Calix, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited quarterly results; fiscal Q4 ended December 31, 2019. Amounts below are in U.S. dollars.
Business context
Calix provides communications service providers (CSPs) with network access and subscriber-premises systems, cloud and software platforms, and related services. Its strategy centers on the Calix Cloud, EXOS and AXOS platforms, including the Revenue EDGE and Intelligent Access EDGE offerings. The company reported approximately 1,600 customers; small CSPs accounted for 70% of 2019 revenue. CenturyLink was the only customer above 10% of revenue, at 15%.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $424.3 million | $441.3 million | Down 4% |
| Gross profit / margin | $187.9 million / 44.3% | $197.4 million / 44.7% | Profit down $9.5 million; margin down 0.4 percentage points |
| Operating loss | $15.4 million | $18.5 million | Loss narrowed |
| Net loss | $17.7 million | $19.3 million | Loss narrowed |
| Net loss per share | $0.32 | $0.37 | Loss per share narrowed |
| Cash from operations | $4.7 million | $3.6 million | Improved |
| Capital expenditures | $13.4 million | $10.4 million | Increased |
Operating cash flow less capital expenditures was approximately negative $8.7 million in 2019. Cash, cash equivalents and restricted cash totaled $47.5 million at year-end, compared with $50.3 million a year earlier. Working capital was $28.3 million, down from $31.1 million. Total assets were $316.8 million and stockholders’ equity was $154.0 million. The company had an accumulated deficit of $702.6 million.
At December 31, 2019, Calix had drawn the full $30.0 million under its Silicon Valley Bank revolving facility. It reported covenant violations of the minimum adjusted quick ratio at September 28 and December 31, 2019; the lender waived both defaults. In January 2020, Calix repaid and terminated that facility and entered a Bank of America asset-based revolving facility of up to $35.0 million, including a $10.0 million letter-of-credit sublimit, maturing in January 2023. Availability is subject to borrowing-base and other conditions, including a $5.0 million minimum availability requirement.
Material changes and unusual items
- Revenue fell primarily because of lower systems demand from CenturyLink, Frontier and medium-sized incumbent local exchange carriers, partly offset by growth among smaller customers and demand for cloud and software offerings. CenturyLink’s share of revenue declined to 15% from 18% in 2018 and 31% in 2017.
- Systems revenue decreased 3% to $393.2 million; services revenue declined 12% to $31.1 million, mainly on lower deployment services tied to government-funded customer deployments. Systems represented 93% of revenue.
- Tariff and related costs were $6.2 million in 2019 versus $3.2 million in 2018. Excluding those costs, systems gross margin was 47.9% in 2019 versus 47.4% in 2018. Calix moved substantially all manufacturing outside China, but the transition caused product shortages and revenue below plan in Q1 2019; the broader realignment was expected to continue through mid-2020.
- Operating expenses declined, principally reflecting earlier restructuring. 2019 included a $2.5 million charge to retire licensed software no longer required by Verizon. 2018 included a $6.7 million gain on the sale of the outdoor cabinet product line and $5.7 million of restructuring charges.
- FY 2019 quarterly revenue rose from $89.4 million in Q1 to $120.2 million in Q4. Q4 operating income was $1.5 million and net income was $0.5 million, versus an operating loss of $5.2 million and net loss of $5.6 million in Q4 2018.
Outlook, risks and contingencies
Calix provided no numerical revenue or earnings guidance in the filing. Management said it expects research and development spending to remain relatively consistent with post-restructuring levels in the near term and expects to increase sales and marketing investment. General and administrative expense was expected to rise initially in 2020 as the new cloud-based ERP system entered service. Management stated that existing cash and expected operating cash flows, together with available Bank of America borrowings, should cover anticipated needs for at least the next 12 months.
Key risks include continued operating losses and uncertain cash generation; customer concentration and CSP capital-spending variability; intense competition and adoption risk for newer platforms; supply-chain dependence on a small number of manufacturers and limited-source components; tariffs and potential disruption from the coronavirus outbreak in China; and credit-facility availability and covenant compliance. The company reported no legal proceedings expected to have a material adverse effect. Its auditor and management concluded that internal control over financial reporting was effective as of year-end.
Commitments included $52.5 million of non-cancelable inventory purchase obligations due within one year, $20.7 million of undiscounted operating lease payments, and financing arrangements that included a software-development revenue-share obligation. The filing estimated total contractual obligations at $125.6 million; the revenue-share arrangement may require a true-up if minimum payments are not met.
Important facts for investors to verify
- Whether revenue growth from smaller CSPs and strategic software and cloud offerings can offset continuing declines among larger or legacy customers.
- Whether the manufacturing transition is completed on schedule and tariffs, component shortages or coronavirus-related disruptions affect supply, margins or customer deployments.
- Cash burn, capital spending and the assumptions underlying management’s 12-month liquidity assessment.
- Borrowing-base availability and covenant compliance under the Bank of America facility, given the prior waived covenant defaults.
- The size, timing and potential true-up of the revenue-share commitment, and the sustainability of quarterly profitability after Q4 2019.