Calix, Inc. ($CALX)

Hey, good afternoon, everyone. For the next section, we have Calix CFO, Cory Sindelar. Cory, thank you for being here. I appreciate the time spending with us.

So maybe just starting off, the migration to Calix 3.0 was clearly a massive undertaking, and congratulations on getting it done. Now that we're on the other side of this and customers are seeing what the AI native platform, how are those early conversations going about Calix One adoption?

Yes. So about 1.5 years ago, we made a determination that we needed to rearchitect the platform -- and so that culminated in the first quarter where we migrated off of AWS onto Google platform. And the benefit of us moving to Google platform was not only to improve the scalability of the platform in terms of cost, but it gives us the ability to enter into some new markets. Part of which was to help us to do a private cloud to go into large customers to go international, but it also enabled us to bring AI functionality into the platform. And bringing automated workflows to the service provider marketplace. And so that's what just happened. So in March, we finished the migration from AWS to GCP. And as you know, we release our software every 91 days on the second Tuesday of the second month, which happened to be last week. So we've done our first major release with the new cloud platform. And we are now at that point engaging with the early customers, those that had already bought the 3 clouds from Calix. And I kind of joke around saying, these are the customers that are all in on Calix. -- if we built a margarita machine, they would buy it. And so these customers are now taking advantage of the 3 clouds that they had in the Calix 1 contract, and we are working with our customer success teams to go demonstrate the value and the productivity enhancements associated with the generic workflows. And so it's going in a very controlled manner, meaning we're going in and measuring kind of where their productivity is today. And then as we -- they deploy the new functionality on improvements are they're seeing. So that's kind of where we're at. So still very early days in terms of bringing it along. And as you see, as we build to our show connections in October, more and more of those outcomes will become more visible as we do press releases and share that with the public.

Got it. And maybe the flip side of this is 1 of the debates we hear from investors is around the defensibility in a world where AI tools are becoming more accessible AI destruction, right? You've talked about security, trust and $0.5 billion workflows or proprietary data as is your moat. Maybe just extrapolate on that a little bit and expand like what is it about the way you've architectured the platform that makes it really hard for someone else to replicate even as AI tools become more commoditized?

If you're going to allow agents to actually work autonomously in the network, you're going to have to construct them in a way that they don't hallucinate and that they are in a controlled manner. And so building that trust and security layer puts the provisioning around them. And then you are using the collective data collected from our 1,200 customers to train the LLMs in order to allow them to take action inside of the service provider network. The platform is obviously have to bring context from other data sources. So through 8A and MCP, we're actually pulling all that data together, combined with the knowledge of our customer activities. That allows us then to provide these Agentic workflows in a way that don't hallucinate and get to the outcomes that we're looking for.

Got it. Maybe another aspect of this is you made the decision that customers can access any meaningful AI features unless they sign up for Calix One and collapse all their contracts into 1, maybe can you just give us an update in terms of how customer discussions have been trending since that decision? How has feedback been on that front?

Yes. So customers do not have to go to Calix 1 out of the gate. Right? They can still purchase our clouds on an individual basis. And maybe I kind of explained that in just a little bit. So prior to Calix One, we sold our cloud offerings on a persona basis. Think about it as a job description. So if you're in the call center, you're using Service Cloud. If you're in operations or a network role, you're using Operations Cloud. If you're a marketer and you're doing the commercial arrangements and you're looking to bring on new subscribers, you're using Marketing Cloud. All of those solutions were oriented to a role to a person. But if you're using Agentic workflows, it's really a horizontal workflow. It's touching all aspects of the enterprise. And so to get to that, you really have to have all 3 clouds. It makes no sense because if you take an example of any of these workflows, it's going to touch every bit of those different 3 clouds. So what we've said is, as we migrate forward with these Agendic workflows, we're going to sell it as Calix One, which is taking all 3 clouds, putting it together into a commercial model that then looks at it as all subscribers are equal and we can move forward. It doesn't preclude you, you can't. You can still buy it the old way. So those customers that don't see the value yet in terms of Agentic workflows can still buy the old way. For the ones that are early adopters, it was easy. They were very happy to sign the Calix contract We're looking forward to seeing the value being created through Agentic workflows and we're in that DV proving stage at the moment.

