Greetings, and welcome to the Calix third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Tom Dinges, Director of Investor Relations for Calix. Thank you. You may begin.
Thank you, operator, and good morning, everyone. Thank you for joining our third quarter 2021 earnings call. Today on the call, we have Chairman and CEO, Carl Russo, Chief Financial Officer, Cory Sindelar, and President and Chief Operating Officer, Michael Weening. As a reminder, yesterday after the close of market, we released our letter to stockholders in an 8-K filing, as well as on the investor relations section of the Calix website. This conference call will be available for audio replay in the investor relations section of the Calix website. Before I turn the call over to Carl for his brief opening remarks, I want to remind you that in this call we refer to forward-looking statements, which include all statements we make about our future financial and operating performance, growth strategy, and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements.
Factors that could cause actual results and trends to differ materially are set forth in our third quarter 2021 letter to stockholders and in our annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements which speak only as of their respective dates. Also on this conference call, we will discuss both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures are included in our letter to stockholders. Unless otherwise stated, on this call, we will reference non-GAAP measures. With that, let me turn the call over to Carl. Carl.
Thanks, Tom. Bookings in the quarter continued to be led by the unrelenting growth of our all-platform offerings. Demand continued to broaden as we added 38 new customers to our already diverse base of broadband service providers of all types and sizes. The exceptional growth we have achieved over the last two years speaks to the power of our platforms, systems and services. Fresh off our 16th ConneXions Summer, it is clear our customers are putting our platforms to good use as many stood on stage and shared their stories of success with their peers. In short, our all-platform customers are taking share in their markets as they build the next generation of broadband service providers, and we are excited to help them win.
While we are clearly positioned in front of a multiyear secular growth opportunity, it is also clear that the short-term supply challenges will persist for longer than we anticipated just a year and a quarter ago. We now expect the supply challenges to persist through the entirety of 2022. While our supply chain team again performed well in the third quarter, their struggle will continue for the next four or five quarters. That said, we are up for the challenge. We have a high-performing team that continues to attract outstanding talent from many industries, supported by a strong balance sheet, leveraging a focused product strategy. We are excited every day to help our customers simplify their businesses, excite their subscribers, and grow their value. With that, let's open the call for questions. Operator?
Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press Star One on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star Two if you'd 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 key. Our first question comes from the line of Paul Silverstein with Cowen and Company. Please proceed with your question.
Thanks. Good morning. First off, I was hoping that Carl, you or Cory can quantify the magnitude of the supply chain impact on both revenue and especially on margins. The related question would be, I appreciate that there are different factors that likely contribute to your exposure and the exposure of your peers. I was hoping maybe you could provide some insight on why it appears that the impact was so much less for you than it was for Adtran based on their pre-announcement and perhaps Cambium based on their pre-announcement.
Okay, fair enough. Let me first address the margin issue, because as you may remember, we've said prior that the margin impacts were greater than 1 point of margin, less than 5 points of margin. Cory, you may want to give a slightly different color or update to that as these things get harder.
Yeah. I would update that with certainly inside of the quarter, things have gotten harder across the board. We've seen lead times push out. We've seen price increases, transit time increase, freight costs increase, both air and water. It's definitely a very challenging environment. I would say inside the third quarter, it's greater than 200 basis points and less than 500 now.
Right.
Clearly an impact to margins.
On the revenue side, Paul, a couple of observations. From a revenue standpoint, we continue to work with our customers. As you know, we have a direct engagement model. We obviously had great attendance at ConneXions, and thanks, by the way, to all of our customers for coming out to ConneXions. We had some 1,500 customers there. By the way, in addition to just being glad, I think, to get out of the house, the spirits there were very high. Again, a lot of it's free to core between us and our customers, and that planning helps us lay out what we're after from a revenue standpoint, which is frankly to make sure that they are meeting their subscriber demand. Right now, we know that they're meeting their subscriber demand, and that's what we're focused on.
