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spk09: Greetings and welcome to the Calix third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the brief prepared remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jim Finucchi, Investor Relations with Calix. Sir, please go ahead.
spk06: Thank you, Operator, and good morning, everyone. Thank you for joining our third quarter 2022 earnings call. Today on the call, we have Calix Chairman Carl Russo, President and CEO Michael Weaney, and Chief Financial Officer Corey Sindelar. As a reminder, yesterday after the market closed, Calix issued a news release and filed an AK with the SEC, noting that our stockholder letter had been posted in the investor relations section of the Calix website. Today's conference call will be available for webcast replay in the investor relations section of the Calix website. Before I turn the call over to Carl and Michael for their opening remarks, I want to remind everyone 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 actual results made different 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 third quarter 2022 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 non-GAAP measures. With that, it is my pleasure to turn the call over to Carl. Carl?
spk04: Thank you, Jim. Robust demand continued in our third quarter, which resulted in a 37% year-over-year increase in revenue and a 65% year-over-year increase in RPOs. This growth continues to be driven by broadband service providers that are providing broadband as a service rather than just a dumb pipe. We expect this trend to continue, and many of our aggressive BSC customers are using the economic slowdown as an opportunity to gain share by delivering an exceptional subscriber experience to those who have never received one. On the supply front, the Calix team again outperformed, and we benefited from a pull forward of inventory, which provided us with the resources to meet more demand and enter the fourth quarter in a better position to meet our customers' subscriber growth. Higher revenue in the third quarter, combined with the revenue guide for the fourth quarter, puts us on a pathway to deliver our third consecutive year of 25% growth.
spk02: The disruption that we have spoken of for years continues to pick up speed. Our medium-sized customers are growing as a percentage of our business.
spk04: And while we do not normally forecast bookings mix, I expect we will see more than 90% of our bookings in the fourth quarter come from our all-platform cloud software associated systems and services.
spk02: These two observations combined with our consistent performance indicate that our transformation is nearly complete.
spk04: And thus, it is appropriate that I step up to the board and have Michael lead our evolution going forward.
spk05: Michael, it's all yours. Thank you, Carl, for the opportunity to follow you and lead Calix into the next phase of our evolution. Last week at Connections, our annual customer success and innovation conference, we shared that Calix is entering the third phase of our corporate journey, which we define as an ecosystem in partnership. In this phase, we are building on 12 years and more than a billion dollars of investment in our platforms to help our service providers transform their business. At Connections, we demonstrated that the maturity of our platforms allow our customers to innovate at a speed that has never been seen before in the broadband industry. In closing, the enormous opportunity we are capitalizing grows every day. The Calix team is committed to executing with excellence to help our customers simplify their business, excite their subscribers, and grow their value to shareholders or members and their community. With that, let me hand it back to Carl. Carl? Thank you, Michael.
spk02: This is the last time you will hear me say, operator, let's open the call for questions.
spk09: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Paul Silverstein with Cowan. Please proceed with your question.
spk07: Thanks, guys. Michael, congrats. You've got big shoes to fill. I think you'll make clear in your remarks, but I've got to ask because it came up last night after you reported from some clients. The shift to software, I heard you say that you're 90% or you expect 90% of bookings to come from all platforms. But the RPO numbers sequentially and the deferred revenue numbers sequentially for cynics out there, wasn't consistent, I'm not overly concerned, but didn't appear consistent with the overall growth. Any thoughts you could share in terms of software cloud progression as a portion of revenue and, you know, that speaks to future revenue growth? And just to be clear, the pull forward you referenced was inventory not taking demand in the future periods.
spk04: So let me start with the end. The pull forward was inventory. Ordinarily, that word's a scary word. But in our supply challenge times, being able to pull forward inventory was a good thing. And you saw that in the outperformance on revenue, by the way. That also actually partially answers the first question you had, which was, we had significant revenue growth on the hardware side because of the pull forward on supply. but I think I'll let Michael speak to the nature of the platform business in general and how bookings go, and maybe, Michael, you can share your experience.
spk05: Yeah, it can be monthly. We were up 65% year on year, and we continue to close contracts, so that growth will be at variable levels. I'd like to follow up on this last quarter.
spk06: Last quarter, we had an 18% growth, which was one of our greatest growth quarters.
spk05: Yeah, and coming out of Connections, It's very clear that our customers understand the opportunity ahead. And as we help them move into new markets and change how they address their subscriber opportunity through incremental files and services and everything that we're doing with the suites, there's no doubt that there is a significant growth opportunity ahead with those customers.
spk07: All right. One last question by May. I trust by definition. Thank you, buddy. I trust by definition visibility into next year in terms of the current strength that you're seeing, that you continue to have good visibility, and that the strength you're seeing is not being benefited much, if at all, by the coming disbursement of funds from the various broadband legislation in the U.S. and abroad. I trust that's still a trickle, not even a strength. But that's a question.
spk05: You're absolutely correct, Paul. That's a trickle that will take a decade to roll out.
