Calix, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2013; comparisons are to the corresponding periods ended June 30, 2012. Amounts below are in millions of dollars unless otherwise noted. Calix supplies broadband access systems and software to communications service providers (CSPs).
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $94.4 | $78.9 | $185.0 | $157.5 |
| Gross profit | $42.5 | $33.2 | $83.6 | $67.0 |
| Gross margin | 45% | 42% | 45% | 43% |
| Operating loss | $(4.8) | $(6.8) | $(10.4) | $(14.2) |
| Net loss | $(5.2) | $(7.1) | $(11.4) | $(14.6) |
| Net loss per share, diluted | $(0.10) | $(0.15) | $(0.23) | $(0.30) |
- Revenue grew 20% in Q2 and 17% for the first half. Management attributed growth primarily to improved market conditions, higher shipments to existing customers, new customer additions, and broader geographic reach.
- Gross margin improved; excluding acquired-intangible amortization, management reported a 47% margin in both 2013 comparison periods versus 45% in 2012, citing product mix and cost reductions.
- Operating expenses increased: first-half R&D was $40.2 million, sales and marketing $32.9 million, and G&A $15.8 million. Higher compensation, headcount, acquisition-related costs, and facility and depreciation costs contributed. Stock-based compensation totaled $10.0 million for the first half, versus $8.7 million.
- Cash from operations was $23.2 million for the first half, compared with $18.1 million. Capital expenditures were $3.3 million, and cash increased $22.4 million to $69.4 million.
- At June 29, 2013, current assets were $206.7 million and current liabilities $107.1 million. Total liabilities were $125.9 million, including deferred revenue; there were no borrowings outstanding under the prior facility. Stockholders’ equity was $270.2 million and accumulated deficit $503.9 million.
Material changes and operating trends
- U.S. sales were approximately 87% of revenue in the first half, down from approximately 93% a year earlier; management expects international revenue to continue growing.
- Deferred revenue rose to $71.1 million from $55.1 million at year-end, primarily reflecting product and service arrangements, including RUS-funded customer contracts and extended warranties. The timing of revenue and related cost recognition can materially affect quarterly results.
- Management said operating results had improved steadily from the second half of 2012 through the first half of 2013 and expected that trend to continue. It expects operating expenses to rise in dollars but decline as a percentage of revenue over time. No numerical revenue or earnings guidance was provided.
Liquidity, financing, risks, and unusual items
- Management believes existing cash, cash equivalents, and available credit are sufficient for anticipated needs for at least 12 months. The $30 million Silicon Valley Bank facility matured June 30, 2013; $1.2 million of outstanding letters of credit was cash-collateralized.
- On July 29, 2013, Calix entered a secured, $50 million revolving credit facility with Bank of America, including letter-of-credit and swingline sublimits. It matures July 29, 2016, subject to possible extensions, and has variable-rate pricing and financial covenants. No funds had been borrowed as of the report date; the company reported covenant compliance.
- A January 2013 amendment extended the Petaluma office lease to February 2019, with $5.6 million of minimum future payments and a $0.4 million lease incentive.
- A Delaware class action relating to the Occam merger continues. Plaintiffs allege breaches of fiduciary duty and seek unspecified damages; defendants moved for summary judgment. Calix said it believes the allegations lack merit and intends to contest the case, but noted possible indemnification obligations for former Occam directors and officers.
- Warranty expense increased: $2.8 million was charged to cost of revenue in the first half, versus $2.0 million a year earlier; the warranty reserve was $12.3 million at June 29.
- Calix remains loss-making and identifies risks including CSP spending volatility, customer concentration, competition and pricing, product development and adoption, supplier and contract-manufacturer dependence, RUS-related revenue timing, integration of Ericsson assets, and international expansion. It maintained a full valuation allowance against most deferred tax assets and reported $13.5 million of unrecognized tax benefits.
- Management assessed goodwill and recorded no impairment. Disclosure controls were judged effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue growth and improved gross margins continue, including the mix and profitability of RUS-funded and other deferred-revenue contracts.
- Cash conversion and working-capital movements, especially deferred costs, receivables, inventory, and deferred revenue.
- Availability, covenant terms, and potential use of the new secured credit facility; the filing reports no borrowings as of its date.
- Customer concentration and international growth, including the effect of CSP capital spending and government-funded programs.
- Progress and potential exposure in the Occam litigation, including any indemnification obligations.
- Whether the company can move from ongoing net losses to sustainable operating profitability while funding R&D, sales expansion, and acquisition integration.