Calix, Inc

Greetings, everyone, and welcome to the Calix third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone to 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, Nancy Fazioli, Vice President of Investor Relations. Thank you, Nancy. Please go ahead.

Thank you, LaTanya, and good morning, everyone. Thank you for joining our third quarter 2025 earnings call. Today on the call, we have President and CEO Michael Weaning 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 along with our stockholder letter. It 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 that on this call we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy, and market outlook, and that actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in the third quarter 2025 letter to stockholders and in the annual and quarterly reports filed with the SEC. CALIS 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 third quarter 2025 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead.

Thank you, Nancy, and good morning. I've just returned from the incredible experience of Calix Connections, where we celebrated customer-driven innovation on our unique platform and the success that the platform drives for our customers by enabling their teams to win new subscribers, grow revenue per subscriber, and reduce churn. To stand in front of that crowd and celebrate NPS scores as high as 94 is a testament to the partnership and trust we have built with our customers and they with their subscribers and the communities they serve. At Connections, we officially launched the Calix agent workforce, our end-to-end integration of agentic AI into everything that we do via our third-generation platform that will launch in partnership with Google this quarter. This marks the next stage in our company's ongoing evolution to help our customers simplify operations and go to market and innovate with our platform, enabling them to grow for their members, investors, and the communities they serve. The ability of our customers to dominate their markets when armed with our unique and highly differentiating platform and managed services model was on full display in our results. In the third quarter, the Calix team achieved record revenue in our fifth quarter of sequential growth while guiding higher in fourth quarter. We set another gross margin record, our seventh consecutive quarter of margin improvement. We also had 20 new customers choose the Calix platform to dominate the markets they serve, and RPOs grew sequentially. At the same time, The team maintained a rigorous focus on operational performance and the balance sheet with OpEx investments returning to the target financial model while using our 10th consecutive quarter of eight-figure free cash flow, ending the quarter with record cash. It was another great quarter of performance by our customers and our teams who support them as we launched the culmination of our vision where those with the Calix platform manage services and access to data our best place to succeed through the power of agentic AI. Corey, over to you to walk through the specifics of Q3.

Thank you, Michael. During the third quarter of 2025, we delivered record revenue of $265 million, reflecting sequential quarterly growth of 10%. Our overperformance relative to our guidance reflected continued robust broad-based deployments from our BXP customers as they added new subscribers and footprint expansion as they continued to choose Calix for network upgrades, new builds, and competitive displacements. RPOs grew 2% sequentially to a record $355 million and increased 20% year-over-year. Our current RPOs were $141 million up 5% sequentially and up 28% year-over-year. This metric is a strong indicator of the strength we are seeing from our platform cloud and managed services model. The combination of our BXP customers winning new subscribers and strength of Access Edge deployments led to another record of non-GAAP gross margin of 57.7%, representing a 90 basis point sequential quarterly increase. Our balance sheet metrics were strong. inventory turns worth 3.8, and free cash flow is $27 million. We have produced quarterly free cash flow for over five years, including 10 straight quarters with amounts in the eight digits. We ended the third quarter with record cash investments of $340 million, an increase of $41 million sequentially. Moving to guidance, given the broad-based demand picture, and the rates at which our customers are deploying products, we believe we can continue to grow revenue sequentially, even with the significant overperformance achieved in the third quarter of 2025. Our revenue outlook for the fourth quarter is between $267 and $273 million, which at the midpoint would represent a 2% sequential increase in revenue and reflect revenue growth of 20% for the fiscal year as compared to 2024. Our non-GAAP gross margin guidance for the fourth quarter at the midpoint would represent a slight increase from the third quarter and reflects our expectations regarding customer and product mix. This guidance for the fourth quarter means our gross margin improvement for fiscal 25 will exceed the higher end of our target financial model of 100 to 200 basis points. And regarding non-GAAP operating expenses, We expect OpEx will increase sequentially primarily related to investments and connections and to accelerate the development of AI agents and functionality to our platform into the first half of 2026. That said, we expect to be back within our target financial model by the end of 2026. Michael, back to you.