No, got it. And so maybe if we think about 80% of the base that does not leverage all 3 clouds today, -- how are you thinking about them transitioning then? Is it more going to be, at least in terms of your viewpoint to date, do you expect them to move to Calix 1 as they think about procuring another cloud? Or do you see them doing more of the piecemeal until they get comfortable in moving to Calix 1? And then I have a follow-up there?

Yes. So the way we want to monetize the AI is not through selling more clouds. That ultimately is not the goal. The goal of Calix AI is to increase their productivity so that they can do more and/or do things faster. One of the issues we have with service providers is their ability to do more things. Calix has been able to deliver a lot of different functionality and capabilities. And the way at which they consume it is gated by know-how and/or capacity. So the promise of AI is to unlock that, allow them to do more and add more subscribers at a faster rate or introduce new services that they aren't today. And so for us, that's the way we monetize it because all of our operating system platform, managed services are on a per subscriber basis. And so the quickest way for us to drive more software revenue is to increase the rate at which they're adding subscribers, not so much selling that third cloud.

Yes. That makes sense. And so maybe as a follow-up to this is what's the milestone that investors should be looking at? Is RPO the right number to be looking at? And then as a second part to that question, how should we think about the cadence in terms of a potential inflection in that milestone.

Yes. Out of the gate, RPO is the telltale sign. It's probably a leading indicator for the progress on our software contracts. You're also going to then see it in the service cloud margin line as we make more progress there. From an early day perspective, we're still now building and proving out to folks the benefits of the AI through the DV creation. I expect, and like I said on the last earnings call, we expect that RPO to reaccelerate in the second half particularly as more of those proof points come into the existence and being shared with others. And ultimately, it leads up to our connection show in October down in Vegas, where we typically do very well with our customers. And fourth quarter, I would expect to be a big quarter in terms of signing contracts, culminating kind of in that experience.

Got it. And then maybe just on the pricing side, like for the average customer who's going from 1 or 2 clouds to Calix One, like how should -- help us frame how we should see the uplift look like?

Yes. So each one of our offerings is fit into a price volume curve. So the more subscribers you have, the better price you're going to get but generically, I'll speak kind of at a high level to give you a sense for what you're talking about, let's say, a cloud is $0.50. So if you had 2 clouds, you're paying $1 do you want to get the third cloud, you're at $1.50 put a new subs coming in at $5. So like I said, chasing the $0.50 is really not what you're after. You're looking for bringing forward the $5 per sub forward as opposed to trying to sell that third cloud.

Got it. And as you bring in new logos, does the bundle approach actually make the value proposition clear for them? Or does it feel like a bigger initial commitment?

Haven't got to that point yet. But like I said before, the commercial arrangement is such that they do not have to buy it all at once. So if they aren't convinced that Agentic workflows is for them at the moment, they can start wherever they want to. They can start with just deploying our systems with EXOS. They can start on the access side with AXOS. They can take one of our clouds and start there. So inevitably, we aren't gated by them having to buy the whole package initially. They can start where they feel appropriate. And you've seen that in some of our prior letters where we try to outline for folks those platform journey. And you typically see that they will start with support cloud. And ultimately, as they move forward from support clouds, they're then going to add managed services onto them. And so we would expect that a customer can come in and start their platform journey at any point.

Got it. So maybe changing gears a little bit here. When we talk to investors, the Tier 1 opportunity is one of the more exciting parts that we're hearing now from the investors that we speak to. You mentioned expecting to in an anchor customer this year. Can you help us understand what that engagement looks like? Is the entry point more likely through an MDU or small business where the barriers are lower and then it expands from there.

