Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Calix Inc (CALX, Financial) achieved record gross margins in Q2 2024, driven by robust expansion in platform, cloud, and managed services.
- The company added 24 new broadband service provider (BSP) customers in Q2, up from 10 in Q1, indicating strong market adoption.
- Remaining performance obligations (RPOs) grew by 9% sequentially and 25% year-over-year, reflecting strong customer commitments.
- Calix Inc (CALX) maintained a debt-free balance sheet with cash and investments totaling $261 million, marking the fifth consecutive quarter of double-digit free cash flow.
- The company closed its largest platform, cloud, and managed services deal in Q3, setting a new record and demonstrating continued momentum.
Negative Points
- Revenue for Q2 2024 was $198 million, which, while within guidance, indicates a challenging market environment.
- Non-GAAP operating expenses were $104 million, reflecting high costs despite a $4 million decrease from the prior quarter.
- The company is experiencing smaller order sizes, which may impact future revenue growth.
- High interest rates and increased competition are causing some customers to reconsider their business models and slow down investments.
- The BEAD program, while promising, is expected to start contributing to revenue only in early 2025, indicating a delay in realizing its benefits.
Q & A Highlights
Q: On the pressure on the large and medium customer cohorts and the decline there, give an updated view of the drivers behind the tight capital environment between interest rates and BEAD preparation. How would you kind of characterize the top three drivers there among your largest customer base?
A: Michael Weening, President and CEO: It's not just a large customer phenomenon; it's across the entire base. The first driver is the decision-making process regarding BEAD, which is complex but making progress. The second driver is the high interest rates and increased competition, causing entities with private equity backing to reconsider their business models. Lastly, there's a shift from focusing on speed to an experienced mindset, which is critical for crossing the chasm from early adopters to winning the early majority.
Q: Can you give us any color on the product mix in the quarter across network versus CPE in general? How has that trended in 2Q versus the last 12 months?
A: Cory Sindelar, CFO: We're seeing operators spending less on building new networks and more on adding new subscribers to their networks. This has led to a shift in our product mix towards premises away from our network appliances. Even though hardware has lower gross margins, the higher software mix more than compensates for that.
Q: We've seen some other suppliers start to talk about receiving BEAD-related orders already. Can you address where you are in terms of timing and how material BEAD-related revenues can be for your model in 2025?
A: Michael Weening, President and CEO: We expect to start receiving BEAD-related orders in the first quarter of 2025, but not necessarily revenue. With 20 states having their volume to proposals approved, representing $12 billion of the $42 billion program, we believe there will be a meaningful impact in 2025. However, there are still steps to follow, such as NTA's approval of each state's broadband map.
Q: Is there anything beyond cyclical headwinds in terms of market share with some of your large customers, given the revenue decline on a year-over-year basis?
A: Michael Weening, President and CEO: The decline is primarily due to a reduction in CapEx spending as they re-evaluate their priorities. However, we are seeing signs of recovery, and some large and medium customers are starting to listen to our advice on changing their business strategies. For example, we closed a deal with a Tier-2 customer on a go-to-market strategy around smart business.
Q: What are the biggest impacts on the hardware side of the business right now? Can you rank the issues like delays in decision-making, higher interest rates, and shifts towards adding subs versus core infrastructure?
A: Michael Weening, President and CEO: The biggest impacts vary by customer. Decision-making on BEAD, adjusting lead times, and high interest rates are all significant factors. Interest rates are causing private equity investors to reconsider their business models, leading to stress on management teams. This is driving conversations about changing business strategies to focus on winning new subscribers and improving margins.
Q: Can you update your thoughts on the growth outlook for 2025, especially considering the BEAD program's progress?
A: Cory Sindelar, CFO: We expect a quarterly growth rate of 1% to 5% for the next several quarters. As we progress through 2025 and start seeing contributions from customer acquisitions, large and medium customers returning, and BEAD shipments, we will move to the middle of that range by the end of 2025.
Q: What could BEAD mean to the company from an overall revenue opportunity standpoint?
A: Cory Sindelar, CFO: BEAD is a $42 billion program with a 25% match, totaling over $50 billion of capital to be deployed over five to eight years. We expect to serve about 8% of that number, which translates to a significant amount of money over the next several years.
Q: Can you provide more details on the new large cloud order mentioned? How did it impact RPOs, and what do you expect in Q3?
A: Cory Sindelar, CFO: The large contract was a renewal with an existing customer who had grown their footprint over the last three years. The increase in RPO is primarily driven by subscriber additions, expansion of platform use cases, and new customer acquisitions. We expect this trend to continue in Q3.
Q: What was the dynamic among smaller carriers in Q2, given the lower appliance revenue?
A: Michael Weening, President and CEO: The lower appliance revenue from smaller customers is due to normalized orders into our shortened lead times, creating a new level of base orders.
Q: With the BEAD program, should you see a material increase in equipment orders over time, regardless of platform software sales?
A: Cory Sindelar, CFO: Yes, we should see a material increase in equipment orders as BEAD money is deployed. More importantly, this will pull forward our platform, cloud, and managed services model, accelerating our overall business growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
