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spk11: Greetings and welcome everyone to the Calix first quarter 2023 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 is now my pleasure to introduce your host, Jim Finucchi, Vice President of Investor Relations. Sir, please go ahead.
spk12: thank you paul and good morning everyone thank you for joining our first quarter 2023 earnings call today on the call we have president and ceo of michael beaning chief financial officer corey cindylar and chairman carl russo as a reminder yesterday after the market closed calix issued a news release which was furnished on a form 8k along with our stockholder letter which was also 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 our website. Before I turn the call over to Michael for his 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 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 2023 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 2023 measures. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead.
spk09: Thank you, Jim. As the Calix evolution continues, I want to start this call by sharing my view on why Calix is performing in a very different manner than the market in general. Three consecutive years of greater than 25% growth. And as Corey will share, raising annual guidance for 2023. Nine consecutive quarters of sequential growth. three consecutive quarters of gross margin expansion as supply headwinds abate, zero debt, and a pristine balance sheet which will see cash grow at an accelerated rate. These are clear indicators the Calix team is executing our strategy in a predictable and disciplined manner. More importantly, it is making it clear that Calix is alone in a new market. This new market is made up of broadband service providers who are building consolidated networks and efficient end-to-end operations that yield incredible margins. This new market has BSPs leveraging data and insights from our platform and clouds to build an entirely new business model where they are the center of the home, the center of business, and the center of the community through the power of our managed services that grow revenue and customer satisfaction to record levels. BSPs continue to add subscribers and grow their business in Q1 through the power of the Calix platform, clouds, and managed services. The land and expand nature of our business was on full display in Q1 as we landed 11 new BSPs and expanded platform adoption as 38 BSPs adopted one or both of the revenue edge and the intelligent access edge. This brings the total number of BSPs deploying our platforms to 988. In Q1, 21 BSPs adopted one or more of our clouds, bringing the total number of cloud customers to 865. And perhaps the most important evidence that this is a new market is the growth of BSPs deploying one or more of our eight managed services. In the first quarter, 41 BSPs began differentiating their offer by launching one or more of our managed services. This is the fastest pace in the last five quarters and brings the total number of BSPs of managed services to 334. On that note, I'll now hand it to Corey to stand on the Calix team's performance in Q1. Corey? Thank you, Michael.
spk13: Calix team executed well across the board as we delivered our ninth consecutive quarter of sequential revenue growth. with record quarterly revenue coming in at $250 billion, which was modestly above the high end of our guidance range. As we have said before, we believe our supply chain will normalize over the course of 2023, and so it did. Vendors, for the most part, are meeting their delivery commitments, and we are starting to see lead times shorten. Consequently, this allowed us to continue to reduce our purchase commitments to $306 million, which we're down $335 million from year end. And we expect our free cash flow to improve significantly as we invest less in inventory. The improving supply chain has also allowed us to reduce our meet times to customers and to work with them to shrink their inventories as well. The consequence of this work was a sequential reduction in our revenue edge system shipments within our small customer segments. At the same time, our large and medium-sized customer segments increased. Specifically, we saw strength from a large platform customer and continued shipments to a recently acquired medium customer, which contributed to the Intelligent Access Edge record revenue in the first quarter. In sum, our platform model provides us with a view of end subscriber demand, which enables us to work with our VSP customers to optimize their inventories. This enables us to perform in a predictable manner and forecast what we expect will be our 10th consecutive quarter of sequential growth. Based on our first quarter revenue overperformance and the expected sequential increase in our second quarter revenue, we currently believe our annual growth for 2023 will be between 15 and 20%.
spk09: Back to you, Michael. Thank you, Corey. In closing, I will call your attention to two additional data points that further amplify that Calix is on a mission in a new market. First is a talent that we are attracting to our team. Industry leaders like John DeRocher, who joined from Salesforce as the Chief Customer Officer are joining because they are inspired by our purpose-driven culture, which is enabling even the smallest broadband service provider to simplify their business, excite their subscribers, and grow their value to their members, their investors, and the communities they serve. Second is the fact that Calix was recognized by Comparably as the number one best place to work in the Bay Area. In addition, our sales, marketing, engineering, and HR team We're ranked top 20 globally because our team members are inspired every single day to help our BSP customers transform the communities they serve by empowering families, students, and local businesses to thrive. More than ever, I'm excited about the future at Cowards. As Corey stated, we raised 2023 revenue guidance as we continue to execute in a disciplined and predictable fashion, supported by an enviable balance sheet. I would like to thank our amazing customers for their partnership, as is their ideas that are delivered every 91 days when we update our ever-expanding platform, clouds, and managed services. I would also like to thank our partners and Calix team members for their continued support and dedication as we execute on this once-in-a-generation opportunity. Jim, let's open the call for questions.
