Calix, Inc. (CALX) Earnings Call Transcript & Summary

Okay. In the past -- or I guess I shouldn't say in the past, more recently as well this year, you've talked about the spending environment being a bit more muted from your medium larger customers, some pauses, delays that you've talked about. There's been obviously the macro being a bit more challenging, higher interest rates. You've talked about [ ACAM ] as well, and obviously BEAD coming up. Just help us pass through all those pieces and what -- how do you think about individually the impacts of those on what's driving the pause and delay right now?

So first of all, and I know that's a hard thing to say, empathetic to what's been going on and obviously, we want to go faster too. But these are all very good things, because what happens is that when everything is good, people have no impetus to change. And let's start out with interest rates. So if you had a pulse, you could raise $50 million 3 years ago, right, because money was free, investors were throwing cash around like crazy. And if you used the word fiber, you could get $50 million. Didn't mean you know how to run a business, didn't know you were any good at it. But -- and you see that a lot of those assets are now in stress, and we're going to see a lot of bankruptcies, which are great, because our good customers are going to sort those out, for pennies on the dollar. But in this new interest environment, all of a sudden -- and I literally -- I flew here from a prospect where they were talking about this. Competition is higher, because now you have multiple 2 or 3 competitors in every single market at a minimum, which we didn't have before. We have -- interest rates are higher, therefore, the cost of capital could be a lot more pragmatic with regards to my expansion. But most importantly, all their investors are saying, hey, where is my monetization on the money I already put in the ground, right? How are you going to win subscribers faster? How are you going to grow the ARPU per subscriber? And this is literally what we've been saying for 3 years. I've been -- I almost got tomatoed off the stage 3 years ago, when I talked about speed is going to lead to commoditization. And so everything that we predicted is coming true, which means that, again, people who have never spoken to us in the past are speaking to us. So I see this as the greatest opportunity. It has also led to -- because we have a very strong balance sheet, thanks to my partner here, Corey and our Chairman, and I'd say the broader team, we've all been very focused on how you build a great balance sheet. Through this tumultuous time, you've also seen a bunch of bankruptcies. [ Caps ] are going bankrupt, and others who are just box companies. But still, they kind of clear the way for more conversations, right? And so in this distressing time, we are the solid one [ ploughing ] through an expanding footprint at a rapid rate. And so this is a huge opportunity. With regards to -- where does it go for a long time on the BEAD expansion and all the other components, we already spoke to that, is that we see those continuing to grow. But for me, it's that macroenvironment of interest rates, and show me the money, that is the biggest impact on our business, and we're embracing it and it's great. That's why I've been spending all of my time meeting prospects who in the past, like I said, I can list a huge number of them, who have never had the time to speak to us in the past and now are. And I'll give you one story, which was, there is -- that General Manager said I didn't have the time to consider you, there was a -- he's got a vendor who's in distress. And so in December, they started to do -- they reached out to us and said, let's have a conversation, but it was more of a -- I'm thinking about de-risking my business because that vendor could go bankrupt, right? And so we started in the conversation, but it opened up into, okay, well, what's the most important things to you? And they started to talk about -- they're in for the long-term, they support their customers, all those different elements. And they were really -- again, they started to say the conversation about -- but we're also thinking about diversification. So they were starting to just talk to us about fiber, we're like, no, no what's your business problem? So diversification. And in January, I had that conversation with our CTO, which led to -- about 1 month ago, I got on a call with their CEO, CTO and COO and at the end of it, the CEO said to me, he goes, we started this as a de-risking conversation through the 4 months of due diligence we've done with you, we've actually come to a conclusion that this is actually going to de-risk our business in a radically different way because you provide us a new business model. And instead of actually just using you and part of your business, we've realized we need to use you end to end, and we're going to start that transition. And so again, that conversation never would have happened during the craziness of the pandemic because, again, if you had a pulse, you could make money. And so when it gets tough, that represents the best opportunities. I keep going back to the Harvard Business article around -- which talks about who succeeds through a recession. A disruption and a recession are very similar. And the company that is strong from a brand and execution and investment point of view, when all of this clears out and the indecision with regards to BEAD, and interest rates start going down, because they will start going down through political pressure, and it starts exploding again, we will have expanded our base of customers at a very rapid rate. And as they go faster, we'll just pick up and go faster. And so -- I keep telling my team, this is the year. We've all worked hard for the last 8 years to rebuild this company. This is the year we actually have to work the hardest. And I'm exhausted. Like I'm already 140,000 miles into this year, but it's all with prospects, and that's the right thing to do, because this is the year we expand footprint. A long answer to a short question.