Thanks, Corey. This is an exciting time for Calix and our customers. The pace of change that AI is injecting into the market is like nothing we have ever seen in human history. As I shared at Connections on stage and with the 350 general managers and CEOs who attended our leadership track, where Netflix took 10 years to get to 100 million subscribers, OpenAI took two months. The pace of change is mind-boggling, and for many, it's overwhelming. For Calix, that pace of change is our advantage. and an advantage for the customers who leverage our platform and manage services. We've invested 15 years and $2 billion to put in place the foundational building blocks in the form of Access Edge, Experience Edge, and Kallus Cloud to make the most of the agentic AI opportunity that is ahead. Our migration to our third generation platform in partnership with Google allows us to support the success of our existing customers while expanding internationally into new geographies with local sovereign data centers, and support large Tier 1 customers with a dedicated instance of our entire platform. We are already well into the fourth quarter, and while Connections is complete, thousands of attendees will be educated on the AI-enabled opportunity ahead as Connections on Demand, our virtual program, launched yesterday. This is in addition to the on-demand replays on calyx.com. At the same time, our customer success team is revamping how they support customers with the Calix agent workforce to speed transformation and expand our impact on our customers' ability to add new subscribers, grow revenue, and reduce churn. In addition, our internal enterprise teams are focused on improving how Calix operates and improves with artificial intelligence. With the insights that our product teams have gained through two years of learning as they built AI capabilities into Kallax Cloud, our enterprise teams are uniquely advantaged to aggressively embrace AI in everything that we do internally to improve our operational performance and help us scale at the fastest pace possible. As I shared in the Fast Company article, the four AI questions that every CEO needs to ask to succeed, Over the last six months, we have seen employees create 725 exploratory agents, with 40 of those agents being selected by our AI steering committee to be scaled across our internal enterprise to drive operational gains across Calix. The next step in Calix's journey is here, and I am excited to lead the team as we speed our ability to transform the broadband industry and enable the success of our customers and partners. I'd like to close by thanking our team, customers, partners, and shareholders whose passion, grit, trust, and partnership have brought us to this exciting next stage in the Calix journey. Nancy, let's open the call for questions.

Thank you, operator. We're ready to take questions.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone would indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for the first question. Our first question comes from Sameek Chatterjee with JPMorgan. Please proceed.

Hey, good morning, everyone. This is Joe Credozo on for SOMIC. Maybe perhaps for my first one, you know, very strong revenue performance this quarter. I believe this marks three in a row now with results tracking 10 to 20 million ahead of the high end of your range. Just wondering if you can help contextualize what has been driving this outperformance relative to your expectations at the start of the quarter. And as we look ahead to next quarter, how are you thinking about the sustainability of those drivers and potentially implications to your outlook? And then I have a follow-up. Thank you.

Hey, thanks, Joe. Appreciate it. The over performance is driven by a couple things. One is just the broad base demand that we're seeing across our customer base. But it's also a function of some of the competitive expansion of our footprint. We're seeing some of these customers, I guess surprisingly, not only do cap and grow, but rip and replace as well. And so when you combine that with the broad base from our existing customer base, that's driven the overperformance.

Yeah, let me contextualize a bit of that. So having just come off with connections, what's happening is that our customers are winning more. That's what's happening. And so when our customers win and they add subscribers, then we win because of the fact is that For example, if they build out a network and then they win a subscriber, that's incremental revenue for us and opportunity to continue to expand. So because of the fact that we're uniquely positioned in the fact that we have almost 1,200 customers on our platform and there's not one single driver, all of them are doing better. That means that our revenue goes up, which is also why we guided higher in fourth quarter because we feel very comfortable with the robust demand that we're seeing. as Corey identified, or as we identified in the letter.

Got it, guys. I appreciate the color there. And then maybe for my next one, we obviously saw the announcements coming out of Connections last week, lots of innovations being unlocked there, particularly in the backdrop of AI. However, if we kind of take a step back here, just curious how you're thinking about the implications of this innovation cycle for Calix, and maybe more specifically on the investment side of things. Particularly, it just sounds anecdotally like there's greater appetite to scale more aggressively. I mean, even if I think about you guys mentioning like international regions, like sounds a lot more aggressive than what you guys have talked about historically. So just curious how you're thinking about the implications to the business model as it relates to more on the investment side, just given kind of this innovation cycle where we're still in the very early innings of. Appreciate the question.

