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spk06: Greetings, everyone. Welcome to the Calix second quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. The question and answer session will follow the brief prepared remarks. If anyone should require operator assistance during today's 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, Vice President of Investor Relations. Sir, please go ahead.
spk03: Thank you, Rob. And good morning, everyone. Thank you for joining our second quarter 2024 earnings call. Today on the call, we have President and CEO Michael Beeney and Chief Financial Officer Corey Sindelar. As a reminder, yesterday after the market closed, Calix issued a news release, which was furnished on a form 8K. 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, 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 second quarter 2024 letter to stockholders and and in the annual and quarterly reports filed with the SEC. Gallatin assumes no obligation to update any forward-looking statements which speak only as of their respective dates. Also on 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 second quarter 2024 letter to stockholders, unless otherwise noted. All financial information referenced in this call will be non-GAAP. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead. Thank you, Jim. Our results in the second quarter demonstrated the strength and execution of our strategy. Our platform, cloud, and managed services continue to enable our broadband customers to dominate their markets as they simplify their operations and go to market, innovate across the consumer, business, and municipal segments of the markets they serve, and grow the value for their members or investors and in turn to Calix. Once again, our unique broadband business model delivered record gross margin. Robust expansion of our platform cloud and managed services led to a sequential 9% increase in RPOs as BSPs continued to turn to Calix in the face of growing competition to win new subscribers through the ever-expanding capabilities of the Calix platform, cloud, and managed services. As we have discussed, The market is crossing the chasm and this is best evidenced by our landing footprint with 24 new BSP customers who started their business transformation with Calix in Q2, up from 10 in Q1. Our appliance business is settling into a new normal where we see smaller orders and many, many more of them. This gives us the confidence to forecast a return to sequential quarterly revenue growth in Q3. And our momentum continues in Q3 as the team recently closed our largest platform cloud and managed services deal, setting a new record. With that, I'd like to turn it over to Corey to review our financial results for the first quarter. Corey? Thank you, Michael. The second quarter represented another quarter of deliberate and disciplined execution. We delivered revenue of $198 million, which was within the guidance range we provided in April. As we continue to navigate the crosswinds that are still prevalent in our industry, the continued growth in our platform cloud and managed services drove record non-gas gross margin of 55.1%. In the second quarter, we saw strong platform adoption with 17 customers beginning their platform journey with us. 19 new cloud deployments and 22 additional customers deploying a managed service for the first time. Remaining performance obligations, or RPOs, grew to $267 million at the end of the quarter. This is an increase of $22 million, or 9% sequentially, and up $54 million, or 25% year over year. Furthermore, our current RPOs were $103 million, of 4% sequentially and of 28% year over year. As we've discussed before, the increases in RPO reflect new customer additions and the continued adoption of our platform offering as our existing customers add new subscribers and expand their use of our platform cloud and managed services. As a result, we expect RPO will continue to grow. In the second quarter of 2024, Non-GAAP operating expenses were $104 million, down $4 million from the prior quarter. The decrease is mostly attributable to lower outside services and professional fees. As we have said before, our plan is to keep 2024 operating expenses, expense investments, relatively consistent with 2023, as we believe this level of investment represents a great opportunity for us to grow our footprint ahead of the expected U.S. government broadband investment. Our debt-free balance sheet and balance sheet metrics remained strong. At the end of the quarter, cash and investments were just over $261 million, representing a sequential increase of roughly $22 million. This was our fifth consecutive quarter of double-digit free cash flow. DSO was 38. Inventories were 2.8 down from 3.1 last quarter as our component inventory increased. Excluding component inventory, our inventory turns would have been 3.7. And inventory deposits decreased by $6 million, bringing our total inventory deposit down to $70 million. Furthermore, we expect continued profitability combined with working capital reductions will result in consistent double-digit quarterly operating and free cash flow. Now let's discuss revenue guidance for the third quarter. Based on the current ordering trends and new customer acquisitions, we believe the second quarter marks the bottom for 2024, and we will grow from here. For the third quarter of 2024, our revenue outlook is to be between $198 and $204 million. In terms of feed, we've seen a lot of progress since our last call. As we sat here a quarter ago, only one state, Louisiana, had completed all 10 steps of the program. Today, there are 20 states and territories approved through all 10 steps, and they represent 12 billion of the 42 