Calix Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Calix Third Quarter 20 24 Earnings Conference Call. At this time, all participants are in 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, Nancy Fasioli, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Rob, and good morning, everyone. Thank you for joining our Q3 2024 earnings call. Today on the call, we have President and CEO, Michael Vaning and Chief Financial Officer, Corey Sindelar. As a reminder, yesterday after the market closed, CALS issued a news release, which was furnished on a Form 8 ks along with our stockholder letter and was also posted on 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 that 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 the 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 Q3 2024 letter to stockholders and in the annual and quarterly reports filed with the SEC. Taos 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 measures. A reconciliation of GAAP to non GAAP measures is included in the Q3 2024 letter to stockholders.

Speaker 1

Unless otherwise stated, all financial information referenced in this call will be non GAAP. With that, Michael, please go ahead.

Speaker 2

Thank you, Nancy. I'm back from Connections, our annual Innovation and Customer Success Conference, where we set another record for attendance. On stage, we had innovative broadband experience leaders such as Tom McGuire from Bright Speed, Brad Meline from Allo and Scott Hendricks from Tonguebe share how they are winning by partnering with Calix to deliver a comprehensive business model across consumer, business, MDU and the communities they serve to benefit their shareholders and members. The replay of their motivational business leadership stories along with those of other broadband experience providers from Connections is now available on calyx.com. As I stated at Connections, the industry is at a crossroads.

Speaker 2

A broadband provider must decide if they remain a speed based network operator, risking commoditization or embrace differentiation through broadband experience. For the last 13 years, we have been building our appliance based platform, cloud and managed services model to enable broadband experience providers to take advantage of this once in a generation opportunity. Our mission remains aligned to helping our customers win through the disruption ahead as they leverage our platform to simplify operations and their go to market, innovate with new experiences that differentiate their offerings and grow for their investors, members and the communities they serve. The strength of our mission, strategy and execution is evident in our results in the Q3. Corey, over to you to cover those results.

Speaker 2

Thank you, Michael. We are pleased by the disciplined execution in the Q3. We delivered revenue of $201,000,000 which represents 1.4% sequential growth. This is within the guidance range we provided in July. As expected, buying patterns for appliances are beginning to normalize, though still modest in the near term.

Speaker 2

Once again, we achieved record non GAAP gross Once again, we achieved record non GAAP gross margin of 55.4 percent in the 3rd quarter. Remaining performance obligations or RPOs grew to $296,000,000 at the end of the 3rd quarter. This is an increase of $29,000,000 or 11% sequentially and an increase of $76,000,000 or 35% year over year. Our current RPOs were $110,000,000 up 7% sequentially and up 29% year over year. We expect RPOs will continue to grow as our customers add subscribers and correspondingly expand the use of Calix platform cloud and managed services.

Speaker 2

We added 13 new customers in the Q3, all existing service providers and therefore examples of landing new footprint. On the expansion front, there were 5 customers that started their first cloud Calyxt cloud deployment and 23 customers who developed deployed a managed service for the first time. These are all examples of broadband experience providers partnering with Calyxt to win in their markets. Non GAAP operating expenses were $105,000,000 up $1,000,000,000 from the prior quarter related primarily to marketing expenses. Considering our guidance for the Q4, we are on track to keep 2024 operating expense investment in line with 2023.

Speaker 2

Our balance sheet metrics remain pristine. Cash and investments were a record $288,000,000 at the end of the 3rd quarter, representing a sequential increase of $26,000,000 of which half was from free cash flow. DSO remained at a best industry best at 39 days. Inventory turns were 3.2, up from 2.8 last quarter related to an increase in shipments and a reduction in component inventory on hand. Inventory deposits decreased by $3,000,000 bringing our total inventory deposits to $67,000,000 Coupled with operational discipline, management of working capital remains a focus to enable consistent quarterly double digit free cash flow.

