Business context and reporting period
Calix, Inc. provides broadband access systems and software for communications service providers (CSPs). This Form 10-Q covers the quarter ended September 28, 2013, and the nine months then ended; comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $103.6m | $81.3m | $288.6m | $238.8m |
| Gross profit / margin | $47.4m / 46% | $33.5m / 41% | $131.0m / 45% | $100.5m / 42% |
| Operating income (loss) | $(0.01)m | $(7.1)m | $(10.4)m | $(21.3)m |
| Net income (loss) | $0.5m | $(7.1)m | $(10.8)m | $(21.8)m |
| Diluted earnings (loss) per share | $0.01 | $(0.15) | $(0.22) | $(0.45) |
- Gross margin excluding intangible amortization was 48% in both 2013 comparison periods, versus 44% in 2012, which management attributed primarily to product and customer mix and cost reductions.
- For the first nine months, operating cash flow was $36.8m, compared with $24.8m in 2012. Investing cash use was $5.5m, principally capital expenditures; financing provided $0.7m. Cash and cash equivalents increased $32.1m to $79.1m.
- At September 28, current assets were $207.4m and current liabilities $98.3m. Restricted cash was $1.0m. The company reported no borrowings or outstanding letters of credit under its new facility.
- Deferred revenue was $63.4m, up from $55.1m at year-end 2012. Accumulated deficit was $503.3m.
Material changes versus prior periods
- Revenue rose 27% in Q3 and 21% for the first nine months. Management cited higher shipment volumes among existing and new customers, improved macroeconomic conditions, international expansion, and recognition of revenue on completed RUS-funded projects.
- Q3 returned to a small net profit from a $7.1m loss a year earlier; the nine-month net loss narrowed by about $10.9m. Q3 income included a $0.6m income-tax benefit, while operating results were approximately break-even.
- Operating expenses increased: nine-month R&D rose 21% to $60.0m, sales and marketing rose 10% to $49.5m, and G&A rose 23% to $24.3m. Management linked increases to staffing and compensation, including the Ericsson fiber-assets acquisition, and other facility and professional costs.
- Operating cash flow improved, supported by noncash charges and working-capital movements, including increased deferred revenue and lower receivables and inventory. Nine-month stock-based compensation was $15.0m and depreciation and amortization totaled $7.8m, in addition to $13.9m of intangible-asset amortization.
Outlook, commentary, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management expects operating expenses to rise in absolute dollars but decline as a percentage of revenue over time, and plans continued investment in product development and sales and marketing.
- Management said available cash, cash equivalents and credit availability should meet anticipated needs for at least 12 months. The July 2013 Bank of America facility provides up to $50m of revolving capacity, matures in July 2016, is secured by substantially all assets including intellectual property, and carries financial covenants; Calix reported compliance at quarter-end.
- Revenue timing remains subject to CSP spending cycles, customer concentration, seasonality and delayed recognition on government-funded projects. The company also cites competitive pricing, product development and acceptance, supply-chain reliance, international expansion, and integration of acquired assets as risks.
- An unresolved class action concerning the Occam merger seeks unspecified damages. Calix disputes the allegations; a summary-judgment hearing was scheduled for December 6, 2013. The company may have indemnification obligations to former Occam directors and officers.
- The Petaluma office lease was extended through February 2019, adding $5.6m in minimum future payments. Calix reported no off-balance-sheet arrangements. It maintained a full valuation allowance on most deferred tax assets and disclosed $13.6m of unrecognized tax benefits.
- Management assessed goodwill and reported no impairment indicator at quarter-end. Disclosure controls were concluded to be effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether revenue growth and gross-margin gains persist, particularly as RUS-funded project revenue is recognized and customer/product mix changes.
- Whether Calix can achieve sustained operating profitability; Q3 net income was small and included a tax benefit, while the first nine months remained loss-making.
- Cash-flow quality and working-capital trends, including deferred revenue, deferred costs of revenue, receivables and inventory.
- Credit-facility availability, collateral and covenant compliance, and any future borrowing or letters of credit.
- Developments in the Occam merger litigation and any resulting damages or indemnification exposure.
- Progress integrating Ericsson assets and growing international sales, alongside the resulting expense and execution risks.