billion program. While the approvals have accelerated, we believe that we will begin seeing orders in 2025, early 2025. In summary, Q2 represents a low point for revenue in 2024, and we will return to sequential quarterly revenue growth in Q3. We continue to add new BSP customers every quarter, which over time will support our growth objectives. In addition, our platform cloud and managed services grows each quarter. driving our RPO and gross margin expansion. We have the most pristine balance sheet in the industry, which gives us the financial capacity to invest in our operation and expand our footprint as our industry crosses the chasm. Michael, back to you. Thanks, Corey. Throughout Q2, I continued to meet with broadband customers and their investors with the discussion remaining the same, how to win. The industry is under significant stress as legacy network operators face the disruption of increased competition and the expanding risk of commoditization as broadband speed disappears as a differentiator. This shift from speed to an experienced mindset is critical to our crossing the chasm from early adopters to winning the early majority, and it is accelerated. With 1,065 BSPs now deploying our platform, which grows every quarter. We continue to engage with prospects of all sizes to educate them on the power of the platform while supporting our existing customers as they expand their business model across consumer, business, and the communities they serve. It is the winning business model that is achieving incredible revenue, margin, cash flow, and customer satisfaction results every single day. In closing, our confidence in returning to sequential quarterly revenue growth is driven by an expanding funnel of opportunities as our unique platform cloud and managed services model enables our customers to succeed. We have the financial strength and balance sheet that allows us to execute without distraction while maintaining a disciplined and steady hand on our operating expense investments that support our DSP customers as they win their markets and together We succeed for the long term. Jim, let's open the call for questions. Thanks, Michael. Rob, at this time, you can please open up the lines for questions.
spk06: Thank you, Jim. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question, it comes from the line of Sameek Chatterjee with JP Morgan. Please proceed with your questions. Mr. Chatterjee, your line is open for questions. Perhaps you're on mute.
spk03: Rob, let's go to the next one. We'll pull Sonic back into the rotation.
spk06: Yes, thank you. The next question is from the line of Ryan Kuntz with Needham & Company. Please proceed with your questions.
spk02: Great. Thanks for having me on. On the pressure on the large and medium customer cohort and the decline there, do you have an updated view of the drivers behind the tight capital environment between interest rates and bead preparation? How would you kind of... characterize the top three drivers there among your largest customer base?
spk03: Well, I actually don't think it's a large customer phenomenon. I actually think it's across the entire base. And this goes back to what we've articulated in fourth quarter and first quarter. It remains the same. So the first one is that they're going through a decision-making process with regards to B. You've seen the complexity of that scenario. Now it's making progress and Corey can talk to that extensively. But as they go through that, again, their planning teams are now focused on how do they do those submissions. And then in second half, a lot of that will finally come to clarity. And that's companies of all sizes, small, medium, and large. That's the first one. The second one is that, again, small, medium, and large. The second thing they're considering is that if they are an entity that has private equity backing or investors, the pervasively high interest rates, and the increase in competition, which again, we forecasted for many years, has caused them to say, okay, should we slow down a little bit or contemplate our business model as we're not getting the loads that we need? And so let's really pivot hard into our existing investments and win new subscribers. which really comes down to the cross and the chasm part, is that we really needed them. You know, if I go back a year ago, a year ago I was at US Telecom, which was a big CEO event, and a year ago I was, and the year before, I was the one who was a bit of a naysayer in that room, constantly saying the same thing that we said at our Connections event, which is speed is going to commoditize. It's not a differentiator. Building fiber is not enough. You actually need to build a comprehensive business model to own the community. And as little as a year ago, especially with the medium and large customers, they were dismissive. They were like, no, I'm doing well enough. I keep going at it. Where our smaller customers were aggressively pivoting into that experienced community-centric brand message. I was there again this summer, and frankly, they were all saying the same thing. There was a ton of investors there, and they were all like, you know what, we've been building for the last three years. We're not getting the subscriber loads on our network that we thought we would. The competition is a lot higher than I expected, and I really need to be contemplating my business model. And frankly, to us, this is the exact thing that we have been building our company for for 13 years to build that opportunity, and it makes us crossing the chasm that crossing the chasm leads easier because now they're under a ton of pressure, which is what I talked about in my opening remarks. Corey, anything that summarizes it?
