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

Greetings, everyone, and welcome to the Calix Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Fazioli, Vice President, Investor Relations. Nancy, please go ahead.

Thank you, Darryl, and good morning, everyone. Thank you for joining our second quarter 2026 earnings call. Today on the call, we have President and CEO, Michael Weening; and Chief Financial Officer, Cory Sindelar. As a reminder, today, after the market closed, Calyx issued a news release, which was furnished on a Form 8-K, along with our stockholder letter and is also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. Before I turn the call over to Michael for his opening remarks, I want to remind every -- but on this call, we will refer to forward-looking statements, including all statements the company will make about future financial and operating performance, growth strategy and market outlook, and that 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 the second quarter 2026 letter to stockholders and the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as to their respective dates. Also on this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the second quarter 2026 letter to stockholders that was posted yesterday. Unless otherwise stated, all financial information referenced in this call that will be non-GAAP. With that, Michael, please go ahead.

Thank you, Nancy. Much like the dot-com revolution before, the AI revolution is changing our society functions and will transform business model in every industry. The key difference between the dot-com era and the AI is a racing -- the AI rate of change is unprecedented, and those who move fast will lead the industries they serve. The second quarter was the beginning of Calix, the AI leader. -- as we began realizing the value of our 15-year investment through the first full quarter of our AI mated Calix platform being live. . Calix is access to data, insights and the ability to autonomously or through team member augmentation improve operations, marketing, support and subscriber experiences for our service provider customers regardless of size. These expanding Calix 1 capabilities to enable our customers to address the threat of broadband commoditization through differential experiences resulting in winning new subscribers growing revenue, higher retention across consumer, business, MDU and the medical segments they serve, while improving operating costs with a predictable implementation of AI capabilities. Customer interest in Calix exploded in Q2, driving record RPLs, record software and services revenue, while the strength of the platform was evidenced by the significant jump in software and service margin as we had all customers live. We also tripled the number of customers that signed up for agent workforce cloud. More important is the makeup of those customers. They were not only the invaders. We partner with Calix early in the product life cycle and are committed to the value that can be realized in their business model by being first to market -- the customers who signed up in Q2 span the entire adoption life cycle from early adopter, which is expected to late majority, which signals a significant Agent Workforce cloud-enabled ship across our base. The shift is that every business leader knows they must have in the strategy or they will be at risk. The late majority adoption crude that Calix 1 is a secure, trusted and predictable approach for every customer to adopt AR. It is secure and trusted as we have invested [indiscernible] years into the platform and domain now to meet our customers' needs. Since November 2023, we have evolved the platform to be AI native while ensuring that our processes, culture, security and governance expanded to meet the needs of the AI era for our customers. It is predictable as our AI native platform architecture allows us to use any AI model and is our belief that hardened open service models meet our workflow, use case and industry needs. That means Calix for the largest issue that is raging across all industries. How do you use AI predictably as one cannot calculate an ROI on a cost that can quickly run out of control. In our architecture, we have a true tokens through hardened open serve AR models and the acquisition of Pure Compute. Paliton customers are adopting a platform that delivers AI capabilities that can be trusted are secure and are offered at a predictable cost which will yield an that will grow every month with their subscription as we acquire new subscribers a low revenue, reduced churn and lower operating costs through the power of Calix agent workforce cloud. At Investor Day, I shared a slide that showed our rate of innovation. On the first generation of our platform, our annual feature rate peaked at 181 in 2018. Our second-generation platform featured sorry, our second-generation platform feature rate, PD18 in 2024. With the third generation of our platform launched, our customers can expect that our past innovation velocity will be quickly suppressed with Agent Workforce filing, which brings me to the Calix team. This team continues to win awards as one of the best cultures in any industry. Having outlined a subset of awards in the investor letter, including Fortune recognizing Calix and the 100 Best Companies to Work -- for list. The strength of this culture has never been more important. While AI is a powerful technology, it requires teams to get the most of it. Our customer success organization will help our customers leverage agent workforce cloud to transform and inside Calix, our leaders are taking a human-centric approach to AI to ensure that Calix transforms internally by understanding how we work so that we can identify those portions of our business that will benefit from it. We are using AI to gain operating leverage across Calix. In summary, we are committed to transforming our customers and ourselves through the power of AI. With that, I'll turn it to Cory to cover the details of an amazing quarter. Clark?