spk07: Operator, let's move to Q&A.
spk11: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The 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 appointment, it may be necessary to pick up your handset before pressing the star key.
spk07: One moment, please, while we call for questions. Thank you. Our first question is from Christian Schwab with Craig Howell.
spk11: Please proceed with your question. Great.
spk02: Good morning, guys. Well, I guess, first of all, you know, congrats that macroeconomic uncertainty hasn't significantly affected your customers' spending patterns like your peers. So congrats on the continued business transformation and a different value proposition. With that... Yeah, you're welcome. With that, Corey, would we expect that, you know, continued sequential revenue growth, you know, throughout the remainder of the calendar year from June?
spk13: The simple answer is yes. But I would, your expectations, obviously with the macro environment, that outlook in the second half of the year is murky. but our expectation is that, yes, we'll continue to grow, but at a very small base.
spk09: I'm just going to add one thing to that. I would add one thing to that, Christian, as you saw in the investor letter. Corey clearly called that out, and we've always said this is one of the transitions that we have gone because we're on a new mission in a new market, and part of that is moving away from that legacy model, which is highly cyclical, and it's moving into a sequential business.
spk02: Right. And then can you give us a little bit of clarity on the large customer activity? You know, your revenue in the March quarter, you know, was, you know, the largest, you know, for greater than two and a half million subs in years. Is this the beginning potentially of an inflection point? I ask that because, you know, we kind of saw the beginning of the inflection point in the medium, you know, base customers and, you know, over the last, you know, two years that went from, you know, a $35 million business to a $52 million business to, you know, almost 105 million. And I know, you know, I know the story has always been, you know, we'll start with the small guys and, and then the medium guys will figure it out. And then the large guys would figure it out. So is everything going, you know, as planned? Should we assume?
spk13: Yeah, Christian, thank you for highlighting what you've been saying. This is one of those things where technology adoptions start with small customers and work their way to large. In terms of what you've seen in the first quarter relative to our large customers, the increase was with that one customer. They were an existing customer. And I think it's just kind of the lumpy delivery schedule associated with the large customer. can expect continued growth from that one customer.
spk02: Okay. That's fair. And I know we started the year, you know, or started the year previously at kind of like a 10% to 15% growth rate. Now we're moving it up to, you know, a 15% to 20% growth rate. And if we even get modest sequential growth from June, We're almost at that 20% range. So was it just conservatism, given the macroeconomic environment, that the expectations have been exceeded? Or have you been positively surprised somewhere?
spk13: As we said last quarter, our view of the annual growth rate was a combination of not so much demand, but more of our view of supply chain. And we saw that improve within the quarter. We built a little bit more inventory. We worked through some issues. And so consequently, we were able to overperform in the first quarter by a little bit. They gave a little bit more confidence on where we're at with Q2. But I think at this point, as the supply chain is expected to continue to normalize over 2023, um you know the concern becomes the demand equation uh in the back half of the year and so we're just taking a conservative view of what that might entail but that being said you know demand continues to be strong great and then my last question you know our objective of growing gross margins 100 to 200 basis points a year you know given um you know given
spk02: you know, that lead times are finally short, uh, becoming, you know, normalizing for lack of a better word. Um, you know, it, it, it, does that give you, um, uh, should we be more encouraged that maybe we, we, we can start operating to the higher end of that hundred to 200, uh, basis point range as the mix continues to improve and the supply chain costs, uh, not only the cost of, uh, of the chips procured, but the expedited fee in some cases to get them, you know, as we get into 24 and 25? Or should we just, you know, stick to 100 to 200?
