Calix, Inc. (CALX) Q1 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the Calix First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Fazioli, VP of Investor Relations. Thank you, Nancy. You may begin.

Thank you, Daryl. And good morning, everyone. Thank you for joining our first quarter 2025 earnings call. Today on the call, we have President and CEO, Michael Weening; and Chief Financial Officer, Cory Sindelar. As a reminder, yesterday after the market closed, Calix issued a news release, which was furnished on a Form 8-K along with our stockholder letter and was also posted in the Investor Relations section of the Calix Web site. Today's conference call will be available for webcast replay in the Investor Relations section of our Web site. Before I turn the call over to Michael for his opening remarks, I want to remind everyone that on this call we will refer to forward looking statements, including all statements the company will make about its future financial and operating performance, growth strategy and market outlook and that actual results may differ materially from those contemplated by these forward looking statements. Factors that could cause actual results and trends to differ materially are set forth in the first quarter 2025 letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward looking statements, which speak only as of their respective dates. Also in this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the first quarter 2025 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead.

Thank you, Nancy. As I stated throughout 2024 and will reiterate as we step into 2025, the industry is at a crossroads. A broadband provider must decide if they remain a speed based network operator that risks commoditization or embrace differentiation through broadband experiences across residential, business and municipal within the communities they serve. The first quarter of 2025 showcased the strength of our experience based broadband business, driven by our unique appliance based platform, cloud and managed services model and industry leading customer success team. A great example of this is Windstream's Kinetic Business as they launched our small business solution SmartBiz to differentiate and win across 18 states. At the same time, our platform continued to expand beyond the consumer and small business segments as we added a new segment, Multi-Dwelling Units with the February release of SmartMDU. That said, as you are all aware, it seems yet again we face a dynamic environment and yet again our unique business model will ensure that Calix and our customers thrive during this time of uncertainty. Our platform enables broadband experience providers customers to simplify operations in their go to market, innovate with unique market differentiating experiences and grow for their investors, members and the communities they serve. The dynamic environment will be defined by three components demand, supply and cost. While dump box providers will look at demand as a function of capital expenditure, I will reiterate that our business model is different. We partner with our customers to leverage our platform to create demand by enabling their sales and marketing teams to reduce churn, grow revenue per subscriber and attract new subscribers. As we look forward through 2025, we will see growing demand and the dynamic environment will not change that. Consumers and businesses have a growing need for broadband experiences and Calix will help our customers meet that demand. Furthermore, subscriber demand for broadband is inelastic. As we saw Netflix earnings last week, which they blew out and forecasted a great future when end consumers are uncertain, they cut out disposable income items, such as taking a flight or eating at a restaurant and stay home and watch a movie. If they're a hybrid worker, they will try to travel to the office less and work at home more. In each of these scenarios, broadband becomes more important and the broadband provider with the best experience wins. In summation, demand is strong and will continue to grow through 2025. Cory, please cover supply and costs before sharing insights on our outstanding Q1 and a view on a strong Q2.

