All right, we're gonna go ahead and get started here. Hi, everybody. My name is George Notter. I work at Jefferies, covering the communications technology sector. This is a software conference, and we're excited to have Carl Russo, former CEO, now Chairman of Calix. And, Carl, welcome. Thank you for coming. We're gonna talk a bit about software here today.
Happy to be here. Thanks for the invite.
Awesome. Okay, so, maybe for some of the folks here that maybe aren't the usual audience for Calix, maybe can you talk a bit about, you know, the quick overview on the business, more specifically, you know, a bit of an overview on the software piece of the story?
Sure. So, the key to understanding what we're doing and who we are, is to think about where we exist. We exist in the network working with broadband service providers. Basically, a broadband service provider is the provider that connects you, ultimately, to the applications and, and content that exists in some web-scale player. So the broadband service provider sits in between that, and we are solely focused on that space, and helping them deliver what we believe to be the, the best service to all of their subscribers. That's what we're focused on. In order to, to deliver that mission, we have literally created a new company in what was an existing company, and we are now a full-blown, appliance-based platform, cloud, and managed services company.
So when George says, "The software," it's literally the platform which consists of the operating systems that run the appliances, the clouds that sit above them, and managed services, which are a set of applications and other things that allow the service provider to deliver that excellent subscriber experience. We are in early stage, if you were thinking about us as a startup, appliance-based platform, cloud, and managed services company, meaning the following: if we were literally a day-one startup, 100% of our revenue would be appliances, and then there'd be some subscription, and it would start to move to the right. And over time, you would expect the software business to grow, as not only an absolute basis but as a relative basis of that revenue.
What we've said, and the stage we are at, is the recurring revenue is somewhere between 10% and 50% of our revenue, and the appliances are the majority of the revenue. So we are still very early stage. The last piece I would add to that is, please recognize that those service providers that I'm speaking to, this is an infrastructure space, so the product life cycles are incredibly long. They are not like what everybody is used to in the technology space. You know, it seems with AI these days, we have a new AI every three months. This is a multi-decade disruption that we are working in, and so it happens very slowly. So this will happen over time, and you will see it manifested ultimately in our gross margin line.
As in the software mix continues to grow, the appliance has the margins that you would expect it to have, and you'll see that chug along, going up. So is that a reasonable concept?
Yeah. So the way I think about the software business, and stop me if I'm misguided here, but I think about it in terms of you've got appliances that are in line with the broadband subscriber, both in the network as well as the residential, the home, the Wi-Fi gateway, the ONT on the side of the house, the OLT that sits in the carrier's central office, and we're grabbing metadata that's relevant to the traffic that's flowing across that connection. You're shunting it into the cloud, Amazon, AWS, or somewhere else, and then you're running analytics on top of that data lake, right? Effectively, and then you're using that data to create services and insights for carriers. Is that the right description there for the folks in the room?
The answer is yes, and. Which I was trained to say, "Yes, and," not "Yes, but." No. Yes, and. Keep in mind one item: the first thing that we're focused on is that subscriber experience. And for all of you, I think, is there anybody here older, as old as I... No, probably not as old as I am. Things used to be connected with wire. They aren't anymore. They're connected wirelessly. 95% of traffic in the world goes over an unlicensed Wi-Fi spectrum, okay? By the way, why do I say unlicensed? Because in the same spectrum that Wi-Fi exists, so does your microwave oven. Do any of you have leaky microwave ovens? You all do. Why do I bring this up?
Because the first thing that metadata is doing is focused on actually, literally, what's going on with you and your device connectivity, and how are we tuning things to make sure you have an outstanding experience, which is, today, arbitrated between the two antennas. So in other words, when a service provider says, "You know what? Eh, we're not gonna do that Wi-Fi stuff. We're just gonna give you a gigabit for $19 a month," nice, necessary, but not sufficient. So the first place we go with this is to deliver that subscriber experience, then add everything else that you just said. Because if you don't do that, why is any subscriber gonna be interested in anything else?