Yeah. So from an investment point of view is that you know, we have a target financial model, we continue to make the investments, but the broader one is that we've been investing for 15 years. So we're $2 billion into this platform. And if I think about those investments, as we articulated in the letter, those create the foundations upon which we can grow. So there are, first of all, in the existing markets, there's significant growth opportunity ahead because of the fact that we're uniquely positioned. If you think about one of our existing customers, and I talked about this on stage, An existing customer who has the access edge in place, which is a consolidated network, which has incredible intelligence in it. Then you have everything that we do on Experience Edge, which includes two components, intelligence at the edge in every single Wi-Fi system that exists on a customer premise, but then all of the solutions that sit on top of it, MDU, Smart Town, Smart Business for small businesses, and Smart Home, all of those come together into the cloud And we've now invested and put the AI layer on top of it, which means that those customers who have those three components, foundational elements, are best positioned to, first of all, take advantage of AI because it farms all the data, puts it into an AI engine, and automates significant components of their business. and allows them to scale at a significantly more rapid rate than in the past. And the best example that I can give of that is that in the past, our customer success teams would talk to a customer who has those things in place, make suggestions, but then in the end, it was the decision for the customer as to whether or not they had the capacity and capability to take that advice and turn it into action to grow their business. Now our customer success organization is going to sit down with the customer and say, we've looked across all your business. We have all the data. We know what the insights are. We know how well you can perform. By the way, here are the AI workflows that go press the button and it'll do it. You don't have to add capacity. You don't have to hire a bunch of new people. This is going to augment your existing capabilities and provide you a massive jump in capacity. And so when I think about the growth opportunity in our existing markets, it is significant because of that capability to transition from advice giver and optionality to press the button and we'll do it for you. That's the first step. On the expansions into international and where we go into large customers, this has always been planned. It's been a timing opportunity. And those represent significant growth opportunities in revenue and margin. The reason why we're talking about those now is because of the fact that we've been very quiet on it because we have always been a very conservative leadership team who actually talks about what we can see very carefully and what we see right there. And with the third generation of the platform turning on this quarter in a few weeks, we now actually see where that expansion goes. And if you took the time to watch the Connections event over Monday and Tuesday on Tuesday, We had the head of Google Telecom up on stage with me talking about how this partnership could flourish. And so it represents a significant opportunity because our platform would sit on top of a Google Cloud regardless of geography and regardless of size of customer, which provides us a significant scale opportunity, frankly, without having to make significant investment other than sales and marketing because it's a cloud. And if you have nothing running on the cloud, you don't pay for anything. So as it scales, we have a great opportunity not only for revenue, but also margin.

Joe, I'll add on some of the model questions to that. When you look at the AI investments that we're doing from an OpEx perspective, in the quarter you saw us hit record revenue and at that time get ourselves back in the model. But we also see an opportunity here to accelerate some of the development work that we wanted to do from the latter part of 26 into the first half. So you saw in the OpEx guidance that we took up the level of OpEx. It's for those investments in R&D related to AI functionality. But we will be back in model by the time we exit 2026.

