Calix, Inc

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.

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.

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.