Calix - Earnings Call - Q4 2020

Transcript

Speaker 0

Greetings, and welcome to the Calyxt Fourth Quarter twenty twenty Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tom Dengis, Director of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining our fourth quarter twenty twenty earnings call. Today on the call, we have CEO, Carl Russo Chief Financial Officer, Cory Sindelar and 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 made available for audio replay in the Investor Relations section of the Calyxt website.

Before I turn the call over to Karl 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

Speaker 0

our future financial and operating performance,

Speaker 1

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 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 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 Karl.

Speaker 0

Karl? 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 Corey to give you an understanding of how we are viewing 2021 from this early vantage point. Corey?

Speaker 2

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 at the upper end of our target financial model range of 5% to 10%.

2020 is 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 2021.

And just yesterday, we were 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 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 Karl for his concluding remarks.

Speaker 0

Thanks, Corey. 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 Weining has been promoted to president and chief operating officer.

Teamed with Corey 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 Corey 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. Daryl?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions. Our first questions come from the line of George Notter with Jefferies. Please proceed with your questions.

Speaker 3

Hi, guys. Congratulations on the results, guidance, the strength in the business. It's great to see. I guess my question was about RDOF. Looking back, the reverse auction got completed.

We can see the list of winners, of course. I'm just wondering what your thoughts are on that list of winners, what 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 gonna go through. I'm just curious if there's any likelihood in your mind of of dollars being re awarded by the FCC through that process.

And then any changes on your views and timing for our off. So thanks a lot.

Speaker 0

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 $9,000,000,000 that was awarded. If you do the math, roughly 9% of it went to satellite, a little under the remaining half 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 sparse 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, 9,000,000,000 was awarded out of the more than 20,000,000,000 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 9,000,000,000 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 weeks out on the long form, and then you have to defend, your responses.

And so it will be interesting to see, who passes muster on that. And ultimately, the funding, you know, starts July, August of this coming year. From a timing standpoint, there's nothing that's changed in 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 list that we know well, and we feel comfortable that we are well positioned. And 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, 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.

Speaker 3

Yes, that's great. Very good perspective. I guess the other question I want to ask relative to the market environment. Obviously, we have the pandemic, you had this big surge in demand around that. I'm wondering if 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 those sub additions? What's demand environment like for your customers? Thanks.

Speaker 0

Yeah. My direct answer to your question would be it's 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 Corey and his comments say that we're getting comfortable now not at 5%, which is where we were ninety one days ago, but actually going towards the upper end of our five 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. Corey, I don't know if you want to add any color to that.

Speaker 2

No. I think you nailed it.

Speaker 0

Thanks, guys. George, does that answer your question?

Speaker 3

It does. Thank you very much.

Speaker 0

Yep. Thanks for getting up early.

Speaker 1

Our

Speaker 0

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

Speaker 4

Good morning. 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?

Speaker 0

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

Speaker 2

Yes. Sure. Yes, Paul. So we think we will actually increase margins throughout the year, but at a much reduced rate. I mean, the last several years, we've been expanding margins at 500, 600 basis points.

We're saying given the supply challenges and the constraints, it's gonna 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. It's the rates are going up.

As the component lead times are pushing out, And just most recently, you know, we're starting to get price increases on our components. So, it's gonna be a challenging year. And so we're we're gonna 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 to 100, 200 basis points.

Speaker 4

Corey, just to be clear, because there's a huge gap between 500 to 600 basis point improvement, which I don't think any of us were expecting and no improvement. But to be clear, you're saying even 100 to 200 basis points would be a stretch. You're not expecting to drive a 100 to 200. It's gonna be something in the tens of basis points. I'm just trying to get a sense for how much improvement given the challenges that you've you've, addressed.

Speaker 2

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

Speaker 0

Yeah. So let me 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 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 Corey 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.

Speaker 4

Alright. I appreciate that. Two two other quick questions, if I may. Yep. It's been a long time since non US matter to your business.

I mean, while US continues to drive the boat, you just had a second straight quarter of a 20 plus million revenue from non US. Is that primarily or entirely Citi fiber? From the commentary in the CFO letter, it sounded like 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?

Speaker 0

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, you know, to be blunt, hats off to the international team because they're they're continuing to outperform.

