Calix, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter ended June 30, 2018; six-month results compared with the period ended July 1, 2017. Amounts are USD unless stated otherwise. Fiscal 2018 results reflect adoption of Topic 606; prior periods were not restated.
Business context and financial performance
Calix provides cloud and software platforms, network systems, and services to communications service providers. It is focusing on software-defined access and cloud offerings and sold its outdoor cabinet product line in February 2018.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $111.7m | $126.1m | $211.1m | $243.6m |
| Gross profit / margin | $50.9m / 46% | $43.3m / 34% | $92.9m / 44% | $77.7m / 32% |
| Operating loss | $2.9m | $18.7m | $14.0m | $51.5m |
| Net loss | $2.8m | $19.0m | $14.5m | $52.3m |
| Diluted loss per share | $0.05 | $0.38 | $0.28 | $1.05 |
Revenue mix: Q2 systems revenue was $102.6m, down 4%; services revenue was $9.1m, down 51%. First-half systems revenue was $195.9m, down 2%; services revenue was $15.3m, down 66%. The filing attributes the declines mainly to lower Connect America Fund activity and, for the first half, the prior-year completion of a large turnkey project. Traditional systems sales also declined, partly offset by traction in AXOS and Calix Cloud.
Cash flow and liquidity: First-half operating cash use was $2.7m, compared with $21.4m in the prior-year period. Investing cash provided was $7.4m, including $10.4m from the product-line sale, less $3.0m of capital expenditures. Financing cash provided was $3.9m. Cash and cash equivalents were $48.2m at June 30, 2018, up from $39.8m at year-end 2017. Current assets were $148.8m and current liabilities $120.8m. Calix had $30.0m outstanding—its full SVB revolving credit facility—maturing August 7, 2019.
Other balance-sheet metrics: Inventory was $20.0m, down from $31.5m at December 31, 2017; accounts receivable was $69.5m, down from $80.4m. Total liabilities were $141.3m and accumulated deficit was $680.1m.
Material changes and unusual items
- Revenue declined 11% in Q2 and 13% in the first half year over year, while gross margin improved to 46% and 44%, respectively. Management cited customer and product mix, a smaller share of lower-margin services, improved systems mix, and services process efficiencies.
- Topic 606 adoption increased reported revenue by $2.7m in Q2 and $3.9m in the first half versus the prior accounting method. Without Topic 606, reported Q2 revenue would have been $109.0m and first-half revenue $207.2m; reported net losses would have been $3.9m and $16.1m, respectively.
- The February outdoor cabinet divestiture generated $10.4m cash proceeds and a $6.7m gain. Clearfield assumed related warranty liabilities and open purchase commitments; Calix agreed to solicit orders for the transferred product line for 15 months.
- First-half restructuring charges were $6.1m, primarily severance and termination costs. Management said the 2018 plan is expected to produce annualized savings of more than $20m.
- Calix recorded $3.3m of accrued excess and obsolete inventory liabilities at June 30, 2018. It also reported $62.3m of inventory purchase commitments due within a year and a separate $17.5m minimum commitment for engineering services through 2022.
Outlook, commentary, and risks
Management said existing cash, expected operating cash flows, and the SVB facility should fund operations and capital expenditures for at least the next 12 months. This is contingent on operating performance and continued covenant compliance; the filing gives no specific revenue or earnings guidance. Management expects R&D spending to remain relatively consistent near current levels, sales and marketing expense to increase with variable compensation and the October 2018 user conference, and G&A expense to remain elevated until the SaaS ERP project is completed in the first half of 2019.
Management noted that its largest customer’s acquisition has disrupted spending plans since late 2017 and may continue to delay or reduce purchases. That customer represented 21% of Q2 revenue and 17% of first-half revenue. The company remains loss-making and warns that lower cash generation could limit borrowing, prompt spending cuts, or require additional capital; availability and terms of other financing are not assured.
Key disclosed risks include CSP spending variability and customer concentration; project acceptance delays and services cost overruns; competition and product adoption; reliance on contract manufacturers and constrained component supply; and potential U.S. tariffs on products made in China, which Calix said could materially affect costs and margins. The company had previously breached its minimum adjusted quick ratio covenant for November 2017; SVB waived that default and covenants were amended in February 2018. Calix reported compliance at June 30, 2018, but cautioned that future noncompliance is possible. It also entered into new San Jose office and Utah data-center leases; total operating lease commitments were approximately $24.8m. Management reported no litigation expected to have a material adverse effect and stated disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the largest customer’s acquisition-related delays persist and how concentrated revenue remains.
- Revenue and gross-margin trends on a comparable basis, accounting for Topic 606’s effect and the much lower services mix.
- Cash use, covenant headroom, borrowing-base availability, and repayment or refinancing plans for the $30m facility due in August 2019.
- Whether restructuring delivers the stated annualized savings and whether the company can sustain lower operating losses without impairing product investment.
- Exposure to China tariffs, component supply constraints, inventory commitments, and the new lease and engineering obligations.