Calix, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended September 24, 2011; year-to-date figures cover the nine months ended that date. Financial statement amounts are unaudited. Calix provides broadband access systems and software to communications service providers.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $83.7 | $75.5 | $253.1 | $195.3 |
| Gross profit | $31.8 | $29.0 | $82.4 | $74.1 |
| Gross margin | 38.1% | 38.4% | 32.6% | 37.9% |
| Operating loss | $(6.9) | $(5.4) | $(47.2) | $(16.4) |
| Net loss | $(6.9) | $(5.4) | $(47.3) | $(17.8) |
| Net loss per share | $(0.15) | $(0.14) | $(1.06) | $(0.70) |
- Q3 revenue grew 11% year over year; nine-month revenue grew 30%. Occam Networks, acquired February 22, 2011, is included in 2011 results only from the acquisition date, limiting comparability.
- Reported nine-month gross margin included approximately $20.0 million of Occam-related inventory charges: $14.2 million from acquisition-date inventory fair-value revaluation and $5.6 million of acquired inventory write-downs. Management reported nine-month gross margin of 40.4% excluding merger-related expenses.
- Nine-month research and development expense was $50.3 million, sales and marketing $38.8 million, and general and administrative expense $21.5 million. These rose overall partly because of Occam-related headcount and facilities.
- Cash provided by operating activities was $8.7 million for the nine months, versus $8.4 million in 2010. Cash used in investing was $37.3 million, including $60.8 million net cash paid for Occam and $6.3 million of capital expenditures, partly offset by marketable-security maturities. Financing used $7.5 million, including $10.4 million of taxes withheld on vested restricted stock units.
- At September 24, cash and cash equivalents were $30.2 million, marketable securities $2.0 million, and restricted cash $1.1 million; unrestricted cash and securities totaled $32.3 million, down from $98.3 million at December 31, 2010. Current assets were $140.8 million and current liabilities $70.8 million.
- Calix reported no outstanding term-loan or revolving-credit borrowings. Its revolving facility is $30 million, subject to eligible receivables; letters of credit outstanding were $2.4 million. Total liabilities were $84.8 million. Management said current resources and facility availability should cover anticipated cash needs for at least 12 months.
Material changes and unusual items
- Calix acquired Occam for approximately $213.1 million, comprising $94.4 million cash and $118.7 million in common stock and equity awards. The acquisition added $50.6 million of goodwill and $97.7 million of intangible assets; nine-month intangible amortization was $13.5 million.
- Nine-month operating expenses included $12.9 million of merger-related and other costs, principally severance, transition staffing, facilities consolidation, professional fees, and accelerated equity compensation. The company said it did not anticipate further merger-related expenses.
- Cash and securities fell materially following the acquisition and related financing and investment activity. Inventory rose to $44.2 million from $24.6 million at year-end; management cited inventory reserves and demand forecasting as factors that can affect margins.
- Shares outstanding increased to 47.3 million at September 24 from 38.7 million at December 31, 2010, largely reflecting acquisition-related issuance.
Outlook, commentary, and risks
- Management attributed Q3 softness to delays in Broadband Stimulus awards becoming shippable orders, lower traditional-network investment at two major customers, competition, weak macroeconomic conditions, and fiber shortages following the Japan tsunami. It expected these conditions to continue and negatively affect Q4 results. The filing provides no numerical Q4 guidance.
- Management cited potential strategic benefits from Occam, including a broader fiber-and-copper product portfolio, expanded market reach, and cost synergies; realization of expected benefits is not assured.
- Key risks include dependence on a concentrated CSP customer base and cyclical customer capital spending; delayed government-funded projects and revenue recognition; competition and pricing pressure; reliance on a small number of contract manufacturers and component suppliers; inventory and warranty exposure; and risks integrating Occam.
- Stockholders’ lawsuits relating to the Occam merger remained pending: California cases were stayed, while Delaware plaintiffs continued to seek unspecified damages. Calix disputed the allegations but noted there is no assurance of a favorable outcome and that indemnification obligations may apply.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether stimulus-program order delays, customer spending reductions, and supply constraints persist into Q4 and affect revenue and cash generation.
- Underlying gross-margin performance after separating Occam inventory charges and acquired-intangible amortization from ongoing product economics.
- Occam integration progress, actual cost synergies, and any additional acquisition-related costs or impairment risks.
- Liquidity and working-capital trends, including inventory, receivables, restricted cash, credit-facility availability, and performance-bond requirements.
- Developments in the pending merger litigation and any resulting financial or indemnification exposure.