spk13: Yeah, Christian, I think you're going to want to stay within the region provided at 100 to 200 basis for the year. And you can see we're tracking along that line. In each of the last couple quarters, we've increased by about a quarter point. And so I think that rate will continue through the quarter. I don't think we're at a point where you're starting to see costs come down precipitously where you would see a faster than that rate expansion of gross margins. So it's still early days. We're still normalizing. And so we feel better about it, but it's not at a point where I think you get to an accelerated pace.
spk07: Okay, great. No other questions. Thanks again. Thank you. Our next question is from George Nodder with Jeffrey.
spk11: Please proceed with your question.
spk03: Hi, guys. Thanks very much. I wanted to ask about the software play here. I noticed that RPOs were up about $7 million sequentially, which is one of the smaller sequential growth numbers you guys have put up in a while. Obviously, it captures just a portion of your software business. I get that. And then conversely, the customer ads look really good, as you guys pointed out in the monologue and in the shareholder letter. I guess I'm just trying to better understand how you feel about the progress you're making in software at this point, and this quarter in Q1 specifically. Thanks.
spk13: Hey, George. Thanks for the question. We feel good about it. If you were to go back to the third quarter, we had a similar lower growth sequentially, and everybody was alarmed by... that lower increase. And then fourth quarter came along and we blew past that number. And everybody was like, oh, is this another inflection point? And we consistently said, contract signings are lumpy and they go up and down. I mean, we anticipate RPO to increase sequentially going forward, but the rate at which it increases will vary from quarter to quarter.
spk09: You know, and I'll add in, look, You know, I spent all of Q1 on the road, all except for two weeks. I was with customers and conferences and CEOs and talking about their business. And what's really great is that we continue to see that our message is landing very strongly with them. In fact, I was with one customer, well, actually not a customer, someone who in essence has refused to talk to us for 25 years. And with some of the things that are going on in a macroeconomic level, in fact, in that individual's case, it was they've been working with regional banks, that's been their only source of funding for their business. When they heard me speak at a conference, we got into a conversation around how do you actually build out a different business model that allows you to attract a radically different type of investment, whether it's private equity or family investors or whatever it is. And if you're just selling a dumb pipe, that's really hard because your margins are low. But if you're partnering with someone like Callis, not only are your margins going to be significantly higher from an operations point of view, but you're also building incremental ways to monetize that subscriber and grow revenue for the long term. And what does that mean? Well, that means that when you get that investment, it's going to be at a higher valuation. They're going to be more apt to pay attention to you, all these kind of things. So, you know, while RPO is one element of it, I would turn you heavily towards you know, 38 customers, you know, adopting one or more of our platforms, 41 people starting on the managed services journey. You know, we continue to see, and I would say that if anything, you know, this whole dumb box mindset is actually really going to go to the side if customers really understand how much value we can bring to their business. So I'm really excited about it.
spk03: Hey, just to follow up on that, you know, if I look at the differential between uh, managed services adoption, just in terms of the numbers of customers and Calix cloud. Um, you know, obviously there's still a really, really big gap there and, you know, I get it. It's a land and expand strategy, but maybe talk about, you know, what the sticking points are with customers in terms of adopting those managed services. Um, you know, why can't you get those guys kind of ramping faster? Is it, is it just inertia? Is it, um, you know, some other sort of technology piece I don't appreciate. Maybe just kind of talk through that gap.
spk09: No, George, that's a great question. And, you know, if I was to actually walk through the continuum of moving from becoming a – from being a legacy provider to entering this new market and becoming a broadband service provider who has a radically different position within the home business and the community, you know, it's a journey, right? And so if you've been in business for 25 years, the only thing you're used to is you're a construction company. You actually operate a network. And then as long as you exist, you get customers. And speed is the only thing that you ever talk about. You're now moving into a scenario where, first of all, you're reengineering your network and collapsing everything so you can get 80% higher margins. Then you're saying, okay, well, I have to change my call center. I have to make it so that when I'm doing an install, they're not just going and installing a Wi-Fi router. They're actually talking to the customer, educating them on how to use the app. And then my installers, I'm converting them into upsell people, right? So if Corey is my installer, he's going to say, hey, let's get them an app. By the way, do you have children? Would you like to do parental controls, all those kind of things? It's a completely different. different market, a completely different mindset. So I would say, if you think about that journey, we're the ones taking it on, taking them on that journey. And that's why, you know, it's really exciting that John Rocher joined the team to lead our customer success army and where, you know, Dumbbox companies don't have success teams because, hey, you know, go do the construction, put in it and sell your pipe. Whereas Calix is helping them create an entirely new business model that And that's what our success teams do, and that's why we continue to invest. So I wouldn't be concerned in any way, shape, or form other than this is the beginning. And this is something we've been saying on every one of these calls for ages, right? Look at managed services. And even that number at 334, you should be pushing on it saying, what about underneath of that? Because there's eight managed services today. We've announced 11. So there's massive expansion even inside of that, right? So there's all these different ways to grow. And look, if we can put up these kind of numbers and project higher for 2023 with this early stage of where we are in this new market, you should be very excited about the future.