From a revenue impact, I mean, I guess we could ship more to their warehouses, but right now we know that we're meeting their subscriber demand. For the factors, look, I think the world of the team, and I think you've seen the discipline of not only the culture of the team here, on our execution and processes. As we've spoken about before, the platforms have allowed us, because of their fully abstracted model, to narrow and focus our SKU count. Our teams are working and managing some 300 SKUs or thereabout, where six years ago, well, when Mike was hired, we had some 3,000 SKUs-3,200 SKUs. There's been a lot of work to drive our platforms not only through our customers, but take advantage of the benefits of the company.
We have a very talented supply chain team with a strong balance sheet, frankly, focused on 300 SKUs. I think that's the biggest difference to that question. Does that help?
All right. Yeah, it does. A follow-up, if I may. Carl, in terms of visibility, I trust it's very strong. Any incremental insight you could offer?
Again, coming off of ConneXions, strong visibility. You know, I don't know that it's stronger or less than it was a week ago or a quarter ago. I would merely amplify what we've said to date, which is the partnerships that we have with our customers. Again, the direct engagement model. Our customers are definitely working with us to plan this out, and that makes all of this a whole lot easier to try and figure out.
Carl, historically, I think your formulation was that a growing number, already meaningful number of your customers were giving you forward visibility well beyond the 90-day book and ship I think typically characterizes your business. Has that? Is that now almost all customers? Is it meaningfully greater number than it was 90 days ago or 180 days ago?
Yeah, it just continues to grow.
All right. I'll pass it on to Tricia.
Thanks, Paul.
Thank you. As a reminder, if you'd like to join the question queue, please press Star One on your telephone keypad. Our next question comes from the line of George Notter with Jefferies. Please proceed with your question.
Hey, guys. Thanks very much. I guess my interest was piqued from the shareholder letter around large customers. I think you said you had one 10% customer during the quarter. You know, I saw the international performance was quite strong again. I'm wondering if maybe that was an international customer, but any insight you can give us into that customer and what's driving that strength and why you had such strong shipments into that customer in the quarter would be great.
Yeah. I think we said it in the letter, or maybe I said it to myself inside my own head, and I didn't say it out loud. It literally is an accident of all the supply chain challenges. That customer had a shipment that went to them in the third quarter that they got in the third quarter, and they had a shipment that went to them in the second quarter that didn't get there in the second quarter. It got there in the third quarter. They ended up just being over the 10% threshold. Look, what it should indicate is that, you know, obviously, you know, it wasn't a large or a medium customer based upon the numbers that are in the histogram in the letter.
What it does indicate is there's a lot of strength in smaller customers. Some smaller customers, depending upon what they're building, especially greenfield customers, can drive quite a bit of revenue. That said, going forward, unless we feel that someone is going to be a 10% customer for the year, as it shows up in the 10-K, we're not gonna identify them.
Got it. Okay.
Yeah.
Just to expand on that, obviously, the large customers were weaker again. I assume that some of that you can attribute to the situation at Lumen, obviously, the selling off a portion of the assets, that strategic divestiture. Maybe you can just talk about, you know, kind of the outlook there. Obviously, it's historically your largest customer, but any insights there would be great.
I think it's the same as it was 91 days ago when, you know, they had announced the spin-off of their eastern assets to a group led by Apollo. We said that that may open up opportunities with that group, but also the capital going into Lumen might open up opportunities. There's no change in the strategy from Lumen that we're aware of, and certainly nothing announced.
Great. Okay. All right. I'll pass it on. Thanks, guys.
Thanks, George.
Thank you. Our next question comes from the line of Michael Genovese with WestPark Capital. Please proceed with your question.
Great. Thanks. I guess, you know, you made comments about the supply chain in 2022. I guess I wonder, with that as context
Can we talk about your current view on revenue growth, gross margin and OpEx levels for 2022?
Yeah. Well, before I go there, let me I wanna make a little more comment on the supply chain because clearly what we're saying is we don't see this abating in the second half. We think this is gonna be with us, and we're just gonna have to execute with excellence, plan with our customers and go accordingly. But, you know, Michael and his team led a fantastic ConneXions. But one of the aspects that isn't much known about from a ConneXions standpoint is not only do we have customers there, but we have partners, and we have our suppliers there. Michael, maybe you have some observations you wanna share from the supplier summit just on that alone, and then I'll come back to your other question, Michael.
