Calix, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter ended June 25, 2011; six-month results are also presented. Financial amounts below are in U.S. dollars. The quarter includes Occam Networks’ results from its February 22, 2011 acquisition, limiting direct comparability with 2010.
Business context and financial performance
Calix supplies broadband access systems and software to communications service providers. On February 22, 2011, it acquired Occam in a transaction valued at approximately $213.1 million, paid with cash and Calix stock and equity awards.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $98.0 million | $71.7 million | $169.4 million | $119.9 million |
| Gross profit | $30.2 million | $28.4 million | $50.6 million | $45.1 million |
| Gross margin | 30.8% | 39.7% | 29.8% | 37.6% |
| Operating loss | $(17.5) million | $(2.4) million | $(40.3) million | $(11.0) million |
| Net loss | $(17.6) million | $(3.2) million | $(40.4) million | $(12.5) million |
| Basic and diluted loss per share | $(0.38) | $(0.09) | $(0.92) | $(0.63) |
Revenue grew 37% in Q2 and 41% in the first half, reflecting continued customer demand and shipments from Occam. Reported margins were reduced by acquisition-related inventory charges. Excluding these charges, management reported gross margins of 40.7% for Q2 and 41.6% for the first half.
Cash flow, liquidity and debt
- Six-month operating cash flow was positive $0.9 million, compared with cash use of $0.2 million in 2010. Investing activities used $42.4 million, including $60.8 million net cash paid for Occam and $4.5 million of capital expenditures, partly offset by $22.9 million of securities maturities. Financing activities used $6.2 million, primarily for taxes withheld on vested restricted stock units.
- At June 25, cash and cash equivalents were $18.7 million and marketable securities were $8.9 million, totaling $27.6 million versus $98.3 million at December 31, 2010. Restricted cash was $1.1 million.
- Total liabilities were $87.2 million, including $35.1 million of current and long-term deferred revenue. The company reported no term-loan debt and no borrowings under its $30 million revolving facility; outstanding letters of credit were $2.4 million.
- Management stated that cash, securities and amounts available under the revolving facility should meet anticipated cash needs for at least the next 12 months, based on its current operating plan.
Material changes and unusual items
- Occam acquisition accounting added $50.6 million of goodwill and $97.7 million of intangible assets. The acquisition included $94.4 million of cash consideration (including $33.6 million of cash assumed) and approximately $118.7 million in stock and equity awards.
- Acquisition-related cost-of-revenue charges were $20.0 million for the first half: $14.2 million from inventory fair-value revaluation and $5.6 million from acquired inventory deemed excess or obsolete. Q2 merger-related and other operating expenses were $5.5 million; first-half expenses were $11.5 million.
- Management anticipated additional merger-related operating expenses of $2.4 million in Q3 and $0.6 million in Q4 2011, and did not expect further such expenses in 2012. It did not anticipate further acquired-inventory charges to cost of revenue.
- Acquired intangible amortization increased substantially; total amortization expense was $6.0 million in Q2 and $8.2 million in the first half. Stock-based compensation was $5.3 million in Q2 and $13.4 million in the first half.
Outlook, commentary and risks
The filing provides no formal revenue or earnings guidance. Management expected operating expenses to rise in absolute dollars while declining as a percentage of revenue over time, and planned continued investment in product development and sales capacity. It cited integration and cost synergies from Occam as expected benefits, not assured outcomes.
Key risks include successful Occam integration, customer and employee retention, and realization of expected synergies; continued operating losses and uncertain path to profitability; customer concentration and variable CSP capital spending; revenue timing and acceptance delays, particularly on government-supported RUS contracts; competitive pricing and gross-margin volatility; and reliance on a small number of contract manufacturers and key suppliers. Revenue was concentrated in the United States (about 94% in both Q2 and the first half). The filing also notes that CenturyLink was a significant customer in the first half, without specifying its percentage for that period.
Occam-related shareholder litigation remained pending in Delaware, with California cases stayed; plaintiffs sought unspecified damages. Calix said it believed the claims were without merit but could not assure a successful defense, and certain indemnification obligations could apply. The Wi-LAN dispute was settled and dismissed with prejudice in June 2011. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of reported revenue growth reflects Occam, and how sustainable are underlying customer demand and shipment trends?
- Whether reported gross margins recover as acquisition-related inventory charges end, and how acquired-intangible amortization, product mix and pricing affect margins.
- Whether Occam integration achieves expected cost synergies without further disruption, expenses or customer and employee losses.
- Liquidity trends after the substantial decline in cash and securities, including availability under the receivables-based credit facility and requirements for performance bonds.
- Developments in pending merger litigation, potential indemnification exposure, customer concentration and dependence on limited-source suppliers.