spk03: Great. Thank you very much, guys.
spk11: Thanks, George.
spk07: Thanks, George.
spk11: Thank you. Our next question is from Ryan Coons with Needham & Company. Please proceed with your questions.
spk08: Good morning. Thanks for the question, and great execution on the quarter, obviously. Regarding the small and medium kind of customer set down market, and as you think about that driving growth through the rest of this year, I wonder if you could reflect on your conservatism around growth there, and specifically, are you seeing impacts from labor in these down market areas or in – How are the kind of subsidy trends working their way through the processes from ARDOF and the ARPA funds, which you've seen a lot of announcements of late? Thank you.
spk09: Sure. Sure. Well, so, you know, I'll proactively ask funding because someone's going to ask that question. So, you know, look, there's tons of investment that's coming in the market, as we've said over and over again with regards to private equity and, you know, family funds investing in these incredible businesses, you know, KKR recently purchased one in the Texas area. You see everybody coming into it. Berkshire is now in here. So there's lots of funding. The government funding is, as we've said, consistently slow. In the end, it'll take 10 years, a lot longer than we anticipated. But in the end, it will also be larger than we anticipated. So you're seeing that continued quarter-on-quarter trickle that's coming through and all the debates that are going on, right? And then with regards to deployment, you know, we can get into the whole immigration thing, but the job market is still strong. So to your point on hiring people, yeah, I was with a customer the other day, and they literally at any point in time have 1,100 open jobs. 1,100. And if you look at the job ads in the U.S. market, like I believe last month was 330, and then the month before was 600, and then the month before was hundreds of thousands. The job market is really strong. There is no recession. So, you know, they have to hire good people. They have to train them, and they have to bring them forward. By the way, if you're looking for a job, they're paying 70 grand for someone who has splice fiber, like out of school. So there's lots of opportunity, but, yeah, those are, you know, normal headwinds, but they're positive headwinds because the economy is so strong.
spk08: That's great. That's great, Michael. Thank you. In terms of the product mix there, it sounds like it was a great quarter for access sales. That's great to hear that footprint going out. I assume the kind of softer revenue edge is mostly from customers reducing their kind of inventory holdings around customer-prem type hardware. Is that correct?
spk13: Yeah, Ryan. Like my prepared remarks said, With the normalization of the supply chain, we started seeing the lead times pull in. That consequently allowed us to reduce our lead times to customers. And so we've been working with our customers to help reduce their inventory levels. They can become more capital efficient, so they can start taking down their inventory levels, and that's what you're seeing. So not obviously concerned about it. obviously by our second quarter guidance that we gave. Obviously, we're seeing another sequential quarter. And so there's obviously no air pocket behind this reduction in supply chain or reduction in premise systems shift.
spk09: I'll just add one comment, and that's that, again, back to this whole concept that we're in a new market, and we are a different company, and everyone needs to start thinking about it as a different company in a different market. Part of that is, We understand exactly their deployment rates. We understand everything they're doing. We know how much inventory they have. And therefore, the key word that you heard from Corey was actually working with and manage. In no way, shape, or form is anything a surprise to us because we generally are now seeing if they're having a problem beforehand, and that's what our customer success army is for. They pop in and they say, hey, you know, we go, we say, what, are your deployments are slowing? What's going on? Oh, it's because I can't get my permits fast enough or I'm struggling. We then subsequently go on top of that, and we look at, for example, every time they install a new router, we're saying, what is your attach rate on Command IQ, which is our mobile app? Are you ensuring every one of your customers is getting the mobile app because that becomes an early seed to driving up sales with managed services? So it's not just about the hardware and everything else. It's also about making sure they have a really strong business in the long term and win against the legacy providers.