spk02: And Corey, the mention of the largest platform deal ever, was that included in your stated RPO for 2Q or is that a 3Q event?
spk03: That is a new event, Ryan, that will be reflected in our Q3 RPO number. Well, to be clear, in second quarter, we booked the largest platform and cloud deal in the company's history in second quarter. And then run up to this call, we actually closed a larger deal. So seven new records for our cloud services.
spk02: But that's a Q3 deal. Awesome. That's great. And Corey, can you give us any color on the product mix in the quarter across, you know, network versus CPE in general? Like, how is that trended in 2Q versus, say, last 12 months?
spk03: Yeah, margin. In terms of our gross margin, what you're seeing is exactly kind of amplified from what Michael just talked about. We're seeing operators... spending less time building out new networks and working towards adding new subscribers to their networks, turning on revenue and cash flows for them. And so we've seen a shift in our product mix towards premises away from appliance revenue, from the network compliance side.
spk02: Got it. So even though the hardware there has got lower gross margin, the higher software makes your selling more than makes up for that.
spk03: That is spot on. All right.
spk02: I'll get back in queue. Thanks for the questions.
spk06: Thank you. Our next questions are from the line of Sameek Chatterjee from JPMorgan. Pleased to see your three questions.
spk07: Hi. Thanks for letting me jump back on here. I know, Michael, you mentioned about bead early on in the prepared remarks. Just wondering, we've seen some other suppliers start to talk about receiving bead-related orders already, even though they ship out in 2025. Can you just address sort of where you are in terms of the timing? And I think the primary question for investors is how material can bead-related revenues be for your model in 2025, anything you can share on that front? in terms of how to think about whether it should be revenues from sort of all 50-plus states, or should it be really a fraction of the geographies, just considering how the pace of approvals are? And I have a quick follow-up.
spk03: Sure, happy to talk about that. While there's others out there that are talking about orders and revenue starting this year, we've been consistent regarding our thoughts around these. We expect to start receiving orders in the first quarter of 2025. Orders, not necessarily revenue. We do not know what that ramp will be after we start receiving orders. We do know that 20 states have their Volume 2 proposals approved, and that represents 12 of the 42 billion. So you might recall on our last call, I suggested that as long as there were at least 10 to 15 states approved, that we would get enough to actually start seeing an impact, a meaningful impact in 2025. And so we're sitting here today with 20. So that's the good news, that there's certainly enough money now available for that program to have an impact on 2025. But, you know, there's other steps that will follow, such as NTIA's approval of each state's broadband map, subsequent to the challenge process. So there's certainly more challenges to overcome as that program continues to roll out. That said, we will do well as we have with every government program, large and small, for the last 20 years.
spk07: Just the other question. question that I'm getting this morning from investors is we've seen the lower mix of revenue from your large customers. Is there anything beyond sort of the cyclical headwinds in terms of market share with some of your large customers just given the revenue decline you've seen with them on a year-over-year basis?