spk07: and your visibility into next year, Michael?
spk05: Continue to be strong, as Corey will talk about, as we've provided with guidance. We'll continue to grow at an incremental level every single year. You're talking about demand.
spk07: I am talking about demand. I'd love to ask you about margins as well, but I don't want to incur the wrath of my peers who are waiting in line.
spk04: So demand visibility is, we believe, quite strong. And I would echo having attended Connections and invested just a few minutes on stage. The excitement is just off the charts.
spk07: All right. And Carl, with respect to margins, I'll apologize to everybody else for answering this question. It sounds like this is the start of meaningful margin recovery and back to that very fine train you'd established up until you got gobsmacked along with everybody else by the increase in freight logistics, EMUs, et cetera.
spk04: As we said, so the answer is, as we think, this is the beginning of recovery. I'm excited to see it just starting to turn up and our guidance would indicate for Q4 it might get a little more of a turn up. The way I think about that, which is back to the 100 to 200 basis points in 2023, makes me feel that much better about us achieving that. Keep in mind that we've always said that if the headwinds slow, the mix of the business will start to take over again and margins will start to expand. And I think that's the way I would characterize it. Without going too long on a discourse into supply chain, there's still lots of issues out there, even though we're seeing some improvements.
spk07: No, Carl, you did just say 200 to 300, not 100 to 200. No, 100 to 200.
spk04: All right.
spk16: I'll pass it on.
spk04: If I said 200 to 300, I was mistaken. If you heard 200 to 300, you were mistaken. Thank you, Carl. I figured this thing, our last conference call, you and I have to get it went in. Thanks, Paul.
spk09: Thank you. Our next question comes from the line of George Notter with Jefferies. Please proceed with your question.
spk15: Hi, thanks a lot, guys. And Michael, congrats on the promotion, and we look forward to working with you. Hey, I guess I wanted to ask about Brightspeed. I noticed that your medium-sized customers doubled roughly sequentially. off of what has been a pretty consistent revenue run rate from that medium-sized customer category historically. So I guess I'm wondering if that is BrightSpeed coming into the mix here. Any sense of that?
spk04: Well, so the answer is BrightSpeed is coming into the mix, but it's not the driver of that. It's more medium-sized customers. But be clear, BrightSpeed is now accepting deliveries as they position themselves. to take over, which they did at the beginning of October. So it started coming into the mix in the third quarter, but it's not the primary driver. It is simply we are seeing more medium-sized customers start to step into what we're doing. And as we've discussed, as you know, George, for many years, when the small segment was growing seemingly at 90%, which it didn't quite make it to, We said that as the disruption continues, you'll start to see larger customers take it off. That's what that's all about. It's not any one customer.
spk15: Got it. Okay, great. That's helpful. And then, you know, last quarter, if I go back to the earnings call, you guys talked about $100 million buyback. I guess I assume that you might have, you know, engaged some of that buyback program during Q3. I didn't see it looking on the cash flow statement. Any thoughts on the buyback program at this point?
spk06: Yeah, George. Like we talked about last quarter, when we decided to go work with the board and put that buyback in place, the company stock was at a much different level. We were looking at our cash requirements. We look at it on every quarter at the board level, at a strategic level. We were getting to a point where we had no immediate needs for cash. And all of a sudden, you're sitting there looking at a $30 share price going, we don't know where this ends. But at some point, our stock becomes a better alternative use for cash than our existing needs of just having it ready for the business. And so we went ahead and through that capital allocation process, decided to go ahead and put a program in place. By the time it got put in place, obviously the shares had recovered to a point where, We're going to leave the cash on the balance sheet, and we'll continue to revisit this every six months or so. And so that's kind of where we're at. So, yes, the shares are kind of recovering. We didn't have an opportunity to step in and buy shares.
spk15: Got it. Okay. And then just last one. It's a quick one. At this point, what is the sort of impact you're getting through the gross margin line? associated with higher input costs. I think at one point you guys told us 400 to 700 basis points. I'm just curious what that is now. Thanks a lot, guys.
spk06: Yeah, so I wouldn't change that range, George. It's still kind of a net number. And as we stated in the stockholder letter, you know, the improvement in margin this quarter was largely more of a reflection of product mix. We finally solved some of those golden screw problems on our access product line, and we were able to ship more of that inside the quarter. And that product mix then obviously helped us with the overall margins.
spk04: And to set it prospectively, George, I'm going to ask Corey a question. Are you done with expedites?
spk06: Or are you still doing them? Well, inside the quarter, we had, again, another component issue. And so we had to expedite, actually put some product on airplanes, which is always expensive. So we're still dealing with them. We are expediting less. You can see that our inventory balance has taken a nice step upward during the quarter, still within the range of what we had said to outset from the very beginning of a terms ratio of somewhere between 3 and 4. We're at 3.1, so that's good. And with that amount of inventory, obviously, we'll have to expedite less and hopefully, you know, avoid all that air freighting.