spk08: Super helpful, Michael. And just a quick question, a quick follow-up on RPO quarries. Was there any – I didn't quite see the release of the numbers of current versus total RPO in the letter. Was there any mix shift at all in current versus total RPO in the quarter?
spk07: No, Ryan. Nothing substantial. Got it. That's all I have. Thanks. Thanks, Ryan.
spk11: Thank you. Our next question is from Fahad Rajan with Loop Capital. Please proceed with your question.
spk00: Hey, good morning. Thank you for taking my question. Corey, Michael, let me start with I'm trying to model a little bit differently given your shift in how you disclose numbers. And the way I'm thinking about is average revenue per BSP And if I look at it, I see a trend starting 3Q22 where you really started to kind of see a ramp in, or I guess growth in average revenue per broadband subscriber, service provider. One, as you head into the second half of this year, how should that normalize? Is it, one, I guess, what was that catalyst event that started in 3Q22 that really expanded your average revenue per BSP, and then how should we be thinking about it in the second half of this year as it normalizes against a tough comp?
spk13: Hey, Fahad, I guess I'm not exactly following your line of questioning.
spk00: Basically, I take your revenue and I divide that by total broadband service providers that you disclose, and I see a trend of average revenue per BSP, and I see that the average revenue per BSP is
spk09: growing considerably or like the starting second half of 2022 is there anything that is uh i guess driving that uh step functioning improvement yeah five so five i would actually say that that you know i understand what you're trying to do and we're not reading anything into it so for example you know our definition of a small service provider is from zero subscribers to 250 000 subscribers right If that customer who has 250,000 subscribers, if they're actually a really good executing Calix customer, their market share is about 60%, so they have significantly more homes passed. If they're actually early stages of their deployment, those 250,000 subscribers could only be 25% market share on a broader goal, right? So as you go and use that logic, I think there's a flaw to it. The other part of it is that $250,000 and $100 a month means that that's a $300 million company. So there's all kinds of ways you can parse this. I just don't know if that's the right thing. And Corey would like to take that question offline and explore it to see if we can understand more how you're thinking about it. But with regards to our business, large customers, small customers, again, small customer can be a $300 million business. there's all kinds of variables in there and it's lumpy and all the different elements. So I would say no, but Corey will take it offline with you.
spk00: Got it. Appreciate that. If I, I was looking, I was going through the proxy filings and I noticed that your, your, your, I guess the orders were in the order of 1.3 billion, which gives you significant visibility. Can you just maybe talk about the momentum in orders? Certainly. Thanks a lot.
spk09: All right.
spk00: I'll pass it on. Thank you.
spk07: Demand is strong. Thank you.
spk11: Our next question is from Tim Savageau with Northland Capital Markets. Please proceed with your question.
spk10: Hey, good morning, and congrats on the quarter. Well, hopefully you do talk about cash flow, though, because that's my question.
spk05: Oh, we do.
spk10: Okay. And you saw, you know, a nice increase in cash in the quarter. And I know I've been talking to you guys previously, and I think Corey mentioned some purchase commitments coming down. You know, do you still anticipate there to be a significant positive impact on cash flow from both obviously ongoing operations but this kind of balance sheet impact kind of maybe review how that how that works and what your expectations are and then any comments on you know capital allocation you know given the strength and cash flow and the balance sheet and and especially where the stock is thanks thanks jim so yes over the course of last year we used a lot of our cash from operations to buy inventory
spk13: And now as we are getting to a plateau, you can see that the rate at which we're investing in inventory is slowing. Consequently, that's going to free up profitability of the company into additional free cash flow. And so we are expecting as we progress to 2023, an increase, a significant increase relative to where we've been, of more cash. Over time, we'd expect our inventory to normalize and start coming back to where we were pre-pandemic. And that'll then free up additional cash. But that's still a ways away. We need lead times to come back in, no matter where they were, and then that'll make that trend happen. In terms of capital allocation, it's a process that we have that we look at every quarter. And as we think about our cash, know there's there's an opportunity cost with the use of our cash our decision to allocate capital kind of relates to its opportunity costs cash that could be used to operate a growing business comes at a very high opportunity cost cash for strategic investments would come then at a high opportunity cost cash beyond those categories would be at a lower opportunity cost and as we generate more incremental cash the opportunity cost goes down. In other words, the price at which we're willing to buy shares goes up as we accumulate more cash.