Thank you, Michael. We saw continued strong and broad-based demand in the second quarter, delivering record revenue of $293 million, a 5% sequential increase and 21% year-over-year growth, exceeding our guidance range. Importantly, this quarter, we experienced a return to strong software growth. Service and -- software and service revenue grew to a record $50 million, up 7% sequentially and 16% year-over-year. as customers began to realize value from Agentic workflows on Calix One. Last quarter was the completion of our platform migration -- we set our focus with pivot to identifying our BSP customers, and RPOs would accelerate...

Sorry, Cory, can I please cause you. Daryl, on this operator, I understand from some of the people on the call that the call has been dropping. Could you please come on and let us know if we should restart.the call.

I am here, and I have heard everything thus far.

Okay. Apparently those who are participating by webcast or having the portions of the call that dropped. And I'm wondering if we should start the call once again.

I can confirm as well the webcast has been stable. And I've been spot checking and I have heard as well through the webcast.

Okay. So you can confirm that the webcast is acceptable and there are no issues on -- for the listeners?

As far as I can tell, there are no issues.

Okay. Pala, Corey, you can go ahead with where you are continuing.

Importantly, this quarter, we experienced a return to strong software growth. Software and service revenue grew to a record $50 million, up 7% sequentially and 16% year-over-year as customers began to realize value from agent workflows on Calix One. Last quarter, with the completion of our platform migration, we set our focus with pivot to identifying our BSP customers and RPOs would accelerate in the second half of 2026, Our customers moved faster than anticipated as we saw record RPOs of $386 million, up 3% sequentially and 11% year-over-year. . Current RPOs were $162 million, up 3% sequentially and 21% year-over-year. Based on the strong momentum exiting the second quarter, we continue to expect RPO growth to accelerate in the second half of the year as we deliver additional identic workflows and demonstrate the value of Calix One. Furthermore, as we discussed last quarter, we would be running on a single cloud infrastructure this quarter. As such, having garnered the corresponding cost reduction, -- and when combined with the Gentek platform-driven demand, we yielded an 810 basis point sequential improvement in non-GAAP software and service gross margin. And to give you a sense of the continued leverage in the model. I will break the precedent and say that we expect software and service gross margin to set a new record in the third quarter. As the AI leader in the broadband space, we are also focused on being the leader in human-centric AI deployment inside our own company. We've demonstrated meaningful operating leverage in the second quarter of 2026. Non-GAAP operating expenses were approximately $122 million or 42% of revenue, down from 45% and in the prior quarter, reflecting both leverage in our growth model and early productivity gains from our human-centric AI investments as well as lower incentive compensation and timing of certain expenses. Turning to appliances. Appliance revenue was a record $243 million, a 4% increase sequentially and a 23% increase year-over-year. Non-GAAP appliance gross margin was 52.9%, representing a decrease of 460 basis points sequentially and 170 basis points year-over-year due to higher memory costs, which was partially offset by memory surcharges. As a result of the above, non-GAAP net income was $31 million or $0.47 per diluted share, above our guidance range. and we generated free cash flow of approximately $12 million. Our balance sheet remains strong. We ended the quarter with cash and investments totaling $194 million after deploying $69 million to repurchase 1.6 million shares. DSO was 42 days, and inventory turns were 2.7%, reflecting deliberate investments in inventory to secure supply and meet continued strong demand. Turning to guidance. For the third quarter of 2026, we expect revenue between $301 million and $307 million, up 4% at the midpoint over the prior quarter. This reflects continued strong broad-based demand even as customers are more tightly managing their own inventory in response to higher memory costs. For 2026, we expect annual revenue to grow at the higher end of the 15% to 20% growth range provided last quarter. Our third quarter non-GAAP gross margin guidance is 2% at the midpoint reflecting higher memory cost impact. As we navigate this industry-wide exogenous event, we remain focused on supply to ensure our customers can continue to meet strong subscriber demand. while we maintain a footprint aggressive stance. As you are well aware, there are many inflationary cost pressures across all industries. In our space, memory costs represents the most extreme of these pressures. As we partner with our customers on surcharges, they value certainty. Certainty on the costs and most importantly, certainty of supply. Our surcharge program is structured to deliver exactly that with the goal to recover the incremental memory costs without adding profit. This means over the long run, memory surcharges will be gross profit neutral while remaining a headwind to gross margin. Given the implementation of our memory surcharge program, we expect appliance gross margin will bottom in the third quarter of 2026. The third quarter of non-GAAP operating expense guidance is $124.5 million at the midpoint, a sequential increase driven primarily by the timing of expense and higher incentive compensation, partly offset by continued productivity gains from our human-centric AI investments. Michael, back to you.