But there's no trend that you should draw from that. Carl, I'm

Speaker 4

not trying to be argumentative here, but you just did 25,000,000 plus, almost 26,000,000 non US. That was up from 23,000,000 last quarter. You haven't done 20,000,000 non US, I think, ever. That's two plus times what you've been doing in the first half of the year. And so when you say there's no there's no change, it's it's I think that's it.

And I appreciate you saying it's better execution, but better execution normally doesn't drive a 100 plus percent growth relative to the previous norm. Again, I'm not trying to give you a hard time, but I'm trying to understand what's going on.

Speaker 0

Well, I appreciate the the preamble of you're 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 let me be clear. I don't want you to 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've fought hard to acquire from a land and expanse standpoint is expanding. So no. I I don't think you're being argumentative. I think your interest is in the right area, but I'm just I wanna make sure it's clear.

We are not there's nothing a priori that we are doing to drive that overtly. It is the team executing upon a a more favorable backdrop. Our focus, first and foremost, is in is in North America.

Speaker 2

Alright. One last quick question for me, if

Speaker 4

I may. On the 85% of revenue that's coming from the smaller customers, 250,000 something less, Given that no one of those customers, I 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 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 with their edge, the 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 their revenue?

Speaker 0

Yeah. 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.

It's 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 there's literally no one thing that that I would choose to highlight. I'll I'll turn it over to Corey, and maybe Michael might wanna add a little bit of comment on this as well. It is a broad base.

But, Corey, you wanna add and then maybe Michael?

Speaker 2

Yeah. I I think it's it's important to note, Paul, that, you know, part of the strength there is, you know, 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 and wanting to add to them.

Speaker 0

Michael?

Speaker 5

I think Carl's Carl and Corey said it well. We have a 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 have only considered a a part of our business as something to fill out their business needs are now looking at us to run their entire business, to actually go across it and and support the entire transformation of their business from their marketing organization all the way back to their their access and everything that 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 Corey stated, and the ability to expand those rapidly as we build those relationships and with our customer success organization demonstrate over and over again that 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.

Speaker 0

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

Speaker 4

Thank you.

Speaker 0

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

Speaker 6

Thank you. Good morning. And let me add my congratulations to the Calyxt team on a very nice year. Carl, you had real strong new customer additions this quarter, I think 30, and it's been probably a year and a half 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, you know, maybe lumpiness as as you might call it in terms of new customers added?

Speaker 0

The only quick comment I would make, Rich, is the following, and and maybe Michael wants to add some color to this as well. In my view, when when we all went virtual due to the pandemic, you may remember us talking about, you know, this is gonna be interesting to try and figure out how to get new customers. Servicing your existing customers is one thing. Trying to build new relationships is 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.

Speaker 5

Since I joined Calix four and a half years ago, we were a virtual culture other than our maybe our research and development organization and some G and A functions. For the most part, everybody was virtual. And while our sales and marketing organizations would spend a lot of time on the road, those initial forays into work from anywhere in the form of we adopted video technology four point five 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 four point five 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 GoToMeeting 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, 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 you know, that's quarter to quarter other than we're engaging with a lot of new customers.

Speaker 0

And we'll see.

Speaker 6

Yeah. That's helpful. Appreciate that perspective. And then Corey, 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 effectively pushed out of the fourth quarter, likely changing in 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 they've boosted 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 as maybe actually being sequentially down from Q1?

Speaker 2

Great, great question, Rich. 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 $10,000,000 in the fourth quarter. Lot of that was getting some material on boats. So we're gonna make up and and ship some of that backlog in the first quarter. So obviously, one is benefiting from that pull, you know, push out of from q four into q one. And, you know, with the guidance that we provided in our opening remarks, you know, we're setting it to the expectation that we think we're at the high end of our range.

So call that, you know, somewhere, you know, under 600. If we're doing one fifty on the front end with that kind of guidance, that means there's gotta be a dip somewhere along the line. And so, yes, I think q two goes down. And then, you know, q four at this point looks extremely challenging. You know, we just had a, lead times for our complex silicon.

So from thirty two weeks out to fifty weeks. So, you know, it's gonna create present some challenges for us in the fourth quarter in terms

Speaker 0

of

Speaker 2

supply. We're not looking, we're going to go work on that. It's out there and so we're concerned about it. So this year, it's going be much, much more of the same, more we're supply constrained and in terms of the demand supply equation, we're going be constrained on the supply side.

Speaker 0

Well, I wanna just amplify what Corey just said on one point. What you heard him say was fifty 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. So thanks, Rich.