Yeah, and to give you practically what Corey was talking about, is that if you look at our clouds, and again, I talked about this on stage, Calix Cloud, which is operations cloud, service cloud, and marketing cloud, or engagement cloud, which is the marketing capabilities and engaging with customers, all that Calix Cloud is is a mapping of workflows on how to run a broadband business. This is why, when it comes to artificial intelligence, we're so uniquely positioned because we are going to, now that we have the infrastructure in place upon which to build AI, which is the data layer, the knowledge layer, trust and orchestration, which then leads to trusted action. We built all that out. That was $100 million investment since November of 2023. Now that that's in place, the easy part and the candy, the ROI is right there. So we're going to accelerate building out those agents. And if you talk to our CPO, he basically states, you know, building an agent is easy. All the hard work was all the other work that we did. So we did all the hard work. Now we're going to do the easy work and we're going to monetize this like crazy because of the fact that we can take a workflow in Operations Cloud, again, that I showed, I laid these out at Connections. We can take an operational workflow inside Operations Cloud and every single step is essentially an agentic agent because it's a task-based entity. We can build all those agents and pop them out and then say to our customers, here's your workflow for anomaly management, here's your workflow. And while all the other industry people are going to be building out these complex custom workflows, we're actually going to take all the insights that we've built over the last six years in Kallax Cloud and plow through all these agentic workflows, which means that by, you know, as we come out to the latter half of 2026, the AI army that we're going to have turned up inside our platform is gonna be unmatched because we know how to run broadband companies. We have all the workflows, we have all the data, we have all the insights, and we have the trust of our customers to partner on building all that out. So to not speed through this at an incredible pace would be foolhardy. And in closing, I'll say the last part of it is everybody's talking about AI and around where to invest. One of the interesting things I've been hearing a lot about lately on investment platforms in other areas is all the tangentials affiliated with it. So you have the big guys who are building out their LLMs, which are, in essence, commodities. The ones who are actually going to provide the greatest value are the ones who understand the business. Well, that's what CalCloud is, a complete map of how to run a broadband company, and we are going to AI the whole thing, top to bottom, over the coming months.

Thank you, guys. Appreciate the insights there.

The next question comes from Scott Serrell with Roth Capital Partners. Please proceed.

Hey, good morning. Great job on the quarter and outlook, and thanks for taking the questions. Mike, maybe just to dive in on the small customer front, it was broad-based, it was strong. I'm wondering if you could provide some other commentary in terms of if there were any pull-ins, the sustainability of that going into 2026, and kind of how you're thinking about that visibility building at this point into 2026 and the sustainability of double digit growth?

Thank you, Scott. That's a great question. And I want to actually kill this right from the get go for everybody who has said that we are doing, we have a broad based demand. There is not a single customer that had significantly more influence on anything that we generated in this quarter or in next quarter. It is broad based demand. The strength of our business model is that while things can go up by segment and down by segment, it is actually up to 1,200 customers that allow us to actually drive demand. So with regards to visibility, and I'll turn it over to Corey to go through some specifics, but because we're so closely partnered with our customers, we see, and the reason why we guided hire into Q4 and see the strength in the business is because of the fact that our customers are winning. It can't be affiliated with, and if anyone writes that, I'm going to be I'm going to kind of go mental on it, is it cannot be written around a single customer because it's around our customers winning more, and as they win more, we win more, and our investors win more. It's that simple, broad demand across the base.

Yes, Scott. So I think the visibility we have into the demand profile, as Michael outlined, gives us that confidence that the sequential growth is durable. Now, we had a large step up here in the third quarter, so I think the sequential increases will maybe be more muted as we move into 2026. So, in terms of our target financial model of 10% to 15%, I think we'll be at the lower end of that range, X bead, right? And I'm sure I'll get a bead question, so I'll let that question be raised.

I'll pass on the bead question, Corey, but just to clarify, the sequential growth, so we'll see sequential growth from the fourth quarter into the March quarter. And then as my follow-up, Gen 3, right, we talked a lot about AI and agentic opportunities there. If we look at the current quarter, international was down due to one customer, I think, in the European theater. But You know, the Gen 3 platform is supposed to deliver private cloud capabilities, sovereign data center capabilities. When do we start to see that accelerate? And Mike, to follow up on your commentary on agentic AI in general, as you start to think about that driving the flywheel within your customer base, does this poise you guys for actual acceleration of RPO growth as we get into late 2026 and the ability to really drive that recurring revenue? Thanks.

Yeah, Scott, great question. The way we think about the monetization of the AI agent is not so much a separate charge for it, but an acceleration of our business model, right? So our customers will acquire subs faster. They'll roll out more services more quickly. So that's how we'll monetize it. So yes, it'll increase RPOs because as they go faster and adopt more of the platforms and the solutions, that will ultimately translate into a contract value that will get reflected into RPO. So ultimately, yes, that's how that will happen.