Thanks, Cory. . And last year, there's been much debate about AI agents and the effect it will have on customers and the markets they serve. We believe that Calix is uniquely positioned to take advantage of the AI market opportunity in the broadband market based on our 15-year investment in the Calix platform and our work since November of 2023 to evolve the platform and our processes for the opportunity ahead. Our customers all know they need AI, and we are best placed to deliver subscriber or revenue growth, churn reduction and cost improvements with Agent Workforce Cloud in a trusted secure and predictable way. predictability of AI cost is the biggest issue gaining AI adoption. And our architecture has solved that problem for our customers. trusted, secure and predictable costs are now possible for all customers regardless of size, and we began to see the results of Calix 1 and Asian Workforce Cloud in Q2. tripling Calix 1 contracts while delivering record RPOs and record software and service revenue is just a start. This is the beginning of Calix, the AI leader and now that the platform is live and running, we are excited to the opportunity for our customers to grow in the markets they serve and for our Calix team members as they leverage AI to transform how we do business and deliver operating leverage for our shareholders. Nancy, let's open the call for questions. Gary, you can open the call for questions.

[Operator Instructions] Our first questions come from the line Joseph Cardoso with JPMorgan.

For my first, if I may, I just wanted to touch on your expectations for gross margins to bottom here in the third quarter. totally appreciate it's a difficult operating margin -- or operating environment. I guess what's just driving the confidence here relative to calling the floor? Is it largely related to cycling past the grandfathered backlog relative to the surcharges -- or are there other levers you're seeing relative to inventory, product redesign, et cetera, that's kind of driving your confidence here in terms of calling the floor in 3Q? And then I have a follow-up.

Yes, Joseph, it is exactly as you outlined. It is the fact that we have grandfather a certain portion of the backlog and as we go through the next few quarters, that backlog as a percentage of the total will shrink. And so new orders are being -- the surcharges are being assessed that kind of our current cost structure. And we're also adjusting those now on a monthly basis as opposed to a quarterly basis. And so over time, we expect that gap to getting to gross profit neutral to improve. . And I should say that our goal for the whole surcharge boring is to get to gross profit neutral. And as we partnered with our customers this quarter to address these higher memory costs, it became clear that they value certainty and certainty of cost and more importantly, certainty of supply. And so we had to modify our program to address this. And so consequently, we did not raise prices on backlog for a second time. And meanwhile, new orders, we will we will adjust to reflect our actual costs and adjusted monthly instead of quarterly -- so as more revenue comes in from those new orders, we closer we come to being gross profit neutral. And that's why I believe in Q3 we will bottom in the client gross margin.

Got it. Makes sense, Corey. And then maybe as my follow-up, you raised the full year guide to the higher end of the range, which if I take literally at the high end implies a pretty solid sequential ramp here into the -- well into the upcoming fourth quarter. First, am I thinking about that correctly relative to how you're framing the exit rate for the year? And if so, could you help us think through the drivers given all the moving pieces? Obviously, you've guys gone into detail around the new platform momentum. I believe bead should start kind of flowing through here into the fourth quarter in terms of a tailwind -- and I assume some benefit from the surcharging pricing there. So maybe just help us think through if I'm thinking about that framing as well as maybe what are the drivers here in terms of the acceleration into the fourth quarter? -- well, I guess, third and fourth quarter, but maybe what's implied in the guidance?

Yes, -- yes and yes, I think is what's the answer to that. If we take a look at what we're seeing from our customers, the demand environment remains strong and understanding that we can see all their activity through our cloud. even though we're seeing these higher surcharges and then changing their ordering paths. The underlying demand environment remains very strong. So that has not changed at all in this environment. And if you think about it, the quickest return on investment is adding a new subscriber to an existing network. And it doesn't really matter what those higher memory costs are when it comes to connecting a new subscriber to their network, they're going to move -- we're going to go ahead and buy that premise is equipment and move forward. So number 1 is the underlying demand environment is strong. . Two, you saw a return to our software growth. Exiting the second quarter, the momentum is very high. And so we reiterate the fact that we expect our software to continue to reaccelerate into the back half of the year. And you're correct that we expect to have some dead revenue pick up in the third and fourth quarters as we exit the year. No real change in terms of that demand environment. Certainly, in the beat environment is extending a little bit in a lot of areas, but as it relates to the impact to revenue for us in the second half, no changes in that environment. And so we're looking at a back half that is strong across the board.

