Calix, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparable period ended March 31, 2018. Calix provides cloud and software platforms, network systems, and services to communications service providers. The 2019 quarter had one fewer day than the prior-year period.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $89.4 million | $99.4 million | Down $10.1 million (10%) |
| Systems revenue | $82.4 million | $93.3 million | Down 12% |
| Services revenue | $7.0 million | $6.1 million | Up 14% |
| Gross profit | $38.3 million | $42.1 million | Down $3.7 million |
| Gross margin | 42.9% | 42.3% | Up 0.6 percentage points |
| Operating loss | $9.1 million | $11.1 million | Loss narrowed $2.0 million |
| Net loss | $9.8 million | $11.7 million | Loss narrowed $2.0 million |
| Basic and diluted loss per share | $0.18 | $0.23 | Loss per share narrowed |
| Cash used in operating activities | $0.4 million | $5.8 million | Use decreased $5.5 million |
Systems gross margin was 45.8%, versus 44.7%; management said Q1 tariffs reduced 2019 systems margin by 260 basis points, and margin excluding those costs was 48.5%. Services gross margin was 8.4%, versus 6.6%.
At March 30, 2019, cash and cash equivalents were $44.1 million, restricted cash was $0.6 million, and the company had $30.0 million outstanding on its revolving credit line—the full facility amount. The line carried a 7.0% interest rate. Additional outstanding financing arrangements totaled $5.5 million. Total assets were $318.2 million and total liabilities were $172.3 million. The company reported an accumulated deficit of $694.6 million.
Capital expenditures were $5.0 million, compared with $1.9 million in Q1 2018. The company reported $64.2 million in non-cancelable purchase commitments, including $48.4 million due within one year. Total contractual obligations were $125.3 million.
Material changes and unusual items
- Revenue fell primarily because production delays and product shortages accompanied the global supply-chain shift away from China. Systems revenue declined $10.9 million; higher services revenue partly offset the decline.
- U.S. tariff and tariff-related costs were $2.2 million in Q1 2019, following $3.2 million in Q4 2018. Calix said substantially all product supply had transitioned out of China during Q1.
- Research and development expense decreased $6.2 million, primarily reflecting lower personnel costs following restructuring and a shift toward software platforms. Total operating expenses declined $5.7 million. The prior-year quarter included $5.3 million in restructuring charges and a $6.7 million gain on sale of the outdoor cabinet product line.
- Operating cash use improved year over year, partly reflecting working-capital movements, including collections and lower inventory. Cash, cash equivalents, and restricted cash decreased $5.6 million during Q1 2019.
- Adoption of the lease standard on January 1, 2019 added a right-of-use asset and lease liability; management said adoption materially affected the balance sheet but not the income statement or cash flows.
Outlook, risks, and contingencies
- Management expected production and product availability to improve in Q2 2019 and tariff costs to decrease in Q2 and Q3; supply-chain realignment costs were expected to continue. These are expectations, not quantified revenue or earnings guidance.
- Calix believed cash, operating cash flows, and future available borrowings would meet anticipated needs for at least 12 months. However, it had drawn the full $30.0 million line and noted that future borrowing depends on the borrowing base and compliance with financial covenants.
- The credit agreement’s minimum adjusted quick ratio and Q1 adjusted EBITDA requirements were amended in February 2019 to accommodate tariff-mitigation costs. Calix was compliant at March 30, but warned that future covenant breaches could restrict borrowing or trigger repayment.
- Key risks include continued supply-chain disruption, tariffs or additional trade measures, reliance on third-party manufacturers and suppliers, customer spending and concentration, recurring losses, and limited liquidity. One customer accounted for 14% of revenue in both reported quarters; another customer exceeded 10% of receivables at March 30.
- Purchase commitments, leases, equipment and ERP financing, and a $15.8 million engineering-services commitment through 2022 create future cash obligations. Management reported no pending legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Whether supply-chain changes restore product availability and revenue without materially higher costs or further customer disruption.
- Actual tariff and realignment costs, and whether the expected reduction in tariff expense occurs.
- Cash use, borrowing-base availability, and continued compliance with the amended credit covenants.
- Revenue and receivables concentration, including the financial condition and purchasing patterns of major customers.
- Whether the company can improve operating performance and cash generation despite its ongoing losses and contractual commitments.