spk03: Yeah, so in the quarter, it's actually better than we thought it would be. So it's better than feared. So that was a positive and encouraging sign for us. The hold back in our large and medium segment is a lot of reduction in CapEx spending as they're reevaluating their priorities. But you might recall that we had talked about, we thought that large and medium segment would have, again, inside of Q2. And obviously it did not. It did better than we thought. So there are signs of them kind of coming out of those decision-making process and getting back on with their ordering programs. So we are encouraged by that. And so I think that's a positive development. And if anything, the medium and large are actually starting to finally listen around the conversation, which I talked about. around the stress around monetization and actually how they have to change their business strategy. So in second quarter, we closed. There's a tier two that we've never done. It used to be a big customer of ours, but has not actually done anything with our cloud. And we closed with them on a go-to-market strategy around smart business. So how to actually attack their very sizable small business base and win with a radically different experience. And so, if anything, I would say that this is now our share opportunity to grow, and you saw that as represented by the 24 new logos that we added this quarter. Those are not new companies starting up. Those are wins for companies who want to change their business model and evolve and transform with Calix.
spk07: Thank you. Thanks for taking my questions.
spk06: Our next question is from the line of George Nodder with Jefferies. Please proceed with your questions.
spk00: Hi, guys. Thanks very much. I wanted to ask about, you know, as we think about the impacts on the business, I think you guys have mentioned a number of things, certainly in the shareholder letter, certainly in recent quarters. But I'm wondering if you could kind of talk about you know, what the biggest impacts are on the hardware side of the business right now. We've talked about delays in decision-making associated with BID and government funding. You've talked about, you know, customers adjusting lead times because of adjusting order levels because your lead times are shorter. We've talked about higher interest rates. We've talked about, you know, a shift towards, you know, adding subs versus core infrastructure. I guess I'm just wondering if there's, you know, kind of a map to, you know, what these different factors are in terms of, you know, how important they are. Is there a rank order of issues here, or how do you think about, you know, what's fundamentally going on here? Thanks.
spk03: Well, actually, George, you've summarized them very clearly. If you want us to staff rank them, I would say that it depends on the company, and therefore, inside each company, they're going to be different. So, you know, let's cover up what you so succinctly and accurately covered, which is what we've been saying for multiple quarters since we started to see this in late 2023. So the one with the decision-making on beef, as we've always stated, that government funding is going to take much longer than anticipated, and in the end will be a much larger funding outpouring over time. So, you know, while it's a $42 billion program on these, it's actually added 25% of the significantly larger. We succinctly stated that lead times has them adjusting how they think about inventory because we actually dropped our lead times down. They're now at what is our new normal on the appliance side, which is why we're also comfortable with stating very clearly that we're going to return to the sequential revenue Our lead times are now where they are. The good thing in that is that I constantly get questions from customers that as they clear that first point on decision making, will we have enough inventory to serve them? That question continues to get asked. I've probably answered it 10 times this quarter alone and my response is the same that we've given to investors also, which is that when we entered the pandemic and faced A surge in demand, it was a significant issue because we had 3,200 SKUs. We're now counting around 200 SKUs. We have an incredible supply chain. We're optimized to meet any demand spikes. And so that's great. So we're in great shape there as that changes. And then the interest rates, you know, you succinctly covered off interest rates. If I'm a private equity investor, you know, they were investing with abandon through, during the pandemic. You know, if you had a, as I like to joke, if you had a false, you could raise $20 million and could spell broadband. And people were throwing money willy-nilly. And now what they're starting to do is take a step back and say, wait a second, we've been at this now for two or three years and the business model showed that I would be getting this amount of ramp and I'm not achieving that ramp. And in fact, what I'm seeing is When I go into