Yes. So we were moving forward with our Calix One platform and enter and Michael went off to Mobile World Congress in March and thought that conversation would gravitate around the use of AI and workflows with those large customers. And his takeaway from coming back from Mobile World Congress was that these conversations with large telcos, inevitably move to MDU and small business. That's the pain point that they are experiencing today. And so we are extremely excited about the opportunity to develop our MDU offering into the marketplace. We see it as a significant TAM expansion to the work we're doing today. It's another $10 billion market TAM. And we see that the profile of that business very similar to the existing business inside of the company with our regional service providers. It's a highly fragmented market, where it's being served today by enterprise solutions coming down. And our approach will be bringing a consumer-led managed service offering from the bottom that is focused on tenant subscriber experience. It's approached by the same way in terms of a sales force in terms of a direct model. And so we think we have the ability to double the size of our company by approaching MDU and the added kicker is by approaching that market is that we can then also service Tier 1s. So if that's the way we go into a Tier 1, as Michael would say, we're going in, in the side door, solving a pain point, that's what we'll do. Our platform once installed makes it very easy then to extend anywhere else inside the enterprise. So the fact that we solve an MDU pain point our technology stack is fully set up. They can then buy definition through our platform move into small business. They can add outdoor WiFi. They can add all kinds of things. in matters of days and weeks as opposed to months and years because there's no incremental IT work involved once our platform is put in place. So -- that's our approach. We've demonstrated that in a couple of locations where we've been that easy button for large service providers. And as long as we continue to show that we are the easiest way forward. I think we'll have the ability to penetrate these larger telcos.

And so maybe can you just touch on the differentiation versus the competitive market? It sounds like there's less of a rip and replace motion if they go with you and implement it. But I guess, why are they displacing the existing incumbent in the

And MDU specifically.

Yes, exactly.

Yes, exactly because it's, again, the way that market has been put together right? They are serving it with enterprise-class technology being pieced together. And our approach has been taking the residential package that has been consumer-oriented and bringing it up with our anchor customers like Zentro who -- that's where they started, right? They were serving the MDU space. They were looking for us to come in and provide them a little bit more functionality to round out the solution. And ultimately, we can provide a solution that is managed at a lower price point than what is being offered today and through the management, give that tenant experience a better option. And you might ask yourself, well, why today? Why are you approaching MDD? And why didn't you do that 2 years ago or 3 years ago, -- and the answer is the MDU is a microcosm of a small town, and it takes all of the technology that we have developed over the last 10 years to bring it to bear into the marketplace. A community in an apartment tower, for instance, as our apartments. That's the smart home application. When they're in the property, they want to be able to roam freely they want to into the parking garages, the workout facilities, the tennis courts. Maybe this apartment has retail on the first floor, they want to be able to go down to the retail shops and their WiFi just works everywhere they go. That's SmartTown. The property is going to have paywalls and different networks and that technology comes right out of our small business applications. So the landlord property management company is going to have its own network. You're going to have a tenant network. You're going to have a guest network FAS retail, they'll have a couple of different networks themselves, managing all those networks in kind of the 1 cloud is what comes out of the small business application. So you're putting all of that technology now together into an MDU package. And so it is here more so because it is there. It's now that we've put it all together to have these pieces. And so we have to augment it with a few more pieces in terms of like of a landlord app for managing tenants as they come and go. But we're at the point where we can actually sell this application into the marketplace. And so we're excited about being able to do that. So today, we've got tens of thousands of apartments under management. And we see our ability to get to millions in not too long a time frame. So pre expanding. The economics are similar to our regional profile. So we are pivoting 100% and trying to make a lot of inroads into that marketplace.

No, very interesting. And as you think about the potential because you described it as kind of like a land-and-expand motion once you're in. Now it opens up the door to other avenues. Like is there a low-hanging fruit there that you think is going to be first up at that in terms of being an addressable opportunity at the Tier 1s? Or is it still a little bit opaque at this time?

The two adjacencies from MDU would be the small business. And then after that, then we'll have to see kind of where that evolves to. But ultimately, we think that, that's the easiest way in is through MDU at the moment.

