Cabot Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 12 speakers on the call.

Operator

Greetings and welcome everyone to the Calix First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the brief prepared remarks. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations.

Operator

Sir, please go ahead.

Speaker 1

Thank you, Paul, and good morning, everyone. Thank you for joining our Q1 2023 earnings call. Today on the call, we have President and CEO, Michael Beeney Chief Financial Officer, Corey Sindelar and Chairman, Carl Russo. As a reminder, yesterday after the market closed, Calix issued a news release, which was furnished on a Form 8 ks along with our stockholder letter, which was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of our website.

Speaker 1

Before I turn the call over to Michael for his opening remarks, I want to remind everyone on this call, we will refer to forward looking statements, including all statements the company will make about its 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 the Q1 2023 letter to stockholders and in the 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 in this conference call, we will discuss both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in the Q1 2023 letter to stockholders.

Speaker 1

Unless otherwise stated, all numbers referenced in this call will be non GAAP measures. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead. Thank you, Jim.

Speaker 2

As the Calyxt evolution continues, I want to start this call by sharing my view on why Calyxt is performing in a very different manner than the market in general. 3 consecutive years of greater than 25% growth. And as Corey will share, raising annual guidance for 2023, 9 consecutive quarters of sequential growth, 3 consecutive quarters of gross margin expansion as supply headwinds abate, 0 debt and a pristine balance sheet, which will see cash grow at an accelerated rate. These are clear indicators that Calix team is executing our strategy in a predictable and disciplined manner. More importantly, it is making it clear that Calix is alone in a new market.

Speaker 2

This new market is made up of broadband service providers We're building consolidated networks and efficient end to end operations that yield incredible markets. This new market has BSPs leveraging data and insights from our platform and clouds to build an entirely new business model where they are the center of the home, the center of business and the center of the community through the power of our managed services that grow revenue and customer satisfaction to record levels. DSPs continue to add subscribers and grow their business in Q1 through the power of the Calix platform, clouds and managed services. The land and expand nature of our business was on full display in Q1 as we landed 11 new VSTs And expanded platform adoption as 38 BSPs adopted 1 or both of the revenue edge and the intelligent access edge. This brings the total number of BSPs deploying our platforms to 988.

Speaker 2

In Q1, 21 BSPs adopted 1 or more of our clouds, bringing the total number of cloud customers to 865. And perhaps the most important evidence that this is a new market is the growth of BSPs deploying 1 or more of our 8 managed services. In the Q1, 41 CSPs began differentiating their offerings by launching 1 or more of our managed services. This is the fastest pace in the last 5 quarters and brings the total number of BSPs of managed services to 334. On that note, I'll now hand it to Corey to expand on the Calix team's performance in Q1.

Speaker 2

Corey?

Speaker 3

Thank you, Michael. Calix team executed well across the board as we delivered our 9th consecutive quarter Sequential revenue growth, with record quarterly revenue coming in at $250,000,000 which was modestly above the high end of our guidance range. As we have said before, we believe our supply chain will normalize over the course of 2023 and so it did. Vendors for the most part are meeting their delivery commitments and we are starting to see lead times shorten. Consequently, this allowed us to continue to reduce our purchase commitments to $306,000,000 which were down $335,000,000 from year end.

Speaker 3

And we expect our free cash flow to improve significantly as we invest less in inventory. The improving supply chain has also allowed us to reduce our lead times to customers and to work with them to shrink their inventories as well. The consequence of this work was a sequential reduction in our revenue of edge system shipments within our small customer segment. At the same time, our large and medium sized customer segments increased. Specifically, we saw strength from a large platform customer and continued shipments to a recently acquired medium customer, which contributed to the Intelligent Access Edge Record revenue in the Q1.

Speaker 3

In sum, our platform model provides us with a view of end subscriber demand, which enables us to work with our VSP customers to optimize their inventories. This enables us to perform in a predictable manner and forecast what we expect will be our 10th consecutive quarter of sequential growth. Based on our Q1 revenue over performance and the expected sequential increase in our 2nd quarter revenue, We currently believe our annual growth for 2023 will be between 15% 20%. Back to you, Michael. Thank you, Corey.