That's fine. Then let's move forward to talking a bit for financials. With BEAD coming, and obviously some of the -- hopefully, some of the macro pressures, interest rates coming down, how do we think about the return of the company to the long-term growth rate of 10% to 15% in terms of timing?

We said in our last earnings call that we believe Q2 is the bottom. So at this point, we'll return to revenue growth. [ They'll ] probably be more anemic this year as we come off the bottom as we're bottoming. But as we move into next year and you start seeing funds flow, we'll return to being a double-digit grower. I'm sure there's quite a wide range of how fast we'll ultimately see where that ends up being. But I don't see an issue with us being a double-digit grower, and in particular with the BEAD funds getting back to what we have done in the past. And then through that entire period, while we go back to that, margins will continue to expand, which is the testament to our business model, [ it's ] different.

Maybe to take that long-term growth guide, and obviously double-digit growth is what you're comfortable with for the next year. But that next year, we do have BEAD. When you think about BEAD running its course, why is 10% to 15% the right run rate for the company, and more so in terms of investors being able to have a more bottoms-up view of why 10% to 15% is the right number and not something higher or lower for the company in a normal state of macro?

Yes. I mean, where we're at this point, don't need to go put a bigger number out there. If you look at what we've done in the past, we'll start off with the 10% to 15% growth. And if we actually see it in the funnel build and the backlog build, we'll call the numbers up. So if you go look at our track record, you would see that we had started the years past with a 0% to 5% growth and did 25% -- 5% to 10% growth and did 25%. And we said 10% to 15% and we did 28% growth. So as our visibility improves, we'll call it different trajectory. There is no doubt there's an inflection point somewhere out there on the horizon. As I sit here today, I can't call what quarter that's going to be, right? I know it's there, it's going to come. And as we get better visibility to it, we'll then change our long-term guidance and our guidance around what that growth rate looks like.

The peculiarity is the one that you called out is that it's -- we've never had so many factors in play for our customers to make decisions on, and they're -- a lot of them in rural America are a very conservative lot, right? And so, them having to deal with ACAM, BEAD, all of the different things that are going on, high interest rates, et cetera, et cetera, has just been something that the safer thing to do is put everything on hold, and I had one customer -- a good long-term customer who -- 2 months ago, when I spoke to him, he was talking about how he was really concerned about ACAM, the next version of ACAM and what are the implications on his business. So he put something on hold, why, because he was worried about -- that he was going to go into the red, which I didn't fathom. But he was like -- it gets us easier just in case. And I talked to them 1 week ago and he was like, okay, we're not going to be in the red, things are going to be good. Our margin’s a little -- a couple of points lower, but -- so we're back on track, right? And so I think that's -- there's more variables than they've ever had before.

The question that we're getting quite a bit after your last earnings report is what's driving the [indiscernible] in 2Q revenues being the trough for the company after all you've done a couple of revisions already?