spk08: Thank you, Corey. Thanks, guys.
spk09: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from Michael Genovese with Rosenblatt Securities. Please proceed with your question.
spk03: Great, thanks very much. Congratulations on a good quarter guys. Now obviously hardware is in an extremely strong cycle and seems like it's going to stay in a strong cycle. My question is for your sales cadence and your sales cycles, is there a phenomenon where customers tend to order hardware first and there's a software pull through later? Is that a good way to think about it? Could you just talk about that a little bit, please?
spk05: That's a great way to think about it. In fact, as we've talked about over the last few years, the way we're going in the marketplace is that once they put, for example, a dairy farm into the home, whether it's a home or small business, that's where the service provider then has a unique opportunity, which has never happened before, which is going way beyond connectivity, where they start to sell services, manage services. and experience IQ, and if you watch Connections, you will see that we continue to expand that portfolio opportunity for broadband service providers. We now serve at 8, 9, 10, and 11. All of those are monetizable opportunities for the broadband provider and then in turn for us. So absolutely, that's the right way to think about it.
spk03: To even dig down on that deeper, I mean, if we looked at a new customer like Brightspeed, which I understand isn't the main reason for the 6% growth of Medium as a category, as a percentage, but if we're just taking them as an example, would you expect that in the beginning the mix is more towards hardware and that later the mix is more towards software? Is that fair?
spk06: Absolutely, yes. No, that's great. That's absolutely right.
spk03: Okay. know i want to ask a little bit more about the gross margin in the supply chain and these are really small points so maybe this question is like too you know too cute or something but um you know you know corey said there was a supply chain issue in the quarter but you still did 50.7 i think uh you know 50 60 basis points above consensus uh and then the guide for the next quarter is better than the guy you gave last time but it's the midpoint is down you know very slightly sequentially So just can you talk about really the fourth quarter versus the third quarter supply chain? Is it the same? Is it improvement? Are you guiding that there could be more surprises? And if there aren't, maybe you'd be at the higher end of the range. What are you thinking there?
spk04: I think the question is marginally too cute, but not too cute, Mike. So we're going to answer your question. So let me go back and frame it in the macro sense, which is, Again, if the headwinds even start to abate, the mix of the business will start to statistically push it. On any one quarter, you better be careful, but let me now ask Corey to add comments to that.
spk06: Yes, so Mike, I think you kind of cut it too finely. There is still enough variability inside the quarter that you're going to be able to see various things that, for example, you know, I entered into or agreed to $5 million worth of PPVs to solve a problem that we have. So those PPVs or purchase price variances are still coming through. And I characterize the whole supply chain as this. In the last 91 days, things have improved in certain areas. But those areas that were those component parts that were problematic remain problematic and we're still chasing them. So there's still call it a dozen or so parts that make it very difficult for us to get everything that we want. And so when we're buying them, we're buying them. We're paying up for it. And in certain areas, it's getting better. So lead times remained extended, albeit I've heard for the first time one vendor reduced their lead time from 52 to 26 weeks. So there's some evidence of it getting better. On the logistics side of the house, Rates have come down, continuing to come down. They're still not pre-pandemic levels. The port congestion seems to have cleared up in Long Beach, but rail and trucking seems to still be kind of a mess. So it's getting better. It's not where it needs to be. And so then you're still looking at the fact that we're having to build more products. But I would say the increase in inventory that you're seeing It's really a reflection of all of the work that we did in the last six quarters. We're finally getting some of those purchase commitments that we made six quarters ago, and they're actually starting to show up. So it's a combination of that. A lot of the longer-run lead orders that we bought, solving some of the golden screw problems, and a little bit of improvement on the shipping logistics.
spk03: Right. That's a great caller. Thank you. Lastly, I just want to ask Carl and Mike a quick question each. So, Carl, you're not going to be on the next conference call, it sounds like. What are you going to spend your time? I mean, you're 100% focused on Calix or other things, and what are you going to be spending your time doing?
spk04: I will not have prepared comments. I will attend next quarter's conference call just because I'll miss it if I don't. I'm just kidding. But I will be on the conference call in case there's a particularly refined question that you ask, Mike. And to your point, look, I've been focused on the board and the future and those pieces. The leadership team has been executing. This is just a natural next step of what we've been doing. This has been a 20-plus year endeavor. I'm not going anywhere. As the company now speeds its evolution, I will certainly be on the board and the chair of the board. That said, I have lots of interests, but my first interest will remain Calix.
spk03: Great, great. I'm glad to be able to talk again on the next call. And Mike, how would you describe this? Is this a new era, a start of a new era for Calix? Is this Continuity, I suppose it could be both. So let me stop talking and hear how you would characterize what this change signals for Calix.
spk05: It doesn't signal anything other than a continuation of our pursuit of our strategy. So as I announced at Connections, we've entered the third phase of the company. And that third phase is where, now that our platforms have reached a level of maturity, We can now shift some of our innovation efforts into how do we continue to provide ecosystem and manage services that really speed the success for broadband service providers. So from my perspective, I would say from the leadership team's perspective and our teammates, there is no change.