Speaker 2

Moving to guidance. For the Q4 of 2024, our revenue outlook is between $201,000,000 $207,000,000 which at the midpoint would represent 1.5% sequential growth. This is consistent with our expectations for the second half of twenty twenty four as discussed in July. Buying patterns related to appliances are normalizing albeit modestly at first. On our perspective on bead as a future lever of growth remains consistent with our prior comments.

Speaker 2

We believe this will be a multiyear lens shaped rollout. There has certainly been positive momentum with the B program heading into the end of 2024 with all but one state now having been approved by the NTIA. Recall that actual funds have yet to be awarded. And though we expect a few states like Louisiana, Nevada and West Virginia to be early movers, we believe the vast majority are 9 to 12 months away from making their awards. As such, we expect to see initial bookings in the Q1 of 2025 with shipments occurring later in the year.

Speaker 2

Our focus on executing our strategy with discipline allows us to help our customers win in the marketplace. Michael, back to you. Thank you, Corey. As I stated at Connections, the industry is in the midst of a disruption and broadband providers are at a crossroads. They will either remain network operators who sell speed and suffer the fate of commodity mobile operators who face declining revenue and margins or cross the chasm by becoming broadband experience providers.

Speaker 2

By leveraging our unique end to end broadband platform and partnering with our team, they become a comprehensive experience provider winning consumer, business, MDU and the communities they serve. On stage at Connections, the CEOs of our broadband experience provider customers inspired the crowd to transform and win and our customer success army stands ready to help these service providers transform. Our team leaves connections inspired by our customers' willingness to partner with us to bring the most innovative ideas to life and by their impressive ongoing success. And as we know, when a Calix broadband experience provider wins, we win. I would encourage all of you to invest time watching the Calix Connections replays on calix.com as it provides great insight into how our customers and Calix are leading the industry.

Speaker 2

Nancy, let's open the call for questions.

Speaker 1

Thank you, Rob. You can go ahead.

Operator

Thank you. We'll now be conducting a question and answer session. Thank you. And our first question today comes from the line of Scott Searle with ROTH Capital Partners. Please proceed with your question.

Speaker 3

Hey, good morning. Thanks for taking the questions and nice job on hitting the September quarter straight down the fairway. Maybe Mike just to dive in, looking at June, it appears that it's a trough. You've been talking about it as the trough. We've got small customers up, I think, 3% sequentially in September.

Speaker 3

And that doesn't reflect, it sounds like, some customers graduating to a larger category. You also have RPOs up 11% sequentially. So I'm wondering what else are you seeing in the pipeline and how comfortably can you declare that June is now the trough?

Speaker 2

I think we declared that last earnings call, do we not Cory? Yes. So we declared in Q2 that that was the trough. And so we're very comfortable that we're there. And we now look into the guidance, the sequential growth guidance that we put forward.

Speaker 2

And as we come out of connections, you saw that from an RPO's point of view. RPO is your forward indicator of where we are going over the long term and customers investing in our platform to win. So I think we're in great shape. They want to become experience providers and that's the theme. My time for the entire quarter was spent on the road meeting CEOs who are talking about this reality that I can remain a network operator who's a construction company or I can become a high value, high margin, high revenue experience provider and frankly Calix is the only solution in that scenario.

Speaker 2

So and that was reflected in our POs. Anything to add Carl or Corey? Yes, Scott. I would say we have now enough evidence that we are in that new normal as it relates to appliances. And so we'll build from here.

Speaker 3

Great. And if I could just to quickly follow-up on BEED, look we're almost through every entity besides Texas and $3,000,000,000 being approved. It sounds like you guys are still talking about some of the early orders maybe coming through in the Q1, first half of twenty twenty five. But it sounds like you might actually have some shipments in twenty twenty five, which seems like it's a mild pull forward on that front. I'm wondering if you could kind of address a little bit the timing and your expectations of being in late 2025 and 2026.