Got it. Okay, great. And then I also think about some of the other service offerings that can run on top of broadband networks.
Mm-hmm.
So, like, the way I sort of think about Calix is, you're trying to sell to customers who are not in the commodity mindset, meaning speed and price are the determinants of, you know-
Mm-hmm
... their marketing angle in the marketplace for subscribers, but rather, new service offerings that ride on top of a broadband network.
Sure.
Maybe you could just talk a little bit about what those service offerings are, what your carrier customers are enabling for their subscribers?
Sure
... based on that software. Like, give us the sort of quick view of some of the value you create.
Yeah, and it's continuously learning. So, we've been at the managed services business now for some five years. So from applications that run on your phone as a subscriber, these applications, so if George decided, "You know what? Doing this analytics stuff is interesting, but I can now go be my own BSP," and he decides to become a BSP, raises some funding. I'm sure there's some private equity folks here that would back him. And he goes off and starts that business. He would, with Calix, have managed services, that when you look at them on your phone, you're managing your network, you wouldn't see Calix anywhere. It would say, George's BSP, and you would use it to manage everything in your home, from connectivity to who can get on it, to notifications, to security, to virus applications, to any number of security items going forward.
And we've extended that into other applications. So, for example, George might, in his neighborhood, have a coffee shop and other small businesses. There's a small business app that we call SmartBiz, which allows those small businesses to have a Wi-Fi router, but also their own app, which allows them to do, in addition to what I just spoke of, things like, I come in and get a coffee, I connect to the Wi-Fi. As the small business owner, I can start to collect email addresses and start to do other marketing to them. George is actually selling that package through his BSP to that small business owner. For those of you who understand small businesses and medium businesses, in every technology space, it's the bane of their existence to go market to them. You have a shake-and-bake opportunity to go do that. By the way, it gets better.
We've learned from our BSPs, "Hey, you know what would be really cool? Is if we could figure out how to do something like with our towns," because we're very subscriber-focused, but we're community-oriented. Because what we've found is by helping the BSPs not only focus on exceptional subscriber experience, but do so on a community-by-community basis, and this is where these guys, the BSPs, become killers. Because they take that metadata, and it allows them to actually, with at subscale, deliver tailored to that community. This community is a little different. So they came back and said, "We'd like to put Wi-Fi up at our high school stadiums." By the way, if you've been in The South, high school stadiums look like professional stadiums. Big part of the community. And now we have an application called SmartTown, where they, in fact, can offer that up.
You can be a customer, go to the football game or the soccer match or whatever the... See? Soccer. And connect to Wi-Fi, and lo and behold, it's George's BSP. By the way, if you're a customer, it hooks up automatically. If you're not, you can apply, and you can just start to see how all of this starts to work together. These are the learnings that we've been doing over the last bunch of years, and we're still early in this. We're learning every day from our customers. We have about 1,000 customers now on our platforms. Lots of input.
Yeah. So as I think about the components of value that you create for customers, is there, like, a hot list that you go down? You've got... You guys, I think, have changed some of the names of the offerings over the years, but there's Support Cloud, there's Marketing Cloud, there's Operations Cloud, there's ExperienceIQ, there's ProtectIQ. Like, what do you think of as being sort of the low-hanging fruit in terms of your ability to penetrate carriers with these software components?
I wish there was a low-hanging fruit, and then I wish there wasn't, and let me explain to you why. We have multiple entry points. So, as an example, you can enter an account. So as Michael spoke to, on last quarter's conference call, as we're crossing the chasm now, as this market is starting to cross the chasm of a disruption, we just signed up a legacy Tier 2 customer with SmartBiz. Just SmartBiz. So it's a Wi-Fi router, the apps, Service Cloud, Engagement Cloud, and that's what they're using to go sell that vertical. The flip side is, as many of you may be aware, Verizon's next generation One Fiber Intelligent Edge Network is built on AXOS, which is the platform in the network.