spk08: This is just a continuation.
spk16: All right, fantastic. Again, congratulations on the new role and congratulations on the performance. Thank you very much.
spk09: Thank you. Our next question comes from the line of Ryan Kuntz with Niedermann Company. Please proceed with your question.
spk12: Hi. Congrats, Michael, on the appointment and to the team on great results here. I think we've hit most of the key points, but I wanted to ask about international. It sounds like that was down. I know last quarter you mentioned that you had a UK customer that brought on board another vendor. And just to set expectations accordingly to the investor community, how should we think about the prospects there over the next 12 months on the international front? Thanks.
spk06: Yes, let me start off with this one, and then I'll ask Michael to comment on market. But what I'd highlight is the fact that if you remember a year ago, had kind of this anomaly where we had shipments that i think got stuck in the suez canal and then really didn't show up and so q3 a year ago we had like two quarters of revenue end up going to city fiber um so hence europe was very strong this year it's more normalized so the decrease that you're seeing is really just a function of that kind of prior year anomaly um and then michael do you want to just comment on our thoughts on international
spk05: Yeah, we have expanded in the UK market. We made that very public, which allows our clouds and everything that we're doing from a broadband innovation point of view to benefit the folks in the UK. And we have a very pragmatic approach to our international expansion while optimizing the opportunity in the North American markets.
spk12: That's helpful. Are you looking at other markets in Europe there, and how do you see the opportunity developing now that the Chinese suppliers are moved aside? Are you seeing a return to any kind of pricing normalcy there in mainland Europe?
spk05: The primary focus remains the North American market, and as I said, we've expanded pragmatically into the UK, and then we'll assess it on a go-forward basis. We really do want to optimize everything in North America at this point.
spk04: Well, and also keep in mind, Brian, that The Huawei replacement opportunity was a price-driven acquisition by certain service providers that, if they're looking for a replacement, are probably going to be very price-sensitive or price-driven. And that's not the dimension upon which we compete.
spk05: So, Michael, do you want to add color? Yeah, this is something you've heard Carl say many times on many calls. which is our whole focus is on finding strategically aligned customers. People who understand that this is not a dump pipe, that speed as a go-to-market is something that leads to quantization, and they're looking for how do I build out a completely different go-to-market. In fact, I talked a lot about that at Connections, is that the broadband market is right. It's a perfect opportunity. for them to actually capitalize on their infrastructure by expanding into experiences. And we are the only company in the world that has cracked the code in this.
spk04: And we had a packed house of aligned customers at Connections.
spk12: Right. That's great. I wanted to ask if I could on the cable TV front and see how those opportunities were developing. Are you seeing more of an interest in MSOs shifting some of their capex over to fiber. It's been a small minority historically. How should investors think about that opportunity in the short to medium term? Oh, absolutely.
spk05: There's not a cable provider out there that is not assessing or transitioning over to fiber because it's a huge opportunity for them to make a shift.
spk08: Absolutely. It's a growth opportunity. Got it. Thanks much.
spk09: Thank you. Our next question comes from the line of Tim Savageau with Northland Capital Markets. Please proceed with your question.
spk14: Well, Carl, it seems appropriate we get perfect pronunciation of the last name on your last call. I wanted to, so well done to the operator. And I wanted to kind of take the discussion to a higher level given the circumstance here. And congratulations on the results for sure. And going all the way back to the Q1 call, Carl, you termed the business recession-proof. And I'd say to date, that's looked like a fairly decent forecast given your performance. I wonder if we might get, as we've gone through the year here and you look into year-end and next year, kind of an updated view of from you about the overall kind of interplay between your business, the sector you operate in, and the macro, because it has seemed very resistant. And then as a sort of small coda to that, on the supply front, are we finally starting to see that dynamic that I think we also discussed in the Q1 call of slackness elsewhere in the tech supply chain, say auto consumers starting to benefit you guys?
spk04: Okay, so first of all, let me give credit where credit is due. There was absolutely no coaching of Melissa, our operator, who knew you and knew you well and nailed the pronunciation on her own. So it is merely a coincidence. Not one through coaching. Secondly, on the recession proof piece um that that has turned out to be true and now it's up to corey and michael to continue that no just kidding um the recession proof piece actually i'm going to set this up and then i'm going to ask michael to give you some color from connections because michael obviously chats with many many customers there are customers that go at this market as a pipe And I believe that they will be subject to the recession. And there are those that are going after it as a service. And I believe those will benefit from the recession because in down times, there is share that shifts. And the share that we're focused on is the broadband service provider share. So I think Michael can share some anecdotes with you to give you some sense for what's going on and why our business, this recession group, it's not because of our business, it's because of our customers.