Speaker 3

And as part of that, how your customers are positioned? It feels like it's swung back more towards your customer base being extremely well positioned, depending on the market, depending on the entity of the smaller carriers, being well positioned to win a decent amount of share going forward with BEAT? Thanks.

Speaker 2

It's a good question. Look, like we've always said is that, Carl has always said this, right, is that these programs always are way longer to get out of the chute and then they last for significantly longer and larger than expected. And with all of the uncertainty, our customers like most don't like uncertainty and we worked our way through that. So as we enter into a period of certainty to your point, there's only one state left. They now understand what the guidelines are, where there's opportunity for them, where they don't think there's opportunity and more and more of our customers are now applying.

Speaker 2

And they will as with previous stimulus programs, this is how they work through it. And so frankly, it's going exactly how we've been saying it would go for the last two and a half years since everybody's been saying it's going to come early, it's going to come early and we're just saying no, it's not. And so with regards to how we see the timing of orders, we are resolute that is exactly the same way that we said it before and the quarter before and the quarter before, which is we'll see a trickle in the first half. We'll see more in the second half. And as we get better insight into it and as we help our customers go forward, we'll make hay.

Speaker 2

So Corey, anything to add to that? Yes. So with 55 out of the 56 states and territories being approved, We expect those first orders in Q1 for BEAT. And then shipments will continue to build over the course of 2025, right, all the way through 2,031, right? That's a 5 to 10 year program.

Speaker 3

Great. Thanks so much. Nice job.

Speaker 2

Thank you.

Operator

Our next question is from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Speaker 4

Hey, thanks for the question. This is actually Joe Firdoso on for Samik. Maybe just a quick follow-up to that last question and more of a clarification. But so maybe just in terms of the contribution in 2025 itself, I think over the past couple of quarters, you talked about the 10 to 15 bogey in terms of approvals and that being indication of being large enough to have a contribution in 2025 itself.

Speaker 5

So as

Speaker 4

we think about the 55 approvals that we have today, like is that ahead of your expectations? Or should we think about that more in line with how you were expecting it to unfold through the year? And then basically getting into that, hey, is there pull forward or is there isn't there pull forward because this is more tracking in line with your expectation? And then I have a follow-up on this.

Operator

Thanks.

Speaker 2

So by the way, from an expectation point of view, we always saw November as kind of that looming deadline where we would see the state hustling, right? And so and they are. So we expected a bit of a hockey stick with regards to what happened for them all to rate to get over that first step because that's what it was required to do. And so it's exactly as our expectations went. And then as for how it rolls out in 2025, I think we're right where we are.

Speaker 2

Cory, commentary on that? Yes. I would say that from an expectation perspective, it's in line. We just needed to see an early start, right? And clearly with the looming election, you're seeing a lot of the states get approved and get those get the program rolling.

Speaker 2

So it's in line with our expectation. How steep the line is in 2025, it's hard to say. So we'll see where that is. But we certainly know that we'll start to see some orders in the Q1 and then those shipments will ramp from that standpoint.

Speaker 4

Got it. Very clear guys. Thanks. I appreciate the additional color there. And then maybe just as my second question, you obviously highlighted the largest platform and cloud deal that closed in 3Q.

Speaker 4

I think that makes 2 back to back, which is obviously contributing nicely to the boost in RPO over the last 6 months. Can you maybe just flesh that out a bit and what's driving these larger deals to close despite kind of what we would characterize as a more sluggish backdrop? And how are you thinking about that deal pipeline and whether we should think of this as more timing or you guys actually seeing momentum build on this front? Thanks for the question guys. Appreciate it.

Speaker 2

So the momentum that's building is it's realized is a broader market thing. It has nothing to do with BEAT. In fact, as we stated, we look at Beat as one investor said a call option and increase, right? But for the last 13 years, we've been really focused on this. We've seen a disruption coming and that disruption is that this broadband market will commoditize.