Got it. And as we think about kind of the broader opportunity there, -- like what are the key milestones investors should be looking out over the next 12 months?

Well, going to Tier 1, our longer sales cycles. So the next 12 months might be an ambitious statement given the fact that they are usually 18-month sales cycles. But ultimately, it will culminate in greater RPO growth. Tier 1s typically do not like to have their name in press releases. But somehow analysts are smart enough to that out and somehow it gets out there. But that's how I think you would see it. I don't know that we would do a press release in particular unless the Tier 1 was willing to share it, which they typically don't.

No. Got it. Maybe shifting gears to the international market. You mentioned Google Cloud partnership opens up the ability to do private instances and hosted market. How are you thinking about the sequencing there is Europe the first focus -- or are there markets in Asia Pacific where you'd further -- or you would look to? And how should we think about the revenue contribution time line?

Yes, that's great. We love our partnership with Google. Calix will be an orderable line item in the Google marketplace because we had talked about how GCP allows us to create a private instance within Google for our cloud. And if you look at us going into a large Tier 1, they're going to have their own contract with Google. Their volumes are going to be greater than what we have their pricing is likely to be better. And if you're talking to a CIO of a large Tier 1, they're going to want to be able to burn down that Google commitment by utilizing these workflows on their own private instance. So we facilitated that. We will then just be a line item within that Google Marketplace. The great news about that is the margin profile turns out to be 100% because large Tier 1 is actually buying the compute and the store and everything else that creates our paths in terms of the cloud operations from it. So as we enter in the Tier 1 market, we are engaging Tier 1s around the world. It probably starts a little bit closer to home here in the North America market. But conversations are being held around the world with large telcos. I don't think one is more aligned with Calix than another whether you're looking at -- when you say Asia, I'm you seeing more of the 5 eyes so opposed to some of the other countries that may not be geopolitically behind.

Yes. That makes sense. And when you think about that motion now going into these international markets and trying to kind of spread out there, how are you thinking about the associated investments to go after it?

Yes. We're making those investments in the selling and marketing resources. It's a small footprint to start in terms of people. You're going to have less than a dozen people that would be focused on adding those Tier 1s who have the relationships that are accustomed to hunting in that environment.

Makes sense. Maybe just sticking on that investment. I think you spent 80% of R&D on the platform migration in '25, which obviously constrained feature output. And now that capacity has freed up? How quickly does the innovation engine ramp back up after kind of that allocation there?

That's a great question. We had said about last fall that we would be ramping up forward, investing in R&D to make investments on Agentic workflows. We did get the cloud migrated over and the funnel for new features is off the charts. So much so that we're actually looking at doing monthly releases, something that we've not done before. So I told you that last week was our first major release post the go live on CCP but features are coming fast and furious. We'll do a June or lease the July release another major release in August all the way probably through November. So sit back and watch you're going to see a ramp in terms of the innovation engine of Calix as now all our engineers are focused on delivering on these product sets.

Sticking to Tuesdays?

Staying on Tuesdays, second Tuesday of the month.

Makes sense. And maybe just on the migration. You've been transparent that there are a few bumps, particularly around installers -- as we sit here today, are those fully resolved? And should investors think of the platform as fully stable and ready to scale from here?

Yes. That's true. I still think we're working inside the new model. And so I've explained to folks that it's a brand-new platform we're optimizing it. expected like, for example, the software and services margins to snap back a little bit more. But I think the optimization of the current platform will take a little bit more time in that -- our current expectation for that is that we would be somewhere between last year's Q3, Q4 margin profile. And as we look to Q3 of this year, we should be setting new records for software and services. Obviously, we didn't go through this pain without expecting to see margin improvement on the overall platform and scalability and so we should be able to grow from there as we move through Q3 and into the future periods.

No, got it. Let me just pause there and see if there's any questions in the room. If you have a question, please raise your hand.

Appreciate the time. Can you walk through the factors that are impacting gross margins from the standpoint of price uplift to account for the memory offset by them not having to run dual clouds and where all that kind of levels out?