Speaker 3

In closing,

Speaker 2

I will call your attention to 2 additional data points This further amplify that Calix is on a mission in a new market. First is the talent that we are attracting to our team. Industry leaders like John Derocher, who joined from Salesforce as the Chief Customer Officer are joining because they are inspired by our purpose driven culture, which is enabling even the smallest broadband service provider to simplify their business, Excite their subscribers and grow their value for their members, their investors and the communities they serve. 2nd is the fact that Calix was recognized by Comparably as the number one best place to work in the Bay Area. In addition, our sales, marketing, engineering and HR teams were ranked top 20 globally because our team members are inspired every single day to help our VSP customers transform the communities they serve by empowering families, students and local businesses to thrive.

Speaker 2

More than ever, I'm excited about the future at Cowenst. As Corey stated, we raised 2023 revenue guidance as we continue to execute in a disciplined and predictable fashion, supported by an enviable balance sheet. I would like to thank our amazing customers for their partnership As it is their ideas that are delivered every 91 days when we update our ever expanding platform, clouds and managed services. I would also like to thank our partners and Calix team members for their continued support and dedication as we execute on this once in a generation opportunity. Jim, let's open the call for questions.

Speaker 2

Operator, let's move to the Q and A.

Operator

Thank you. We will now be conducting a question and answer The confirmation tone will indicate your line is in the question One moment please while we poll for questions. Thank you. Our first question is from Christian Schwab with Craig Hallum. Please proceed with your question.

Speaker 4

Great. Good morning, guys. Well, I guess, first of all, congrats that macroeconomic Uncertainty hasn't significantly affected your customers' spending patterns like your peers. So congrats on The continued business transformation and a different value proposition. Yes, you're welcome.

Speaker 4

With that, Corey, would we expect continued sequential revenue growth throughout the remainder of the calendar year from June.

Speaker 3

The simple answer is yes, but I would meet your expectations. Obviously, with the macro environment, That outlook in the second half of the year is murky, but our expectation is that, yes, we'll continue to grow, but at a very small pace.

Speaker 5

Right. I'm

Speaker 2

just going to add one thing to that. I would add one thing to that, Christian, as you saw in the investor letter, Quite clear, we called that out and we've always said this is one of the transitions that we have gone because we are on a new mission in a new market And part of that is moving away from that legacy model, which is highly cyclical and it's moving into a sequential business.

Speaker 4

Great. And then can you give us a little bit of clarity On the large customer activity, your revenue in the March quarter was the largest for greater than 2,500,000 subs in years. Is this the beginning potentially of an inflection point? I ask that because We kind of saw the beginning of the inflection point in the medium base customers and over the last 2 years that went from A $35,000,000 business to a $52,000,000 business to almost 105,000,000 And I know the story has always been, we'll start with the small guys and then the medium guys will figure it out and then the large Guys would figure it out. So is everything going as planned, should we assume?

Speaker 3

Yes. Christian, thank you for highlighting what we've been saying. This is one of those things where Technology adoption start with small customers and work their way at large. In terms of what you've seen in the Q1 relative to our large customers, it was The increase was with that one customer. They were an existing customer.

Speaker 3

And I think it's just kind of And a lumpy delivery schedule associated with the large customer. I don't think it's an inflection point where you should anticipate continued growth in That's from that one customer.

Speaker 4

Okay. That's fair. And then I know we started the year We're started the year previously at kind of like a 10% to 15% growth rate. Now we're moving it up to a 15% to 20% growth rate and if we even get modest sequential growth from June, We're almost at that 20% range. So what Was it just conservatism given the macroeconomic environment that that the expectations have been exceeded or have you been positively surprised somewhere?

Speaker 3

As we said last quarter, our view of the annual growth rate The combination of not so much demand, but more of our view of supply chain. And you saw that improve within the quarter. We built a little bit more inventory. We worked through some issues. And so consequently, we were able to Overperformed in the second in the Q1 by a little bit.