So we entered from an entirely different perspective on the network side and not vertically, horizontally. So we can enter on any one of these. It depends on the customer to tell you which one we're gonna enter first, so no, there's no hot. And as we're crossing the chasm now, it's all over the place as far as entry points. We do believe, over time, if you start over here, it makes it easier to come over there. If you start over there, it makes it easier to come over here. Because if you understood George's comment about metadata, if you're pulling metadata from everywhere in the network, the more of it you do, the more data access you have, the more powerful the whole story becomes for the BSP to their subscriber.
Got it. You know, I think for me, the thing that's also interesting about your customer base is that a lot of these guys are Tier 3 telecom operators. They're in rural areas. They have limited resources. They don't have engineering teams. They don't have significant tech support teams or marketing teams.
Mm-hmm.
So you guys can come in and take a lot of that functionality and basically productize it in the form of your software components and and really make these guys, you know, killers in the marketplace in terms of their ability to win subscribers, get high penetration rates, get good ARPUs, reduce truck rolls, all that good stuff, so-
Well, let's just take that-
The flywheel piece of that.
Yeah, let's take that real quickly. Imagine that George is that start-up, and he's a small service provider. He can't build the things that we're talking about. You don't have the mass, the revenue, the, the funding. Now, all of a sudden, he's been given almost a shake-and-bake franchise, that you're better than anyone out there, but you have an added advantage. You're in the community, and that becomes a killer advantage for these folks, and as they scale, they learn to do it community by community. If you look at the BSPs that have grown with us most, most aggressively, they literally come at it from that perspective, and there's no more scale disadvantage. So running a large-scale service provider used to be a lot more efficient than running a small-scale service provider. But the beauty of the platform model is Verizon clearly has scale over others.
But the E9-2 system and the AXOS operating system that run on it is the same E9-2 system with AXOS that's, you know, Cedar Falls Utilities. It's running in their network in Iowa, and trust me, they're not of that scale. And do they have a scale disadvantage? Sure, but it's not like this, it's like that. And it's the same AXOS that runs at Cox in the E3-2, which is a different system, but it's literally the same AXOS on the same software cadence. And so you're starting to flatten that scaling, and you're putting the premium now on the ability of the company to go to market. And by the way, that's the evolution.
You guys have talked a little bit about, having more opportunity with some of the bigger carriers. The bigger carriers, there's a not invented here mentality.
No doubt.
You know, they want to own the sort of software content and value-added services that are in the service in the network, in the offering. They don't wanna give away their portion of their ARPU to somebody like Calix. Like, 'cause that gets interesting, 'cause that could be a good lever for you guys in terms of the model.
Well, if you study disruptions, then you know that the first thing that you do, if there's a technology disruption, and we've been working on this disruption for 15 years, is you focus on early adopters. You have to, because otherwise, you'll get taken off of the disruption and miss it. What's happening now is these BSPs that are growing up are actually taking subscriber share from the legacy providers. Until that happens, they're not. It's like they're doing fine. And now that you start to put them under pressure, they become interested in who they're losing share to, and it opens up the door for conversations. But they still have lots of pride of ownership of what they've built, and so it will happen over time. But let me give you a parallel in the software business.
Large customers, large enterprise customers years ago figured out that if they tracked their customer relations, they could be more efficient. And so they built software systems to track customer relations. Salesforce comes along. Okay, who buys Salesforce? Well, the first ones that buy it are the ones that don't have it, can't build it. And over time, eventually, somebody in those large customers goes: "Why are we building this? Why do we have 200 engineers doing this? Aren't we in, like, the banking business? Can we just go buy it from them?" And so ultimately, that's what happens in this maturity curve. Keep in mind, this is a multi-decade disruption, so I believe over time that will happen, but it's gonna happen slowly. But we are clearly now engaged with customers that are under pressure from a subscriber standpoint, as you see.
You know, as Michael would say, "The pipe for a price model doesn't work anymore." So there's a lot more conversations going on, for sure.
