Calix, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 26, 2015; comparisons are to the periods ended September 27, 2014. Calix sells broadband access systems and software to communications service providers.
Key financial results
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $112.3 million | $105.8 million | $302.5 million | $289.6 million |
| Gross profit | $53.1 million | $45.1 million | $143.9 million | $126.3 million |
| Gross margin | 47% | 43% | 48% | 44% |
| Operating income (loss) | $0.9 million | $(3.7) million | $(16.8) million | $(17.5) million |
| Net income (loss) | $0.9 million | $(3.8) million | $(16.8) million | $(17.8) million |
| Diluted EPS | $0.02 | $(0.08) | $(0.32) | $(0.35) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1.2) million | $14.5 million |
Balance sheet and liquidity
- At September 26, cash and cash equivalents were $36.2 million and marketable securities were $57.7 million, totaling $93.9 million, down from $111.7 million at December 31, 2014. Current assets were $197.1 million versus current liabilities of $66.5 million.
- Total liabilities were $87.6 million; stockholders’ equity was $256.6 million. The company had no borrowings or outstanding letters of credit under its $50 million revolving credit facility; the facility matures July 2016, subject to possible extensions. Calix reported compliance with its covenants.
- Cash and cash equivalents declined $12.6 million during the nine-month period. Investing activities used $1.4 million, including $5.9 million of capital expenditures offset by net maturities of securities. Financing activities used $9.7 million, including $11.1 million of share repurchases.
- Accounts receivable rose to $48.2 million from $30.7 million at year-end. Inventory was $43.8 million, down from $46.8 million. Accumulated deficit was $547.4 million.
Changes and management commentary
- Revenue increased 6% in Q3 and 4% for the nine months. Management attributed growth to stronger bookings and shipments in certain territories, partly offset by lower revenue from completed Broadband Stimulus-funded contracts.
- Gross margin improved by four percentage points in both comparison periods, primarily due to more favorable product and customer mix. Q3 services costs also declined.
- Research and development expense rose 11% in Q3 and 13% year to date, mainly from added employee compensation. General and administrative expense rose 20% and 27%, respectively, driven in part by legal fees and other professional services. Management intends to continue investing in product development and sales and marketing.
- Management expects operating expenses to increase in absolute dollars but decline as a percentage of revenue over time. It said existing cash, securities and available credit should cover anticipated needs for at least 12 months. No specific revenue or earnings guidance is provided in this filing.
- Management noted that turnkey projects may require upfront equipment and materials purchases, with customer payment deferred until project completion. Revenue and related costs may consequently be recognized over longer periods, increasing working-capital needs and period-to-period volatility.
Risks, contingencies and unusual items
- Occam litigation: A long-running shareholder action remains unresolved, with trial tentatively set for April 2016. Calix says it cannot estimate a reasonably possible loss. It expects defense costs to exceed remaining D&O insurance coverage; Jefferies-related indemnification is not expected to be insured, and potential obligations could be material. Plaintiffs’ valuation expert asserted that Occam shares were worth $7.77–$9.65 more per share than the merger consideration; defendants’ expert concluded value was below the consideration. These are opposing expert opinions, not an established loss amount.
- Profitability and cash generation: Despite Q3 profitability, Calix remained loss-making year to date and used operating cash. It cautions that results fluctuate with customer purchasing and capital spending, project completion and revenue recognition, product mix, and seasonality.
- Customer and market exposure: Most revenue was domestic (87% in Q3 and 89% year to date). One customer represented at least 10% of Q3 revenue; the filing does not identify that customer in the cited disclosure. Risks include customer concentration, competitive pricing, CSP capital-spending changes, and the wind-down of government-supported programs.
- Capital allocation: The board authorized up to $40 million in repurchases. Calix bought 1.45 million shares for $11.1 million year to date at an average $7.69 per share; $28.9 million remained authorized.
- The company maintains a full valuation allowance against most U.S. deferred tax assets. The new revenue-recognition standard was expected to become effective for Calix in Q1 fiscal 2018; its impact was still under assessment.
Most important facts for investors to verify
- Whether improved gross margins and Q3 profitability can be sustained as product mix, pricing, and service revenue change.
- Cash conversion and receivables collection, particularly given the $17.4 million year-to-date increase in accounts receivable and negative operating cash flow.
- Customer concentration, future CSP spending, and revenue timing as government-funded projects wind down and turnkey projects progress.
- Developments in the Occam litigation, expected uninsured indemnification and defense costs, and any eventual loss estimate.
- Use of the remaining repurchase authorization alongside operating cash needs and the July 2016 credit-facility maturity.