This week I review the Q2 Earnings of Calix. The company reported Revenue of $107.4M with a loss of $0.04 per share. Revenue was up about 8% on a Year over Year basis. Calix should always be looked at in year over year as much of their business is impacted by bad weather. They primarily provide equipment to telephone companies that sit outside. That means that for part of the year their business is impacted by bad weather. There is nothing unusual about this, other than that looking at the preceding quarter is not informative for investors.
In Q1, the CEO Carl Russo talked about his spending and how that was leading to greater growth. This is an important point because Calix is in a period of very slow growth. This is particularly a problem as the company is losing money. If you compare Calix to Keysight (as an example), you will see slower growth out of Keysight. Keysight is highly profitable where Calix is not. It is important that all the money being spent becomes valuable to investors in earnings at some point. At this time, you can not say that the plan has worked. But it is too early to call.
One of the questions that came up multiple times was about Gross Margins. These are declining slightly year over year, but even a percentage point or two can mean a lot to the bottom line. The reason stated was growth. This makes sense in a business like Calix. When a new Calix system is deployed there is a number of mechanical and power items that are part of the package. This includes a big box, power supplies, batteries, and cabling. This kind of product has a lower gross margin than the software and hardware that is the heart of their systems. So, at initial install, the product has a gross margin. As the customer adds more of its customers to the Calix box, they will buy more electronics. This tends to be at a higher Gross Margin and so things improve. The Revenue on the mechanical and power components is large, but the electronics is more profitable. It is just a bit of how this business operates.
The challenge really comes into focus next quarter. The company is guiding to record revenues above $115M. They are predicting a profit, but that is based on some gains in the ongoing Occam litigation. Without that, the company still loses money. And that is the point. The record Revenue prediction helped the stock spike up, but the lack of profit has caused it to return to its doldrums.
The only thing in the near term that can change that is a potential business with Verizon. There are a number of folks at Calix who have sold products to the Tier 1s in the US before. It can a challenge for them to have a voice in this process. Dealing with a company like Verizon is very different than even Centurylink and Calix needs to make sure that its Tier 1 veterans are used to make this happen. How will we know if there is a deal? Well, there will be an announcement at some point. But you have to realize that any deal with Verizon will be visible on the Income Statement. We will have to watch Gross Margins carefully if something comes to fruition.
So, where does that leave investors? They need to watch and wait for more information. There is nothing that the company has done to truly excite them, but it is not going away either. So, we shall have to see what comes to be in Q3.
Have a great day!
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