Speaker 3

They give a little bit more confidence on where we're at with Q2. But I think at this point, as the supply chain is Expected to continue to normalize over 2023, the concern becomes the demand equation in the back half of the year. And so we're just taking a conservative view of what that might entail. But that being said, demand continues to be strong.

Speaker 4

Great. And then my last question, our objective of growing gross margins 100 to 200 basis points a year, Given that lead times are finally short, becoming normalizing for lack of a better word, Does that give you should we be more encouraged that maybe We can start operating to the higher end of that 100 to 200 basis point range as the mix continues to improve and the supply chain Costs, not only the cost of the chips procured, but the expedited feed in some cases to get them You know as we get into 2024 and 2025 or should we just stick to 100 to 200?

Speaker 3

Yes. Christian, I think you're going to want to stay within the range that you provided at 100 basis points for the year. And you can see we're tracking along that line. In each of the last couple of quarters, we've increased by about a quarter point. And so I think that rate will continue through the quarter.

Speaker 3

I don't think we're at a point where you're starting to see costs come down precipitously where you would see a faster than that rate expansion of gross margins. So it's still early days. We're still normalizing. And so we feel better about it, but it's not at a point where I think you get to an accelerated pace.

Speaker 4

Okay, great. No other questions. Thanks again.

Operator

Thank you. Our next question is from George Notter with Jefferies. Please proceed with your question.

Speaker 6

Hi, guys. Thanks very much. I wanted to ask about the software play here. I noticed that RPOs were up about $7,000,000 sequentially, which is one of the smaller sequential growth numbers you guys have put up in a while. Obviously, it captures just a portion of your software business, I get that.

Speaker 6

But, and then conversely, the customer adds look really good as you guys Pointed out in the monologue and in the shareholder letter. I guess I'm just trying to better understand how you feel about the progress you're making in software at this point and in this quarter in Q1 Yes, specifically. Thanks.

Speaker 3

Hey, George, thanks for the question. We feel good about it. If you were to go back to the Q3, we had a Similar lower growth sequentially, and everybody was alarmed by that lower increase. And then Q4 came along and we blew past that number and everybody was like, oh, is this another inflection point? And we've consistently said Contract signings are lumpy and they go up and down.

Speaker 3

I mean, we anticipate RPO to increase sequentially going forward, but the rate at which it increases will vary from quarter to quarter.

Speaker 2

And I'll add Ian, look, I spent all of Q1 on the road, all except for 2 weeks I was with Customers and conferences and CEOs and talking about their business and with only with them in fact, I was with one customer, well actually not a customer, someone Who in essence has refused to talk to us for 25 years. And with some of the things that are going on in the macroeconomic level, in fact, That's been their only source of funding for their business. When they heard me speak at a conference, we got into a conversation around how How do you actually build out a different business model that allows you to attract a radically different type of investment, whether it's private equity or family investors or whatever it is. And if you're just selling it down pipe, that's really hard because your margins are low. But if you're partnering with significantly higher from an operations point of view, But you also have all these incremental ways to monetize that subscriber and grow revenue for the long term.

Speaker 2

What does that mean? Well, That means that when you get that investment, it's going to be issue all these kind of things. So while RPO is one element of it, I would return you heavily towards 38 customers adopting 1 or more of our platforms, 41 people starting on the managed services journey. Yes, we continue to see and I would say that if anything, this whole dumb box mindset is actually Really going to go to the side if customer

Speaker 6

Just to follow-up on that, If I look at the differential between managed services adoption just in terms of numbers of customers and Calix Cloud, obviously, there's still a really, really big gap there. And I get it, it's a land and expand strategy. But Maybe talk about what the why can't you get those guys kind of ramping faster? Is it just inertia? Is it Yes.

Speaker 6

Some other sort of technology piece that I don't appreciate, maybe just kind of talk through that gap.

Speaker 2

George, that's a great question. And If I was to actually walk through the continuum of moving from becoming a from being a legacy provider to entering this new market And becoming a broad business in the community, it's a journey, right? And so if you've been in business for 25 years, the only thing you're used to is You're a construction company. You actually operate a network and then as long as you exist, you get customers and speed is the only thing that you ever talk about. You're now moving into a scenario, well, first of all, you're reengineering your network and collapsing everything so you can get 80% higher margins.