Speaker 6

Got it. Appreciate the color. Thanks, gentlemen.

Speaker 0

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

Speaker 2

Great, guys. I just have one quick question. As you guys look at your upper end of revenue plan for 2021 and just elaborate further by revenue by customer size, is that just a continuation of land and expand and continue to grow with your small you know, customer size? Or are you anticipating some type of recovery, from your large customer base?

Speaker 0

So, Christian, let me just I'll give you a quick answer. You know from q four that we didn't have any 10% customers, and part of that reason was our largest customer, had a turndown on their CapEx approach in q four. We expect that to recover. But to be honest, we may actually go this entire year without a 10% customer. And as Corey informed 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 we we think we're gonna continue to grow, in small and medium. And 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?

Speaker 2

That's extremely helpful. Thank you. No other questions. Thanks, Christian.

Speaker 0

Yes.

Speaker 1

Our

Speaker 0

next questions come from the line of Tim Savageaux of Northland Capital. Please proceed with your questions.

Speaker 7

Hi. Good morning and congratulations on the results. A couple of different questions here. I first want to focus on some of the gross margin discussion. Corey, 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? 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.

Speaker 2

Thanks, Tim. Thanks for the question. So the the direct answer is, I probably could, but but I'm not going to. We have indicated in the letter. We have kind of arranged those kind of in in size of significance.

So you can kinda take that and use that as a benchmark in terms of those impacts. So, you know, mix mix being first and then followed by the expedite fees and shipping costs and the other stuff related to increased COGS. So you can take a look at our letter for some guidance in terms of size of impact in that regard.

Speaker 7

Okay. And, well, I guess, you know, if that same dynamic would extend for the year, to what extent sort of gets to Karl's comments about one of my questions was, would you think you would have a 10% customer in 'twenty one? 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 $150,000,000 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?

Speaker 0

I I think the normalization, you know, has been continuing as you've seen the distribution. You we you've asked that question before, and I said, you know, 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 and 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 gonna drive it in the future is the mix of 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 one dot o as a box company.

But then there's no cover for these kinds of, price increases from vendors. And I think everybody's well aware of what's going on in the silicon space. This is going to be fight all year long.

Speaker 7

Got it. And final question for me, kind of higher level. 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 'twenty one on whether a more aggressive approach to m and a might be warranted given, you know, the the currencies that you have at your disposal?

Speaker 0

In my career, when this happens, strategic hallucinations occur, and people start thinking we need to go buy things. I wanna 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 processes, the right culture. The opportunity cost of us taking any attention away from that is extremely high, and there's nothing better to ruin 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's been a core and key part of that, and I wanna 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.

Speaker 7

My pleasure. Congrats again.

Speaker 0

Thanks, Tim. Thank you. Our next questions come from the line of Paul Silverstein with Cowen. Please proceed with your questions.

Speaker 4

Yeah. Thanks for the follow-up. First off, how much revenue can you quantify how much revenue you think you're not gonna be able to realize because of the supply logistic situation?

Speaker 0

No.

Speaker 4

No. You can't quantify or no. You don't wanna share? It would be the latter. Can you qualitatively I assume you're talking about a meaningful amount of revenue that you will not you don't think you're gonna be able to ship.

Speaker 0

Yeah. I mean, look. The the the qualification is is the same thing you've heard for the last two, almost three quarters from us now, Paul, unfortunately. You know, 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 Corey said as we look out at 2021. And it's sort of not a hard thing at some level because if you have fifty week lead times, your supply is sort of set. So to ask us what amount would be is I I I can't forecast demand that that far out. If you're asking, could you could you do more if you could get more supply? I think the answer to that right now would be yes.

Speaker 4

Alright. Secondly, Carl, normally, once these services track products with a four to eight quarter, they're about lag. I recognize the complexion of your services have 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 lag basis given the significant increase in the 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?

Speaker 0

Yeah. 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 thirties, 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 they're ramping, And we expect to make additional investments in customer success in q one and q two, and then it will go go back to programmatic growth.

So we'll be in the low thirties and then starting to grow back again. Where can services get to over the long term? In the forties, possibly in the fifties. They won't go much higher than that because we're gonna continue to invest in the success of our customers. But if they stay proportionally where they are as a 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 I appreciate it. Thank you. Thanks, Paul. There are no further questions at this time. I would like to hand the call back over to Tom for any closing comments.

Speaker 1

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.