This week both Calix and Enphase released their earnings. I need to spend a bit more time on the 10-Q from Enphase (that is the formal report by the company filed every quarter with the SEC). So, I will be reviewing the numbers and call from Calix. Revenue came in at $126M with $107M of that being Product Revenue. Losses were $0.38 per share. In general, it was a bit more of the same as Q1. The revenue growth year-over-year was from the service sector. Unfortunately, this sector had negative gross margin (in other words they lost money on selling the services). Operating Expenses were up $6M over last year with an $8M increase in Research and Development. Over the last 6 months the company has burned $13M in cash and is about 9 months away from insolvency on that standpoint. I don't think that will be an issue anytime soon, but the company does need to figure out how to become profitable on a regular basis.
The company forecasted Q3 numbers as $126M - $130M in Revenue, 36% to 39% Gross Margin, and Losses of between $0.21 and $0.27 cents a share. Since that time, the stock has tanked over $1 per share (over 20%) and is as of the moment $5.25 per share.
There is one other thing is that Calix announced the signing of a deal for NG-PON2 at a North American Tier 1 for Trials and Early Deployment. This can only be at Verizon and there has been much talk about it for a very long time. This is not going to replace FiOS. There are too many units of FiOS installed and the pricing on those units were a total of about $100/customer. It is not reasonable to have NG-PON2 priced that way otherwise there would be massive losses. However, a deal would Verizon would have to be at much less than corporate gross margins overall. They might be able to get good margins out of the CO units (and thus early shipments) but not out of a fully deployed system. On the other hand, this could be a significant Revenue opportunity.
So, I think what investors see is two things. All the growth of any substantial amount has been at very low gross margins. There is concern that this will be true with the Verizon deal as well. At today's Operating Expense (OPEX) levels Calix will have to have Revenue of $181M per Quarter to break even. If this is simply an addition of the Verizon deal, this implies that $60M a quarter or $240M per year would come from Verizon. This is not outlandish at one level. FiOS was about $600M a year for its equivalent. But how many endpoints of NG-PON2 will be deployed. For BPON, we did 3.5M. If NG-PON2 is significantly smaller (used for Business and Cellular Services), then the Revenue will not be there. Until we see how Verizon rolls this out we will not know.
And I think it is that uncertainty as well as the ongoing losses that are causing investors to sell Calix stock. Right now to break even the company would need to reduce OPEX by about 33% and I see no indication of that coming in Q3. So if you think there is something important going on with Verizon, this stock is a lot cheaper than it used to be. One thing to point out is that business at Verizon could lead to a sale of Calix, but the number of companies who would be buyers can be counted on less than 1 hand.
Have a great day!
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