spk10: I'm sorry about that. Any updated quantification on – I think you talked about before I don't know, tens of millions coming off the balance sheet. But, you know, as we sit here, any updates on that? Are we still in the same range in terms of incremental free cash?
spk13: Yeah.
spk07: Tim, I expect we'll start seeing double-digit cash generation. Double-digit billions, yes. Thanks very much.
spk11: Thank you. Our next question is from Greg Mesnia with West Park Cabin. Please proceed with your question.
spk01: Yes, thank you, and congrats on the print. Last couple of quarters, your OPEX levels were running a little hot, I thought, and I was wondering, as we looked beyond the guidance you gave for the June quarter, What should we kind of be modeling as far as OPEX levels? Do you foresee continued investment in sales and marketing, or do you see those OPEX levels starting to moderate in the second half of the year? Thanks.
spk13: Yes, thank you. I would give you the same counsel that I would give you every quarter, which is that we're going to continue to invest according to our target financial model. We haven't deviated from that. You can see in the quarter that we were a little bit higher on the engineering side, a little bit less than the G&A, but for the most part, we're executing very predictably to our model. So as we continue to grow the top line, there will be incremental investments up into, I guess the word we like to say is we're going to invest wholesomely to our new financial model. So specifically, every area will grow according to the model.
spk09: Yeah, and I'll add on to that. I'll add on to that. Look, we're in a new market. It's the beginning of that new market. It's a once-in-a-generation opportunity. In fact, you know, new markets don't happen in not once-in-a-generation opportunity. And for us, investing to our model fulsomely is actually the team doing their job as leaders. and making sure that we drive organic growth in this new market and succeed. And so we will continue to invest to what we predicted for everybody to ensure we can take advantage of this opportunity.
spk13: And one last thought on this point. I will highlight in the fourth quarter we have our Connections user group event. And obviously sales and marketing will take up by an incremental percent in the fourth quarter.
spk01: Got it. Thank you for that. And just to quickly recap, you had mentioned earlier in answering a question regarding the broadband stimulus roadmap that basically it's taking longer but should be bigger at the end of the day. Is that right?
spk07: Correct.
spk01: Thank you.
spk07: Thank you. Thank you.
spk11: Thank you. Our next question is from Michael Genovese with Rosenblatt Security. Please proceed with your question.
spk06: Great, thanks. I guess, first of all, on gross margins, you know, there was a little bit of upside in the first quarter, a little bit of upside in the second quarter outlook. I'm assuming that with the mixed shift to infrastructure, that's probably a, um, or, or, you know, makeshift to intelligent access edge. That's probably a function of supply chain. Um, but, but I wanted to check with you if, if, if, if that's right, or if we're also seeing, um, the business model, the mix shift to software, uh, cloud recurring revenue, um, driving the gross margin. I mean, how do you think about that for the first half of 23?
spk13: yeah yeah so you're exactly right mike it's all those things right so it's the continued adoption of our software that's obviously giving us a margin uplift as well as you're seeing you know the access business itself driving some of the margin expansion from our product shift i just expect i expect that that'll continue to normalize meaning i think we'll go back to they want to take the delivery of their systems you've seen this in the past you know when we got a customer here wanted to get all their equipment into the warehouse at the end of the year it's just a normal process with large customers on the timing of shipments but over time and just continue up into the left but it can be lumpy on how we get there but I just to be clear a mix shift to revenue edge in the future should have a
spk06: more positive gross margin implications. I mean, we're kind of more powerful than we're seeing, you know, currently. Is that correct?
spk13: For sure, when you're looking at the managed services and then that attaches on top of it. For sure. That's the greatest portion of the reoccurring revenue comes on prime systems.
