Calix, Inc. — Q3 2016 Form 10-Q
Business and reporting period. Calix provides broadband access systems and software to communications service providers (CSPs). This unaudited quarterly report covers the three and nine months ended September 24, 2016; comparisons are to the periods ended September 26, 2015, unless noted. Calix reported more than 22 million deployed Unified Access ports and over 1,200 customers with specified fiber access networks.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $121.2 million | $112.3 million | $327.0 million | $302.5 million |
| Gross profit | $53.5 million | $53.1 million | $149.0 million | $143.9 million |
| Gross margin | 44% | 47% | 46% | 48% |
| Operating income (loss) | $0.7 million | $0.9 million | $(15.9) million | $(16.8) million |
| Net income (loss) | $0.6 million | $0.9 million | $(15.9) million | $(16.8) million |
| Diluted earnings (loss) per share | $0.01 | $0.02 | $(0.33) | $(0.32) |
Cash flow and liquidity. Nine-month operating cash flow was positive $5.3 million, versus cash used of $1.2 million in 2015. Investing activities provided $14.8 million, primarily from marketable-security maturities; financing activities used $11.7 million, largely for share repurchases. Cash and cash equivalents were $31.8 million and marketable securities were $29.6 million at September 24, 2016, totaling $61.3 million, compared with $73.6 million at December 31, 2015. Calix had no revolving borrowings under its $50 million credit facility, which matures in September 2018, and stated it was in covenant compliance. Management believed available liquidity and facility capacity would meet anticipated needs for at least 12 months.
Balance sheet. Total assets were $323.9 million; total liabilities were $105.4 million and stockholders’ equity was $218.5 million. Calix reported an accumulated deficit of $572.8 million. No debt was drawn under the credit facility at quarter-end.
Material changes and management commentary
- Revenue rose 8% in both Q3 and the first nine months. Management cited stronger bookings and shipments in certain territories, increased customer demand, and ramping turnkey projects; lower revenue from completed Broadband Stimulus-funded contracts partly offset growth.
- Gross margin declined to 44% in Q3 and 46% year to date, mainly due to a higher mix of lower-margin professional services. Management also cited increased product shipments, higher professional-services costs, and warranty charges for two product families. Warranty expense increased by about $2.4 million in Q3 and $3.4 million year to date versus 2015.
- Research and development expense increased 27% in Q3 and 14% year to date, primarily reflecting compensation, outside development work, and prototype costs. Sales and marketing expense increased 12% in Q3 and 3% year to date.
- Q3 and nine-month operating results included a $4.5 million litigation settlement gain, recorded as a reduction to operating expense. Calix also recorded $6.4 million of Occam-litigation defense costs in excess of insurance coverage during the first nine months.
- Calix expects operating expenses to increase in absolute dollars, while declining as a percentage of revenue over time. It expects continued investment in research and development and sales and marketing. The filing gives no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Customer concentration is significant: two customers represented 37% of Q3 revenue and 34% of nine-month revenue. Customer timing, spending plans, and project acceptance can make revenue volatile.
- Turnkey projects can require equipment, subcontractor, and labor costs before customer acceptance and payment; deferred revenue and related costs can shift between periods. Services growth may pressure margins, and deferred costs could require write-downs if unrecoverable.
- The Occam litigation settlement was approved and the case terminated. Calix was not required to contribute to the $35 million settlement consideration for the plaintiff class; separately, it accrued a $4.5 million reimbursement of its out-of-pocket litigation expenses and expected payment by November 22, 2016. No appeal was filed by the October 7 deadline.
- Other key risks include a history of losses, intense competition, CSP capital-spending cycles, dependence on contract manufacturers and constrained component suppliers, product quality and warranty exposure, and international, regulatory, currency, and technology risks.
- Calix maintained a full valuation allowance against net deferred tax assets, except for certain foreign deferred tax assets. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and turnkey project execution continue, and whether customer concentration changes.
- Whether services mix, project costs, and warranty charges continue to weigh on gross margin and cash conversion.
- Receipt of the expected $4.5 million litigation-expense reimbursement and any subsequent legal developments.
- Cash, marketable securities, working-capital demands, and compliance with the credit facility’s financial covenants.
- Progress toward profitability, given year-to-date losses and the accumulated deficit.