Speaker 2

Large percentage of them, 95% will have access to fast broadband and in a scenario where fast broadband is ubiquitous and you have 2 or 3 competitors going at it hard, if they stay on a speed based mindset and what's going to happen is they become a commodity just like mobile operators. And we've seen mobile operators continue to dump tons of capital into the market and really get nothing back in the form of all they see is declining revenue, declining margins. And so this is the disruption that we've been focused on and is now front and center. Every conversation with CEOs is around how do I transform my business from a network operator construction company into a full bodied experience company. And when I say comprehensive, what I mean is not just dumb consumer putting out a piece of Wi Fi, but managing the whole home, but then how do I go into small business, medium business, MDUs in an effective way, which is constantly a challenge for these service providers because every MDU is different in size.

Speaker 2

And then how do I build a brand that is synonymous with the community where I have a really high NPS and they select me because they feel a sense of loyalty. On stage, I put Tom Bigby up there and Tom Bigby was really clear. They actually have an NPS of 91 because everyone across the community, police, fire, ambulance, education, the football fields, beyond just the consumer broadband type, they think about Tom Baby as part of the community and that's the conversation we're having. So are we having momentum? Heck yes, because the fact is that these service providers are in big trouble if they don't wake up and actually transform their business into something other than a dump pipe.

Speaker 2

And you literally heard the CEO of BrightSphere, Tom McGuire come on stage behind me and articulate this is exactly what's happening and it's the thing that keeps me up and what my team are working on, which is how do I transform my business. So, I'm much more than a dumb fiber connection. And so, that's the momentum. Everything that we've been saying and I've been here for 8 years, we've been working towards this since Carl first saw this 13 years ago, we're $1,300,000,000 into it and nobody from a competitive point of view is following us because they don't see the opportunity like we do. More importantly, if they started now see in a decade.

Speaker 2

So yes, do we see momentum? Just like we've been saying, we see momentum and that you saw that in the RPOs. Why? Because the RPOs are basically an indicator of I have bought into the Calix vision of where the business is changing and I'm all in. Long way of answering a short question, but it's worth saying.

Speaker 2

So Corey? Yes, Joe. I would say when you look at the contracts that we landed in the second and third quarters. What you're seeing is our customers that have embraced the platform growing. And so it's just a natural extension of their adoption.

Speaker 2

So think of it just as simple mathematical formula, right? So when they first join us, they're not on the platforms, they're getting started and they may have signed a contract and it represents $1,000,000 $2,000,000 $3,000,000 in the 1st 3 years. While that tie may come back around for a renewal continuing on that same linear extrapolation, maybe at 4, 5, 6, you get more of a 2.5x their original contract just as they're continuing to build out. That's what we're seeing. We're just seeing those customers that have partnered with us the longest that are seeing the success growing their subscriber base.

Speaker 2

And when they come back for the renewals, those renewals are obviously 2.5 times of the original renewal. So that's why you're seeing the continued growth in the RPOs as customers are seeing success with the Calix platform. Sorry, I want to come back on this one more time. So like we talked about in the last earnings call, we had a customer who has been who is now a customer that are a prospect. They've been a broadband provider for 25 years.

Speaker 2

And last quarter they made their 1st acquisition of anything from Calix and it was Engagement Cloud to understand the data in their network, the experiences their subscribers were having and where the market opportunity is. And then to your point, what will happen is they start with engagement cloud and they'll look at transforming their go to market in small business and in consumer and they'll expand and expand. And so you can expect that we have this nice long tail on how we do this as represented by our POs, by as we transform, we help these customers transform. And look, if you've been a broadband provider for 20 years, this is not easy. And that's why we have the only customer success organization worth noting in the entire industry and we've made a massive investment into it because of the fact that our customers need help and we'll be right beside them as they do that.

Speaker 2

And so that's a it's this is the business that we do. Thanks Joe.

Speaker 4

Very clear. Thanks, John.

Speaker 2

Great question.

Operator

Our next question is from the line of Michael Genovese with Rosenblatt Securities. Please proceed with your question.