spk06: Great. And then, you know, finally, I mean, a lot of good questions were asked on the conference call already, but... You know, I wanted to ask about the new customers in the quarter, you know, falling to 11. You know, do you think that there's a macro reason for fewer new customers? And obviously, the expand part of the model is working really, really well. But as we look to the rest of the year on the land part, should we think about, you know, this lower number being the new normal? Or do you think that we could go back to what we saw last year or the year before?
spk09: Yeah, it is a good question. So remember, in that number, there's two component parts to that. The first is it could be an existing service provider who's actually now recognized that they need to create a new business and they're joining CALIS for the first time, right? Or it could be someone actually starting a broadband service provider, which is something that we've seen a lot of over the last couple of years. And clearly, with the rise in interest rates, that has made the hurdle for someone to acquire capital to start a brand new company harder. And so we noticed that happening in the market for sure. What's interesting though, is that the ones who did get capitalized, our analysis is that they're getting a lot more capital than we anticipated, and they're going to be more successful over the long term because they built into their business model, this significantly higher margin model affiliated with Calix and everything they were doing from a platform and the insurances point of view. And so their investors are saying, hey, let's go big. And so, you know, what will it be long-term to see?
spk06: Right. And actually, you know, my very last question is I just wanted to check, is Carl in the room? Is he on the call?
spk09: He is in the corner.
spk06: He's doing his best to not speak, Mike, but I do appreciate the shout-out. Okay. Well, great. Congratulations on the performances. Thank you. And thanks for the questions.
spk11: Thank you. Our next question is from Scott Thurl with Roth MKM.
spk04: Please proceed with your question. Good morning. Nice job on the quarter, and thanks for taking my questions. Hey, maybe for starters, could you just talk a little bit about linearity in the quarter, you know, what you've seen through the first quarter and kind of early parts of the second quarter here? And also, on the small customer front, taking a little bit of a pause, seems like it's a managed inventory reduction on your part. Are we through that? Do we start to see a sequential increase back within the small customer base into the June quarter and beyond? And then I had a couple of follow-ups.
spk13: Sure. Let's start off with your linearity question. Linearity was good in the quarter. I mean, you can see that in the fact that the DSOs are down. So that was a very positive trend, and it has continued. And as it relates to the second part of your question, Scott,
spk04: Small customers in terms of the dealership.
spk13: Yeah, so it likely continues into the second quarter, but obviously it's something we're not very much worried about because you're showing the substantial increase in revenue quarter on quarter. And so there's going to be a little bit of that as we continue to normalize the business management.
spk04: Got you. And if I could, Mike, from a high level, when you're in discussions with your current customers right now, how are they thinking about their build-out plans in terms of footprint expansion versus harvesting within the existing footprint as we kind of look at the second half of this year and maybe early thoughts on 24? And then also in terms of the revenue edge side of the equation, how should we be thinking about the incremental services and adoption of those services? I know you give numbers in terms of how many customers have adopted one service or more. But I'm wondering if there are some other metrics or idea that you could help us see into in terms of penetration of multiple services, targets on that front from customers and the velocity on that front. I know we get an RPO number, but if there are some other metrics we could think about.
spk09: Right. So first of all, the customers now they're thinking about their business. I would actually say they're, you know, every single one of them is thinking in bulk. ways right unless they're a legacy provider and you're seeing that from some of the big ones who with interest you know this we see this all the time with large public um legacy service providers as interest rates increase they're actually pulling back on capex because their margins are declining and this is a way for them to fund it so they just they slow down and our customers are seeing this as an incremental opportunity Right. Hey, they were going to go build up this town. Now they're going to do it even faster. They still have access to capital because, again, their their business as a whole is radically higher margins. Therefore, they can pursue they can actually get all the capital that they need. So they're looking at quickly going into a new market. And I'll I'll give you an example. We had a service provider in recently. And what they did was they shared out their spreadsheet and we went through 10 different markets that they're looking at towns. And they had profiled out who the competitors were. And a number of those places were legacies. And they were saying, let's build a joint plan to actually attack those legacy providers and take share. And where should we stack rank? And we helped them identify who we thought was weakest and best place to go. You know, on growing their existing business, this goes back to the whole customer success discussion. The whole point of our business model is that, you know, land and expand. And that, you know, permeates over to the customer's business model in that they're a land and expand also. In the past, all they ever did was they would sell a pipe and that's it. And then I would hope that I would monetize. And generally that means that over time they're under pressure because someone else throws a cheap price, whatever it is. Now their whole business model is I land in the home or the business, I'm selling all these incremental services. I expand my margin and my revenue inside that account, but I also make it wickedly sticky so that if somebody comes and throws, you know, a legacy provider who is only speed, throws in some cheap price, the customer's going to say, no, I've got all these great services coming from Corey and his broadband company. I'm not even going to consider that cheaper price because the service is so incredible. And by the way, my NPS is 75. So, you know, these customers are incredibly loyal. So that grow is absolutely front of mind. And that, I guess, comes to the core of what we're doing in this new market. It is a new market with a new business model. And we're teaching these customers how to transform their businesses and disrupt the legacy companies. Now, with regards to your question on incremental metrics beyond RPO, we consider that competitive. And no, you can just assume that, again, we have a growing customer success army that spend every single day helping our customers use best practices and insights and understanding what works and what doesn't, segmenting data, all these different elements to grow their business.