certain markets, I have more competition than I anticipated. But more importantly, the fundamental thesis at the beginning of the pandemic, which is build fiber and they will come and you will win, is actually fundamentally flawed, again, which you've been stating. So that and the fact that interest rates are higher are having some of them say, wait a second, I need you to go pivot all your attention back to, you know, it's great that you're a good construction company, And that's what a lot of broadband companies are. Great construction companies, great network operators, but how are you going to market and sell and win that community and get, you know, do what Tom Bigby has done and get market share that's at 60% and an NPS of 92 and, you know, shedding off incredible ARPU, massive cash flow and huge margins or like Allo's doing. How are you going to go do that? And so that not only interest rates, that becomes a, a reason why they have the conversation, but it also is leading to these management teams coming under significant stress because their investors are saying, where's the frigging money, right? And that's great for us. I go back to U.S. Telecom. When I was there a year ago, people were kind of, you know, yeah, yeah, whatever, Michael, whatever, Michael. But, you know, when I was there, this go-around There were many of them saying, hey, I'm working with Calix on this. I'm working with Calix on that because I need to change my business model if I'm going to win. And that's what we've always stated. And it just becomes the impetus to actually have the conversation and realize that the pain is right there. So the interest rates, I would say, are just an impetus to having the conversation. Your business model needs to change, right? You need to cross that chasm with us. And then which then led to the very succinct thing. So I think your third point and then your subs versus infrastructure, those in essence are the same thing. Because if you're winning a shed load of subs like Allo is or Tom Bigby is or many of our other customers are, who cares about interest rates? Because your margins are so strong, your take rates are so high, your return on investment capital is so massive, you don't care. If it was a 20% interest rate, you'd still be investing because your market share is yielding a huge return on investment. And so it's difficult for us to stack rank it other than say, George, you're spot on. And it just depends on the customer. And so, you know, and I go back to, well, you know, the quarters ads, 24 network operators decided to become broadband service providers this quarter. 24. And these are not new companies. These are ones that are deciding that, you know what, I'm going to partner with Calix to actually change my business model. And so that's the market. That's the industry.
spk00: Got it. And then just one quick one. On lead times, was there more reduction in lead times this quarter versus last quarter, or have we been at a stasis on lead times all year? And what are lead times?
spk03: Yeah. You know, we've been consistent with our lead times this year, and it's 12 to 14 weeks. Great. Okay. Thank you very much.
spk06: Thank you. Our next question is from the line of Scott Searle with Roth Capital Partners. Please proceed with your questions.
spk01: Hey, good morning, guys. Thanks for taking my questions. Nice to see the bottom put in for the second quarter and looking for sequential growth as we go into the back half of the year. Hey, maybe quickly to just hit on a couple of share questions, Mike. It sounds like you're gaining share within the Tier 2s. I was wondering if you could address that. And then more specifically as we look to BEAD, I know you guys have been working in a, you know, consulting with many of these BEAD requests. I'm wondering if you have some early thoughts in terms of, What do you think share is going to look like between Tier 1, 2s, and 3s as BEAT funding starts to roll the market in 2025? Clearly, you guys would be better positioned with the Tier 3s and Tier 2s, but I'm kind of wondering what your thought process is there in terms of the share gains that they might have within those categories.
spk03: So, lots of complex questions in there. So, the first one is, with regards to share, the way we think about market share is actually – the customers that we're aligned with, whether or not they're taking share. And one of the best examples of that this quarter would be that we had a small customer who grew to a medium customer. Why? Because they're taking, they're actually adding subs, they're growing their business, and they're winning in the markets that they serve. So when we think about market share, we think of it that way. And then on adding subs, you know, One of the things that we talked about that Tier 2 actually went to our small business solution, the way this goes back to the underlying business strategy we've always articulated, which is we're uniquely positioned in that we have this very diverse