Speaker 2

Then you're saying, okay, well, I have to change my call center. I have to make it so that when I'm doing an install, they're not just going and installing a Wi Fi router. They're actually talking to the customer, on how to use the app. And then my installers, I'm converting them into upsell people, right? So if Corey is my installer, he can say, hey, let's get them an app.

Speaker 2

By the way, do you have children? Would you like to do parental controls, all those kind of things? It's a completely different market, a completely different mindset. So I would say if you think about that journey, we are the ones taking it on taking them on that journey. And that's why It's really exciting that John Groesher joined the team to lean our customer success army and where gum box companies don't have success teams because A box is helping them Create an entirely new business model and that's what our success team do and that's why we continue to invest.

Speaker 2

So I wouldn't be concerned in any way shape or form other than this is the beginning and this is something we've been saying on every one of these calls for agents, Right. You look at managed services and even that number at 334, I would you should be pushing on and saying, how what's what about underneath the path? Because there's speed managed services today, we've announced 11, so there's massive expansion even inside of that, right? So there's all these different ways to grow and look if we can put up these kind of numbers and project higher for 2023 with this early stage of where we are in this new market, You should be very excited about the future. Thanks, George.

Operator

Thank you. Our next question is from Ryan Koonce with Needham and Company. Please proceed with your question.

Speaker 5

Hi, good morning. Thanks for the question and great execution on the quarter obviously. Regarding the small and medium kind of customer set down market and as you think about that driving growth through the rest of this year, Wondered if you could reflect on your conservatism around growth there? And Specifically, are you seeing impacts from labor in these down market areas or in And how are the kind of subsidy trends working their way through the processes from RDOF and the ARPA funds, which you've seen a lot of announcements of late? Thank you.

Speaker 2

Sure. Sure. Well, so I'll proactively ask funding because someone is going to ask that question. Yes. Look, there's tons of investment that's coming in the Mark Family Fund investing in these incredible businesses.

Speaker 2

KKR recently purchased 1 In the Texas area, you see everybody coming into it. Berkshire is now in here. So there's lots of funding. The government funding is, as we've said, consistently slow. In the end, it will take 10 years, a lot longer than we anticipated.

Speaker 2

And But in the end, it will also get all that's coming through and all the debates that are going on, right? And then with regards to deployment, Yes, we can get into the whole immigration thing, but the job market is still strong. So to your point on hiring people, yes, I was with a customer The other day and they literally at any point in time have 1100 open jobs, 1100. And if you look at the job ads in the U. S.

Speaker 2

Market, like I believe last month it was 330 and then the month before it was 600 and then the month before it was 100 of 1000, The job market is really strong. There is no recession. So they have to hire good people. They have to train them. They have to bring them forward.

Speaker 2

By the way, if you're Looking for a job to pay $70 for someone else who's slice fiber, like out of school. So there's lots of opportunity, but yes, those are normal headwinds, but The positive headwinds because the economy is so strong.

Speaker 5

That's great. That's great, Michael. Thank you. In terms of the product mix there, it sounds like it was great quarter for Access sales. That's great to hear that footprint going out.

Speaker 5

I assume the kind of softer revenue edge is mostly from customers Reducing their kind of inventory holdings around customer prem type hardware, is that correct?

Speaker 3

Yes, Ryan. Like my prepared remarks said, It was the normalization of the supply chain. We started seeing the lead times pull in. That consequently allowed us to reduce our lead times to customers. And so we've been working with our customers to help reduce their inventory levels.

Speaker 3

They can become more capital efficient. So They can start taking down their inventory levels and that's what you're seeing. So not obviously concerned about it, Obviously, by our Q2 guidance that we gave, obviously, we're seeing another sequential quarter. And so there's obviously no air pocket behind this reduction in supply chain or reduction in premise systems shift.