Yes. So I think I just talked through the service and support gross margins of they bottomed obviously, in the first quarter, and I think we get to new highs starting in the third quarter moving forward. As it relates to memory, that's our favorite topic of the week, month, and year, we are being encumbered by increased memory pricing, no different than anybody else in the industry. We have chosen to pass that along to our customers in the form of a surcharge. And we did that as it changes, we can then concomitantly pass that on to our customer. So if it continues to go up, surcharges go up, if they go down, they will get the benefit of any relief that we see in terms of memory pricing without having to change price. Our estimate for margin impact for the year as a result of memory was 200 basis points to gross margin. Since we aren't margin stacking it, you're effectively pushing through a surcharge at 0 margin. And so that's having that headwind to it. At the same time, we took our revenue growth profile up as a consequence for that increased pricing through the form of a surcharge where does it go? I would say, ultimately, your crystal ball is as good as mine. I do not think we're at peak pricing yet in terms of memory. I do, based on from what we understand from our supply chain is that it will continue up into the third quarter and then flatten out a little bit in the fourth. We do think in some time in '27 that you'll start seeing additional capacity come online. That actually helps up the supply. At the same time, companies such as Calix and others are optimizing their memory footprint, shrinking the software to help reduce that price. When memory was $1 a gig, you didn't care actually having an extra gig in your appliance. At $25, it's all a different story. So you're going to make that change and you're going to reduce that footprint. So I think those supply demand dynamics will continue, and we'll start seeing something in 2027. Ultimately, I think this plays out that we'll get to a new normal for memory. In the beginning of 2028, we'll probably start seeing the first bits of Wi-Fi -- and I see this playing out in 1 of 2 ways. We'll simply take that new normal for memory pricing embed that in the WiFi 8 pricing and as customers migrate from WiFi 7 to WiFi, it just goes away. If WiFi 8 pushes out later in time or the new normal for memory accelerates earlier in '27, not what I'm thinking is going to happen. But if it did, well, then we would just simply increase the price on WiFi 7 and put the surcharges behind us. So this headwind that we're facing here in the short term actually unwinds itself, right? Because ultimately, what will happen is the gross margin the revenue at 0 margin will dissipate that 200 basis points will reverse itself. The incremental revenue growth will then contract a little bit. And it will be our goal to just continue to grow through all the other avenues we talked about in terms of bed in through the MDU, through the footprint expansion that we have on the business that will overspend that slowdown in revenue growth. That's how I see this ultimately playing out.

Can you take that product in strengths and other macro factors might be impacting your customers' cadence of deployment of fiber passing and fiber connecting? Are they -- are you -- is your customer set getting a little bit more reluctant or unable to deploy as much as they would because of component constraints.

No. I mean -- well, let me frame that a little bit early. There isn't -- the component shortage hasn't left to a supply chain shortage. We can still produce and supply. The increased price has an impact on what they made but by -- for example, if they had a plan to go deploy $2 million worth of CapEx during the year, fiber costs are higher. Labor costs are higher. We just increased our equipment costs on them. they may not be able to pass 1,000 homes, might be 800 or the competitive landscape may be such that somebody is coming right behind them and they need to get it done and maybe they go back to their board and increase the capital to $2.2 million kind of hard to say. But these price increases have an impact of some kind. And so at this point, -- it's not because of the lack of supply. I mean our #1 priority is for us to be in a position where our customers have a new subscriber to turn on, they have the equipment to do so and start generating revenue. And of course, we benefit then from the reoccurring revenue from having that new subscriber on the network. And ultimately, we would like to be in a position such that if there is an opportunity to take share, we can -- so we are aggressively in the marketplace, making sure that we have adequate supply not only to serve our customers, but take advantage of the situation if we can.

Any other questions? No, I don't see any. Okay. So maybe shifting gears from there and maybe your second favorite topic, bead. So I think is it fair to say that the peak numbers that you guys were estimating for beat has come down a little bit, and I'll caveat that with, I think, some of the analysis that you guys were doing has changed a little bit. But I guess where we're getting a question from investors is around has peak numbers come down? Or has the timing changed in terms of when deployments are occurring now?