And the key word that you used was actually flywheel. In fact, we talked about that from a good to great point of view on a regular basis is that you have this – that is exactly what Calix is. When I go back to what I – answering the previous question, the flywheel that we have is 15 years of investment that has been – going into our platform allowing us to actually become stronger and better and stronger and better because we enable our customers to be stronger and better and stronger and better which is why i go back to the you know is it broad-based demand absolutely because we are the enabler for our customers to actually go to faster and faster pace to to do the three things that drive growth which is one how do you actually add subscribers two how do you increase revenue per subscriber and three How do you eliminate churn? And if you eliminate churn, then obviously your gross ads go up faster. And so that is the power that we see in our platform. And those core components access edge. And so if you've actually done the work, and I said this on stage, where if you've consolidated your network with everything that we've done, which is collapsing the BNG access aggregation onto a single system, you have the most powerful network that exists with all the data and the insights to run it autonomously. Same with on the experience edge. And then you bring it all into the cloud, throw an AI engine on it, and we can help our customers optimize their business. And as they optimize their businesses, they add those subscribers and become more profitable. We become more profitable. With regards to international, to your question on the one, again, we keep getting these questions every single quarter. It's just lumpy up and down, right? It's lumpy up and down. But we have broad-based demand across all those customers. In no way, shape, or form does it signify the strength or weakness of that customer. It's just, it's a timing thing. And so, we go through this, you know, every single quarter is that is there any change? There is not. We have strong demand across small, medium, and large customers. And then with the international markets, you know, that's really a later 2026 is where we see that we start to expand into the right markets. But, you know, we're going to get our existing base over it because, frankly, our existing base is all primed because of those foundations in place and a huge opportunity for us to make them wildly successful at a very fast pace. So your statement of flywheel is 100% accurate.

Thanks so much, guys. Great work.

Thank you. The next question comes from George Nata with Wolf Research. Please proceed.

Hi, everybody. Can you guys hear me? Good morning. Super. Good morning. All right. Thanks. Hey, look, I was curious, you know, about your monetization strategy on the agentic AI workforce. And, you know, is there – did you guys consider, like, charging customers a la carte for this capability and, you know, maybe being a bit more aggressive on monetizing rather than just – sort of giving it away, I guess, and kind of working towards hoping these guys are going to generate more success in the marketplace. I guess I'm just curious why you guys didn't take a more direct approach on monetizing it.

We are taking a direct approach on monetizing it. It's actually a matter of perspective. So there will be some elements that we charge for, and then there's others that we will monetize by helping them drive gross ads. We have a very clear monetization strategy, and we're very comfortable as a leadership team that it's going to yield significant revenue and upside, massive amount of upside and revenue.

Got it. So if I look forward and just think about the growth in the company, I think you guys, Corey, I think you said 10% to 15% or maybe the lower end of that range. Without B. I'm sorry?

Without B.

Right, okay. And then, so of that growth, is most of that coming from same-store sales in a sense, like existing customers growing faster or growing more with you, or is it new customer wins that drive the big percentage of that 10% to 15%? How do you kind of parse out where the growth comes from?

Well, it's, again, broad-based demand across all the different segments. So first of all is that existing customers have a bunch of unmonetized footprint. So for example, if I only have, you know, we have some customers who are at the right market share levels, who are at 65, 70% market share. That's kind of your, I would say, almost a theoretical maximum in a competitive market. But we have some customers who have only 20% market share, so that represents significant uplift in those scenarios. At the same time, we've launched our MDU products. So those customers all have an MDU problem, And they've driven it pretty aggressively on stage. We actually had an MDU company who has something like 900 apartment buildings under management, and they did their first two and were ecstatic about transitioning to Calix for those scenarios. So there's a great example of a significant unmonetized footprint, both in our existing base, because all of our customers, about a third of all tenants in the United States are in MDUs. So there's a massive untapped market that we haven't even started selling into that allows our sales teams to expand significantly. We're very bullish on where MDU goes. As you noted in the quarter, George, we added 20 new customers. So those are essentially starting customers. I don't know where we are year to date, but it's gotta be around probably 60-ish, I guess. I don't remember. So we're winning new customers. and expanding there. So those growth numbers file into, and that's what we're specifically looking at with regards to where Corey's talking about. And then we have new market expansion, which we have not incorporated into the 10 to 15% because it's too early. But we have all the international markets and everything we're going to do there. And we have the tier ones through dedicated platform implementations, which are not in those numbers. And then the last part is we don't have the bead things, but we got our first bead orders this quarter, and that's not in the number either.