spk05: Michael, do you want to share some stories? Sure. The CalX customers who are thinking well beyond speed as a go-to-market and how do I engage with my subscriber and transform not only the subscriber's home, the small business, but also the community have a huge opportunity ahead and they are very bullish with regards to the coming years. They're making the investments in their communities and then they The thing that they're focused on is that that's just the start. The next step is how do I actually monetize on top of the existing infrastructure investment? And that is all through incremental services. So if you watch connections, one of the things I talk a lot about is consumer behavior. And the consumer really doesn't understand speed, but what they do understand is they understand reliability, they understand the service provider cares about the community, And then they also understand the service provider who has a plethora of services that actually transform their home. And each one of those are monetizable and become an excellent opportunity to build loyalty, eliminate churn, and grow revenue.
spk04: So hopefully that helps, Tim. On your question about inventory, you know, look, I want to echo what Corey said and amplify it. We're seeing some benefits now. frankly, more due to us being after this for the last six, eight, 10, 12 quarters. Our purchase commits, the data that we have on our customer demand, all of that is giving us the ability to perform better than what the macro is. That said, we've said before there were some green shoots last quarter, but you still have countervailing effects to those green shoots. I do believe over the next four quarters, as you see in our letter, We think this is going to continue to mitigate, but I think it's going to be a gradual thing over four quarters. Corey, feel free to add any comments.
spk06: I agree, and I would say, Tim, we're not seeing that now. So it's not like the consumer segment's weak and so all of a sudden the networking space is strong. That inherently will take time if you just think about it. The demand decreases in those other segments. We'll have to start with wafer starts. By the time you run them through, wafer starts getting them down the line, having them built, having them put on cards, put them on boards, into products, putting them on the water.
spk08: It's measured in quarters, not weeks. Got it.
spk14: And I appreciate that. If I could just follow up. Another kind of high-level question here. But as I see discussion of the third phase of the business around ecosystems and partners. And of course, we see, you know, Carl's role evolve to the board level. And congrats to both you guys on that. You know, should I should we infer from there a more of a strategic and externally focused view from Calix here going forward, as you ponder what to do with your $4 billion market cap? Or is it business as usual?
spk04: So let me start the front end of that, but I'm going to ask Michael to amplify platforms and partners. As you and I have discussed before, Tim, the platforms open up a very interesting opportunity to bring things to market, as you heard Michael say, at an incredible pace. But it also opens up the opportunity every time you look at something that, you know, in the old world as a complex systems business, you would look at acquiring because you have to integrate it. We don't have to. And so from a strategic standpoint, I am certainly going to stay focused on both laterally and deep what's going on. But I would dissuade you from thinking there are any inorganic opportunities that are in front of mind. As a matter of fact, I'm going to turn it back over to Michael. I think our focus is on the rapid evolution of that ecosystem. So Michael, if you could add some anecdotes to that.
spk05: Sure. As I said at Connections, the industry really stops because they did they have not built a platform at a few services we demonstrate and are demonstrating every single day that by integrating with partners who have great technology that our customers see as a market opportunity that we can bring things to market at a rate that's never been seen before in telco in fact in the broadband market this has been the biggest issue you know they really struggle going beyond a pipe selling speed we have solved that problem and that's evidenced by the fact that we released smarttown wi-fi which is our aid service really smart business smart business is fascinating because there's 28 million smart businesses in north america and while everybody else looks at that as i put connectivity into the business we actually see it radically different we see that you give a great experience that's reliable and then we see a whole range of services that we can build with partners on top of it things like incremental cyber security services foot traffic analysis marketing demographics all this information so for us every single time we land it's just another opportunity to find the right partner that our customers identified as an opportunity and integrating it into our platform for them and then for the partner group this is where i'm spending a lot of my time partners in the past would have to one-off integrate with every broadband service provider We have explained to them by integrating with us once, they have the opportunity to reach thousands of broadband service providers and tens of millions of homes and businesses. And so they are flocking to us because it's a huge opportunity ahead. And then last piece, you know, we also announced two additional services that are 10, which is Arlo security, allowing a small service provider to do full home security and then a service around reliability for home office, home office IQ. And what you should think about that is that that's just the start. We did 8, 9, 10, 11. Every quarter, we will be on our 91-day cadence and releasing more. I do want to provide one clarification. To go back to your recession comment, Carl said that the pipe provider actually would suffer from the recession. I would actually expand that out and say that the company who is only focused on speed-based marketing as a broadband service provider, is not just open to the recession. More importantly, they're open to significantly losing market share to a Calix partner broadband service provider who understands experience. This is the paradigm shift that we're seeing, not just recession.
spk08: They are going to fall prey to a Calix customer.
spk14: Okay, thanks very much, and congrats once again. Thanks, Jen.
spk09: Thank you. Once again, it's Star 1 to join the question queue. Our next question comes from the line of Fahad Najam with Loop Capital. Please proceed with your question.
spk11: Good morning, and thank you for taking my question. Mike, congratulations on the promotion as well. Let me start off with, if you can double-click on the supply chain, I suspect some of your suppliers like Broadcom have increased pricing, but on the other hand, memory pricing is coming down pretty hard sequentially. Can you walk us through the dynamics in the supply chain? Apart from improving availability, are prices or pricing beginning to normalize?