Let me contextualize with a couple of customer interactions. I've been on the road quite a bit over the last quarter. talking to customers. And so the closest point I'm not adding a subscriber, it's a really salient point because we've been saying this at all times is that as organizations move to their build cycles, and, for example, they come to end of building fiber. Then their entire organization pivots away from being a really efficient construction company to how to become a really great sales and marketing organization that can win subscribers. And so the first thing I would say is that I continue to hear that theme in a lot of places. In fact, I had 1 CEO conference and the panel I was on, he basically said he can see the end of really the baby builds in fiber for his company and everything that he's thinking about is how do I add subscribers. And for Calix, that adding in subscribers means that we install a new subscriber, we provide new services, and we have an incredible strong revenue opportunity and our customer success organization and the tools we're putting place are really great at helping on the marketing side. The other side of it, though, as I said in my opening statement, which cannot be understated is that we've cracked the code on how to make AI predictable. And this means that customers all know I need AI-- and in fact, we, as Calix, as we look at the change of how we get leverage out of our operating model and how we transform our teams, we know we need AI. The biggest challenge that we had, frankly, is how do we do it in a predictable way. And this predictability cannot be understated where we believe that Calix will become the easy button because not only do we offer a predictable cost model we had 25, 30 CEOs in our office a couple of weeks ago, and we provided a very predictable road map over the coming quarters where we show workflow by workflow, here's how we're going to identify their business and where we see the payoff ROI and output. And frankly, those CEOs all left feeling incredibly enthusiastic about the opportunity to transform their teams and how AI will very clearly with the strong ROI change their business, and that's just going to snowball as other companies see this implemented within their peer group, and then they adopt quickly to you because -- it's inevitable. We you have to adopt it. It's just about what's the fastest path with the most predictability and that's what we've cracked the code on.

Our next question is come from the line of Scott Searle with ROTH Capital Partners.

Cory, maybe to just dive in quickly the impact on the memory charges in the third quarter. I'm wondering if you could quantify both the sales and EPS impact. It looks like just from a cursory glance that EPS would have bracketed or maybe even been higher if you had fully implemented memory surcharges across the board in the third quarter. And then looking to the prior guidance from the Analyst Day for 27, 28. I wonder if you could give some early thoughts in terms of how are you progressing in terms of the comfort on the revenue outlook? And particularly on the OpEx front, much lower in the second quarter. It sounds like you're going to be able to continue to leverage internal AI capabilities and efficiencies to carry that forward into the future. So does the model start to change or accelerate a little bit of when we should start to see operating leverage?

Great. So let's talk about that. We'll go ahead and talk about that first. So I think the revenue outlook is firming up. I think there are plenty of demand drivers as we look into '27, '28. Software is reaccelerating the power of the agentic workflows is resonating with customers. And so we see that we'll continue to drive our software and our software gross margins higher. We've got the tailwind of bead will happen at some point in 2027. And in the meantime, customers are continuing to add subscribers. So we're seeing no letup in terms of the demand environment. And so to reiterate our 15% growth targets for '27 '28, they're on track. In terms of the OpEx leverage, we are -- we are a leader in terms of the broadband space. We're obviously going to continue to be an AI leader in the human-centric deployment of AI and sialic -- you're starting to see some evidence of that work in the quarter. We expect more of that to come as we're committed to that as a strategy. I would say it's too early for us to accelerate that OpEx improvement, but I understand it's a keen focus inside the company to accelerate that. But I'm not changing guidance at this point, which is we will drive OpEx at a lower rate than revenue growth next year, leading to operating leverage. And we'll see what we can do to get to half or better growing at half rate revenue or better leave that as a goal, not a commitment.

And Corey, just the memory impact sales and EPS in the third quarter, that would be helpful if you could provide some context. And Mike, if I could just quickly, the competitive landscape, there was a lot of talk throughout the second quarter about the StarLink impact, et cetera. I'm wondering if you could just update your thoughts in terms of, I'll call it, the terrestrial competitive landscape and then throw in the satellite impact of how that's impacting your customers and what they're doing.

