Calix, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Calix provides access-network equipment, cloud and software platforms, and services to communications service providers (CSPs); it reports one operating segment.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $510.4 million | $458.8 million |
| Product revenue | $421.9 million | $428.6 million |
| Services revenue | $88.5 million | $30.2 million |
| Gross profit / margin | $172.9 million / 34% | $201.2 million / 44% |
| Operating loss | $81.6 million | $28.1 million |
| Net loss / diluted loss per share | $83.0 million / $1.66 | $27.4 million / $0.56 |
| Cash from operating activities | $(62.8) million | $24.4 million |
| Cash, cash equivalents and marketable securities | $39.8 million | $78.1 million |
| Working capital | $34.1 million | $97.9 million |
| Credit-facility borrowings at year-end | $30.0 million | None reported |
FY2017 R&D expense was $127.5 million, or 25% of revenue, versus $106.9 million, or 23%, in FY2016. Total assets were $295.1 million and stockholders’ equity was $145.0 million at year-end.
Fourth quarter: Revenue was $137.9 million versus $131.8 million in Q4 2016; gross profit was $50.6 million versus $52.2 million. Operating loss was $12.8 million versus $12.2 million, and net loss was $12.9 million versus $11.5 million. Gross margin was approximately 36.7%, compared with 39.6% in Q4 2016.
Material changes versus prior year
- Revenue rose 11%, driven by services revenue growth of 193%; product revenue fell 2%. Services grew to 17% of revenue from 7%.
- Gross margin fell to 34% from 44%. Management attributed the decline chiefly to the larger services mix and cost overruns, rework, delays and third-party costs on turnkey network projects. Services gross margin was negative 15% for the year.
- Operating loss widened substantially as gross profit declined and R&D spending increased. FY2017 also included $4.2 million of restructuring charges; FY2016 included a $4.5 million litigation settlement gain.
- Operating cash flow swung from a $24.4 million inflow to a $62.8 million outflow. Management cited operating losses, project working-capital demands, increased receivables—including delayed payment by a large customer—and lower customer advances.
- Cash and securities declined by $38.3 million, while the company drew the full $30 million available under its new SVB revolving facility.
Outlook, risks and unusual items
- Management expected FY2018 services revenue to decline as major turnkey and CAF-funded work completed and the overall volume of CAF projects was expected to be lower. It expected this decline to be partly offset by services supporting platform sales.
- Management expected R&D expense to decrease in 2018 in both dollars and as a share of revenue, and said it would pursue improved efficiency in professional services. The filing provides no specific revenue or earnings guidance.
- In early 2018, Calix established a restructuring plan, expecting about $4.0 million of first-quarter charges and annualized savings exceeding $16 million. It also sold its outdoor cabinet product line in February 2018 for $10.4 million cash, with the buyer assuming related warranty liabilities and open purchase commitments.
- Calix stated that existing cash and securities, expected operating cash flows and available SVB borrowings should fund anticipated needs for at least 12 months. This outlook is qualified by persistent losses, cash outflows and dependence on customer collections and credit-facility availability.
- The company failed its minimum Adjusted Quick Ratio covenant for November 2017. SVB waived the default; a February 2018 amendment revised financial covenants and added an Adjusted EBITDA covenant. The facility is secured by substantially all company assets and matures August 7, 2019.
- Customer concentration is significant: CenturyLink generated 31% of FY2017 revenue and represented 42% of year-end receivables. Calix reported lower order volumes from this customer late in 2017 and expected its acquisition-related transition to continue to delay or reduce purchases.
- The Tax Cuts and Jobs Act produced a provisional $1.1 million transition-tax inclusion; the $84.4 million deferred-tax remeasurement was offset by a valuation-allowance reduction. Calix maintained a full valuation allowance on domestic deferred tax assets. The company adopted the new revenue standard on January 1, 2018 and estimated an approximately $1 million accumulated-deficit reduction, with possible material effects on the timing of future project revenue recognition.
- Key risks include ongoing losses and cash consumption, project execution and margin pressure, CSP spending and government-program changes, concentrated customers, competition, and reliance on contract manufacturers and limited-source components. The filing reports no legal proceedings expected to have a material adverse effect. Management and the auditor concluded internal controls over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether professional-services projects can be delivered without further overruns and whether services margins recover.
- Whether lower expected CAF and turnkey activity is offset by platform-related sales, and how customer concentration affects orders and collections.
- Cash burn, receivables and working-capital trends, plus borrowing availability and compliance with amended SVB covenants.
- Whether announced restructuring savings are realized and the cabinet-sale proceeds support the stated strategy.
- The actual impact of adopting the revenue standard on reported revenue timing, project accounting and comparability.