Speaker 2

I'll just add one comment and that's that, again, back to this whole concept that we're in a new market and we are a different company and everyone needs to start thinking about it and exactly their deployment rates. We understand everything they're doing. We know how much inventory they have and therefore the keyboard that you heard from Corey was actually working with and managed. In no way, shape or form is anything a surprise to us because we generally are now seeing if they're having a problem beforehand and that's what our customer success army is for. They pop in and they say, hey, we go we say what, are your deployments are slowing, what's going on?

Speaker 2

Oh, it's because I can't get my permits fast enough or I'm struggling. We then subsequently go on top of that and we look at for example, every time they install a new router, we're saying what is your Hatch rate on Command IQ, which is our mobile app. Are you ensuring every one of your customers is getting the mobile app because that becomes an early seed to driving upsells with managed services. So it's not just about the hardware and everything else, it's also about making sure they have a really strong business in the long term and win against the legacy providers.

Speaker 5

Super helpful, Michael. And just a quick question, a quick follow-up on RPO. Corey, was there any I didn't quite see the release of the numbers of current versus total RPO in the letter. Was there any mix shift at all in current versus total RPO in the quarter?

Speaker 3

No, Ryan. Nothing substantial. Got it.

Speaker 5

That's all I had. Thanks.

Speaker 2

Thanks, Ryan.

Operator

Thank you. Our next question is from Fahad Najam with Loop Capital. Please proceed with your question.

Speaker 7

Hey, good morning. Thank you for taking my question. Corey, Michael, Let me start with I'm trying to model a little bit differently given your shift in how you disclose numbers. And the way I'm thinking about is Average revenue per BSP, and if I look at it, I see a trend starting 3 key A ramp in or I guess growth in average revenue per broadband subscriber service provider. 1, as we head into the second half of this year, how should that normalize?

Speaker 7

Is it Well, I guess, what was that catalyst event that started in 3Q 2022 that really expanded your

Speaker 3

I guess I'm not exactly following Your line of question, maybe Basically, I

Speaker 7

take your revenue and I divide that by total broadband service providers that you disclosed and I see a trend of average revenue per BSP and I see that the average revenue per BSP is growing considerably over like the starting second half of twenty twenty two. So is there anything that is, I guess, driving that step function improvement.

Speaker 2

What you're trying to do, I would not read anything into it. So for example, our definition of a small service provider It's from 0 subscribers to 250,000 subscribers, right. If actually a really good executing Calix customer, Their market share is about 60%, so they have significantly more homes passed. If they're actually early stages of their deployment, those 250,000 subscribers Could only be 25% market share on a broader goal, right? And so as you go and use that logic, I think there There's a flaw to it.

Speaker 2

The other part of it is the company. So there's all kinds of ways you can parse this. I just don't know if that's the right thing. And Corey would like to take that question offline and Laurie, see if there is if we can understand more how you're thinking about it. But with regards to our business, large customers, small customers, again, Small customer can be a $300,000,000 business.

Speaker 2

So there's all kinds of variables in there and it's lumpy and all the different elements. So I would say no. But Corey will take it offline with you.

Speaker 7

Got it. Appreciate that. If I I was going through the proxy filings And I noticed that your $3,000,000,000 gives you significant visibility. Can you just maybe talk about the momentum in orders?

Speaker 2

Thanks, Bob. We don't talk about booking.

Speaker 7

All right. I'll pass it on. Thank you.

Speaker 2

Demand is strong.

Operator

Thank you. Our next question is from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Speaker 8

Hey, good morning and congrats on the quarter.

Speaker 3

Well, hopefully you do

Speaker 8

And you saw a nice increase in cash in the quarter. And I know we've been talking to you guys previously, and I think Corey mentioned some purchase commitments coming down. Do you still anticipate there to be a significant positive impact on cash flow from both obviously ongoing operations, but this Kind of balance sheet impact, kind of maybe review how that works and what your expectations are? And then Any comments on capital allocation given the strength in capital?

Speaker 3

Thanks, Jim. So yes, over the course of last year, we used a lot of our cash from operations to buy inventory. And now as we are getting to a plateau, you can see that the rate at which we're investing in inventory slowing into additional free cash flow. And so we are expecting as we progress through 2023, An increase, a significant increase relative to where we've been of more cash. Over time, we'd expect our inventory to normalize and start coming back to where we were pre pandemic.