Got it. Okay. And then just on bead, since you guys brought it up, I mean, how much – I guess how incremental could that be, you know, in 2026 and 2027? I mean, do you have any sense for magnitude or opportunity or timing there? That would be great. Thanks a lot.

Yeah, so – Yeah, I'll just give you my thoughts on the bead. We are more constructive on bead than we were 91 days ago. The turnaround from the states on their preliminary awards was faster than we had expected. As such, you know a certain percentage of those customers have the ability to plan for a certain amount of the jobs next year. And so while we did receive our first order during the quarter, it's still too early to determine the demand dynamics for next year. there will be some amount versus last quarter I thought there would be like none. But to provide a little bit more color, here's what we know. Of the 49 of the 50 states reporting, California still hasn't submitted their awards yet. The total amount of dollars have shrunk by about 50%. So the original program being $42 billion, it's now going to be something like $20 billion. And when you include the matching funds, now we're talking about a $30 billion program. Fiber is still the dominant technology at 65% of locations and 85% of the dollars. Fixed wireless was 12% of locations and 8% of the dollars. Meanwhile, LEO was 21% of locations and 5% of the dollars. So, as we have said, historically we've done really well with government programs and that we expect we'll do the same with the... Great.

Thank you very much.

The next question comes from Christian Swap with Craig Hallam. Please proceed.

Great. Thanks for taking my question. It was kind of crystal clear the sustainability of double-digit growth that you're seeing. uh but as we look into next year should we assume we um given the outperformance this year uh corey that we should be at the low end of gross margin expansion year over year of 100 to 200 percent is or is that uh not correct you you've got that right thank you uh we haven't talked about that yet but

Yeah, given the overperformance on gross margin this year, I think the increase next year will be more muted. It'll be at the lower end of that 100 to 200 basis points. So we'll continue to expand it. Obviously, our software content grows every single day. And we're going to continue to guide to the 100 to 200, and we're going to grind away at it, right? That's right. But it'll likely be at the lower end of that 100 to 200 basis points next year.

Great. And then now that we found this newfound enthusiasm for BEAD, If you think about aggregate dollars that could come to you over a multi-year time frame, when do you think that peak spending would be?

Well, we still think it'll likely be more of a lens-shaped deployment curve. And so it'll start early. ramp up to some level in 26, then probably level off for a few years before it tails off. Like we said with all these government programs, they take a lot longer to get started than anybody thinks. The dollars that they pull through tend to be much larger than the program, and then these programs then go on for a longer period of time. So we do think it's still a lens shape. It's still too early on the awards to understand the buying dynamics of how much they buy, how much they buy ahead, what mix of products that they're buying and how much they're actually going to actually start building next year. Because, again, it's very late in the cycle. But, you know, so that's all we can say at this point is that there will be some B revenue next year. Just don't have a good sizing of what that might be. Great.

Give us another 39 minutes.

Yeah, we'll give you another 90 days.

Great, thank you.

Well, the other part, I will say, so again, I had a lot of these conversations that I was at connections. To Corey's point around this is going to be significantly larger than anticipated, which we have the exact same narrative that we've had, you know, where other people three years ago were saying bead money is around the corner. We have been very clear. So one of the things you should take away from it is the fact that we're actually proactively talking about it now means that the money is about to flow. Right. So in 2026, the money will flow. But the bigger part of that that everyone needs, you know, and you kind of touched on it, right, is that the bead money. So, for example, when they go and they build out a bead network and they drive it to what was funded while they're doing that. And in fact, we had I had this very specific conversation with a customer where while they're actually building to the ones that they got funded for. they're actually, in essence, passing a whole bunch of other ones that didn't get funded, and they're going to go drop those customers in. And so all of the TAM affiliated with those is pretty significant. So, for example, if they got funded to do $10,000, in many cases there could be another $5,000 to $15,000 that they pass that they're going to build as they go. And so that's not really built into the bead TAM. That's the first thing. The second thing is that once they get the networks in, that's really just to go and build the connection to the subscriber. And going back to George's questions with regards to how do we actually monetize and where are we going, the most important thing for us is to add subscribers. Because if we were just back to old Calix where we were just a network company, then we wouldn't be so fixated on how do you win the subscriber. But as we talk about in our model, the monetization of one to $10 a month in software margins, which are massive is where we're focused because that's the long-term growth and what actually allows us to continue significant margin expansion. And so as we, they go and they build that network, we get them there and then we go help them actually, how do I convert and get to 65 or 70% market share? on the bead money that I put into it to actually build the network while at the same time expanding with the customers who are not funded on bead, but I'm passing them anyways, I'm going to drop a fiber in. So in those scenarios, we're talking about it now because in 2026, it's finally there. We don't talk about things. It goes back to the other question, is it why are you bullish on AI now? Because it's right there and we don't talk about things that we can't actually touch and see. So that's why we're talking about bead now because we can touch and see it.