Yes, so I had that question quite a bit since our earnings call. First and foremost, if you take a look at that medium and large segment, it's kind of de-risked itself, right? So that large and medium segment was $77 million in the fourth quarter, $43 million in this first quarter. And we're thinking it will probably half again in the second quarter. So you've got a group of 15 to 18 companies that are now doing about $20 million in revenue. It would be difficult for me to say that, that group going to 0 at this point, because a lot of it is just normal recurring revenue. Second, and more importantly, we're seeing the signs of our small customer base getting comfortable with the new inventory lead times, right? So supply chain, we reset the lead times. Their ordering patterns have now adjusted accordingly to that. So we're seeing funnel build. We're seeing more rapid and predictable repeatable ordering patterns going on. So that's a positive sign. And then the third piece is, as Michael has been on the road since January, we're starting to see some of that work that's being done in terms of footprint expansion taking hold. And so we're seeing some activity in ordering from that day as well. So when you kind of put that together, it's how we think and feel confident that Q2 is the bottom.

In the past, you've talked about visibility into your customer networks being pretty high for Calix relative to some of your competitors, just given the business model you have through your appliances. You did eventually see the headwind in relation to inventory digestion with some of your customers. And so maybe talk about what you could have done differently in managing customers to overall smooth out [ the ] inventory issues a lot more than it was?

It wasn’t inventory. It was actually -- they stopped -- what stopped us in the first half, we've been very clear on is actually that -- we couldn't factor into our decision-making, the indecision that basically stopped things. I gave you the example of that customer with ACAM. They stopped everything just because they were worried about -- while the program was X dollars per year, it got reduced but lengthened out for 15 years. And in their conservative mindset, they decided to stop everything. You can't predict that, right? You can't predict that your customers had programs -- and as I -- one of the stories I've shared many times is I had a very good customer who -- I talk to their CEO at least once a month. And through last year in August, he's like, not doing BEAD, September not doing BEAD, October not doing BEAD, November not doing BEAD. And then in the middle of December, he says, he calls me and says, I'm going to take my entire planning team and I'm going to actually decide to move after a huge amount of BEAD. How do you predict that? Because the planning teams are the ones who actually are the -- they are the ones who are doing the builds, working with all the different rolling [ out ]. And by taking them and putting them into BEAD, you basically stop -- and essentially what we're going to be -- the new builds that we had predicted. And so it was this indecision and the shift in mindset that was -- that really happened as a cliff. And Carl has actually talked to a bunch of folks about this. And he said to me, he was -- I should have predicted that because he's been through it like 4 different times. And that's not for -- I take full responsibility for it to be really clear on the CEO of the company. But he said, hey, I could have coached you on that because this -- actually in hindsight, yes, I should have seen this coming because it's happened 3 other times where you get within the window of the BEAD program, and they say no, no, no, no, no, no, no, no. Interest rates stay high, because we all thought that interest rates were going to get -- go down in the second half too, right? And so interest rates stay high, and then you come in -- within that window of BEAD, and they're going, I put $25 in and I get a $100 back. Money isn't free anymore. You know what, it's only 12 months out. It's actually real. It's not going to take another 4 years, I got to go for it. And that was what led to all the changes. We've been managing the inventory issues, and the cycle times as they reduced very aggressively. Do we have some of them? Sure. But for the most part, we -- every single day, we see how many units a customer deploys every single day, because it calls into our cloud. And all of those are going up, and they still are. But it was this future build thing that we didn't -- and those different things coming together, perfect storm. So myself and Cory take responsibility for that. Our chairman does too, we all 3 of us in our leadership team. In hindsight, would we do different? We couldn't have predicted that. Now let's just say, if I'm in this chair 10 years from now, which I won't be because I'll be really old -- if I was to go through this again, then yes, I'd be able to say, hey, you have a perfect storm of high interest rates, $60 billion worth of money and all the other things. Yes, okay. Here's how that plays out.

Let me check if anyone in the audience has any questions they want to ask. Okay. Let me then move on and let me try to get the question that you get probably pretty often, which is to try and figure out the monetization of the cloud and the managed services. Maybe just talk about the process of where do you see the customers typically come in, in terms of your portfolio? What's the entry point? How do they expand within the portfolio? And what -- any sense you can give us of the...