Yes, it's Scott. Essentially, it was a flip, right? We overperformed on EPS in the second quarter and the impact on not changing surcharges on the backlog had an impact into the quarter -- the third quarter. So we picked up a $0.05 in the second quarter. We lost a nickel in the third quarter. So for the year, we think we're EPS-neutral. -- that was part of what we thought about in terms of partnering with our customers and trying to get through this event of higher memory costs.

On the competitive landscape, excess fully like overtime competitor versus a fiber competitor. -- that changes market to market time by town. So competition exists, and it really just depends on how many people are building in that market and what their offerings are. Our position remains the same is that if you're in a market and you deploy the full car solution, you're going to be uniquely advantaged because of the fact that -- now again, this comes from a number of CEO who have proven this term over and over a guy, if you just are in market as a consumer and broadband provider, your at risk, if you are the broadband provider who takes the approach that we've built with our customers to being the dominant provider with the dominant brand in a town or an allocation you'll destroy your competition because you're selling consumer, you're winning the businesses, you're in the MDUs and that entire footprint comes together to provide enrollment capabilities through Smart Town that allows you to be the dominant brand with regards to talking to the PTI and the local school board around how do you provide WiFi roaming for all students who are underprivileged and we just want to have access to broadband to do homework. How do you provide roaming as an augmentation technology for police for inlands. They currently have their public safety radios but they could be in areas where there's worse coverage or they're using an iPhone that you've given them. And now whenever they actually hit a roaming network and whether there's WiFi coverage. Placements can actually have faster speeds and better downloads on their iPhones and the P25 radios. And all these things come together to you building a great partnership with the Mayor with the Head of Parts and Rod with all these different groups, the fire chief the police chief, and then lay become the dominant brand in your town and that brand dominance makes you local and helps you win subscribers. With regard to Sterlink, as we've always been saying forever, and the satellite providers, whether it's Starling or Amazon have a place. So if you're in a super area, it can put $500,000 to run fiber then Starlink is a great option if you're out on the boat, Starlink is a great option.

And so where it won't be an option is or where our customers know that if they lost the Starlink and they're in the town and they've got a higher connection, then they need to really look inside their business and decide what's going on because no logical customer is going to pick a sterling over fiber. The capacity differences are as phenomenal. And so fiber is going to destroy them from an experience point of view. And if the service provider does a smart thing. And the smart thing, for example, is they have to offer outdoor WiFi. And if you have the tax rate that's 40% on outdoor lipid, that customer is going to be wildly sticky because you've now put WiFi in by the pool, you got WiFi by the backyard by the garage, all those different places. And there's going to be no impetus even if StarLink uses their significant capital availability to run this at a significant loss as we expect Amazon to do that cheap off or will be beaten over by the fact that I have a great experience, I have incredible speeds I have Wi-Fi everywhere I need it. I have virus protection that protects me every day and hacking pre protection. And therefore, plus when I go to the local parks as my phone picks up and it wanders around town, why would I ever go anywhere else? So satellite has a place that 5% to 10% of the market, the matter really comes down to customer execution and they should crush.

Our next questions come from the line of Christian Schwab with Craig Hallum.

I just want to be clear on the no surcharges on backlog. It appears to me that customer certainty on pricing and the decision not to surcharge backlog was made some time during Q2 as gross margins now are implied a little bit different than the Analyst Day on the 23rd and -- in addition, we also brought a substantial amount of stock at higher prices than where we're going to open up this morning. Is that fair? Or was that the plan all along?

No, Christian, it was not the plan all along. Our plan all along was to be -- to do cost recovery right? That was the plan we outlined at the start of that was to get to gross profit neutral. And as we partnered with our customers, it was important for them to have certainty around price. So we've made a couple of changes. So backlog was adjusted in the second quarter. where we implemented the surcharge from the second quarter. So to say there's no surcharges on backlog is not an accurate statement. There are -- what we said is we're not going to adjust at a GaN as we move forward, right? So we gave them that certainty because customers were upset about changing price after the fact. So that was an acknowledgment of that in our partnering with them. And so the second side of that is that we've gone to adjusting surcharge pricing on a monthly basis versus a quarterly basis. so increase the frequency at which we have a chance to adjust the new orders coming in. And so that's what we've done. It had an impact to Q3 gross margins -- but ultimately, our goal has not changed, which was to maintain a gross profit neutral stance. And over time, we will narrow that gap.

Yes. Okay. That's clear. And then on a go-forward basis, kind of reiterating the fact of 15% annual growth through '27 and '28 plus. If memory prices continue to increase and we have surcharges that 15% is an organic number, correct?