I apologize for being slow in getting these out. Post-Fire Business Activity has been quite high and I have had some trouble getting these out. I want to start by talking about Calix. The company announced results before Valentine's Day and I want to talk about that. Revenue for the quarter was $137M and the company lost $0.15 per share. This was slightly lower than Wall Streets estimates but at the low end of the company guidance.
Once this release was out the company was down in aftermarket trading. The stock has since gone positive and I want to talk about both of these items.
I believe the intial negative reaction was due to two items. The company has had lower product revenue in 2017 than it did in 2016. The total revenue is up but is skewed by the increase in services revenue. The challenge is that this service revenue is negative gross margin (sold at a loss) today and predicted to be substantially below product gross margins (products are a lot more profitable). All of this came at a cost of more Operating Expense (OPEX) than in the past, though this trend has reversed itself in the 4th Quarter.
That lowered OPEX is the first reason that I think the stock has recovered. It has been very clear that the company has been spending too much money. By lowering these costs, there seems to be a recognition for what I have been asking the company to do for the past year.
The wild card here is the announced contract and trial deployments with Verizon. The analysts have done a terrible job with this. Verizon already has a substantial Fiber To The Home (FTTH) project with FiOS. It seems unlikely that Verizon will be doing this new trial for FTTH. It seems much more likely to part of the 5G Wireless deployments that Verizon has also announced. There is good news and bad news for this. A FTTH home deployment in Verizon represented millions of endpoints. It is unclear what a 5G rollout would represent. This is partly because the density of 5G stations is unclear. Verizon believes that it will be able to get several hundred megabits per second with distances of say 1,000 ft (3 football fields). Other carriers (in other spectrums) think the distance will be more like 300 feet (1 football field). I think the issue is up for debate and you may want to look at this article as an introduction.
Wireless cells would be a nationwide rollout which would be good, but again it probably won't be millions. Imagine rolling out a cell antenna every couple of thousand feet across Montana on I-90. So 5G coverage will be less than 4G for a long time.
What this means to me is that you are buying an option on this Verizon business with the stock. Verizon will not stand for high prices and I suspect analysts question the gross margins on the deal. No public information is available, but you would have to think that this will be a squeeze.
Finally, this notion of a multi-year ramp in Verizon is flawed (see the Q & A with Christian Schwab on the call). The company quoted past Fiber Rollouts. I take that to mean FiOS. Within the 2 years from first deployment, Verizon was building FiOS at $150M/quarter business rate. By setting the expectation at about 10% of that, I would guess that Calix is really unsure what is going to happen here.
Have a great day and weekend!
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