Thank you, Michael. To address the effects of the dynamic environment that we find ourselves in, we have one of the most talented and capable supply chain teams in the industry that learned and adapted rapidly during the pandemic induced supply chain crisis. Furthermore, our appliance based platform model has allowed us to reduce our active SKU count to less than 200, which further reduces the complexity of managing in these dynamic times. We have a diversified supply chain with the manufacturing presence around the world. The data direct relationship we have with our customers combined with our strong balance sheet allows us to make intelligent investments in critical areas such as component inventory and incremental finished goods, thereby, ensuring supply for our customers. Our costs will be affected by this dynamic environment. However, it is difficult to forecast with precision by how much. We will do our best to minimize the impact to our customers. And to the extent we pass on these costs, it will be done strictly on a pass through basis, meaning we will add no profit margin to these costs. Now let's turn our attention to the first quarter results. We saw strong demand during the first quarter and delivered revenue of $220 million, which represented 7% sequential quarterly revenue growth. In addition to the continued strength from our platform cloud and managed services, we had a large sized customer pull forward demand, which contributed to the over-performance in the quarter. As an indicator of strength of our platform cloud and managed services model, Our RPOs grew 4% sequentially to $340 million and increased 39% year-over-year. Our current RPOs were $128 million, up 6% sequentially and up 30% year-over-year. The aforementioned strength led to record non-GAAP gross margin of 56.2% in the first quarter. The sequential increase related to customer mix and our broad -- our BSP customers winning new subscribers as they continued the adoption of our platform. In the first quarter, we added 16 new BSP customers as we continue to focus on landing new footprint. The majority of these customer wins were competitive takeaways and we expect this trend to continue. Our balance sheet metrics remained pristine. We generated double digit free cash flow for the eighth consecutive quarter ending with cash and investments of $282 million even after utilizing $40 million for share repurchases. DSO was an outstanding 30 days, down six days sequentially and down 10 days from the year ago quarter. Inventory turns were 3.6. Aligned with operational discipline, management of our working capital remains a focus to enable consistent quarterly double digit free cash flow. Moving to guidance. For the second quarter of 2025, our revenue outlook is between [$224 million] and $227 million, which at the midpoint would represent a 2% sequential increase in revenue. For the second quarter of 2025, non-GAAP gross margins at the midpoint of our guidance would represent a slight increase from the first quarter and reflects our expectations regarding customer and product mix. For 2025, we anticipate annual gross margin improvement will be within our target financial model of 100 to 200 basis points. Regarding non-GAAP operating expenses, we plan to continue to hold our 2025 operating expenses flat to slightly up compared with 2024 in terms of absolute dollars and they will continue to decline as a percentage of revenue as our revenue grows each quarter. With our improved visibility, the strength of our US centric platform model and increased expected free cash flow generation, the Board increased our common stock repurchase program by another $100 million. Michael, back to you.

Thanks Cory. After highlighting the board's decision to allocate an additional $100 million for our stock repurchase program, I believe there's nothing more to add. Nancy, let's open the call for questions.

Daryl, we're ready to go ahead.

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Ryan Koontz with Needham and Company.

I want to ask about the macro spending environment, what you're hearing from your customers about their CapEx plans for '25? I'd expect that your BXPs are going to remain pretty resilient in this climate, given the inelastic characteristics of broadband. So any kind of commentary you might share with us from kind of your different customer cohorts would be helpful.

Well from a capital point of view, we continue to see they're investing appropriately. And so all of them have plans with their builds, that's the capital part of the build. The second part of capital is around consumer demand. So for example -- and business demand. So if they win a new subscriber, then they have to make a capital investment into the home and put a WiFi system in place and then they monetize it. And from our perspective, as I stated in my opening remarks, we are uniquely positioned unlike the dumb box vendors who really do not add any incremental value in that scenario other than shipping a box and saying, see you later. Our whole business model is built around how do we use marketing analytics, so insights into the consumer to not only drive upsell, cross sell but how do you expand out those new subscribers and win them. And that is what the broadband experience provider is all about how do I attract that new subscriber, which will then drive capital. So do we feel comfortable with that? I think that you see from the fact that in Q1 strong results but more importantly that we're guiding higher in Q2 is because of the fact that we absolutely believe that our business model is the winning model. And as they look to monetize the networks that through the pandemic in the last couple of years they've been investing in we are the best answer to help them win in the markets they serve.

Maybe a quick follow-up, if I could. You mentioned in your letter twice about some customer pull forwards. We saw, I think, an international customer pull forward in Q4 and now your large customer cohort here in Q1. I'm curious if this has anything to do with tariffs or this was purely just budget timing typical things you have in large customers?

Cory can answer, it has nothing to do with tariffs. It's actually just the -- every quarter, we see the inherent lumpiness of the business where one customer has different demands and we move things around to help them out. Cory, any other color on that? No, it had nothing to do with tariffs.

Yes, I agree. It had nothing to do with tariffs. Obviously, Q1 happened without the effect of tariffs. That said, that pull forward, we see enough strength in our business that there's no air gap behind it, no pocket. And so we obviously raised our guidance for Q2 sequentially by 2%. And so we see revenue continuing to grow off this higher base even with that pull forward in by that large customer.

And any customer commentary about -- since the tariffs were enacted, what kind of behaviors they're exhibiting with regards to demand in the near term?