Yes. At the end of the day, we've been trying to caution investors not to really get in the stock because of beat. We don't bead be to grow, beads a nice tail breeze, tailwind if and whenever it happens. We don't feel any less bullish or more bullish about it, but our estimates haven't changed Unfortunately, our stock trades quite a bit with bead announcements and sentiment, right? Somebody says something negative about bead and we're being traded down, and I don't understand that dynamic at all. Bead is a favorable line item that will happen in time, whenever it happens, we'll benefit just fine. So specifically, nothing has changed from our estimates. Our estimates for low tens of millions of dollars of revenue this year hasn't changed. Backlog got coverage. I think it ships this year, that's great. If other people have their bead money slipping out into 2027, so be it, I don't think that affects us at all. And as we're looking out in 2027, nothing has changed from the tops down number. Where just what we're working to is looking at what the backlog is. How it's developing. And I suspect that it will continue to mature. I mean, 2027 is a long ways away. They're still working through a lot of different things within the bead program. And I said, I'm not any more or less bullish on the program. I think we'll do fantastic as it goes along, and I don't really care when it starts.

Got it. Just on that same topic, though, you've mentioned that it beat does surprise to the upside, you'd want to reinvest some of that into sales and marketing for MDU and international opportunities that we just talked about. Should investors think of beat upside as effectively self-funding the expansion into these new TAMs with operating leverage still improving on the core business underneath?

Yes. I mean that was a statement of really our OpEx model. And our OpEx model, as we outlined at our Investor Day was one of -- as we move into 2027, we will slow the growth of OpEx such that it is a portion of the revenue growth and as we get to 2028, you're going to start seeing more of the full effects of AI being adopted internally at Calix in terms of productivity. So the areas that you're going to see us grow is that we're going to have to build a little bit more into the sales capacity to a the 2 new markets that we're entering into. But it's in the in the context of inside the revenue growth. Ultimately, in 2028, we think the operating margins get into the 20s that OpEx itself rolls down, drifts down to 40% or less. The margins stabilize and get back into the 60s overall. And so I think that's ultimately where we get to in 2028. Bead is just another source of revenue. It just fits into the model. And like I said, I mean, beads a tailwind, tail breeze maybe in which case, we don't really need it to grow. It's just -- it's there when it happens, we'll do well.

Got it. And then maybe just on satellite technology as a competitive threat, obviously, is pretty discussed topic. So maybe in the last 30 seconds here. Help us think through how you guys think about that narrative.

Starlink is great. I think it actually helps. So for some of our customers, they need a competitive push to help them move along. I mean why would you try Starlink? You have a crappy Internet experience. If you enjoy your Internet and satisfy it with your Internet, you aren't calling Starlink right? So you take somebody like Tom Big be fiber, who's down in Mississippi that has 30,000 subscribers with a 92 NPS. They aren't calling Starlink. However, if you're a service provider and somewhere in rural that you're the only game in town and you haven't been servicing your service providers and you suck well, yes, you should have your margins compressed. You should have an ARPU battle. You should have let Starlink come in there. Now what should that do I should invite them to come to Calix and talk about how you can actually improve your game, focus on NPS, focus on the subscriber and keep Starlink get paid. So it's really incumbent on the service providers to provide a better service. And if they don't, Gladly that Starlink is there to provide that competitive nudge to make them go do something. And the only other place we see it is really around a backup play. So got an example of where my boss lives in an affluent community and they had an 8-hour outage. Well, what do you think that affluent community is doing? -- without there signing up Starlink as a backup alternative because they can't live 8 hours without Internet. So it doesn't matter when you're coming from that perspective. So Starlink's a good thing. We embrace it and now well, the Internet traffic is not going to space. The economics just don't make sense.

No. Thank you, Cory. I think we're out of time. I appreciate it, and thank you, everyone, for joining us today.

Thank you, everyone. Thank you, [indiscernible].