Thanks, Carl. I had the opportunity to meet with many of our suppliers. While different media outlets continue to forecast when the supply shortage will end, it's very clear that this is not going away in the short term. Whether it's delays in the L.A. port, COVID outbreaks, slowing down a factory in Asia, or even the weather that we're seeing in California this week, the disruptions continue to have an impact, and it was the discussion point at the supplier summit. Most believe this is a 2022 issue, and some believe that we could see this seep into 2023.
Yeah, I mean, that's what we're seeing, and they were very forthright in that room saying it ain't happening in 2022. On the revenue side and the margin side and the OpEx side, as you know, we have a model, and we're not moving off of that, but maybe categorically, Cory, you can sort of walk down revenue margins, and OpEx and give color on that for 2022.
Yeah. A refresher, you know, our revenue model is 5%-10% per annum. We did provide a little bit more color inside the letter, which said that we expect to be towards the high end of that range. On the margin side, it's still 100 basis points-200 basis points. I would say to you today that there's a lot of uncertainty as we look to 2022. We certainly don't have a line of sight to it, but we're not changing our view of that margin expansion. If you look at the OpEx, we're gonna continue to invest the model. Right? You know, R&D will be at 30% of gross profit. Sales, marketing will be 16%-18%, but we will be looking to drive towards the high end of that 16%.
One thing, G&A will continue to think will be about a point less than where we're at with the model. Our model would say 9%. We're closer to 8%, largely due to the increased revenue growth over the last couple of years that accelerated that number downward.
just to add, we're committed to invest fulsomely in that model for a very simple reason. We see an extraordinary secular opportunity ahead of us. Mike, sorry. Go ahead.
Right. Well, yeah, I want to follow up on that point. I mean, when I look at the projected rate of spending in OpEx, and then you talk about this extraordinary opportunity, and I also look at the revenue growth in the last couple of years, I mean, frankly, it looks like the OpEx plan is ahead of a 5%-10% revenue growth company or even a, you know, even a 10% revenue growth company. There just seems to be a little bit disconnect. Am I thinking about that the wrong way? I mean, when I look at your investment plan, it seems like you think you're gonna grow faster than 10%. Am I thinking about that the wrong way?
Well, yes, you are thinking about it the wrong way, if I may be forthright. There's part of it that you were saying, I think, is the correct way. Again, to go back, you have to go back a year and a half ago, two years ago, because we were very tight-fisted on our OpEx growth during the pandemic for a number of reasons when it first came. As we got more and more comfortable with our growth rate, and as we got more and more comfortable that we could manage through the pandemic, we then let ourselves go back to our model. The reason the rate is outgrowing what you see is because we're behind our OpEx model by a substantial amount. We are gonna continue to grow our OpEx fulsomely to that rate.
Now to your point, look, we've also said that we have grown our employee base on average about 5% a quarter for the last few quarters. If we didn't see the opportunity in front of us that would justify that employee growth, we wouldn't be growing. On the one hand, to your point, we clearly feel that we are in front of a significant secular growth opportunity, and we are going to go capture that demand. We're gonna try and figure out how to supply it. You know, it's very simple. We see a long-term secular opportunity muted by a short-term, you know, a year is transitory or more, on the supply side. Does that give you the color to frame that, Mike?
Yes, absolutely, Carl, it does. I just wanna ask one more question, probably give Michael a chance to come back. Which is just, you know, ConneXions seemed like a great event, and there were a lot of important announcements. I just was wondering, just focus us on what the most important announcements from ConneXions were. Thank you.
Wait a minute. That's not Michael barking, is it? Okay, just kidding. Look, ConneXions was fantastic. Michael, as a matter of fact, why don't you give some color on customer meetings or something that makes sense to you that you can weave in the product announcements and what you saw there?
Yeah, more the product announcement stuff. Thank you.
On the product announcement?
Yeah. Go ahead.
Okay. From a product announcement point of view, you know the most important, I think that the thing that you saw from us, if you watched the opening general session, was that all of our product announcements were correlated to customers. This was a key message because at this next step with our platform, we have the opportunity to innovate in any direction. The last thing that we want to do is innovate based upon our own beliefs. We want to focus on innovation based on what our customers need, where they view us adding the most value, and how we drive their success to gain this long-term opportunity.