So if you're talking about their demand and what they're seeing from subscribers, there is none. But as I alluded to in my opening remarks as the economy changes, so let's say, to the downside that there is -- we heard the recession word in Wall Street Journal and all these other places, let's say that happens. I keep going back to the fact that broadband is inelastic and highly resilient. So I would suspect, and this is something I've talked to many CEOs about, not only suspect that we'll see ongoing demand, if not a strengthening of demand. One could just look to the pandemic and what happened when everyone stayed home, demand went through the roof. And so you saw that with Netflix. Netflix had a good quarter but more importantly, they forecasted the year is going to be insane for them. Why? People stay home and they watch more movies. And I would say that that's the exact same thing that's going to happen. Broadband will continue to expand both on the consumer and business side, which is why we felt very comfortable with raising our guidance for the year.

Ryan, we see no change in demand in the first part of Q2, it remains strong.

Our next question's come from the line of Michael Genovese with Rosenblatt Securities.

Following up on those last questions. I mean, in the past, you guys have said that you expect to grow sequentially every quarter kind of moving forward without any seasonality hitting the business again. Is that still the take? And I mean, specifically, do you think in the back half of 2025 that we'll see sequential revenue growth?

Yes, Michael, we believe we can continue to grow sequentially from here. Even with the demand pull forward by that large customer, we can continue to grow sequentially moving forward and particularly in the back half of 2025.

And then just in terms of like a '26 growth rate, I think in the past you guys have kind of put what a normalized annual growth rate should be for you guys. Has anything changed there or is that still the same?

We would still guide you to a low double digit growth rate for next year.

And then on the gross margin, I mean, I guess we're seeing some higher tariff costs but your gross margin continues to move up. So are we seeing any impact from the tariffs there and on the gross margin right now? And then just looking ahead, how important is it to you guys that sort of Taiwan and Southeast Asia get deals done? Does that matter or if those reciprocal tariffs fully go into effect, does that make a bigger difference in the future for you guys? How do we think about that?

So for Q1, there was no impact related to tariffs as nothing had been enacted at the time. And obviously, we have inventory on our balance sheet that kind of protects us going into Q2. But in this dynamic environment, it changes almost on a daily basis. So forecasting what will happen in the future is almost impossible.

And not something we're going to do. And so as you heard Cory say, though, is that we will just pass that through with no margin.

And so consequently, the best thing to understand is that we have a fantastic supply chain team that can react rapidly and we will do our best to minimize those costs as we move forward. And at the same time, we've got the strong balance sheet. We're going to take that balance sheet and utilize it by making investments in components and incremental finished goods, which then should help us with obviously supply and playing out the timing here, delay the impact of such tariffs to our customers.

And then just final for me. I mean you guys have always said that in disruptions, you guys would gain ground and gain share. And I'm wondering if that's not what we're seeing here with this extra layer of disruption and that the kind of the cross through the chasm that you guys are doing is really going to shine through, in particular, because of more disruptions in the market. What do you guys think about that?

I think you're spot on. Cory and I were laughing yesterday about the fact that it's not one thing, it's another. That's why I use the word yet again, right? We had a pandemic, then we had the ongoing high interest rates, then we had questions about BEAD, then we had this, that, and the other thing. And so what you are seeing us is taking share. This is absolutely what we're doing. And the way we take share is by educating the executive teams of our customers on where is the market going and how do they do the most important three things for any broadband business, which is reduce churn, grow revenue per subscriber and attract new subscribers. And again, on the -- I was on the road again way too much this quarter, which is another theme that happens every bloody quarter. And I spend a lot of time with CEOs and that is the conversation, not buy a dumb box, not pawn, it's actually how do I grow my business. And we are uniquely positioned. We're the only ones having that conversation with them because we're a good business partner. And that's why unlike everybody else, we have this massive customer success army that spends every single day coaching them on how to use data and analytics to understand where the growth opportunities are, how to improve their operational efficiency through less truck rolls and all the other insights and then how to drive NPS and build the most loyal base of customers. And so you're spot on. This is just another bunch of crappy noise around us that we will plow through. And fortunately, as Cory alluded, he talked about the strong supply chain team. It isn't just a strong supply chain team. It's actually a broad Calix organization that is highly motivated, continues to win cultural awards, understands our purpose and customers who partner with us to succeed. And so we are absolutely taking share.