platform that allows us to find a beachhead into a customer and then demonstrate to them what success looks like. So with that one, They are coming under pressure with regards to, I need to improve ARPU, I need to slow churn, I need to grow revenue. And that's why they chose our small business solution. And once the small business solution goes into that customer, now the entire platform is in. So we've hooked into their back office, we've hooked into their business processes, and it's easy for them to continue to expand as they see success. So the key thing about gaining share for us is that once we garner that beachhead like we have in that tier two with small business, we then flood our customer success team into it to help that customer transform their go-to-market strategy, win a whole bunch of new small business customers, and then hopefully expand with us over time. With regards to beef consulting, the way that our beef process is radically different than most others. You saw that in Q1 when we announced the relationship with Ready.net who has incredible cloud and software tools to help broadband service providers actually understand BEAT. And so we're hand in glove. So while others are, as Corey said, touting, hey, I got some orders in, I got some orders in, we're actually sitting down beside them putting in their base submissions, helping them articulate it. We've got a team, a big team of people who do a Plus Our Ready partnership to ensure that we are side-by-side in planning with them not only in how to win and how they pitch the local state office, but then also what the implications are on timeline. And that, through the second half, will get clearer and clearer. With regards to who's going to win Tier 1, Tier 2, Tier 3, the The reality is that one of the things you've heard a lot of grousing about is that if this program was actually centralized in Washington, D.C., and everything was through a single office centrally, then the bigger companies would definitely have a significant advantage because they'd be able to do what they do well, and they'd put a massive lobbying arm into D.C., and they could influence outcomes. By having this as a state-by-state, territory-by-territory program, the ones who are advantaged are the ones who are local. And you hear that when I'm out speaking to the different groups, you hear a lot of that is that as these are state-run projects, they really want companies who care about the local state, whether that's a for-profit or a cooperative, to actually be that voice in that office and win the money. Because they know that they're not in it just to kind of scarf up a bunch of money and pad a P&L like other programs have in the past. They're actually, they care about the community, they're in the community, they're in the state, and they're there for the long term. And so while that has definitely been one of the reasons where you've seen a slowdown in the BEAD process, at the same time I think that very democratic process and that's been diffused out to the different states is really powerful and frankly I think it advantages the companies that care about the state. Scott, just to amplify one thing on Michael, you know, BEAT is just a single program. Yes, it's a big one, but there are lots of government programs, a lot of state money. Our customers do very well, and Calix does very well as a result, and have so for the last 20 years. And taking advantage of these government programs, we're going to do just fine with this B1 as well.
spk01: Gotcha. So not to put words in your mouth, but it sounds like your customers, disproportionately to their current broadband share, should participate pretty well in B1 and other programs going forward. Is that correct? Yes.
spk03: That's true, Ryan. Indeed, in particular, you've got to think, these are hard locations, right? These are the most rural parts of the country. And so these are the ones that are done last. And so it's going to be somebody with a community-minded perspective willing to make those investments to go after those hard-to-get locations. So we think that will disproportionately lead to the smaller football players to go after those locations.
spk01: Great. And lastly, if I could, on a follow-up, you know, I think last quarter you talked about, right, certainly 24 is a transition year, but it seemed like there was enough green shoots that 25 you'd be shaping up to get back into the targeted 10% to 15% growth range. I'm wondering if you could update your thoughts on that front and also kind of fold BEAD into the conversation. Corey, you said, look, if we get, you know, 10 to 15 states or territories, you'd be feeling pretty good about the BEAD contribution. into 2025. Now we're at 20 states. You've got another 36 states that have completed nine out of 10 steps. So by the time we have this call in the October timeframe, you know, you could have double that number. So I'm kind of wondering how Bede kind of layers into that thought process for growth in 25. Thanks.
