Calix, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 27, 2015; comparisons are with the quarter ended June 28, 2014. Six-month figures cover the six months ended on those dates. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Calix sells broadband access systems and software for communications service providers (CSPs). Its Unified Access products support fiber- and copper-based networks. The company reported more than 20 million deployed ports and over 1,000 customers with fiber access deployments. U.S. customers generated about 92% of Q2 revenue and 91% of first-half revenue.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $99.1 | $98.0 | $190.2 | $183.8 |
| Gross profit | $48.3 | $44.3 | $90.8 | $81.3 |
| Gross margin | 49% | 45% | 48% | 44% |
| Operating loss | ($5.8) | ($3.9) | ($17.7) | ($13.8) |
| Net loss | ($5.8) | ($4.0) | ($17.7) | ($14.0) |
| Basic and diluted loss per share | ($0.11) | ($0.08) | ($0.34) | ($0.28) |
- Cash flow: First-half operating cash use was $6.7 million, versus $0.5 million in the prior-year period. Investing activities used $1.1 million, compared with $50.9 million, largely reflecting lower net purchases of marketable securities. Financing activities used $1.4 million, including $3.4 million of share repurchases.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $99.5 million at June 27, 2015, including $4.5 million held by foreign subsidiaries. The company had no borrowings under its $50 million secured revolving facility, which matures in July 2016, and reported covenant compliance. Management expected available liquidity and facility capacity to cover needs for at least 12 months.
- Balance sheet: Current assets were $194.9 million and current liabilities $64.2 million. Total liabilities were $85.5 million; accumulated deficit was $548.3 million.
Material changes versus the prior comparable period
- Revenue grew 1% in Q2 and 3% in the first half. Management attributed growth to stronger bookings and shipments across territories and revenue recognized as customers accepted projects funded by broadband stimulus programs.
- Gross margin improved four percentage points in both comparison periods, mainly from favorable product and customer mix. Inventory write-downs partly offset the improvement: $1.8 million in Q2 and $2.8 million in the first half of 2015, primarily for slow-moving or older products, including products acquired from Ericsson.
- Operating losses widened despite higher gross profit. First-half R&D rose 14% to $44.8 million, sales and marketing rose 9% to $39.0 million, and G&A rose 31% to $19.6 million. Higher staffing and compensation drove much of the increases; G&A also reflected Occam-litigation legal costs.
- Accounts receivable increased to $42.0 million from $30.7 million at year-end 2014. Inventory declined to $40.7 million from $46.8 million. Cash and marketable securities together declined to $99.5 million from $111.7 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no numeric revenue or earnings guidance. Management said operating expenses were expected to increase in absolute dollars but decline as a percentage of revenue over time, and planned continued investment in R&D and sales and marketing. Results were described as in line with expectations.
- Government-funded projects: Revenue from American Recovery and Reinvestment Act broadband stimulus contracts was declining as projects neared completion. RUS subsequently allowed completion through July 31, 2015 for existing contracts it had approved before June 30; project acceptance and revenue-recognition timing could affect results.
- Customer and market risks: CSP capital spending, long and unpredictable sales cycles, competition, customer concentration, product mix and limited purchase commitments can drive quarterly volatility. One customer represented at least 10% of Q2 revenue; the filing does not identify that customer in this disclosure.
- Occam litigation: A shareholder action related to the 2011 Occam acquisition remained pending. In July 2015, the court allowed plaintiffs to add former counsel Wilson Sonsini as a defendant but denied adding Jefferies; no new trial date had been set. Calix said it could not estimate a reasonably possible loss. Potential indemnification and defense costs may exceed D&O insurance; Jefferies indemnification payments are not covered by insurance. Plaintiffs’ valuation expert estimated a per-share value shortfall of $7.77–$9.65 for approximately 15.1 million class shares, while defendants’ expert valued Occam shares below the merger consideration. These are litigants’ expert positions, not a loss estimate by Calix.
- Capital allocation: A $40 million repurchase program was authorized in April. Calix repurchased 435,000 shares for $3.4 million at an average $7.76 per share; $36.6 million remained available. The program is discretionary and may be modified or ended.
- Other items: The company maintained a full valuation allowance against most U.S. deferred tax assets. It identified no material off-balance-sheet arrangements and reported disclosure controls effective at a reasonable-assurance level, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth and the improved gross margin persist after stimulus-funded project work winds down, and whether inventory write-downs continue.
- Whether operating expenses and cash burn can be controlled while Calix continues R&D and sales expansion.
- Collections and customer concentration: receivables rose materially, and a customer accounted for at least 10% of Q2 revenue.
- Developments in the Occam litigation, including trial timing, potential indemnification exposure and costs not covered by insurance.
- Use of the repurchase authorization and liquidity available after operating needs and any potential litigation payments.