Our next question's come from the line of Samik Chatterjee with JPMorgan.

Maybe if I can just start with first one on the guidance. You had a strong 7% sequential growth in revenue in 1Q. You're guiding to a modest sequential growth in 2Q. If we can sort of outline what you're embedding in there for the large customer that had a pull forward in 1Q? Are you embedding the similar run rate to continue? I think this [20 million] plus to continue into the second quarter or is the pull forward sort of symbolic of them sort of stepping down in terms of that run rate into 2Q? And maybe a side question on that front, it seems like from the customer segmentation that you have that you are seeing that inherent lumpiness from your customers. So what's giving you the confidence of a lower longer term investment cycle from them, particularly are they giving you more maybe forward visibility into their demand than they were in 2024? Just wanted to understand the confidence despite the lumpiness that you have in terms of those investments continuing. And I have a quick follow-up.

So I'll just talk at the broader level. The organization, one of the things that we're able to do is partner closely with our customers and look at the data, look at their inventory levels, understand their daily demand and actually help them forecast that effectively and we're getting better insight. As we talked about through 2024, there was some inventory changes that we had to work through as lead times went from a peak of 71 months or whatever it was down to -- or weeks down to 12 to 14 weeks. And so we work through that effectively with them and we have very strong visibility on how to work through it. And with regards to the segments, every quarter is lumpy. We get the same question every quarter, which is one is up and the other one catastrophic and is the other one up and the other one is down. And the reality is that we have a lumpy business. So Cory, why don't you talk about, as you said, no air gap in behind.

So Samik, to answer your question directly, we don't expect that large customer to have run rate moving forward. So it's the pull forward. But it's being backed by broadly across our business. You saw the strength in the first quarter of our small business -- small customer segment, that will continue. And I expect there will be other larger customers who will backfill that customer and that's kind of the lumpy nature of some of those large accounts. But for the most part, we're seeing broad based strength across all customer segments and that gives us the confidence as we look at the back half of '25.

And maybe for my follow-up, just in terms of what's the discussion with your customers at this point relative to BEAD looking like. It sounds more like the customers are not really waiting at this point to see any sort of disbursement of funds from BEAD and sort of moving ahead with their plans. But just still want to understand what you're hearing from -- on that front and any expectations that you're seeing in terms of timing there?

No, I would say on BEAD, seeing how -- in the field with customers all the time is that if they had BEAD plans, they're still working through those with the different government channels. And if they didn't have BEAD plans, they're continuing to go forward, right? And then you have some insights on BEAD, Cory?

So I would say on the front end of the curve that front end has slowed down to some extent, waiting for the finalization of rules and the appointment of the NTIA director. But the back part of the curve, they continue moving forward, right? So if they were behind later in their approval cycle, they're not moving forward, gathering the data. And so what you'll ultimately see is more of a compressed front end but the rest of it kind of moving through. And what we understand is the rules are expected to be finalized by the end of May. So this could all go. The bottom line is we aren't counting on BEAD in our numbers. When BEAD happens, whatever it is, we'll do well.

Which goes back to what we've been consistently saying for the last two years, which is it will take a lot longer for it to arrive. It sure is. And when it does arrive, it will go over, it will last longer than anticipated and it will be bigger than people expect.

Our next question's come from the line of Christian Schwab with Craig-Hallum.

I just have one question, guys. Congratulations, though, on great execution and outlook in the current environment. Understanding -- back to BEAD, understanding it will be a significant tailwind eventually at some point. But I got to believe you feel much better about supplying your customer base. I know supply chain, different components, particularly semiconductors, who knows what may happen. But you guys, like other people in the industry, increased your hardware manufacturing capabilities. You guys, in particular, in Michigan with Jabil on the hardware side to make products in the United States for the United States. So do you view that as a fortunate situation today?

