Calix, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 29, 2018; comparisons are to periods ended September 30, 2017. Amounts are in U.S. dollars. The filing is unaudited.
Business context
Calix provides cloud and software platforms, network systems and services to communications service providers. Its strategy emphasizes software-defined access and cloud products. The company sold its outdoor cabinet product line in February 2018 and reported a $6.7 million gain on the sale.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $114.7 million | $128.8 million | $325.8 million | $372.5 million |
| Gross profit | $52.8 million | $44.6 million | $145.8 million | $122.3 million |
| Gross margin | 46% | 35% | 45% | 33% |
| Operating income (loss) | $0.7 million | ($17.3 million) | ($13.4 million) | ($68.8 million) |
| Net income (loss) | $0.8 million | ($17.9 million) | ($13.7 million) | ($70.2 million) |
| Diluted earnings (loss) per share | $0.02 | ($0.35) | ($0.26) | ($1.40) |
- Q3 systems revenue was $105.0 million, down 1%; services revenue was $9.7 million, down 57%. Nine-month systems revenue declined 1% and services revenue declined 63%.
- Management attributed the revenue decline chiefly to lower Connect America Fund activity and reduced professional services tied to a completed turnkey project. Lower services mix, improved systems mix and service-process efficiencies supported higher reported margins.
- Operating expenses were $52.2 million in Q3 and $159.1 million for nine months. Nine-month results included $6.0 million in restructuring charges and the $6.7 million product-line sale gain.
- Operating cash flow was positive $5.2 million for the first nine months, versus negative $28.6 million in the prior-year period. Investing cash flow was positive $4.8 million, including $10.4 million of sale proceeds and $5.6 million of capital expenditures.
- Cash and cash equivalents were $53.0 million at September 29, 2018, versus $39.8 million at December 31, 2017. Current assets were $161.6 million and current liabilities were $136.7 million.
- Calix had $30.0 million outstanding under its revolving credit facility, the full amount then available. Total liabilities were $157.0 million; stockholders’ equity was $144.1 million. The credit facility maturity was extended to August 7, 2020.
Material changes and unusual items
- Revenue declined 11% in Q3 and 13% for the nine-month period year over year; the U.S. remained the largest market, contributing 87% of Q3 revenue.
- One customer represented 21% of Q3 revenue and 19% of nine-month revenue. Management said a major customer’s acquisition continued to delay and reduce its purchases.
- Calix adopted Topic 606 in 2018 using the modified retrospective method. Adoption increased reported revenue by $0.9 million in Q3 and $4.8 million for nine months; prior-year results were not restated, limiting comparability. Adoption also increased opening accumulated deficit by $1.8 million.
- The company recognized $6.7 million from the outdoor cabinet divestiture; Clearfield paid $10.4 million cash and assumed related warranty liabilities and open purchase commitments.
- A 2018 restructuring plan was completed by June 30. Management expects annualized savings of more than $20 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is stated in the provided filing text. Management expects research and development spending to remain relatively consistent near term, sales and marketing expense to increase in absolute dollars, and general and administrative expense to remain elevated until the SaaS-based ERP project is completed in the first half of 2019.
- Management believes cash, expected operating cash flows and the credit facility will fund operations and capital expenditures for at least twelve months, but cautions that ongoing positive cash flows are not assured and additional liquidity may be needed.
- U.S. tariffs on products manufactured in China are expected to significantly pressure gross margin and cash flow in coming quarters. Calix is re-engineering its supply chain, expects the impact to diminish after the first half of 2019 if mitigation succeeds, and warns that execution could take longer or cost more than planned.
- The company reported compliance with its amended credit covenants at quarter-end, but disclosed a prior adjusted quick ratio covenant default that was waived and warned future noncompliance could restrict borrowing or trigger default. The facility is secured and subject to borrowing-base limits.
- Contractual obligations totaled $137.2 million, including $76.7 million of non-cancelable purchase commitments, $24.6 million of operating leases, $33.8 million of projected line-of-credit payments including interest, and $2.2 million of equipment financing payments.
- Management reported no legal proceedings expected to have a material adverse effect and stated disclosure controls were effective at the reasonable-assurance level. Key risks include customer concentration, CSP spending variability, competition, tariffs and supply-chain dependence, and the company’s history of losses.
Important facts for investors to verify
- Whether the major customer’s acquisition-related purchasing delays continue, and the customer’s share of future revenue.
- Whether Calix can offset tariff costs through supply-chain changes on the stated timetable without disruption or significant extra expense.
- Progress toward sustained positive operating cash flow and continued compliance with credit-facility covenants and borrowing-base requirements.
- Whether improved gross margins persist as customer, product and services mix changes, and how much of the reported improvement reflects lower services activity.
- Comparability of 2018 and 2017 results given Topic 606 adoption and the nonrecurring product-line sale gain.
- Execution of the restructuring savings plan and completion costs or timing for the ERP project.