From an announcement point of view, if I was going to stack rank the most important announcement, the first one I would start with was our end-to-end solution model, which we call one plus one equals four. That's where we have the ability to tie the Intelligent Access EDGE with the Revenue EDGE using Calix Cloud. It gives you the capability to drive new services. This is something we pursued for 11 years to get to this point, which allows us to then create new services and drive automations that have never been seen before in this industry. The second significant innovation, and I believe, is the most important thing that Calix is doing, is launching Calix Marketing Cloud, the Professional Edition, and that's based upon bringing demographics into real-time behavioral analytics.
This is the purview of big companies, Tier 1s and Tier 2s, people who can put 200 or 300 data scientists onto a floor and have them do this work. We have now democratized that data and made it so even the smallest broadband service provider can now be as effective as an Amazon or a Google or one of those Tier 1s who has 300 or 400 data scientists. It is the holy grail of marketing and allows them to drive wickedly efficient marketing campaigns. The third is basically what we're doing with regards to community Wi-Fi. We launched My Community IQ, and My Community IQ gives a broadband provider the ability to have ubiquitous Wi-Fi roaming in their town.
The benefit of that, as I covered off and spoke to with Brad, the CEO of ALLO, is that this allows them to partner very closely with the municipality. As we all know, if you're a fiber provider and you're building into a town, your most important partner is a municipality because that municipality controls right-of-ways and all those other different elements. This gives them the capability to provide ubiquitous Wi-Fi across the town and then allow everybody to roam on it, but reach out to police, fire, ambulance, reduce their data costs, and that's going to be very important to the municipality. At the same time, it allows them to deal with the FCC mandate, which is around E-Rate and providing underprivileged children with access to broadband.
This is a great opportunity for our service providers who are incredibly community-centric to really make that a reality. We're really excited about it.
That's just the top three of many announcements. As you know, we release our products on a 91-day cadence. The rate of innovation at Calix is frankly accelerating. Mike, any other questions before we go?
No, that's it for now. Thanks so much, and I apologize for my wolves. Thank you.
Thanks, Mike.
Thank you. As a reminder, if you'd like to join the question queue, please press Star One on your telephone keypad. Our next question comes from the line of Chris Howe with Barrington Research. Please proceed with your question.
Good morning, Chris.
You talked about the supply chain issues lasting through the entirety of 2022, some of which may bleed into 2023. To be direct with my question, how do you foresee the underlying gross margin potential of the business? You mentioned greater than 200 basis points approximately of impacting Q3 margin. If we were to, let's say, average that through 2022 on a quarterly run rate basis, that would point to 2023 margin improvements potential beyond what your target model would suggest.
Chris, are you trying to do a 2023 model?
I guess what I'm getting at indirectly is your comments on the last quarter call, just about all platform offerings, systems and software representing greater than 50% of bookings. I assume this trend is only going to continue. The supply chain environment might put a shadow over some of this positivity. As we get more into the light into 2023, certainly from a revenue and margin perspective, with the easier comparisons against 2022, the best is yet to come in this disruption.
To be clear, let me just put the directional levers that you're speaking to. The underlying model is continuing to drive gross margin expansion. That gross margin expansion, unfortunately, is dramatically muted by the headwinds of the supply chain, that those headwinds are going to continue through 2022. As you heard Cory say, more than 200 basis points, less than 500 right now from what we can see. You also heard him say, 200 basis points of improvement per year. While we don't have it figured out yet, we are not getting off of that model.
If you project it through to some point in the future when, heaven only knows, demand and supply are harmonized worldwide and the headwinds abate, then you're going to see a rapid improvement in our gross margins as the cost of inventory flows through the business and you move back to something that's more normalized. No question about it. Is that 2023? Well, right now what we're saying is it's pretty clear that these headwinds will continue through 2022 into 2023.
We may be sitting here two quarters from now going, it looks like 2023 is going to be better. We may be sitting here saying, looks like it's going to continue. I just want to be cautious and say your thesis is correct. I would just be careful about calling out any timeframe right now because it's quite cloudy.