Got it. Okay, that's interesting. Is there... As I think about your business, you know, you guys brought in Michael Weening to be the CEO some time ago. He comes from a Salesforce.com background. You know, the software story is really about, I think you guys call it customer success, right? You're going into, it's not just sell the customer and come back three months later and-
Mm-mm
... sell them more when they've, you know, deployed all the stuff you've sold them. It's, it's not an equipment type of sale.
Not at all.
It's a consulting sale, effectively. You're in there every day, helping them get more utilization out of the software, turning on new software components, new software modules. Like, I guess the question here is, like, how do you see the growth dimensions for Calix? Like, is it more about deeper penetration of existing customers with more software modules? Is it more about new customers? Is it about winning the big customers? Like, how do you think about the growth algorithm on the software side of the business?
Okay, watch this. Let's see if the audience is awake. Is the audience awake? How many of you have broadband? Who doesn't have broadband in here? Does everybody have? Okay.
For the record, everyone's hands are up.
Here we go. How many of you love your service provider? Uh-oh!
Only a few, only a few hands are up.
So, here's the opportunity. The service provider model, remember, it comes from a utility, monopoly, direct, right? But it's very much you take what we, we give you, and it is what it is. They haven't grown up being subscriber-focused marketeers. And so to your point, the customer success teams, culturally, are very much focused on helping them start to really orient towards that subscriber. So that part of the business, you could almost say, you're a consulting business. And oh, by the way, you have these products that you can bring along with it. The customer success teams are extraordinarily valuable, and they're led by a person that arguably created customer success, actually at Salesforce, not John Durocher. Without that, we don't help our customers evolve at the rate that we think is optimal for them to be successful in the market.
So it is a huge part of what we do... every day. So absolutely correct.
I was looking at your headcount numbers, in the 10-K filing from a couple months back.
Mm-hmm.
You guys grew headcount in 2023 by 50%?
Yeah, that's probably about, like, yeah, 1,100 to, like, 17. Right?
And then you guys grew headcount, sorry, in 2022, you grew headcount by 23%. I think the company now is around 1,700-
That's right
... employees. Yeah. But the revenue's grown quite a bit slower. You're investing ahead of the revenue growth, and I assume that a lot of these hires are really around this customer success story, and but this year, the top line's gonna decline, and we've kinda talked about that on a different, a number-
Yep
... of different levels. But, talk about your investments in the customer success team. How are you measuring productivity and return on that investment? And does it portend a big inflection in the overall sort of financials of Calix? Like, how, how do you think about that investment and, and where it's going?
So let's, I'm gonna-- since you started the arc of the story, I'll go back to the beginning. So as our revenue started to really ramp up, I'm a big fan of making sure you know what you know, and so we actually under-ran OpEx, initially in the ramp. And we sort of waited to make sure that, "We're sure? We're really sure? Okay." And then we started to let OpEx come up into the model. OpEx came up into the model at the end of 2022, and then OpEx tracked the model in 2023. Now, you have a downturn, what do you do? Right. So how much do you believe in the disruption? And so for us, it's plainly clear what the opportunity is in front of us.
And so the decision is, we're not gonna lose money, but we're also not going to cut OpEx, given the investments that we're making and what we believe the long-term returns are. So that headcount number you just spoke to is gonna be pretty flat, going forward, and we're gonna simply go muscle through that. Because the time to have hors d'oeuvres, as someone once said, is when hors d'oeuvres are being served. They're being served, and so we're gonna stay there, but we're... You know, look, we don't use the word 'spend' in our culture. And if somebody says it, I'm gonna kill 'em. We use the word 'investment,' just like we don't use the word 'hope.' Don't care about what you hope, care about what you plan. Given all of those things that we see, we're gonna hold that flat.