That's fascinating, there's a segment element to this too now. So we just had a medium customer who, to a large extent, has stopped buying from us over the last 5 years. And they just selected us to do our smart business product, which is SmartBiz. And so what happens is the -- and we -- this is an interesting learning for us -- because they have -- they built some of their own stuff, some low-cost questionable stuff. There's some low-cost stuff that they have -- for their consumer go-to-market. But they had a real problem in small business, and they have a lot of small businesses, right? And that alone almost makes them a medium customer just on their small business footprint. And they selected us there because they wanted to -- they needed a great platform play around what we've done with SmartBiz. And our smart business product, if you don't know what it is, it's basically our Ubiquiti killer. All of our customers said to us, I buy Ubiquiti, I can't stand them because it's an IT solution, not a managed service, replace Ubiquiti and that's what we built. And it is going like gangbusters. And so they selected us to put into their base and use as a go-to-market strategy. What are the implications to that? In that scenario, now that medium customer has put the entire platform in, because when you put smart business in, you put in all of our clouds and you put in our platform. So now we can have a very interesting conversation with them around, hey, you know what you're doing on the consumer side. If you actually use our appliance model and our platform, here's how you can grow revenue and differentiate in the market, all those different components. Oh, by the way, you know what, Mr. Customer, you've already put the platform in, you know what it's going to take you to actually get -- launch our services in consumer, about 5 weeks and no IT work. Because in the end, medium and large customers, their biggest challenge, every single one of them is IT. Everything costs a fortune, it's really complex, it takes a long time. And so that is -- as we look into medium and large, that becomes a very interesting beachhead opportunity with our existing customers. Or if I'm a regional customer and they generally start on the consumer side. Although there will be some -- I got a small business problem, solve that -- and then, oh my gosh, their eyes open up. So we are very advantaged in that, because our platform has so many segments to it. We can actually go into the customer and start having conversations, like I did yesterday with this prospect. I said, here's the whole thing, now where would you like to start? But by starting, they put the whole thing in and then it's just what else they want to turn out.

I'll try to see if I can get a more quantification on that. Let's say you have $100 of a customer wallet running across your portfolio. What would you expect maybe in 5 years that to look across platforms, cloud managed service?

We've always said that per subscriber -- it's $1 to $10 per subscriber, right? But the managed -- the small business product is -- the MSRP on that product is $20, right? Now in -- if I have a 1,000 subscribers as a broadband provider, generally 10% of them are small businesses, right? And so you're going to have a weighted average element to it. So we're still focused on the $1 to $10 out of every subscriber, we haven't got there yet, like to $10. I'd like to get an average of $10 and then take it higher, right? The key thing, though, is that again, we're very confident with regards to the business model because our margins keep going up. That is a demonstration that we're actually continuing to expand on behalf of our customers, monetization of that end subscriber. And ultimately, this is the big shift that's going on in the market. If I have -- because the GMs are saying, I got to win more subscribers than I differentiate, but I'm also under a ton of pressure to grow revenue and profit. And the great thing is with all of those services, these are not CapEx implementations. These are us sitting beside them with our customer success team, winning subscribers and growing revenue, and then we just get a share of that. And they're much more open to sharing a percentage of revenue, then they -- it's a lot easier sale. A revenue sale -- growth of revenue sale is a heck of a lot easier sale than a CapEx, how do I keep my cost savings sale, right? And so -- and that prospect was kind of shocked by how much we're doing with them or how much we can offer to help them win revenue, which no one else is doing that. He goes, it's fascinating, no one else is doing what you're doing, coming to me and talking to the COO and CEO, and saying here's how we help you make more money.

Great. I'll wrap it up there. Thank you for coming to the conference. Thank you to the audience as well. Thank you.

Thank you, appreciate it.