month over now I guess, not quite a month into the new quarter, but I trust the strength from that small customer base where there's no one customer that has that much throwaway. You're seeing that continuing at this level?

Speaker 2

Yes, we are. Yes, we are. And that's the guidance that we gave for Q4.

Speaker 4

All right. I'll pass it on. May come back in the queue later, but I'll pass it on. Thank you.

Speaker 2

Thanks, Paul.

Speaker 0

Thank you. Our next question comes from the line of Rich Valera with Needham and Company. Please proceed with your question.

Speaker 5

Thank you. Good morning. Let me add my congratulations on the strong results. Carl, I was hoping you could maybe shed a little more light on the sort of non pull forward part of the strength you're seeing, particularly with, I guess, the platform business. How much of you think that acceleration is due to new dynamics imposed by COVID and just sort of natural momentum you're seeing in from you guys learning to sell it better and broadening out your product platform, the product offerings in the platform area.

Any color you can provide on that?

Speaker 2

Sure. I mean, part of it very clearly is driven by the coronavirus. You know, as we discussed, way back when we thought that there was a pull forward of behaviors that would not only affect the subscribers, but also affect the service providers that are delivering, those services to the subscribers because they too are trying to deal with, you know, folks working remotely. I was looking at a Microsoft Azure. I think it was an Azure article where they talked about looking at all of their data and they see they have seen two years of digital transformation acceleration occur in two months.

So it gives you some sense for the order of magnitude of that pull forward. And then, obviously there's the pipes on the other side. The second piece is there's just a general continued ramp of our platforms. And maybe what I'll do here is Michael Weaning is on the phone. Think he's currently having a power outage where he is.

Michael, are you on? I am. Maybe you want to just share with folks what you're seeing in our all platform offerings and how that's going in the marketplace.

Speaker 6

Sure. The benefit that we have to your question around our ability to sell it better is really one of partnership. So how we work very closely with CSPs of all sizes and become that partner who coaches them through their business transformation is they adjust to the new market dynamics. You know, they have new competitors. There's large customers or large companies like Amazon and Google who are aggressively attacking their subscriber and they're looking to companies like Calix and what we're offering to partner with them to actually provide a great subscriber experience and win that customer for the long term, in other words, win the home.

And so we're doing very well. Our customers are, seeing robust demand and we continue to partner very closely with them to help them transform their business.

Speaker 2

Michael, thank you. Rich?

Speaker 5

Yes. Thanks for that, Carl and Michael. And, so wanted to look, into 2021 and see if there's any more you're willing to talk about that. I think The Street had been sort of at the low end of your multiyear target range, think, of 5% to 10% for next year. You're obviously going to have much tougher comps now, particularly in the back half.

And just wondering if there's anything you're willing to say at this point about how we should be thinking about '21 from a from a growth perspective.

Speaker 2

Let me let me tell you what Corey will tell you. 4.999%, which I've rounded up to five. To your point, at the low end of the range, let's face it, these are significant uplifts. Think when I looked at it, you know, this is lifting up twenty twenty one by some 8%. It's a big step.

And, you know, George earlier had asked the question about an air pocket. And my comment was, we don't see a negative growth air pocket. But it would be foolish, you know, unwise to the point of being foolish to do anything other than 5% until we get more visibility. So 5% it is in my mind.

Speaker 5

Oh, that that totally makes sense. Thanks, Shimon. I'll I'll yield the floor.

Speaker 2

Rich, a hearty welcome aboard. Thanks.

Speaker 5

Thank you. Appreciate it.

Speaker 0

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

Speaker 7

Hey, congratulations guys on the great quarter and guide. Just a follow-up to George and the last gentleman's question is, as we go through 2021, Carl, you know, not expecting an air pocket, and you said, you know, kind of I don't wanna put words in your mouth, but, you know, odds of this kind of being a new normal as we accelerate deployment for network capacity constraints. Is should we anticipate, you know, exiting 2021 to be kind of a time frame that you would probably have enough time frame to update your long term model to see if that growth rate long term could actually now be greater than the 5% to 10%, or we just take it one quarter at a time?

Speaker 2

So look, we're going to take it one quarter at a time. But to answer your question, any adjustment like that is easily four quarters off. When we set the model, we set it for 2021 and beyond for the next few years to make sure that we could get everybody a view of the business. If there's something that causes us to have much better visibility, we obviously would come back and adjust the model. But anything in the next four quarters for sure, Christian, would not happen.

Speaker 7

Perfect. And then lastly, can you give us an update on Verizon? And, any chance or opportunity, over the course of the next few quarters where we may begin to see a more material reacceleration with that customer and how likely that may or may not be?

Speaker 2

Yes. So let me frame that actually. Great question. Let me frame it in the answer that I gave on CenturyLink. As we go forward, I think our larger customers are going to perform in a noisy fashion because that's the nature of their rollouts in their business.

As an example, CenturyLink is going through a brand and then ultimately a restructuring around Lumen Technologies. Verizon is in the middle of a multi decade infrastructure build that has puts and takes every quarter. There are other customers that we have that are doing large infrastructure builds. I think the opportunity for any one of them to be a 10% customer in any one quarter is pretty good. I think the opportunity for any of them to be a 10% customer for the entire year is diminishing rapidly.

