Michael Weening, president and CEO of Calix, told investors during the company’s fourth quarter earnings call on Jan. 30 that Calix has completed its fourth year of deliberate revenue growth, gross margin expansion, disciplined operating expense investments, and ongoing predictability.
“2024, “ he said, “ represents both a challenge and a unique opportunity for Calix with one constant: our unique platform, cloud, and managed services continue to lead the way with robust growth as they enable our strategically aligned broadband service provider customers to simplify their operations and go-to-market strategies, innovate for residential, business, government, and communities, and grow for their investors, members, and the communities they serve.”
In Q4 2023, Calix had a revenue of $264.7 million, a non-GAAP gross margin of 54.1%, and a GAAP gross margin of 42.8%. They also added 17 new broadband service providers (BSPs) to their roster, increasing the total to 1,030.
Weening also addressed the opportunities and challenges that come with the Broadband Equity, Access, and Deployment (BEAD) program, saying, “Today, nearly all our customers are either assembling a BEAD strategy or actively pursuing funds. The clear reality is that the BEAD funds are simply too large, at $42 billion, and too close for any strategic-minded BSP to ignore. While they do this, they slow their new builds as BEAD money can be used instead of consuming their own capital, and thus, we’ll slow our appliance shipments until decisions are made and funds are awarded. At that point, the winners will move ahead, and those who decide to skip the BEAD program or did not receive BEAD funding will begin investing to ensure the winner does not infringe on their market. This represents a delay, but also represents a unique opportunity for Calix in 2024.”
Calix also reported that the vast majority of its BSP customers are contemplating or already applying for BEAD funding.
Overcoming supply chain issues
Cory Sindelar, Calix’s chief financial officer, spoke to some of the factors affecting growth, saying, “Our supply chain has settled into a new normal where price increases from the past are difficult to undo. We will rely on future design wins and product releases to drive down costs over time, much like prior to the pandemic. Consequently, we consider the pandemic-induced supply chain challenges to be behind us. From a balance sheet perspective, we continue to see improvement in component lead times during the fourth quarter and continue to work down our purchase commitments as they decreased by $51 million from the third quarter to $176 million—back to a pre-pandemic level. Over time, we expect to see an improvement in inventory turns and a reduction in supplier deposits. These reductions in working capital requirements combined with continued profitability will result in consistent quarterly double-digit operating and free cash flow.”
Sindelar then went on to provide commentary on the inventory and component liability charges that Calix took in the fourth quarter and their impact on GAAP results.
“Over the past few years,” said Sindelar, “we have provided progress checks on our transformation from a box ship company to an appliance-based platform, cloud, and managed service company. Last year, we communicated that our legacy business represented less than 10% of our fourth quarter 2022 bookings and that the transformation was largely complete. Over the past year, we benefited from the legacy customers moving to our platforms at a faster rate than we initially anticipated. In the fourth quarter of 2023, we reached a point where we could see the end of shipments for this legacy product set. While this transformation over the last few years to our platform, cloud, and managed services has been a huge positive, we had to make purchasing decisions regarding our legacy products during the global pandemic-induced supply chain prices. As a result of these circumstances, we were left with excess legacy finished goods inventory and components at suppliers. After a thorough evaluation, we took charges in the fourth quarter to effectively wind down this business. This was the primary reason why our fourth quarter GAAP gross margin came in at 42.8% and why we reported a GAAP net loss of $4.1 million.”
Sindelar also spoke on Calix’s balance sheet and stock repurchase program, saying, “We continue to make deliberate decisions with our strong balance sheet in the fourth quarter. We purchased $44 million of our common stock at an average price of $35, bringing our total utilization of the original repurchase plan to $86.4 million. With expectations for continued double-digit quarterly free cash flow generation, the Board authorized an additional $100 million to continue our common stock repurchase program.”
The revenue guidance presented by Sindelar revealed that Calix expects revenue for the first quarter of 2024 to be between $225 million and $231 million. The first quarter earnings, Calix expects, will mark the low point for the year, and they predict quarterly earnings will grow sequentially throughout the year. However, Sindelar did note that a few of Calix’s significant customers paused purchasing in 2024.
“We expect customers will make decisions regarding whether to pursue government stimulus over the course of the year as customers decide to pass on BEAD that they will begin their network builds, which should translate into increased shipments,” said Sindelar. “If they decide to pursue BEAD, then their purchases will be delayed until the award is received. We believe there are customers all along the continuum.”
Based on this, Sindelar reported that Calix’s non-GAAP gross margin guidance for Q1 2024 is 54.5% at the midpoint, an increase of 40 basis points compared to Q4 2023.