That makes perfect sense. Thank you. I didn't want to lose sight. Some support in the quarter, from federal and state, government areas. Can you comment on the benefits? A lot is ongoing, I understand, with these government support programs. What kind of benefit do you anticipate, in the Q4 guide, and how should we think about the level of benefit in these areas?
It's still nominal in our numbers. As we said before, the ARPA funds have actually come out faster than the RDOF awards, which actually happened before the ARPA funds. RDOF is moving very slowly. The ARPA funds are going through. Way out, you have, if it gets approved, the bipartisan infrastructure bill, which has $65 billion in it, on broadband, but you wouldn't see those funds until 2023 or 2020. There's a continued number in there, but it's not driving our model, and it is certainly not driving the customer excitement that we saw in ConneXions. We're continuing to see our customers winning and investing irrespective of government funding.
Got it. Perfect. One last quick one, if I may. I just wanted to ask a question about the third cloud solution. You signed up your first customers in this area. Can you just share some color around that and how we should think about this opportunity as it pertains to this solution?
Yes. What you're speaking to is Operations Cloud, which is, in fact, our third cloud offering. Michael, why don't you add some color to that?
Sure. Going back to the one plus one equals four in the product announcement that we made, the Operations Cloud is core and central to that. What it basically does is, you know, our first two clouds, one is Marketing Cloud, the second one is Support Cloud, which allows broadband service providers to run the most rigidly efficient contact centers. The third, with Operations Cloud, is really, again, back to that 11 year vision of allowing these platforms to create the lowest OpEx or, as Carl has frequently said, lowest cost per bit per mile network operations organization possible, allowing our even the smallest broadband service provider to compete and win in their market on an efficiency point of view. Operations Cloud is around tying the Revenue EDGE with the Intelligent Access EDGE together and then automating everything.
This is that next step where we go into AI neural networks and massive amounts of workflows that we create for these broadband service providers, and then they roll it out within their operations to be very successful and efficient.
Thanks, Chris.
Great. Thanks, Carl. Thanks, Michael.
Welcome.
Thank you. Our next question comes from the line of Ryan Koontz with Needham & Company. Please proceed with your question.
Thanks for the question. With regards to the gross margin decline and the impact on supply chain, can you discuss maybe your ability to increase and pass along pricing to your customers and kind of where you are in that process?
Yeah. I think the gross margin is worth a double click. Let me directly answer your question. We could potentially pass along pricing, but we've remained committed to not doing that, because of what you heard us talking about earlier and Chris asking about, which is the model continues to drive gross margin improvement in the company, which is mitigated by the supply chain issues. Our model in the long term, if we're playing the long game, is to help our customers win as much market share as they can win and let them move without wondering whether we're raising prices or not, and not have us spending the time, frankly, in a sales environment explaining that to them.
Nothing has demonstrated our sense of partnership to our customers, and we've heard it over and over again at ConneXions, than helping them get their supply and not changing their pricing. If we were simply a box-only company where all we were doing was box ship, then we would probably try and pass it off. We're not. The box, when it's shipped, i.e. our system, is the beginning of the revenue stream for the platforms. It makes much more sense to us to continue to fight the good fight and go forward. Now, let me just dovetail a couple other pieces in. You have graphic evidence of what I just said in this last quarter, because you've had companies around the space miss on revenue, you've had companies miss on margin, and you've had companies miss on revenue and margin.
You've seen margins not in the 50s%, not in the 40s%, but in the 30s%. We are not raising our prices. I believe you've got graphic evidence of what we believe to be the correct decision, not only for our customers, but for our long-term success.
That's helpful, Carl. Thanks a lot. In the past, you've given some perspective on kind of where you are in terms of the mix of, you know, bookings or revenue for your platform products. Can you give us any?
Yeah.
kind of qualitative insights there?
It really can be qualitative because last quarter we said that we passed the 50/50 bookings on our all-platform systems and services model as a percentage of our bookings. You also may remember me saying that once that happens, I can't imagine it going backwards. So far, I can't imagine is true. It's only accelerated from there. I would absolutely expect coming off of ConneXions that it continued to accelerate into the fourth quarter as well.