Speaker 5

Great. Thanks a lot. Just a couple of quick clarifications first. Just on the OpEx for connections in the Q4, should we think about OpEx being lower in the Q1 sequentially for that reason?

Speaker 2

That's true. It will be consistent with what you've seen in prior 1st quarters.

Speaker 5

Okay, great. And then on the RTOs I mean, it's a

Speaker 2

step down. Yes, right. And then what I would say similar step downs from Q4 to Q1.

Speaker 5

Okay. Thanks, Craig. On the RPOs, I mean, the last couple of quarters, you took the last few quarters, you've had the largest managed services deals in history going into the RPO. I just wonder on the pipeline there. I mean, should we expect to hear similar things happening in the future or was there something special over the last two quarters?

Speaker 2

So it's always lumpy. We said that in the past, right? But there was something that happened this week that I think is worth noting. So Louisiana popped out to everyone who's applying for B and what was on the list? Amazon.

Speaker 2

Amazon is actually applying for bead. So with regards to how do I feel about the pipeline, Amazon applying for bead is a validation of what I have been saying on stage every single year for the last 4 years that eero and Amazon are the enemy of every broadband provider out there. So if you are an eero customer and eero was a great company when it was eero, but as soon as they got bought by Amazon, they became the enemy. All those customers now come to the table because they finally realized that Amazon has actually come out of the the wolf out of the sheep's clothing has popped up and they are applying for bead to compete with all of our customers. And so do I think with regards to another indicator that our customers are going to consider a different business model to change their markets, that was a big one and it should be a wake up call for every customer out there.

Speaker 2

If we're not transitioning from a dumb network operator who actually has one go to market which is speed into a full experience provider for the entire community that there's a missing an opportunity. So as with regards to the future of our opportunities, I think that they're going to continue to grow because all of the elements of a disruption continue to rear their head. Cory, anything to add? Yes, Mike. I would add that RPOs in the Q1 grew 7% sequentially.

Speaker 2

In the Q2, it was 9% and in this quarter, it was 11% sequential growth. As Michael said, we're seeing this growth because our platform cloud managed services are helping our customers win, but the dealer is lumpy.

Speaker 5

Okay, perfect. Okay, last question for me then on bead, obviously a popular topic. I just want to ask, are you guys do you guys see any political risk with the upcoming election, depending on how that goes? Do you think if there's like a change in administration, that the timing of bead could be at risk because of that? Is that something that you're worried about at all?

Speaker 5

Thank

Speaker 2

you. No, we're not worried. And we believe that the dramatic acceleration in approvals over the last 6 months is in part because of the impending election. But I will remind everybody that this is a bipartisan bill that everybody worked on. And whether it's a red state or a blue state, everybody needs broadband and they're all going to stay behind it because they want votes.

Speaker 2

So, no. Cory? I agree with you, Mike.

Speaker 5

Okay, perfect. That's it for me. I appreciate it.

Speaker 2

Thanks.

Operator

Our next question is from the line of Christian Schwab with Craig Hallum. Please proceed with your question.

Speaker 6

Hey, good quarter guys. So just as we kind of think about good yes, thanks for the time. So as we kind of think about the opportunity going forward, right, so we're kind of at this 1% to 2% sequential growth here coming off of the trough. Can you give us some type of color as we get to the end of 'twenty five and into 'twenty six and beyond, how we should expect sequential growth to continue on a multiyear basis that you kind of outlined in your letter as the bead money rolls out as hopefully interest rates go lower as elections are over and people can get back to business here?

Speaker 2

So we've guided to 1% to 5% every single quarter, right? And as I've stated openly that the longer this takes the better for us because the looming challenge that our customers have with regards to do I remain a network operator or to cross the chasm and become an experienced provider, right? That decision becomes more and more challenging as time goes by. So the interest rates actually being high has actually made everybody kind of have a coming to Jesus moment where they had to say, what am I going to do with regards to my future because all of a sudden money isn't free and I better be driving a good margin. And so what do I think is the kind of the end of 2025?

