Calix, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter ended June 25, 2016; comparisons are with the quarter ended June 27, 2015. Six-month figures cover the periods ended on those dates. Amounts below are in U.S. dollars.
Business context and financial performance
Calix provides broadband access systems and software to communications service providers (CSPs). It reported more than 21 million Unified Access ports deployed at quarter-end. Revenue remains affected by CSP spending patterns, project acceptance and revenue-recognition timing, and the mix of products and professional services.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $107.4 million | $99.1 million | $205.8 million | $190.2 million |
| Gross profit | $50.0 million | $48.3 million | $95.5 million | $90.8 million |
| Gross margin | 47% | 49% | 46% | 48% |
| Operating loss | $5.9 million | $5.8 million | $16.6 million | $17.7 million |
| Net loss | $5.8 million | $5.8 million | $16.6 million | $17.7 million |
| Basic and diluted loss per share | $0.12 | $0.11 | $0.34 | $0.34 |
Q2 and first-half revenue each increased 8% year over year. Management attributed growth mainly to stronger bookings and shipments in certain territories, including ramping turnkey projects; declining revenue from completed Broadband Stimulus-funded contracts partly offset growth. U.S. revenue represented approximately 92% of Q2 and 91% of first-half 2016 revenue.
Gross margin declined mainly because services, which generally carry lower margins, made up a greater share of revenue. Product and services costs also rose with shipments and professional-services activity; warranty costs increased, including charges related to two product families. Lower intangible amortization partly offset these pressures. R&D expense increased 10% in Q2 and 7% for the first half; G&A increased 23% and 24%, respectively, primarily reflecting legal costs. Lower amortization expense and lower stock-based compensation in some functions partly offset expense growth.
Cash, liquidity and capital resources
- Cash, cash equivalents and marketable securities totaled $64.2 million at June 25, 2016, down from $73.6 million at December 31, 2015. This included $5.7 million held by foreign subsidiaries.
- Six-month operating cash flow was positive $5.4 million, versus negative $6.7 million in the prior-year period. Investing activities provided $8.6 million, chiefly from net maturities of marketable securities; financing activities used $11.4 million, mainly for share repurchases.
- Calix had no borrowings under its $50 million revolving credit facility, leaving $50 million available. The facility matures in September 2018; the company reported compliance with its covenants.
- Management said existing cash and securities, together with available credit, should cover anticipated cash needs for at least 12 months. Turnkey projects may increase working-capital requirements because equipment and materials can be purchased before customer payment.
- The $40 million repurchase program was completed in March 2016. During the first half, Calix repurchased 1.79 million shares for $12.8 million, at an average $7.16 per share; the program’s total repurchases were 5.33 million shares at an average $7.50 per share.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expected operating expenses to rise in absolute dollars but decline as a percentage of revenue over time, and planned continued investment in R&D and sales and marketing.
- Two customers each represented more than 10% of revenue in Q2 2016; together they accounted for 35% of Q2 revenue and 32% of first-half revenue. Both also exceeded 10% of receivables at quarter-end. This concentration increases exposure to customer purchasing decisions and collections.
- Calix continued to report losses and had an accumulated deficit of $573.5 million. Management cautioned that results may fluctuate because of CSP capital spending, customer and product mix, project timing and acceptance, competition, warranty costs, and other factors. The company also cited reliance on contract manufacturers and certain limited-source components.
- Occam litigation: In April 2016, parties reached a settlement in principle involving $35 million for the plaintiff class, with no contribution required from Calix or its officers or directors. The company separately expected to receive approximately $4.5 million toward uncovered defense costs. Court approval remained pending at quarter-end; Calix had not recorded amounts for the settlement and expected to recognize the recovery upon approval. It incurred $2.9 million of uncovered litigation defense costs in Q2 and $6.5 million in the first half.
- Disclosure controls were assessed as effective at a reasonable assurance level, and no material change in internal control over financial reporting was reported. The filing identifies pending accounting standards, including revenue recognition effective for Calix in fiscal 2018, whose impact was still under assessment.
Important facts for investors to verify
- Whether the Occam settlement received court approval and whether the anticipated $4.5 million recovery was recognized.
- Whether turnkey and professional-services revenue growth continues, and how the services mix affects gross margin and cash requirements.
- Whether revenue and receivables remain concentrated among a small number of customers, and whether collections and customer spending hold up.
- Whether the company sustains positive operating cash flow while continuing to incur net losses, and whether credit-facility covenant compliance and liquidity remain adequate.
- How warranty costs, especially charges involving the two cited product families, and other operating expenses develop.