spk06: No. Generally, no. In fact, we're still looking at facing price increases come January 1, so quite contrary to that. So, no, I have not seen prices come down in any material way. On components. On the freight side, we said yes, that you're starting to see pricing come down on your list, pricing, freight logistics.
spk11: But is it your expectations over the next four quarters that pricing for components will begin to normalize?
spk04: So normalize, meaning stop going up, those are mine. But if you mean normalized going back to like the good old days where silicon went down every quarter, no, not in the next four quarters.
spk11: Okay. And then lastly, if we look at the improving gross margin outlook driven by just, I guess, trade costs coming down and your ability to ship more and thereby driving higher revenue and benefiting from volume, your R&D spend is pretty much tied to your gross profit line. At some point, I suspect your gross profit is going to grow faster than your ability to invest in R&D. How are you thinking about it? Your historical 19% of gross profit, is that still your outlook or do you think that there is an opportunity to revisit that framework?
spk04: Let me start where you started, which was The notion of gross margin going up because of logistics or other pieces, let me be clear. As pricing headwinds slow down, the mix in our business, so the mix towards more platforms, software, et cetera, is what will drive the margin expansion, not logistics costs or lower component costs. So all that has to happen, as we've said, Each quarter is at the... At some point in time, the headwinds just slow down. We should start to see some margin expansion, and that's what we are saying. So that's the first piece. On R&D, our OpEx investment model remains the same. As a reminder, it's 30 points of product gross profit. That said, your question about growth, At these rates of growth, can we invest? That's our target. We're going to do our level best to do it.
spk05: Yeah, and let me expand on that. The executive leadership team has their most important commitment and goal is that as we continue to go through this quarter and subsequent quarters, that we invest right up to what's available. We would be fools to not do that because the growth opportunity ahead is so significant. And because of the fact that our platforms are now at a level of maturity that allows us to expand at an innovation level that has never been seen before, slowing down at this point would be wrong.
spk04: Now, one last comment on that, Fahad. In this quarter, because of the late in the quarter pull forward of inventories, That additional revenue came unattended by OpEx because you can't react to that. So in this quarter, we fell behind, but given the opportunity to satisfy more of our BSP demand, that's what we chose to do. But as a model, we're going to stay focused on staying on that model.
spk11: Appreciate that. One more clarification. I think you mentioned that 90% of your bookings in the fourth quarter are going to come from all platforms and cloud services and software. What was the bookings as a percentage in this quarter and the last quarter, if you can share, give us some trend line where that is going?
spk04: Yeah, in Q2, we said that it crossed over 80%. You can assume that it was probably above 80% in Q3, but we've been doing this sort of across the quarters, as you may remember. I am saying as the departing CEO that it's going to be over 90%. That's my guess. I'm pretty sure I'm right, but we'll see if that in fact happens. Either way, my point was at this point we are so close that what used to be Calix, we called Calix 1.0, is so far in the rearview mirror that the transformation of Calix from what was way back when a systems company to now a platform company and now evolving into an ecosystem company, we're there. That was my only point of the comment.
spk08: Appreciate the clarification. Thank you.
spk04: Yep. Thanks, Rob.
spk09: Thank you. Our next question comes in the line of Scott Searly with Roth Capital. Please proceed with your question.
spk01: Hey, good morning. Thanks for taking my questions. Congrats on the quarter. Mike and Carl, congrats on your new roles going forward.
spk08: Thank you.
spk01: Hey, maybe to just dive in and get some clarification, looking at mix and growth going forward, earlier in the call I think you addressed the mix of medium-sized customers had a big step up in the quarter. Just want to clarify there that it sounds like it's a pretty diverse mix of customers that are contributing to it, and it's not a one-time event. We should expect this to continue going forward, if not expand as we go into 2023. And then looking at some of the, I guess, new connections, new lines, Axos had a big quarter up, I think, 118% year-over-year. Could you talk a little bit about that dynamic in terms of what's going on there? Are pre-existing customers starting to adopt the platform? Is this all new line-driven growth, both of which are good, but trying to get a little bit more color on what you're seeing that was driving that performance in the most recent quarter, and then I had a couple of follow-ups.
spk04: Yeah, let me just answer your medium-sized customer piece, and I'll hand the AXOS piece over to Michael. Be careful on the medium-sized piece. It is a trend, for sure. It is going to be noisy. So you're going to see some quarters where it's up, some quarters where it's down. But in general, if you think again about disruptions, you're starting to see larger customers take this on, But by the way, larger customers can also be noisier in and of themselves on shipments because it's a much smaller set of medium-sized customers than it is the hundreds in the small set. So hopefully statistically that makes sense to you, Scott. Yep. And for AXOS growth, et cetera, I'm going to turn that over to Corey and Michael.
