Calix, Inc. — Q1 2018 Form 10-Q
Business context and period: Calix provides cloud and software platforms, network systems, and services primarily to communications service providers. The quarter ended March 31, 2018; the comparable quarter ended April 1, 2017. The company adopted Topic 606 revenue accounting on January 1, 2018 using the modified retrospective method, so prior-period results were not restated.
Financial results
| Metric | Q1 2018 | Comparable period | Change / context |
|---|---|---|---|
| Revenue | $99.4 million | $117.5 million | Down 15% |
| Systems revenue | $93.3 million | $91.6 million | Up 2% |
| Services revenue | $6.1 million | $25.9 million | Down 76% |
| Gross profit / margin | $42.1 million / 42% | $34.4 million / 29% | Margin increased 13 percentage points |
| Operating loss | $11.1 million | $32.8 million | Improved |
| Net loss / diluted loss per share | $11.7 million / $0.23 | $33.3 million / $0.67 | Loss narrowed |
| Cash used in operations | $5.8 million | $23.5 million | Cash use decreased |
At March 31, 2018, cash and cash equivalents were $42.6 million, total current assets were $138.0 million, and current liabilities were $111.3 million. The company had $30.0 million drawn on its $30.0 million revolving credit facility, which matures August 7, 2019. Total liabilities were $132.9 million; accumulated deficit was $677.3 million.
Q1 investing cash flow was positive $8.5 million, including $10.4 million in proceeds from the product-line sale and $1.9 million in capital expenditures. Financing cash flow was effectively flat. Operating cash flow benefited from collections of receivables and lower inventory, partly offset by reduced accounts payable.
Material changes and unusual items
- Revenue declined chiefly because a large turnkey network improvement project generated substantial services revenue in Q1 2017 and was substantially completed. Systems revenue rose modestly, reflecting traction in AXOS and Calix Cloud that partly offset traditional systems declines.
- Gross margin improved with customer and product mix, including stronger sales to smaller regional customers and a higher share of newer systems; management also cited improved services execution. Services remained a smaller share of revenue.
- Topic 606 increased reported Q1 2018 revenue by $1.2 million versus the amount that would have been reported under prior guidance. Adoption also produced a $1.8 million favorable opening accumulated-deficit adjustment. The accounting change affects period comparability.
- In February, Calix sold its outdoor cabinet product line to Clearfield for $10.4 million cash, transferred $2.1 million of net inventory, and recognized a $6.7 million gain. Clearfield assumed related warranty liabilities and open purchase-order commitments. Calix will solicit orders for the transferred product line for 15 months.
- A new February 2018 restructuring plan generated $5.3 million of Q1 charges, primarily severance and termination benefits. Management expects annualized savings exceeding $16.4 million.
Outlook, liquidity, and risks
Management expects existing cash, operating cash flows, and the SVB facility to fund operations and capital expenditures for at least the next 12 months, while noting that additional equity or borrowing could be needed if plans or cash flows fall short. Calix said the largest customer’s recent acquisition has disrupted spending and may continue to delay or reduce orders. Management expects operating expenses to be relatively consistent in absolute dollars over the next several quarters and to decline as a percentage of revenue over time; it expects near-term R&D investment to be flat to down, while planning incremental sales and marketing investment.
The company had previously breached its minimum Adjusted Quick Ratio covenant for November 2017; SVB waived the default, and the facility was amended in February 2018. At March 31, Calix reported an Adjusted Quick Ratio of 1.05 against a 0.925 minimum and Adjusted EBITDA of negative $2.9 million against a negative $6.0 million requirement; it was in compliance. Borrowing availability is subject to an accounts-receivable borrowing base and covenants.
Contractual obligations totaled $127.8 million, including $74.9 million of non-cancelable purchase commitments, $20.4 million of operating lease obligations, and $32.5 million of line-of-credit payments including projected interest. Purchase commitments include approximately $57.4 million due within one year and a $17.5 million engineering-services commitment through 2022. Key risks include customer concentration and spending delays, continuing losses and negative operating cash flow, covenant and liquidity constraints, volatile CSP spending, competition and margin pressure, and dependence on contract manufacturers and component suppliers. No material litigation was identified. Disclosure controls were reported effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the largest customer’s acquisition-related delays continue, and how customer concentration affects future revenue and collections.
- Whether Calix achieves the expected restructuring savings and controls costs while investing in platforms and sales.
- How Topic 606 changes revenue timing and reported comparisons; Q1 revenue was $1.2 million higher than under prior guidance.
- Whether operating cash flow and liquidity improve while the company remains fully drawn on its credit line and meets amended covenants.
- Whether purchase, lease, and engineering commitments—and potential product, supplier, and inventory costs—affect cash needs or margins.