So I'll talk to the broader business. One of the things that Cory misspoke about on his comments, he said 200 SKUs, it's actually 150 SKUs, right? And so when it comes to designing out our business and what we've done through the pandemic is we use that as an opportunity to grow as a company and put ourselves into a stronger position. And so -- and in fact, we continue to have an evolutionary approach to our business regularly, which has become better and better. And once again, when competitors are going to have SKUs of add a zero to it or add a zero and times it by 2 or 3 or 4, we are uniquely positioned in this industry to lead and to pivot as required. I mean at the same time, from a manufacturing diversity, we talked about our United States, as you said. And so I think we're in a great position. Anything to add?

Christian, we will be -- we're going to be very adept and move quickly. The United States certainly gives us a capacity to deal with reciprocal tariffs if that should come to pass. But ultimately, manufacturing in the United States comes at a higher cost. And so we will continue to optimize our supply chain as we move forward and move quickly to minimize those costs as they may occur.

Our next question's come from the line of Tim Savageaux with Northland Capital Markets.

I wanted to go back to the large customer category. And I know you've mentioned pull forwards here, but Verizon has been pretty open about plans to increase their fiber homes passed build rate this year. I wonder if that's playing a factor in the strength here and what you might expect out of that large customer for the year given the result. And as an aside, and I know it's still pretty early, any indications on what kind of opportunities Frontier might bring you guys? And I have a follow-up.

Yes, that's the answer. Yes, Verizon continues to be a long term customer. They invested us and sole sourced their fiber network to us ages ago, was it five, six years ago or longer. They've been a great partner and they continue to expand. And as they continue to build out fiber, as others do, we will benefit from that. So that close partnership has yielded great dividends and that will continue. Anything else to say on that?

And it's too early on Frontier. We don't have an idea of what that might look like.

Yes, I figured that might be the case, but who knows. From a follow-up perspective, I'm wondering if you can talk to any opportunities, potential tailwinds coming out of the DZS bankruptcy for Calix.

Well, the first thing is I'd like to express my sympathy for all of the customers who are in that situation. It's crappy, right? When you buy these products, you anticipate that you're going to be able to depreciate it over a 10 to 15-year life cycle and I do not envy any of those customers. Obviously, with Zhone going down a peculiar path, I think we all thought they would go into Chapter 11 and they did the, what I would call, a rather nefarious move of going to Chapter 7 and stripping that -- strip mining that thing and left customers in an awkward position, because it's not even like the asset is worth anything and you can expect to get supported. And so that's the first thing is I don't envy them on their situation. And with that perspective in mind, what we've been doing is speaking to a lot of companies who are in that situation and frankly offering how we help. And so I feel bad about saying the word opportunity, frankly, because of the fact that it feels like you're kicking someone when they're down. How about we are offering a helping hand empathetic to their horrible situation, feel bad for the leaders and their investors, because it's something that they shouldn't have to go through due to the bad actions of a bad actor and we will do everything that we can and we have been. So yes, out of that will come some opportunity. But at the same time, our focus isn't really about how to make hay there, our focus is how to help.

Our last question will come from the line of Scott Searle with ROTH Capital Partners.

Great job on the 1Q results and the second quarter outlook. Maybe, Mike, Cory, to dive in on the macro front, small customers certainly coming back in a meaningful way, it sounds like it's broad based. Could you provide a little bit of color? Is that deeper penetration into existing footprints or is that expanding within those footprints? And Cory, I just want to clarify the comments around BEAD and growth for '26. I think you were talking about double digit growth without BEAD. And then coming back to the dreaded BEAD question again, in terms of when that starts to ramp up, we saw a pause last year ahead of that as customers were evaluating those build plans. As BEAD starts to filter into the mix, whenever that is, whether it's second half of this year or '26. Do the existing programs and build cycles slow down at all or do you expect to continue to see linearity on growth on that front and BEAD just kind of feathers in incrementally?

