Calix, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; unaudited. Comparisons are with the three months ended March 30, 2013, unless otherwise noted. Calix supplies broadband access systems and software to communications service providers (CSPs), primarily in North America.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $85.8 million | $90.5 million |
| Gross profit | $36.9 million | $41.1 million |
| Gross margin | 43% | 45% |
| Operating loss | $9.9 million | $5.5 million |
| Net loss | $10.0 million | $6.2 million |
| Diluted loss per share | $0.20 | $0.13 |
| Cash used in operating activities | $5.2 million | Cash provided: $2.4 million |
| Capital expenditures | $1.9 million | $1.3 million |
At March 29, 2014, cash and cash equivalents were $75.2 million, restricted cash was $0.3 million, total assets were $361.4 million, and stockholders’ equity was $267.4 million. The company had no borrowings or outstanding letters of credit under its $50 million revolving credit facility, leaving the full amount available. It reported compliance with credit-facility covenants. Accumulated deficit was $519.8 million.
Material changes and operating drivers
- Revenue declined 5%, which management attributed to weaker demand across multiple customer markets and CSP capital-spending delays, particularly among some large customers. U.S. revenue was approximately 88% of total revenue, compared with 86% a year earlier.
- Gross margin fell to 43% from 45%; excluding intangible-asset amortization, it was 45% versus 48%. Management cited product and customer mix, deferred and recognized or shipped revenue, and inventory-reserve movements.
- Operating expenses were nearly flat overall: lower research and development and general and administrative costs were offset by higher sales and marketing expenses. Sales and marketing increased 10%, largely reflecting hiring and spending for international expansion.
- Operating cash flow weakened to a $5.2 million use, including significant cash outflows from lower accounts payable and deferred revenue. Cash and equivalents decreased $7.6 million from year-end 2013.
- Total deferred revenue was $47.5 million at quarter-end, primarily related to RUS-funded customer contracts and extended warranties; the timing of revenue recognition can cause period-to-period fluctuations.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said it expects international and overall revenue to grow as it expands international markets, while noting current demand softness and customer budget delays. The company expects seasonal customer spending patterns, with typically lower spending in the first quarter.
- Management believes existing cash, cash equivalents, and available credit should cover anticipated needs for at least the next 12 months. Future needs depend on revenue growth, product development, sales and marketing investment, and other factors; additional financing may not be available on acceptable terms.
- Key risks include CSP capital-spending variability, customer concentration, competition and pricing pressure, long sales cycles, product development and acceptance, reliance on contract manufacturers and limited-source suppliers, and inventory and gross-margin volatility. CenturyLink accounted for 26% of 2013 revenue.
- In April 2014, the Delaware Court of Chancery granted in part and denied in part defendants’ summary-judgment motion in litigation arising from the 2011 Occam acquisition. Claims remain against Occam’s former CEO and CFO concerning the sale process, and disclosure-related claims remain. Calix says it intends to contest the case; potential damages are unspecified, and indemnification obligations may apply.
- Two new facility leases signed in March 2014 carry minimum future payments of $1.0 million and $1.5 million, respectively; each also includes a $0.4 million allowance for leasehold improvements. The company reported no off-balance-sheet arrangements.
- The company maintains a full valuation allowance against net deferred tax assets, except certain foreign assets, and reported $14.4 million in unrecognized tax benefits. Goodwill impairment indicators were not identified at quarter-end.
Important facts for investors to verify
- Whether CSP budget delays persist and whether revenue stabilizes or grows, including in international markets.
- Whether gross margins recover and the effects of customer/product mix, rebates, inventory reserves, and RUS-related revenue timing.
- Whether operating cash flow improves, especially as accounts payable and deferred revenue change.
- The status and potential financial impact of the Occam-related litigation and any associated indemnification obligations.
- Customer concentration, supplier and contract-manufacturer dependencies, and compliance with credit-facility covenants.