Speaker 2

Well, as that kind of lands in the end of 2025 and goes into 2026, will we get stronger if we continue to do our jobs, which is articulate to our customers the opportunity ahead and the challenge that they have if they don't change, then what they do is they buy into our vision, which will be reflected on increasing RPOs and we will gain more, we will land and expand through that footprint over time. So if anything, the ongoing delays indeed has been a boon for us and will continue to be a boon as it shows up in the end of 2020 in the second half of twenty twenty five. Christian, last quarter we had said that we saw that we would grow from the 2nd quarter on at 1% to 5% per quarter in sequential growth. And we said that we would be at the low end of that range here for the next several quarters and exit 25% at middle of that range. So we still stand behind that and that's reflective of the strong demand that we're seeing.

Speaker 2

It creates that confidence in terms of the visibility that we're starting to see. But as we look out to 2025, 2026, it's too early to say what that slope of the line looks like. And so unfortunately, I can't give you better guidance than to just be patient and we'll let you know as we start seeing some of that improvement as we get into 2025.

Speaker 6

Great. And then can you remind us, you said lead times for appliances now at post pandemic new normal. Are those the same as pre pandemic levels or lead times can you is there any color you could give us there? That's my last question.

Speaker 2

Yes. So our lead times have been normal stable all year long. But what you're kind of getting at is the amount of inventory that customers are wanting to maintain. And so that is in at a slightly higher level than where we were pre pandemic. So we are starting to see those customers come back and do their orderings.

Speaker 2

They've got their inventory at appropriate levels, albeit at a higher level than it was pre pandemic. And we're starting to see that momentum continue to build from here. So we think the order normalization process is kind of is a longer headwind as we move forward. We're in the new normal.

Speaker 6

Great. No other questions. Thank you.

Speaker 2

Thank you.

Operator

Our next question is from the line of Tim Savage with Northland Capital Markets. Please proceed with your questions.

Speaker 7

Hey, good morning. Question over in Tier 1 land, where you had a strong year there with some of your top customers last year, less so this year. But as we look at what Verizon in particular is saying about plans for fiber builds and also the planned acquisition of Frontier, I wonder what kind of implications that might have for Calyxt on the one hand. And sort of leads me to my next question is, which is as you look into your Q4 guide, do you see any significant moving parts in terms of customer segment by size and any changes that we might want to know about? Thanks.

Speaker 2

Obviously, it's way too early to know anything about Verizon other than Verizon has been and continues to be a very good customer who is strategically aligned with regards to the value we add. So we are working with them to cross the chasm. And Corey, he had questions about Q4 and whether or not there will be an impact. I'd say that it's just lumpy. So Mike, maybe share a little bit of color on the engagement at large and medium customer that you're now seeing as they make this transition?

Speaker 2

You are. So on the large and medium customers, by the way, this is no different than the small customers other than if you're a smaller customer, it's quicker and easier for you to make a change. And so the conversations we're having with medium and large customers is they had the exact same problem that everyone else has. In fact, you could take somebody who is a large service provider who happens to have a mobile business and if I was them, I would be really scared because my mobile business continues to decline. And the concept of just buying broadband providers to expand our revenue is frankly a bit of a fool's errand because that's just buying another commodity unless you cross the chasm and become a broadband experience provider, which means you have to have a comprehensive business.

Speaker 2

And in the past with larger companies, they have lots of money. And so what they would often do to build a comprehensive business with they would literally set it up as unique bespoke lines of business with no economies of scale. So I would have a consumer business and then I would have a completely different organization doing my small business and then I'd have an organization doing medium and then I'd have an MDU business and they would get no scale across that business. We represent a pretty significant opportunity for them to rapidly and massively scale that business across a single platform, leveraging the appliances, same appliances can go on a consumer, small business, medium business and an MDU and support communities. And so if you think about the economies of scale alone, just from an operating simplicity point of view, the margin growth we can provide them is significant.