spk06: Yeah, so Scott, on that piece, I talked about that a little bit earlier. Inside the quarter, what contributed to the margin expansion was mostly product mix. Part of that was catching up on some XGS cards that we had built up a pretty big backlog on that we saw the gold screw for, and it led to some of that AXOS overperformance.
spk01: Okay. Thanks. Helpful. And then if I could, to kind of jump in on the expansion of the ecosystem, virtual services, You know, Carl, you're talking about the excitement coming out of Connections. And, Mike, you're talking about basically the growing ecosystem and partnership opportunity there. A couple things. For starters, I was wondering if you could update us on maybe how you're thinking about attach rates, what you're seeing in terms of the existing product offering with Arlo Certified Bark. And then expanding beyond that, Mike, you know, again, going back to the partnership and it sounds like that ecosystem in general. I think earlier I was thinking about this more as a very – confined and curated experience in terms of what you offer to broadband service providers. But it sounds like it might be growing beyond that in terms of the interest level and the number of partners that are out there on that front. So does it become something bigger because of the level of interest in terms of the menu of services that you can go to your pre-existing installed base? Thanks.
spk04: Yeah, so real quickly, just as a preamble, as you remember, Scott, from our conversation, at the ecosystem partner level, we said it's very early days. We had a small number of customers taking it up, but they were starting to be very successful with it. And that was before Connections. And then at Connections, I would say a very different reception, just another step up, but now I'm going to turn it over to Michael and let him fill it all in.
spk05: So the first thing is, I'm going to go back a little bit to the medium, right? What you're seeing is that with this transformation of the market that we're creating, In the past, and I talked a lot about this at Connections, is that the big companies have the advantage. They no longer have that advantage. It's actually small and medium-sized companies are smaller becoming medium. They have a huge opportunity because we've seen a massive democratization of the access to technology. That's what our platforms do. In fact, I would argue that a smaller medium customer will be significantly more agile in the marketplace versus a big company because of all of the technology and innovation we're bringing. So as you look forward, this kind of goes back to the previous question around recession proofing, right? If there's a company who's just a pipe company and that's all that they offer in the market, a Calix customer will run circles around them. The second part of it to address your curation of experience is it's an interesting word to use, the curation. And actually, to some extent, represents what we do. What we do is we, again, I talked about this connection, we take what today is an over-the-top service or a DYI service. And in the past, the service provider had no opportunity to be part of that value chain because they added no value. None. They would just say, my value is put it on my bill. That's not value, right? And what Calvix has done with our platforms in this third phase is take any one of those services and we basically put it in what we call like a foundry and we hardened it. We put privacy support. marketing insights, all these different capabilities onto that service and convert it into a fully managed experience where it goes from do it myself to now the service provider can control everything, have insights into it, and offer it to the end subscriber, whether that's a small business or a home, as a fully managed service where they add a lot of value. And that is great for their brand, but it also completely transformed the consumer experience. And this is really the opportunity. They put that infrastructure in place. And now to your point, they have a huge laundry list of experiences, but more importantly, they understand that subscriber and can really position the right ones for the right subscriber at the right time. So I would not call it, if you're using the word curation to dictate that it's a small number, I would actually say no. If you're saying they're curated because of the fact that we do a lot of research with our customers, On what should come to market and be created into a managed service, yes. But it doesn't dictate volume. And as evidenced by us doing 8, 9, 10, and 11, this is just the beginning, to be really clear. A Calix partner broadband service provider is going to completely dominate their market because of the fact that their offerings are going to be unlike everybody else.
spk01: Perfect. Very helpful. And by the way, Mike, I was going for what was behind door number two there in your description. I think I heard this correctly, but I just want to clarify, Corey, on the R&D front, the target has been 30% of gross profit. Even though you're spending below that, that's still kind of the target that you're trying to work towards. It's just in a high-growth environment. It's been difficult to get there. Thanks again, guys. Great job on the quarter.
spk08: Thank you, Scott. Thank you.
spk09: Thank you. Our next question comes from the line of Christian Schwab with Craig Hallam Capital Group. Please proceed with your question.
spk13: Hey, guys. Carl, congratulations on successfully on a many multi-year transformation of a company, which a lot of us had our doubts along the path and journey that you would get to. So congratulations on that. And, Michael, congrats to you on the opportunity to steer the ship forward. I don't have any other questions other than those statements. They've all been asked. Thanks, guys. Thank you, guys.
spk04: Thanks, Christian. Christian, let me use that as an opportunity to say thank you to you for hanging with us throughout and to all the analysts on the call. It's taken a bit of patience, but it has been appreciated very much by us.
spk08: So thanks for saying that.
spk09: Thank you. Our next question comes in line of Paul Silverstein with Cowan. Please proceed with your question.
spk07: Well, after that, I almost feel guilty asking, but I have to ask. While we're complaining how blue the sky is for you and your future, what, other than the obvious in terms of macro and supply chain, et cetera, company specific, what do you worry the most about? What could go wrong? where could you, notwithstanding how fine you seem to be doing, where could you be doing better?
