Calix, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended July 1, 2017; comparisons are to the corresponding periods ended June 25, 2016. Calix provides broadband access platforms, systems and software to communications service providers (CSPs).
Financial performance
| Metric | Q2 2017 | Q2 2016 | First six months 2017 | First six months 2016 |
|---|---|---|---|---|
| Revenue | $126.1 million | $107.4 million | $243.6 million | $205.8 million |
| Gross profit / margin | $43.3 million / 34% | $50.0 million / 47% | $77.7 million / 32% | $95.5 million / 46% |
| Operating loss | $18.7 million | $5.9 million | $51.5 million | $16.6 million |
| Net loss | $19.0 million | $5.8 million | $52.3 million | $16.6 million |
| Net loss per share | $0.38 | $0.12 | $1.05 | $0.34 |
- Q2 product revenue rose 7% to $107.3 million; services revenue grew 158% to $18.8 million. For the first six months, products increased 4% and services increased 220%.
- Services represented 15% of Q2 revenue, versus 7% a year earlier. Services gross margin was negative 30% in Q2 and negative 12% for the six-month period, compared with positive 19% and 20%, respectively, in 2016.
- R&D expense increased 32% in Q2 and 40% for the six months, primarily due to personnel, contractors and product-development investment. G&A declined, partly because prior-year expenses included Occam litigation costs that did not recur.
- Cash used in operations was $21.4 million for the six months, compared with $5.4 million provided in the prior-year period. Capital expenditures were $4.7 million. Cash and cash equivalents declined to $37.3 million from $50.4 million at year-end; cash, cash equivalents and marketable securities totaled $50.2 million.
- At July 1, 2017, current assets were $194.4 million and current liabilities were $142.3 million. The company reported no borrowings, but no funds were available under its then-existing Bank of America facility under its leverage limits.
Material changes and management commentary
- Revenue growth was driven mainly by turnkey network improvement work, including a significant project substantially completed during the first quarter and work on previously awarded projects, along with higher product shipments. U.S. revenue remained the majority of sales; international revenue increased year over year.
- Gross profit and margins fell as services became a larger share of sales and project delivery incurred overruns, rework, delays and third-party costs. Calix recorded $3.6 million of charges during the six months for overruns and rework on turnkey projects.
- Two customers together accounted for 34% of Q2 revenue and 44% of six-month revenue. Each represented more than 10% of six-month revenue; both also represented more than 10% of accounts receivable at July 1.
- Deferred revenue related to ongoing turnkey network improvement projects was approximately $28.7 million; recognition depends on customer acceptance or agreed milestones. Project timing also creates substantial working-capital requirements because costs may be incurred before customer payment.
- Management expects continued investment in software-defined access, products, services and sales capabilities, and said operating expenses may rise in absolute dollars but decline as a percentage of revenue over time. It expects to moderate R&D investment as next-generation systems and software reach market.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management stated that existing liquidity and borrowings available under the new facility were expected to cover anticipated needs for at least 12 months, based on its current operating plan.
- A March 2017 restructuring targets greater focus on software-defined access and lower costs in traditional systems. Charges were $1.7 million for the first six months; total fiscal 2017 charges are estimated at up to $6.8 million, with up to $5.1 million of additional charges expected during the remainder of the year.
- In August 2017, after quarter-end, Calix entered a senior secured revolving facility with Silicon Valley Bank of up to $30 million, subject to an accounts-receivable borrowing base, exclusions and covenants; it replaced the Bank of America facility. The facility matures August 7, 2019, and is secured by substantially all assets, including intellectual property.
- Calix plans to adopt the new revenue standard (ASC 606) on January 1, 2018 using the modified retrospective method. Management anticipates earlier recognition for certain obligations currently deferred until customer acceptance and capitalization of certain sales commissions; the overall financial impact could be material but was not yet quantifiable.
- Key risks include continued operating losses and cash use, services-project execution and margin pressure, revenue-recognition delays, customer concentration, CSP capital-spending cycles, competition, and dependence on suppliers and contract manufacturers. Management reported no litigation expected to have a material adverse effect and stated disclosure controls were effective.
Important facts for investors to verify
- Whether turnkey project costs, overruns and rework decline enough to restore services and consolidated gross margins.
- Whether deferred project revenue is accepted and collected on schedule, and how that affects operating cash flow and working capital.
- Customer concentration, including the major customers’ purchasing plans, receivable balances and payment timing.
- Availability under the SVB facility after borrowing-base exclusions and compliance with its liquidity covenant; confirm subsequent borrowing and liquidity levels.
- The eventual financial-statement effects of ASC 606 and the remaining restructuring charges.