spk03: Thanks, Scott. What we're seeing here on the appliance side is that we're establishing a new normal where our smaller orders, you know, seeing smaller order sizes, but many, many more of them. There's a healthy trend with us landing new footprint, as evidenced by the 24 new customers. When you combine that with the robust demand of our platform cloud and managed services, as noted by the 9% sequential growth, and the signing of our largest cloud deal ever this quarter in Q3, I think what you're seeing is we've put the bottom in and we're going to return to that sequential revenue growth. What you're poking at is what does that quarterly growth rate look like from here on out? I think we're going to take a very pragmatic view about it, given the fact that we've had the last few quarters on the employment side, and so we will be cautious going forward. I think as we look out at the next several quarters, we had talked about a quarterly growth rate of 1% to 5%. We'll be at that lower end of that range here for the next several quarters. And as we progress through 2025, as we start seeing contributions from the customer acquisitions, as we see the large and medium customers continue to return back as we start seeing some of the bead shipments, not just orders, but shipments, we will move to, let's call it the middle of that range by the end of the 2025. And so there'll be a general progression there as those revenue streams layer into this bottom that we're creating right now. Yeah, a good example of that would be, you know, we won a really incredible customer in Q2 last year. They were at the upper end of small, definitely crossover in the medium, and they're an innovator with a huge amount of money behind them. But it took them some time to actually migrate their way over to Calix. They had to get rid of some of their existing inventory, those different elements, and Q2 is the first time we started to see, actually Q2 this year, a year later, doing all that work with them is where we finally started to see the orders fly. The key thing in all of this is that we can have a short-term view of chase this, but we're actually, as we stated on and on every single time, our whole goal is to use this disruptive time when things are falling apart or the disruption is happening to cross that chasm, win a whole bunch of new customers, and then basically set in place by winning those beachheads, as I mentioned with that tier two, So that becomes the beginning of an expansion of the footprint in an entirely new customer. And so this footprint attack that we're on has not yielded in this quarter or next quarter, although we have hit the bottom and we're going to now grow sequentially. But we're laying those early green shoots in net new accounts to win for the long term. And that's what our entire leadership team, our entire field team, is what they're focused on is we're thinking about you know, 2025 and 2026. Like, you know, the work that we're doing right now will pay off in a huge way. Again, it's evidenced by the amount of logos that we've won over this quarter.
spk07: Great. Thank you.
spk06: Our next question is from the line of Tim Savage with Northland Capital Markets. Please proceed with your questions.
spk04: Hey, good morning. I wanted to stay with Bede for a second here. as this opportunity maybe comes into greater view or greater focus. With the approvals that we've seen, and I understand the kind of mechanics from a customer standpoint, I wonder if you have any updated thinking on what B could mean to the company just from an overall revenue opportunity standpoint. We've got a $40 billion program where I guess the grantees are supposed to bring some money to the table as well, so maybe that's even a little bigger. I think you guys have talked about kind of a high single-digit percentage exposure from a kind of access infrastructure and network standpoint, but when we get rolling up to something like significant with deed, what do you think that could mean to Calix from a revenue perspective on an annual basis?
spk03: So, Tim, that's a great question, and I think it'll be a significant number. You've laid out the math, right? So it's a $42 billion program. There's a 25% match. So you're looking at over $50 billion of capital being put to work. It'll be over a five, six, seven, eight-year timeframe. And we're going to start seeing the beginning of that in 2025. So I think it'll take some time to get rolling and full steam. Our expected amount that Calix can serve is about 8% of that number. So you take 8% of 50. So it's a very large amount of money. that will come over the next five, six, seven, eight years. And so you can kind of put your own kind of ramp on it to when it gets to that full steam. And I think we'll just do very well if it's past experience on these government programs is any indication and the bias towards smaller service providers serving those rural areas is any indication. Calix will get its fair share of those proceeds.
spk04: Great. Thanks. I'm sorry. If I could follow up, try to combine a couple of things here, but really starting with the new large cloud order that you mentioned, if you had any color on that with regard to kind of type or size of service provider, you know, new or current customer. And I guess I asked that in a broader context of the uptick in RPOs. And A, it sounds like, given your earlier comment, you said maybe expect that to continue with this new order contributing, but if we look at the drivers of RPOs, it seems to me it's probably three big, I won't say one-off, but big orders like that, new customers, which you mentioned, and also the shift in current customers towards additional platforms. Of those three factors, I guess, How did you see that play out in Q2 with the increase in RPOs and what would you expect in Q3?