Great, thank you for that clarity. No other questions.

The next question comes from Tim Savagell with Northland Capital Markets. Please proceed.

Hey, good morning and congrats on the results. Just a couple quick ones here. On the bead front, I think historically we used to use maybe 10% of the award value or network cost to kind of get a sense of what the access infrastructure

opportunity might be, I wonder if that's still a good number or, you know, given your... No, we're using more 5% to 10% depending on the, you know, it's more 5% to 10% is where the number is. But then what you have to also do is extrapolate the incremental opportunity when you win subscribers, which is not part of that to your point on it being the access network.

You've got to think that these locations are harder to get to. There will be put more money into construction. A lot more construction, right. More construction dollars, Tim. So 10 is too high. You're going to have to go less than that.

Yeah. Fair enough. Speaking of the $1 to $10 per month, any update on the timing for a more detailed breakout of the appliance business versus the software and platform business? I know you were, end of next year was what you were discussing.

Yes. I mean, that's still the stated goal by the end of 26. Got it.

So no change there. And if we look at the guidance for Q4 for sequential growth, you know, the various quarters this year you've had maybe small customers driving things and Q2 large and medium. Anything to call out in terms of customer segment movement into Q4 in terms of driving that sequential growth?

Yes, broad-based demand across all segments. Yeah, nothing to call out, Tim. Yeah, but no, I'm going to call that out. That is something to call out, right? Broad-based demand across all segments. The value in our business model and the fact that we have almost 1,200 customers is the fact that we don't have a 10% customer, correct? Correct. No. Right? And we have no 10% customers, which means that from an investment point of view, because of the fact that you see the segments going up and down, that's the value of our business because we have a diversified revenue stream. And so one might be up one quarter and down the next and up the next quarter. It's actually allowing us to even out the whole thing broadly. And when you have broad-based demand, which we do, that allows us also to plan the business very well. Great, thanks very much.

Thanks Tim.

We will take our last question from Ryan Koontz with Needham and Company. Please proceed.

Great, thanks. Maybe a couple topics if I could. Maybe philosophically, you know, relative to your 10 to 15% growth model and thinking about your SAM and your current customer relationships and how do you think about growth limiters in the industry that can allow you to outperform that, whether it's relative to the bead process, supply of fiber, supply of labor, supply of components, which doesn't seem to be that big a deal anymore. I mean, how do you philosophically think about risks and upside relative to things that are out of your control?

So from a risk point of view, at this point in time, we've actually been talking a lot about that, is where do we see the risks? And we really don't see them with regards to limiters. So, you know, there's, you know, the bead stuff, the reason why we're actually saying, hey, now we see it coming out is because of the fact that obviously, because it's a governmental process, and as we said right from the get-go, is that these things are a bit complex and takes longer to get here, but when it does get here, it starts flowing and it flows for longer. So, you know, there's some timing components affiliated with that Right? So that's the first one. And then from a systems and components point of view, we don't see any issues other than, you know, there's some memory prices going up, but we balance that out with some other areas. Right? But these things all balance out because, in fact, we have a broad-based business. There's nothing specifically from a leadership point of view that we're looking at as a risk. I will talk to Upside, but are there any other risks that you see, Corey?