Speaker 3

That will then free up additional cash, but that's still a ways away. We need lead times to come back in, kind of where they were and then that will make that trend In terms of capital allocation,

Speaker 6

it's a process that we have

Speaker 3

that we look at every quarter. And as we think about our cash, there's an opportunity cost with the use of our cash. Our decision to allocate capital kind of relates to its opportunity costs. Cash that could be used to operate a growing business comes at a very high opportunity

Speaker 2

cost. Cash flow

Speaker 3

of strategic investments would come down at a high opportunity cost. Cash beyond those categories would be at a lower opportunity cost and as we generate in other words, the price at which we're willing to buy shares goes up

Speaker 8

Great. I'm sorry about that. Any updated quantification on, I think you talked about before, I don't know, tens of millions coming off the balance sheet, but As we sit here, any updates on that or we're still in the same range in terms of incremental free cash?

Speaker 3

Tim, I expect we'll start seeing double digit cash generation. Double digit millions, yes.

Speaker 8

Okay. Thanks very much.

Operator

Thank you. Our next question is from Greg Mezia with Westpark Capital. Please proceed with your question.

Speaker 9

Yes. Thank you and congrats on the print. Last couple of quarters, Your OpEx levels are running a little hot, I thought. And I was wondering, as we look beyond the guidance you gave for the June quarter, What should we kind of be modeling as far as OpEx levels? Do you foresee continued Investment in sales and marketing or do you second half of the year?

Speaker 9

Thanks.

Speaker 3

Yes. Thank you. I would give you the same counsel that I would give you every quarter, which is that we're going to continue to invest According to our target financial model, we haven't deviated from that. You can see In the quarter that we were a little bit higher on the engineering side, little bit less than the G and A, but for the most part, we're executing very predictably and to our model. So as we continue to grow the top line, there will be incremental investments Up into, I guess, the word we like to say is we're going to invest fulsomely to our target financial model.

Speaker 3

So specifically every area will grow according to the call.

Speaker 2

Yes, and I'll add on to that. Look, we're in a new market. It's the beginning of that new market. It's a once in a generation opportunity. In fact, new markets don't happen in not once in a day.

Speaker 2

The best thing to our model fulsomely It's actually the team doing their jobs as leaders and making sure that we drive organic growth in this new market into key. And so we predicted for everybody to ensure we can take advantage of this opportunity.

Speaker 3

And one last thought on this point, As I will highlight in the Q4, we have our Connections user group event. And obviously, Sales and marketing will tick up by an incremental percent in the 4th quarter.

Speaker 9

Got it. Thank you for that. And just Just to quickly recap, you had mentioned earlier in answering your question that regarding the Broadband Stimulus Roadmap, that you're basically it's taking longer, but should be bigger at the end of the day. Is that right?

Speaker 2

Craig?

Speaker 7

Thank you.

Speaker 2

Thank you. Thank you.

Operator

Thank you. Our next question is from Michael Genovese with Rosenblatt Securities. Please proceed with your question.

Speaker 10

Great. There was a little bit of upside in the Q1, a little bit of upside in the Q2 outlook. I'm assuming that with the mix shift to infrastructure, that's probably a or mix shift to Intelligent Access Edge, that's probably a function of supply chain. But I wanted to check with you The business model, the mix shift to software, cloud, recurring revenue, driving the gross margin. I mean, how do you think about that for the first half of 23.

Speaker 3

Yes, yes. So you're exactly right, Mike. It's all those things, right. So it's The continued adoption of our software that's obviously giving us a margin uplift, as well as from a product shift. I expect that that will continue to normalize, meaning I think we'll go back to more prime shipments In the back half of the year, and I think it's just delivery of their systems.

Speaker 3

You've seen this in the past. We had a customer in Europe, wanted to get all their equipment into the warehouse at the end of the year, it's just a normal process with large customers on the, but it can be lumpy on how we get there.