Helpful. Just one last question if I could squeeze it in, please, on the Marketing Cloud product. Is that purely a software product or are there services tied to that? How should we think about Marketing Cloud and how that has kind of driven through your model?
By the way, let me give a preamble, and the preamble is also coming off of ConneXions. I think there were a lot of light bulbs going on in the audience about Marketing Cloud, especially as their peers stood on stage. Michael, why don't you give the color on Marketing Cloud and all of the associated opportunities that we give to our customers to help them become better marketeers.
Yeah. There were a number of announcements around the Professional Edition and Marketing Cloud. As I stated, Marketing Cloud is the holy grail of marketing because it brings together demographics, which are essentially useless unless you have behavioral analytics. It brings demographics and behavioral analytics together. It allows customers to reduce churn and drive significant upsell, which we heard over and over again, but more importantly, also work on an acquisition strategy and allow marketers to guide the network engineering team on where you should build fiber to drive the highest propensity to buy. Why would you build in an area where your experience shows that you can't get that upsell, really starting on where you have your biggest opportunity. With regards to the services around them, we believe that Marketing Cloud is a partnership with their customers.
First and foremost, we put their brand first, since we're very focused on how do they elevate their brand against the consumer direct companies who are trying to win that direct relationship with their subscribers and turn that broadband service provider into a dumb pipe. As part and parcel of that partnership is a few things. First, our customer success team continues to expand. The customer success team are built with data scientists and other folks like that who really engage with the customer to build really great marketing campaigns based upon the micro-segmentation that they do in Marketing Cloud.
The second thing that we announced is a partnership with a comedian, Gary Vee, who actually created ads that our service providers can then brand easily with a tool that we have on the web, which is a video branding product, and they can then launch those as ads in their marketplace. Those are available on the calix.com website. You can see the replay, and they're a brilliant expansion of the content that we create for those service providers to really do great marketing. You know, it should be noted that we created over 3,300 pieces of content for them to leverage. That includes Instagram posts, Facebook posts, but then also over 200 videos, including these Gary Vee videos, but also support videos, so that they can brand those support videos and put them on their website.
The last thing that we announced at ConneXions is the Marketing Academy. The Marketing Academy is bringing together together some of the best marketers in the world to create a very focused broadband marketing academy and learning opportunity so that, for example, if you're a small service provider and you've done marketing for the last five years, but you'd really like to up your game, you can run through this academy, learn around the best broadband social marketing, how to use YouTube, Facebook, all these different component parts, and bring it together into a and basically raise up your skills. Think of it as marketing certification for broadband marketers.
What you're hearing is over and over again, that we're here to help simplify their business, thank their subscribers and grow their value. Most importantly, what you just heard Michael speak to is grow their value through also growing their brand presence. This is something that service providers, we believe, can do better and better. It shows up in a lot of the results that our service providers are getting with their subscribers. Thanks for the question, Ryan.
Sure. Thanks a lot for the questions.
Thank you.
Thank you. Our next question comes from the line of Tim Savageaux with Northland Capital. Please proceed with your question.
Hi, good morning. Wonder if you guys might be able to share any, you know, if I heard you right, you sort of said you weren't seeing much in the way of revenue impact or, you know, seem to be shipping to customer demand. Do you have any, you know, backlog or book-to-bill metrics that you can share to give us a sense of kind of overall demand trends in the quarter? Thanks.
Not a one.
I'm sorry, Carl, could you repeat that?
Yeah. I said, not a one. I mean, there's nothing that we would share on backlog or book-to-bill or anything of that nature other than to say that we had strong bookings in the quarter, and we'll get on with executing the business.
Okay, thanks.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Dinges for any final comments.
Thank you, operator. Calix leadership will participate in a number of investor conferences and meetings during the fourth quarter of 2021. Information about these events, including dates and times for public webcasts with management interviews, will be posted on the Investment Presentations page in the Investor Relations section of calix.com. Once again, thank you to everyone on this call and on the webcast for your interest in Calix and for joining us today. This concludes our conference call. Goodbye for now.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.