Calix, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited quarterly results; Q4 ended December 31, 2011. Amounts below are in U.S. dollars unless noted.
Business context
Calix sells broadband access equipment and software to communications service providers, supporting fiber- and copper-based networks. Its Unified Access portfolio includes access platforms, optical network terminals, and network-management software. The Occam Networks acquisition closed February 22, 2011, expanding the product portfolio and customer base; Occam’s results are included from that date.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $344.7 million | $287.0 million |
| Gross profit / reported gross margin | $119.5 million / 35% | $112.7 million / 39% |
| Operating loss | $52.3 million | $17.5 million |
| Net loss | $52.6 million | $18.6 million |
| Net loss per share, diluted | $1.15 | $0.65 |
| Cash provided by operating activities | $14.6 million | $9.2 million |
| Cash, cash equivalents and marketable securities at year-end | $38.9 million | $98.3 million |
| Working capital at year-end | $77.7 million | $127.0 million |
Revenue increased 20% year over year, primarily reflecting the expanded customer base following the Occam acquisition. Gross margin declined as reported, in large part because of acquisition-related inventory revaluation and acquired-intangible amortization; excluding merger-related expenses and intangible amortization, management reported gross margin of 43%, versus 41% in 2010. Research and development expense was $67.7 million, sales and marketing $55.6 million, and merger-related and other operating expense $12.9 million.
Q4 2011 revenue was $91.6 million, compared with $91.7 million in Q4 2010. Q4 2011 gross profit was $37.1 million; operating loss was $5.2 million and net loss was $5.2 million, versus Q4 2010 operating loss of $1.1 million and net loss of $0.7 million.
Operating cash flow was positive, but cash and investments fell by $59.4 million during 2011. Investing activities used $36.4 million, including $60.8 million for Occam net of cash acquired and $7.4 million of capital expenditures, partly offset by marketable-security maturities. Financing activities used $5.6 million, primarily reflecting taxes withheld on vested restricted stock units. The company reported no outstanding borrowings at year-end; its $30 million receivables-based revolving facility had $2.8 million of letters of credit outstanding and matures June 30, 2013.
Material changes versus prior period
- Revenue rose from $287.0 million to $344.7 million, with management attributing the increase primarily to the Occam acquisition. CenturyLink remained the largest customer, but its share of revenue declined from 29% to 20%.
- Reported gross margin fell from 39% to 35%, while operating and net losses widened. FY 2011 included $20.0 million of merger-related cost of revenue, including inventory revaluation and excess-inventory charges, and $12.9 million of merger-related and other operating expenses.
- Cash and investments decreased from $98.3 million to $38.9 million, alongside the cash portion of the Occam purchase. Total assets rose to $359.5 million, including $116.2 million of goodwill and $80.0 million of intangible assets.
- Year-end common shares outstanding increased to 47.8 million from 38.7 million, reflecting, among other items, shares issued in the Occam acquisition.
Outlook, risks and unusual items
- Management said delays in converting Broadband Stimulus awards into shippable orders, reduced traditional-network investment by a major customer, competition, weak macroeconomic conditions, and fiber shortages affected the second half of 2011; it expected some of these factors to continue into the first half of 2012. No numerical revenue or earnings guidance is provided.
- Management expects operating expenses to increase in absolute dollars, while declining as a percentage of revenue over time. It stated it did not anticipate further merger-related expenses.
- Material risks include dependence on CSP capital spending and government-supported programs, long sales cycles and limited purchase commitments, customer concentration, competitive pricing, reliance on contract manufacturers and sole- or limited-source components, and uncertainty in integrating Occam. CenturyLink represented 20% of 2011 revenue.
- Occam-related shareholder litigation remained pending, with damages sought in an unspecified amount. Calix said it intended to contest the cases; it also may have indemnification obligations to former Occam directors. The filing identifies no other legal proceeding expected to have a material adverse effect.
- The company reported an accumulated deficit of $464.2 million and a full valuation allowance against deferred tax assets. Management said existing cash and available credit were expected to meet anticipated needs for at least 12 months. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Key investor verification points
- Track whether stimulus-funded customer projects convert into orders and revenue, and whether the anticipated first-half 2012 headwinds persist.
- Assess underlying margins apart from Occam-related charges and acquired-intangible amortization; verify inventory levels, reserves, and warranty accruals.
- Monitor customer concentration and CenturyLink purchasing trends, including the effects of its merger with Qwest.
- Review cash consumption, working-capital needs, letters of credit and revolving-facility availability, and the company’s stated liquidity runway.
- Follow the Occam litigation and potential indemnification exposure, and evaluate acquisition integration and the carrying value of goodwill and intangible assets.