Speaker 10

Just to be clear, a mix shift to revenue edge in the future should have more positive gross margin implications. I mean, we're Kind of more powerful than we're seeing currently. Is that correct?

Speaker 3

For sure, when you're looking at the managed services and anything that attaches on Top of it. For sure, that's the greatest portion of the reoccurring revenue comes on premise systems.

Speaker 10

And then finally, I mean, a lot of good questions were asked on the conference call already, boomers in the quarter, falling to 11. Do you think that there's a macro reason for fewer new customers? And obviously, the expand part of the model is working Really, really well. But as we look to the rest of the year on the land part, should we think about this lower number being the new normal? Or do you think that we could go back to What we saw last year or the year

Speaker 2

before? Yes, it's a good question. So remember, In that number, there's 2 component parts

Speaker 3

to that. The first is it

Speaker 2

could be an existing service provider who's actually in the first time, right? Or it could be someone actually starting a broadband service provider, which is something that we've seen a lot of over the last couple of years and clearly with the rise in interest rates. That has made the hurdle for someone to acquire capital to start a brand new company harder. And so We noticed that's happening in the market for sure. What's interesting though is that the ones who did get capitalized, Our analysis is that they're getting a lot more capital than we anticipated and they're going to be more successful over the long term because they built into their business model This significantly higher margin model affiliated with Calix and everything that we're doing from a platform and services point of view.

Speaker 2

And so their investors are saying, hey, let's go big. And so, what will be long term to see?

Speaker 10

Right. And actually, my very last question is, I

Operator

just wanted to check, is Carl in the room?

Speaker 10

Yes. Is he on the call?

Speaker 2

He is in the corner. In the corner. Yes. He's doing his best to not speak, Mike, but I do appreciate the shout out.

Speaker 10

Okay. Well, great. Congratulations on that.

Operator

Thank you. Our next question is from Scott Thorel with ROTH MKM, please proceed with your question.

Speaker 11

Good morning. Nice job on the quarter and thanks for taking my questions. Thank you. Maybe for starters, could you just talk a

Speaker 10

little bit about linearity in

Speaker 11

the quarter, what you've seen through the Q1 and kind of early And also on the small customer front, taking a little bit of a pause, it seems like it's a managed inventory reduction on your part. Are we through that? Do we start to see a sequential increase back within the small customer base into the June quarter and beyond? And then I had a couple of follow ups.

Speaker 3

Sure. Let's start off with your linearity question. Linearity was good in the quarter. I mean, you could see that in the fact that the DSOs are down. So that was a very positive trend and it has continued.

Speaker 3

And as it relates to 2nd part of your question, Scott? Small customers in terms of absorption. Yes. So it likely continues into the 2nd quarter, but obviously it's something we're not very much worried about that you're showing quarter on quarter. And so there's going to be a little bit of that as we continue to normalize the business management.

Speaker 11

Got you. And if I could, Mike, from a high level, when you're in discussions with your current customers right now, How are they thinking about their build out plans in terms of footprint expansion versus harvesting within the existing footprint as we kind of look at in the second half of this year and maybe early thoughts on 2024. And then also in terms of the revenue edge side of the equation, How should we be thinking about you give numbers in terms of how many customers have adopted one service or more? But I'm wondering if there are some other metrics or idea that You could help us see into in terms of penetration of multiple services, target on that front from customers and the velocity on that front. I know We get an RPO number, but if there are some other metrics we could think about.

Speaker 2

Right. So first of all, The customers now they're thinking about their business. I would actually say they're every single one of them is thinking in both ways, Frank, Unless they're a legacy provider and you're seeing that from some of the big ones. 2, with interest, we see this all the time with large public Legacy service providers, as interest rates increase, they're actually pulling back on CapEx because Yes, their margins are declining and this is a way for them to fund it. They just they slow down and our customers are seeing this as an incremental opportunity, Right.