No, I think as it relates to the practical limiters on the business as you go and build new networks, it's permitting and labor. So that puts a natural governor on just how fast they can go.

Well, but by the way, and in Washington, that's probably one of the biggest topics that everybody's talking about, which is how do you actually speed permitting and access and those different components. So there's so much focus on driving that, right? I would also think that the midterms coming up next November, that people want to get things done as they go into an election cycle. So that's definitely a, I would say that's going to speed the process to some extent. And so, I would say that there's nothing out of the ordinary that Corey and I are talking about and the leadership team is talking about that is a significant risk. In fact, the exact opposite, we feel very confident with regards to the broad-based demand, the running of the business, the talent that we have inside the company and our relationship with customers. So we see that as everything's green. Now, with regards to upside, I'll go back to what I said around artificial intelligence. So this is, you know, this is where we're uniquely positioned because of the fact that we have deep insights on how to run a broadband company. We've mapped it all into our cloud. We have intelligence at the, in the network and we have significant intelligence on the prem and we bring all that together in the brain, which is the cloud, which is now AI capable. and we're uniquely positioned to help our customers do more. I go back to the question I got asked about the monetization of AI. We are absolutely going to monetize AI in a significant way by helping our customers monetize their business at a significantly faster pace. You have to understand how sales cycles work, which is my background. I spent 30 years running enterprise sales organizations. would you rather go and pursue a customer and get, I don't know, 5% or 10% price uplift on a single cloud, or would you actually help that customer add 25% more subscribers, which takes your revenue per subscriber from zero to significantly higher in the $1 to $10 range per month? My view is I want the $1 to $10 as high as I can and fast as I can, instead of grabbing a 5% or 10% kicker. Makes no sense. And plus, this will also help us drive, you know, if you look at our clouds, we have roughly 1,000 people on our clouds or customers on the clouds. And then it drops off. We have three clouds. It drops off. It drops off. And therefore, how do we get all of our customers to every single customer having three clouds? That's what AI can help us drive to. And that increases monetization. And so we'd much rather have a thousand customers on three clouds than, you know, a large, you know, a thousand of them at X clouds in that way. So we think there's huge opportunity. And frankly, I've been here, I've been here nine and a half years. This is what we work towards. We tested neural networks for the first time back in 2017. We saw the opportunity, but we couldn't actually meet the privacy and security requirements that our customers needed to use artificial intelligence in a trusted way. Spent the last few years building all of that, and now we're literally going to have our success teams go into a customer and say, hey, Corey, remember how I was telling you that you really should do this, and you said I don't have the team members or the capacity to do it because I'm busy doing other things? Now with AI, we're going to say, hey, Corey, here's what you should do. Press the button. And the AI engine will do it. And that, you know, when we talk about crossing the chasm, that is going to allow us to cross the chasm at a rapidly faster rate, which is why we are so bullish on AI.

That's great stuff. One more quick follow-up, if I could. You know, nice to see the rebound in the small customer cohort, you know, best in like 10 quarters. But looking up market, the medium and large cohorts have grown over 50% year to date, clearly a great indicator there. How much of that gain up market is competitive displacement versus your customers investing more and being more successful with your help?

Do you mean in small or in large?

Medium and large. Medium and large.

And those are competitive displacements. a large percentage of us, is us actually becoming the go-to-market engine for these customers. So where they were with someone else and that's who they were using just for what I would call dumb Wi-Fi, and now they're looking at what we do across our clouds and everything we're doing on the experience edge and saying, I want to radically improve my go-to-market strategy, and Calix is the best one to do that. So absolutely were displacing in the Fed because they had a previous partner and were now helping them drive their business. And one could argue that from a competitive displacement point of view, if we're with a service provider and they're competing with someone else who's not using our product and they crush them as they do, that's us actually displacing a competitor in a different way. Whether helping our customers win and crush their competition is who's not using us is actually us helping us. That's competitive displacement, just in a different way. And that's absolutely 100% how I think about it every single day.

Great stuff, guys. Really appreciate it. Thanks for the questions.

We have reached the end of the question and answer session, and now I'd like to turn the call over to Nancy Fazioli for closing remarks.

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

Thank you. You may disconnect your lines at this time and have a great day.