Calix, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 27, 2020; comparisons are with the quarter ended June 29, 2019. Financial amounts are in U.S. dollars.
Business context and results
Calix provides cloud and software platforms, systems and services for communications service providers. Systems sales accounted for 93% of Q2 revenue. The company reported higher demand, particularly from smaller regional customers, as service providers accelerated some network deployments to address capacity needs.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $119.0 million | $100.3 million | $220.7 million | $189.7 million |
| Gross profit | $56.4 million | $44.7 million | $102.0 million | $83.0 million |
| Gross margin | 47.4% | 44.5% | 46.2% | 43.8% |
| Operating loss | $3.3 million | $4.9 million | $9.7 million | $14.0 million |
| Net loss | $4.2 million | $5.0 million | $11.2 million | $14.8 million |
| Net loss per share, basic and diluted | $0.07 | $0.09 | $0.20 | $0.27 |
| Operating cash flow | Not separately stated | Not separately stated | $3.9 million | $(3.3) million |
At June 27, 2020, cash and cash equivalents were $50.6 million; cash, cash equivalents and restricted cash totaled $51.2 million. Current assets were $158.1 million and current liabilities were $117.2 million. The company had $26.0 million drawn on its $35.0 million revolving credit facility, with $9.0 million available and a 4.1:1 fixed charge coverage ratio; it reported compliance with facility requirements. Total liabilities were $162.1 million and stockholders’ equity was $159.2 million.
Changes versus the prior comparable period
- Q2 revenue rose 19%; systems revenue increased 19% and services revenue 10%. First-half revenue increased 16%.
- Q2 gross margin expanded 2.9 percentage points. Management attributed improvement primarily to favorable product and customer mix and higher-margin platform-related services; systems margin also benefited from continued growth in all-platform offerings.
- Net loss narrowed in both the quarter and first half, despite higher operating expenses. Q2 included $6.3 million of restructuring charges, with no comparable charge in Q2 2019.
- First-half operating cash flow improved from a $3.3 million use to $3.9 million provided. Cash increased by $3.7 million from year-end 2019, while line-of-credit borrowings declined from $30.0 million to $26.0 million.
Outlook, commentary and risks
- Outlook: The filing provides no specific revenue or earnings guidance. Management said existing cash and expected operating cash flows, together with available credit, should meet anticipated needs for at least the next 12 months.
- COVID-19 and supply chain: Near-term demand had been strong as subscribers sought more bandwidth and better Wi-Fi, but management cautioned that economic uncertainty could delay customer spending. Supplier restrictions, component shortages, longer lead times and logistics disruption could constrain product supply.
- Restructuring and product changes: Calix adopted a work-from-anywhere model and reduced its office-space requirements, recording $6.3 million in restructuring charges. It also consolidated legacy product lines, with a $1.8 million component inventory accrual included in systems cost of revenue.
- Commitments and concentration: Inventory purchase commitments totaled approximately $104.8 million, substantially due within one year. CenturyLink represented 15% of Q2 and first-half revenue and 19% of accounts receivable at quarter-end. The company also disclosed a potential minimum revenue-share obligation of up to $15.8 million under a product-development arrangement.
- Other risks: Calix cited customer concentration and credit risk, dependence on limited-source components and third-party manufacturers, tariffs and trade uncertainty, competition, gross-margin variability, and risks associated with its recently migrated cloud ERP system. Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether component availability, supplier lead times and logistics constraints affect deliveries, revenue or costs in subsequent periods.
- Whether customer demand and purchasing patterns remain strong as pandemic-related economic conditions evolve, including at CenturyLink and other large customers.
- Whether gross-margin gains persist after product mix, tariffs, inventory charges and restructuring effects.
- Whether cash generation is sufficient to fund operations and meet the credit facility’s availability and covenant requirements.
- How the $104.8 million of inventory commitments and the product revenue-share arrangement translate into future cash requirements and inventory risk.