spk03: Yeah, so as it relates to the RPO of those factors you outlined, it's consistent with what we've been saying. The number one factor for the increase in RPO is going to be the subscriber additions that our customers are adding. All right, so they're out there taking care of growing their footprint The second one is they expand your use cases and the amount of products that we offer. So they're expanding the actual platform, cloud-advantaged services. And the last contributor is new customer acquisition. It takes them a while to build up to it. And so this large contract was an existing customer. It was a renewal. In Q2. In Q2 and in Q3, existing customers. You get to further down the stream and when they come back in, they've grown their footprint over the last three years to a much larger size. And so when they renew that contract for the next three years on that larger base, it just tends to grow. So this is what you're seeing as these contracts come up. So that's the biggest genesis of it is not only do they take more of our platforms, but it's the size of base that they're applying that contract over. So let me expand out on that. So I want to use these two deals as explicit examples of the land and expand strategy. So the biggest deal we've ever done, we had a record deal in Q2, and as Corey said, that was a net new deal with a customer committed over time. Why did they do that? who have been working with us for a long while. They've been adding subscribers. They see the value of the platform. And then they made a pretty significant commitment to us over the long term. But their previous cloud contracts were tiny. The one that we closed last week was the same idea, where it was essentially like a pay-as-you-go, working together, laying out the business model, identifying what the opportunity is, And then as that customer enjoyed significant success, we re-upped it into a massive contract. And so that's what you have to think about on the way that we do these. Sometimes we say, hey, we added a new customer, and like that small business customer, the commitment wasn't significant, but the commitment was significant mentally because they landed our platform into their business, and now we're going to help them transform how they win small businesses. And what will happen is that will then lead to, at some point in the, once we demonstrate that they add a ton of sauce, they'll go, hey, we want a better price, therefore we understand our volumes, and let's actually do a proper contract, and boom, you have another record contract. And so this business requires patience. This business requires consistency. This business requires us sitting beside our customers, their CEOs and their leadership teams, helping them win. And we're the only ones doing it, frankly. No one else is. Everyone else is popping into the office and saying, here's a PO by my box, you know, I'll see you in a little while. We're going to win because our customers are going to win.
spk04: I appreciate all that color and Last one for me. And you mentioned that, you know, the large and medium segments were, you know, less weak than you anticipated, I think, probably close to down 20% versus 50. You know, conversely, that implies some weakness among the smaller carriers that maybe you didn't expect. And I know there's the shifting of the carrier classification there likely has some impact. But I wonder if you can, you know, Give us a little more color on that dynamic amongst the smaller carriers and what you saw there. And that's it for me. Thanks.
spk03: Yeah, you bet. The lower appliance revenue from our smaller customer segment is really from the normalized orders due to our shortened lead times and creating that base for what we're seeing as the new normal.
spk06: Thanks. Thank you. Our next question is from the line of Christians. Rob with Craig Hallam Capital. Please proceed with your questions.
spk05: Hey, great. Just I think we all understand, you know, by this point, the platform sales process of your company and the competitive advantage you have there. But in reality, when we go back to bead, right, on our math, you have a little bit over 2,100 different service providers in the tier two, tier three, tier four category. And so when that feed money is released, obviously you'll have an expanded opportunity for customer dialogue on a platform. But just as far as feeds and feeds equipment, right? you should, over time, as that money is rolled out and deployed, regardless of whether they buy your platform software, you should see a material increase in equipment orders, shouldn't you?
spk03: Yes, that is true, Christian. But more importantly, understand that that hardware is the ability for us the premises and our platform cloud and managed services. So we look at BEAT as kind of an acceleration to be able to pull forward our platform cloud and managed services model. So while there will be an increase in hardware or appliance revenue, the real, real positive is the fact that it pulls forward our business model.
spk05: Yeah, understood. I just wanted to make sure I was thinking about it correct. That's it. Thank you.
spk06: Thank you. We've reached the end of the question and answer session, and I'll turn the call over to Jim Finucchi for closing remarks.
spk03: Thank you, Rob. Calix will participate in several investor events during the third quarter, and information about these events, including the dates and times and publicly available webcasts, will be posted on the events and presentations page of our investor relations website. Once again, thank you to everyone on this call and webcast for your interest and talents and for joining us. This concludes our conference call. Have a good day.
spk06: Thank you. Thank you for everyone's participation today. You may now disconnect your lines at this time.
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