spk04: Are you asking me, Paul? Are you asking Michael? Who are you asking?
spk07: I'm asking whoever would like to actually respond to the question, Carl. You or Michael or both.
spk04: Well, I'm never at a loss for words, so I'll answer it. From my perspective, When you're functioning as we are, focused on our customer success, as you've heard Michael, I think very eloquently speak to just the curating opportunity and thinking through every day how we're doing this. The number one focus here is on execution and making sure that we grow at the rate that the opportunity is growing. From a macro standpoint, I'm not trying to have rose-colored glasses, but To me, this is very much about our execution. I do not see, you know, major things that you could plan for. You know, if there's an outbreak of war or there's a common strike, I mean, these are not things you could plan for. So this is very much about us executing on that path, buying together with, for example, R&D investment and making sure that we meet the evolution rate for innovation that our customers can uptake. There's all these things, but they're very much inside of the domain of what we have been doing and executing to.
spk08: So I do not see an exogenous event that threatens us in that way. Michael, did you turn out anything?
spk05: No, I agree. The focus for the executive team is actually execution. And I think we've demonstrated over the last quarters that we can execute. And so we're doing a good job of bringing on new people. Our culture continues to evolve. I would say, you know, as we, one could say you worry about culture, but that's not how we think about it. We actually think about culture as better, better, never best is our, is our cultural focus, which means all these new people are actually a huge opportunity for us to be self-reflective every single time and say, Hey, I brought this from my own company. You should think about this and constantly, constantly changing as a leadership team, changing as teammates so that we just keep getting better. So, no, I think it's an exciting opportunity ahead.
spk04: And that better, better, never best also translates into the customer success environment with ideas coming from customers. As you saw Michael elucidate on stage, how many of the ideas that we're working on come from kernels of ideas from our customers?
spk05: And that's a really important point. Literally, every single one of the big announcements that we did at Connections, and there were a lot. You would have seen all the announcements that we did last week. Every single one came from a customer. And I also stated on stage what our customers said to us in the leadership advisory board that I lead with 32 CEOs, GMs of all different sizes, right? The one thing they said to us, they said, keep investing in customer success, which I announced we are. We're expanding that team pretty significantly. It's already the largest in the industry. It's just got a lot larger. The other thing that we're doing, as they said, be our innovation engine. So we are innovating with them based upon what they see in the market, what we see in the market, a lot of data-orientated analysis to pick what are the right experiences that we bring. And so there is a lot more opportunity ahead for them, which there's a great opportunity ahead for us. Okay.
spk08: So now I think I'll hand it to Debra.
spk07: Hey, Carl. Carl, notwithstanding my tremendous disdain for saying congratulations on conference calls, I will break my golden record and echo Christian's sentiment. Watching you all having gone from the walking dead not so long ago to where you are today, it's been fun to watch.
spk04: Well, we appreciate everybody being a part of the call, so thank you. Thank you very much.
spk09: Thank you. Our next question comes from the line with Loop Capital. Please proceed with your question.
spk10: Thank you. I actually wanted to follow up on Paul's question as he framed it on the risks. Let me ask you, what is the biggest opportunity ahead of Kellogg's? Paul, it seems like you're going to be focused on partners and ecosystem. Do I get a sense that this
spk05: marketplace opportunity are you trying to become the amazon the telco version or telecom version of an amazon marketplace and how big these in this time can be so given your question and we're going to close the call with this question is on our future and our evolution it's all yours michael so the opportunity i i would actually say the marketplace math model is that is the wrong analogy we thought a lot about this actually what we do is we take services that are over the top of DYI and convert them into carrier hardened solutions that become managed where the service provider adds value. This is a very, very, very important distinction. You can't just throw a bunch of things up and hope they work. You have to make them right for the service provider. And the best example I can give is how do you handle security and privacy? We literally take these partners and educate them on how a service provider thinks about their subscriber, the security, the workflows, the support, all those different elements and convert their product into a managed service. So it's a significant differentiation, which means that we are a very active participant in it versus just throw it up and hope something works. And so is there a huge opportunity ahead? That is the opportunity ahead because we've also heard all these conversations about the infrastructure investments that are coming. You know what the great thing about what we're doing with regards to the revenue edge? It works on any infrastructure. So it doesn't matter what network it is. It doesn't matter what type of network it is. The revenue edge will work with everybody. So we intend on monetizing the entire market.
spk08: Thanks, Bob.
spk09: Thank you. Ladies and gentlemen, we've come to the end of our time for questions. I'll turn the floor back to Mr. Fanuki. Any final comments?
spk06: Thank you, Melissa. Calix leadership will participate in a number of investor events and meetings during the fourth quarter. Information about these events, including dates and times for public webcasts and management presentations, will be posted in the events and presentations page of the investor relations section of calix.com. Once again, thank you to everyone on this call and on the webcast for your interest in Calix and for joining us today. This concludes our conference call. Have a good day, everyone.
spk09: Goodbye. This concludes today's conference call. You may now disconnect your lines.
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