spk04: Hey, Mike, maybe just to quickly follow up in terms of your commentary of the changing landscape and enabling the thought leaders. But for the broadband Luddites, is there an epiphany ongoing here that it's driving more conversations with them on that front? Or is that something that takes longer?
spk09: No. Well, I don't know if it's an epiphany. I'd say it's your normal product adoption curve. You always start with the innovators who are those thought leaders. then you follow up as the market matures. And if you look at our press releases, what are you seeing in those press releases? Story after story after story of customer success and customer success and what's possible and what kind of NPS they're driving, what margin levels they're driving, all these different things. So as we go through a normal product adoption curve, you're gonna continue to see more and more growth. And even somebody who is a legacy provider who has never thought that way. At some point, everybody's gonna have a different realization and say, oh my gosh, the whole market's changed, it's a new business model, and there's this once-in-a-generation opportunity for me to grow my business in all kinds of different ways, but clearly the only person or the only company that I can do that with is Calix. And so I wouldn't say it's like, everyone has different epiphanies at different times, and we're moving up and to the right, And that's just going to continue. And, you know, that's why we have our press release here, to educate.
spk04: And, Mike, lastly, if I could, on the managed services front, I think you're up to eight now that have officially been launched. But I was wondering if you could talk a little bit about the pipeline, you know, the level of interest and kind of what you guys are waiting through there, if there are any targets that we should be thinking about. And maybe quickly, like, an update on things like smart biz and smart time. Thanks. Sure.
spk09: Well, it's early days. And as we said, as evidenced by the fact that there's 334, I would, you know, I think you'd look at the, we added 41. That's great. So to your point on when they had the epiphany, well, those 41 decided that that's the right time to get into starting to explore managed services. And again, it's, you know, what's the pipeline? It depends on the customer, right? I was with one CEO, you know, last week and, And he has an incredible go-to-market. He's got all his build plans in place. He's really focused on operational efficiency and customer satisfaction as his first go-to-market with a clear recognition that as he lands, then he will be able to expand in those existing markets over time. So, you know, what's the uptake on these services? It really depends on the customer and where they are in their market needs. Someone who's very mature is adopting, I would say, more managed services to differentiate. Somebody who's Just building out is going to be in a different mindset. And with regards to all the managed services, look, they're unique. This is a new market. We have a new business model. And what we've done with small business and smart town, they've never been done before. And they're super exciting. And so, you know, our customers, if they're deciding, hey, you know what, it's not the right time for me today, maybe in six months, maybe a year from now, everybody's talking about it. That's what we do.
spk04: Great. Thanks so much.
spk11: Nice job on the quarter.
spk07: Thanks, John. Thanks, Scott.
spk11: Thank you. No further questions at this time. I'd like to hand the floor back over to Jim Finucchi for any closing comments.
spk12: Thank you, Paul. Calix Leadership will participate in several investor events during the second quarter. Information about these events, including dates and times and publicly available webcasts, will be posted on the events and presentations
spk07: of our website once again thank you to everyone on this call webcast for your interest in calix and for joining us today that concludes our conference call have a great day goodbye concludes today's conference you may disconnect your lines at this time thank you for your participation
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