Oddly, I'm going to answer all those questions. So the first one is small are not coming back, small continue to be strong. And so the business is inherently lumpy. Some customers, we have to move things around from a shipping point of view through the quarter to deal with different -- the vagaries of the business. Small businesses continue to always be strong. I would say that through 2024, what we were -- they were very -- the customers were all strong. It was we were dealing with lead times going from 70 weeks down to 12 to 14 weeks and helping them manage through that. So that's -- now that we're well through that demand remains strong as it was through 2024 and they will continue to grow. On BEAD in our numbers, BEAD is not in our numbers. We do not actually forecast them as growth, because at this point, there's not clarity while we're getting closer, there's not clarity with regards to when BEAD will hit. And then with regards to your question on BEAD and whether or not there would be a pause before the cycles and all those things, I will go back to how I've answered that question in the past and what I just said to one of the other questions, which is if you are not going for BEAD then you're just plowing ahead. If you are going for BEAD, we've been working with you on this for the last two years and you've been planning that into your cycle. So there is no pause in demand because you're not doing anything about it anyways. And so all it is, is that it's an ongoing delay in when you actually feel comfortable when you've been allocated the money and how you do it. And the reason why BEAD is not in our growth numbers is because as we saw with Louisiana, Louisiana's paused some of the disbursement of money. There is still uncertainty. And so fortunately, unlike a lot of other dumb box guys, we have not been forecasting in this -- this in our numbers. We have not pinned our hopes on it because we don't have to. We have a very strong broadband business model that is unique to this industry and we help our customers drive demand by winning subscribers.

And lastly, if I could, Mike, RPOs. They continue at a really torrid pace, up 30% year-over-year, continuing to grow sequentially. You made some comments, I believe, MDU kicked off in the first quarter. You've had growth in small business. I'm wondering if you could kind of maybe stack rank what the biggest drivers are on that front and what the growth rate you think looks like for RPOs over the course of '25 and beyond?

So as you know, with RPOs, we burn them off on a regular -- on a daily basis. And therefore, you have to backfill them and they are indicators of customers signing on three year contracts, right? With regards to stack ranking demand, I would say it goes from left to right based upon maturity. So the strongest demand is continued penetration on the consumer. The second one behind it is what we're doing on small business with SmartBiz, which is our customers came to us and really wanted us to displace their Ubiquity nightmare because that product is an IT based product and doesn't really serve their business well. So we expanded our platform with SmartBiz and made it so that they could provide incremental cyber network management and great capabilities using the existing WiFi appliances and all of the existing clouds. So no incremental complexity, in fact, a radical simplification, which then led to this newest one, where we -- in November, we put out the first release and in February, we put out what I would call the MVP release for Multi-Dwelling Units. And this is the next demand from our customers saying, MDUs are a nightmare. Every MDU is different, whether it's the WiFi footprint, because I can have a triplex or a quadplex, I can have an apartment building with 600 apartments. There's every form factor on the planet. There's a pool in the -- there's an outdoor pool, there's a parking garage. You have real complexity with regards to physical WiFi challenges. And then on top of that, you layer in the business model challenge. And the business model challenge is bulk versus every unit is a residential. And so we are in the process of knocking that challenge down for our customers by radically simplifying it. Again, expanded out our software so that we can cover an MDU, both from a business model point, whether it's resi or bulk but more importantly, through -- or as importantly, from a WiFi footprint point of view, because you can take our appliances, mix and match them infinitely and cover any physical WiFi footprint imaginable with just with a different piece of software and that will allow our customers to do what they've always wanted to do, which is go after MDU business in a very simple way based -- while building upon their existing small business and consumer business. And so that's the third one and the least mature from a market penetration point of view and I would -- that's how I would stack rank those three. And so the great thing about MDU is that MDU also opens up other channels and segments from a channel point of view. So where MDUs will be served by our existing broadband customers, there are a large number of MDU companies out there who just deal with MDU and then they will partner with broadband companies in the back end. And so this, to us, MDU actually represents what I would call a TAM expansion because the addressable market just got larger because we will be going on beyond broadband customers.

I would now like to turn the floor back over to Nancy Fazioli for any closing comments.

Thank you, Daryl. Calix will participate in several investor events during the second quarter. Information about these events, including dates and times and publicly available webcast will be posted on the Events and Presentation page of the Investor Relations section of calix.com. Once again, thank you to everyone on this call and webcast for your interest in Calix and for joining us. This concludes our conference call. Have a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines. Have a great day.