Now, having said that, the platform cloud and managed services business continues to grow every day and grow by a little bit more every day, as we learn more and more about it. But the appliances, through the pandemic, have clearly blown up and down, and while we were underweighted to it from the market's perspective, we weren't immune to it. We very much worked with our customers to not let them stuff their warehouses. But on the downside, as what's happened is, lead times have come dramatically in from 4 or 5 or 6 quarters to 1. And when that happens, okay, we're here. We'll get on with it. As we look forward into the business, it's very clear what's coming, on the platform cloud and managed services side. And to your point, on the customer success side, that evolution has to keep going.
The appliances will recover. So that's sort of a long-winded, circuitous, non-answer to your question, maybe.
We've got a few minutes left here. I wanted to... And that, that's good insight. So how do you think about the capital allocation in the business, right? You talk, you mentioned investment. I was thinking about the buyback, right? So you guys have had a couple disappointing quarters, expectations came down, the stock was down. You announced $100 million dollar-
Right
... share repurchase program, you know, earlier this year. I think you only repurchased, I think, $4 million or so in Q1, and you said that this year's repurchase program would be smaller than last year's in aggregate. But you've got quite a bit of cash on the balance sheet. You're generating positive cash flow.
Mm-hmm.
Like, why not be more aggressive with the stock?
Because the answer to your question is, it's not whimsical or emotional. As you and I talked about personally, I'll never get on a conference call and say, "Our stock is undervalued." You make that determination. Our job is to go focus on building the business. We run a strategic committee as part of our process. The strategic committee actually looks at five-year models, pieces, et cetera, relative market stats, and there's actually a matrix that's put together on the stock buyback. And so that's what drives it, and so the $100 million plan is in place. It'll be driven through that matrix. One thing being said, it is interesting about... Let's just say, I've learned more about 10b5-1s-
Right
... and the timing of them, so we sort of got ourselves in the middle of that with board calendars, et cetera.
Got it.
So-
So you adjusted the 10b5 program at some point, and therefore, you've got to sit on the sidelines for a period of time. Got it. Okay.
What he said.
Uh.
But we will continue to buy back shares. No, no question about it.
Got it. Okay.
Now, having one other piece, I don't remember what the movie was, but it was Protect the Nest Egg. We are very focused on operational discipline. There's a phrase that I've used for a hundred years, called 'run a clean shop.' I expect the team to deliver best-in-class balance sheet metrics. I literally laid out a bunch of balance sheets over the weekend, 'cause I have nothing better to do, and looked at ours. You look at Calix's balance sheet versus any other company, man, I'll tell you, it's a pristine balance sheet. Hats off to the team.
Yeah. Okay, good. So you're investing in yourself, you know, and buying back the shares-
Correct
... as well as investing in the business, fundamentally. Got it. Is there any kind of, with all the investment in the customer success team, I guess I would assume that there's sort of, kind of a formula in terms of yield. People get better at their jobs. There's more-
Sure
... traction that happens over time. Is it, and I know you guys don't report the software business from a revenue perspective, but is it fair to say you're seeing the returns on that investment? There's an inflection in the growth in software, or how do you think about sort of the dashboard of what does success look like in software?
Well, let me give you the dashboard of what success is in the company, because we literally have a dashboard, and we review it at the board level, every 91 days, and I look at it. Cory and Michael allowed me to stay on email and inside the company's systems, probably a mistake. So, you know, you watch it all. The first, the number one chart we look at, bar none, is the rate of subscriber adds, because ultimately, that's the amalgamation of everything you just said, plus other things. And that rate continues to just slowly... It's going up, but it slowly bends up, as we learn.
Okay.
I, every flippin' week, I look at that chart. Every week.
Okay. So that's accelerating. Software business is accelerating.
Correct.
Software is accelerating.
And then-
Great
... the other piece is, then the pieces on top of it, the cloud, the managed services, how are they disseminating across it? 'Cause ultimately, what you're - everything we do is monetized, not on a customer basis, not on a system basis, on a subscriber basis. So that's fundamentally the metric that we look at.
Okay. Well, we're out of time. Carl, thank you very much for your time. Really appreciate it. Have a great day, everybody. Thank you.
We're out of time?
Yeah.
I wish somebody would've told me.