Business context and reporting period
Calix, Inc. provides cloud and software platforms, communications access systems, and services to communications service providers. This Form 10-Q covers the quarter ended June 29, 2019, and the six months then ended; comparative periods ended June 30, 2018. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $100.3 million | $111.7 million | $189.7 million | $211.1 million |
| Gross profit / margin | $44.7 million / 44.5% | $50.9 million / 45.5% | $83.0 million / 43.8% | $92.9 million / 44.0% |
| Operating loss | $4.9 million | $2.9 million | $14.0 million | $14.0 million |
| Net loss | $5.0 million | $2.8 million | $14.8 million | $14.5 million |
| Diluted loss per share | $0.09 | $0.05 | $0.27 | $0.28 |
- Revenue fell 10% year over year in both Q2 and the first half. Systems revenue declined 9% in Q2 and 11% in the first half; services revenue declined 18% and 5%, respectively.
- Q2 gross margin declined by 1.0 percentage point, mainly due to lower services margin. First-half gross margin was down 0.2 percentage point. Systems margin was reduced by tariffs and related costs by 200 basis points in Q2 and 230 basis points in the first half; excluding those costs, systems margins were 48.6% and 48.5%, respectively.
- Operating expenses were $49.6 million in Q2 and $97.1 million in the first half, down from $53.8 million and $107.0 million in the comparable periods, largely reflecting prior restructuring and lower personnel costs.
- Cash used in operating activities was $3.3 million for the first half, versus $2.7 million in 2018. Capital expenditures were $9.5 million, compared with $3.0 million; investing cash flow in 2018 included $10.4 million proceeds from a product-line sale.
- Cash and cash equivalents were $34.9 million at June 29, 2019, plus $0.6 million restricted cash. Cash, cash equivalents and restricted cash decreased $14.7 million from year-end 2018.
- Borrowings under the revolving credit line were $25.0 million, at a 7.0% interest rate. The $5.0 million standby letter of credit reduced facility borrowing capacity to $25.0 million. Separate equipment and ERP-related financing totaled approximately $4.9 million outstanding.
- Current assets were $148.2 million and current liabilities $128.7 million. Total liabilities were $164.0 million; stockholders’ equity was $147.2 million. The company reported an accumulated deficit of $699.7 million.
Material changes versus prior comparable periods
- Management attributed lower revenue principally to reduced demand from a large North America-based service provider and medium-sized incumbent local exchange carrier customers; lower services revenue also reflected reduced deployment work associated with the Connect America Fund.
- First-half net loss widened modestly, while Q2 net loss increased from $2.8 million to $5.0 million. Lower revenue and gross profit outweighed reduced operating expenses.
- Tariff and tariff-related costs were $4.0 million in the first half, including $1.9 million in Q2. Calix moved substantially all production out of China during Q1 and continued supply-chain re-engineering in Q2.
- Adoption of the lease accounting standard added operating lease assets and liabilities to the balance sheet. At June 29, operating lease assets were $16.4 million and lease liabilities were $17.4 million; adoption did not affect the income statement or cash flows.
Outlook, risks and unusual items
- Management expected reduced demand from medium-sized ILEC customers to continue, with the decline diminishing during the remainder of 2019. The filing does not provide a clear numerical revenue or earnings guidance range.
- Calix expected to expense $0.7 million of remaining U.S. tariffs on previously China-produced inventory in Q3 2019. It stated that it had incurred $3.2 million of tariff-related costs in Q4 2018 and $4.0 million in the first half of 2019.
- Management believed available cash and expected operating cash flows, together with available SVB borrowings, would cover anticipated needs for at least 12 months. It also warned that continued operating losses or insufficient cash generation could cause covenant breaches and require additional liquidity, cost reductions, or reduced investment.
- Key risks include supply-chain transition delays and product shortages, reliance on a small number of contract manufacturers and component suppliers, possible additional tariffs or trade restrictions, customer concentration and variable CSP spending, competitive and pricing pressures, and the company’s history of losses.
- The SVB facility has minimum liquidity and Adjusted EBITDA covenants. Calix was in compliance at quarter-end but disclosed prior covenant amendments and warned that future noncompliance could constitute a default and restrict access to borrowing.
- Contractual obligations totaled $121.3 million, including $67.5 million of non-cancelable purchase commitments, $21.6 million of operating lease payments, and $26.9 million of line-of-credit payments including projected interest. The filing reported no material pending litigation expected by management to have a material adverse effect.
- Calix expected to launch its migrated cloud ERP system in Q4 2019; it disclosed prior delays and higher-than-planned resource requirements. Disclosure controls were assessed as effective at a reasonable assurance level, with no material change in internal control over financial reporting reported for the period.
Important facts for investors to verify
- Whether large-customer and medium-sized ILEC demand stabilizes, and the extent to which customer concentration affects future revenue; one customer generated 17% of Q2 revenue and 15% of first-half revenue.
- Whether supply-chain re-engineering resolves production shortages, supports delivery and margin recovery, and avoids further tariff or transition costs.
- Whether Calix generates enough cash and meets SVB liquidity and Adjusted EBITDA covenants, given $25.0 million of line borrowings and ongoing losses.
- Whether services margins improve as investments in customer success and support continue, and whether systems margins remain resilient after tariff costs.
- Whether ERP migration proceeds as planned and whether purchase commitments, lease obligations, and other financing needs remain manageable.