Speaker 7

Okay, great. Thank you. And then, lastly, can you let us know, on the component challenges, what what components that, are are most stressed in the supply chain system for you currently?

Speaker 2

Sure. This is not an uncommon phenomena.

Speaker 6

It's, it's the it's

Speaker 2

the more complicated silicon components. And, you know, when you when you go listen to the silicon, quarterly earnings, you'll hear them talking about their challenges upstream, as an example, with substrates and other things. And that they if they had more supply, they could in fact do more revenue. The fact that matter remains is that when you listen to Michael's comments, the fact is we're helping our customers succeed by building very valuable business models.

Speaker 4

That

Speaker 2

demand drives the demand for our all platform offerings, some of which have hardware underneath them. The increase in our demand combined with the increase in component lead times, it's not one or the other, it's both, is what drives the supply constraint and balancing our demand with our supply to make sure our customers are moving forward. It's a daily executive meeting and executive focus. It also makes forecasting revenue a little tricky, But that's what we're seeing and that's what we're working through. But to just put one last fine point on it, it's not really smaller components.

It's the larger silicon.

Speaker 7

Great. No other questions and congrats again,

Speaker 2

Thank you, Christian.

Speaker 0

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

Speaker 8

Hi, good morning and congratulations on the results. I wanted to kind of continue along the theme of kind of puts and takes on growth going forward given how strong your 2020 is. And I want to focus on a couple of areas. First, international, where you saw pretty significant uptick. And I wonder if you describe that similarly in terms of a pull forward dynamic or is that more kind of ramps and rollouts kind of proceeding along at their own pace, maybe accelerated by some of this.

But I wonder if you can kind of characterize the strength internationally, whether you expect that to continue. It didn't bounce up pretty sharply, and then I'll go from there.

Speaker 2

So the answer is the latter to your question, more ramps and rollouts. Secondly, as you know, international, is the next phase of our growth and and a work in in progress as we are very focused on North America. So that's the two answers I would give you to characterize what you saw.

Speaker 8

Sorry. Mute issue there. Well, I guess, you expect that to continue as you implicit in your q four guide, do you expect international revenues to kinda maintain at this elevated level you've seen? Or is there any kind of

Speaker 2

bounce in No, they'll your comp to bounce around, Tim.

Speaker 8

Great. The other area I wanted to focus on was kind of the medium carrier segment where there's been, you know, a lot of activity lately. And I think you referenced some of it in terms of attracting capital. I I always found out with with one of the kind of midsized players. And you're, you know, you're seeing some growth in that group as well for the first time in a while even though the smaller group has been the real, you know, engine.

But I wonder, as as you look forward into to next year or or maybe also implicit in next quarter's guide, what kind of trends you're seeing among that group of players, many of whom are kind of emerging from bankruptcy, attracting new capital and engaged in big fiber builds? Is that something you could see accelerating next year or is it also kind of part of the pull forward dynamic you've described for this year?

Speaker 2

Less to pull forward dynamic this year. I think it's a longer term play. But I think if I were gonna characterize what's going on for many of the former, mid sized wireline telcos, they're being recapitalized and restructured. And lo and behold, the capital that's coming in to do that in almost every case, I'm trying to think of a case where it hasn't been, has said we're gonna go build fiber. If you look at the Ziply spin off from Frontier, if you listen to the words that are coming from Windstream, if you, look at the investment that's being made by a private equity firm into consolidated, you hear the same theme.

And so we look at those as the opportunity to help those customers not only build that unified access infrastructure, but then build an entirely new business model on top of it. But I would be wary of trying to fold that into numbers in any given quarter as they are larger and going through, you know, pretty significant restructurings.

Speaker 8

Got it. And and last question for me. And I know, you know, given the magnitude of the strength you're seeing, you know, short term, you know, there's it's sort of, you know, prudent to be conservative about, you know, growth for next year. So I don't know if you're gonna have a specific answer to this. But, you know, as you look at '21, obviously, we're gonna see the the RDOF process, you know, kick off in a a week or two here.

You know, in in I guess, implicit in in at least your starting point for next year, what sort of assumptions are you making about incremental business coming out of that process? Or might it even be the case that some of the activity we're seeing now is sort of accelerated in anticipation or in advance of that process. How any update on how incremental you expect are off or indeed any other stimulus to be for you, in '21?

Speaker 2

Yeah. So none of, what you're seeing currently has anything to do with RDAP. So let me be clear about that. Number one. Number two, pretty clearly in the guidance that we've given for q four and then obviously extrapolating that into the answer that I gave to George for 2021.

You know, that's a that's I I don't know. It was some $40,000,000 step up in 2021 from where we were ninety one days ago. And, obviously, we don't guide, but if you just look at the 5%, that's what it's gonna take you to. So there's some of that RDoF that's clearly being factored into that. All of that having been said, I I don't see anything that causes us to change from our guidance on RDoF, which has been.

But it's a 2022 event, but you'll see some of it in 2021. And that's right now, it's steady as she goes.

Speaker 8

K. Thanks very much, and my congrats. Thanks, Dan.

Speaker 0

Thank you. At this time, I will turn the floor back to Tom Dinges for closing remarks.

Speaker 1

Thank you, operator. Calix management will be participating in three virtual investor conferences during the 2020. Information about these 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.

Speaker 0

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