Speaker 2

Hey, they were going to go build out this town. Now they're going to do it even faster. They still have access to capital because again, Their business as a whole is radically higher margins. Therefore, they can pursue they can actually get all the capital that they need. So they're A service provider, Ann, recently and what they did was they shared out their spreadsheet and we went through 10 different markets that they're looking at towns And we they have profiled out who the competitors were in a number of those places were legacies and they were saying, let's build a joint plan to actually Attack those legacy providers and take share and where should we StackRanc and we help them identify who we thought was goes back to the whole customer success discussion.

Speaker 2

The whole point Of our business model is that land and expand and that permeates over to the customer's business model. All they ever did was they would sell a pipe and that's it. And then I would hope that I would monetize and generally that means that over time they're under pressure because Someone else throws a cheap price whatever it is. Now their whole business model is I land in the home or the business, I'm selling all these incremental services. I expand my margin and my revenue inside that account, but I also make it wickedly sticky.

Speaker 2

So that if somebody comes and throws legacy provider who is only speed, throws in some cheap price, the customer is going to say, no, I've got all these things considered that because the service is so incredible. And by the way, my NPS is 75. So these customers are incredibly loyal. So that grow It's absolutely front of mind and that I guess comes to the core of what we're doing in this new market. It is a new market with a new business model and we're teaching these customers how to transform their businesses and disrupt the legacy companies.

Speaker 2

Now with regards to your question on incremental metrics beyond RPO, we consider that competitive and No, you can just assume that again, we have a growing customer success army that spends every Single day, helping our customers use best practices and insights and understanding what works and what doesn't, segmenting data, all these different elements to grow their business.

Speaker 11

Hey, Mike, maybe just to quickly follow-up in terms of your commentary of The changing landscape and enabling the epiphany ongoing here that it's driving more conversations with them on that front? Or is that something that takes longer?

Speaker 2

No. Well, I don't know if it's an epiphany. I'd say it's your normal product adoption curve. You always start with The innovators who are those thought leaders, then you follow-up as the market matures. And if you look at our press release, What are you seeing in those press releases?

Speaker 2

Story after story after story of customer success and customer success and what's possible and What kind of NPS they're driving, what margin levels they're driving, all these different things. So as we go through a normal product adoption curve, You're going to continue to see more and more growth. And even somebody who is a legacy provider who has never Thought that way at some point, everybody's going to have a different realization and say, oh my gosh, the whole market's changed. It's a new business model And there's this once in a generation opportunity for me to grow my business in all kinds of different ways. But clearly the only person that I wouldn't say it's like Everyone has different epiphanies at different times and we're out moving up into the right and that's just going to continue and that's Why we have our press release here.

Speaker 11

And Mike, lastly, if I could on the managed services front, I think you're up to 8 now that have been launched, but I was wondering if you could talk a little bit about the pipeline, the level of interest and kind of what you guys are waiting through there, if there are any targets that we should be thinking about? And maybe quickly like an update on things like Smart Business and Smart Time. Thanks.

Speaker 2

Well, it's starting to explore managed services. And again, it's what is the pipeline? It depends on the customer, right? I was with one CEO last week And he has an incredible go to market. He's got all his build plans in place.

Speaker 2

He's really focused on operational efficiency and customer satisfaction And this first go to market with a clear recognition that as you land, then you will be able to expand in those existing markets over time. What's the uptake on these services? It really depends on the customer and where they are in their market needs. Someone who's very mature is Adopting, I would say, more managed services to differentiate somebody who's just building out is going to be in a different mindset. And with regards to all the managed service, Look, they're unique.

Speaker 2

This is a new market. We have a new business model and what we've done with small business and smart town They've never been done before and they're super exciting. And so our customers, if they're deciding, hey, you know what, it's not the right time for me Today, maybe 6 months, maybe a year from now, everybody's talking about it. That's what we do.

Operator

Great. Thanks so much. Nice job on the quarter.

Speaker 3

Thanks, Scott. Thanks, Scott.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Jim Fanucchi for any closing comments.

Speaker 1

Thank you, Paul. Calix leadership will participate in several investor events during the Q2. Information about these events, including dates and times and publicly available webcasts will be posted on the Events and Presentations page of the Investor

Operator

Goodbye. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Cabot Q1 2023
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