Speaker 2

So I would say long answer is that just like everybody else, it's just harder for them because if you've ever worked in a big company, change is big. It's like a big turn around a big truck or turn around a big boat takes more time and more effort. And most important, the captain of that business has to wake up and realize that they need to actually lead instead of just managing the business. So now we talk to leaders about helping them transform their business and that will pay dividends for us as they also come into crisis. Corey, on Q4?

Speaker 2

Yes, I'd like to go to Q4. You said is there any indication with regards to Q4? I would just say that we're seeing early days of that segment

Speaker 7

improving. Yes. I think that was less on Verizon in particular and more on just across the segments, small, medium, large, whether you expect any movement into Q4 and versus Nothing

Speaker 2

significant. Nothing significant. We see those as lumpy. Sometimes as with Verizon, sometimes it's been up, sometimes it's been down, but they've been good consistent customers.

Speaker 7

All right. Well, maybe let's stay on this for a moment. I mean, actually Verizon did have some interesting commentary about higher market share in mobile and reduced churn where they did have a fiber footprint, which in theory maybe explains this frontier thing as well as what T Mobile is doing with some of the smaller carrier investments. So as you look into 2025 with that kind of guidance for sequential growth, should we assume that's principally small carrier driven, heading forward or do you see any opportunities for medium and large to rebound?

Speaker 2

I think you will see progress on all customer segments as we move forward through 2025. We expect Okay. Then a lot We expect I keep going back to my statement. We were working towards this disruption and the crisis ahead. They're finally because their businesses are struggling.

Speaker 2

They have to feel pain before because I stated this I think in Q1 is that we had a large organization come over and they have 18 broadband providers or 19 broadband providers and they said during the pandemic money was free in essence. Anyone with a pulse could raise $50,000,000 frankly. And so the bar was really low with regards to acquiring capital. And everybody was so busy that it was even tight it was tough. If you had partners and you had a business strategy, you were just building as fast as you can.

Speaker 2

This concept of homes passed, right. And it's fascinating to me that there are still legacy minded operators who still use the word homes passed. Homes passed means absolutely nothing. That's like I built a mall and there's all this revenue that's going to come, but I have nobody in the mall, right. If you don't actually win subscribers and have a strategy to win subscribers, you're not going to succeed.

Speaker 2

And what's happened is that now that they've gone and done a bunch of homes path and they've deployed, they're all getting stuck at 20%, 22% market share. And so if you want to get up to like a Tom Bigby who's over 60% or an Allo or some of these industry leaders, Lumos or T Mobile Bot, if you want to become an industry leading provider who makes a ton of money for your investors, You have to be an experienced provider and you have to have a comprehensive business model. So to your question with regards to what's going to happen in 2025, I reiterate and come back to the same thing I said, which is that if we continue to find leaders in these businesses who actually are strategic minded and Karl often coaches on this. The difference between CEOs, there's 2 types of CEOs. There's a CEO who is a founder entrepreneurial mindset and there's a CEO who is a professional manager.

Speaker 2

And the professional manager just wants to do the same stuff that's being done for the last 20 years. And in this coming disruption, the professional manager is going to get crushed because the entrepreneur founder who actually understands the trend that's coming ahead will actually look for change and will drive transformation in their business and they will crush their competition. Why? Because they're going to have a comprehensive business model. So with regards to what segments grow in 2025, frankly, that just comes down to are the leaders smart enough and strategic enough to listen.

Speaker 2

And if they are, we'll help them win. And so as Corey said, we see strength across all of them because they're coming into crisis. The amount of people like I was at the TMT forum, which is an investor forum for broadband and all the investors were saying the same thing. They've come to this realization that they were valuing their assets based on homes passed. It doesn't mean anything.

Speaker 2

And last comment on homes passed, you go and they say, hey, it cost me $700 to do a homes passed, dollars 1,000 to do a homes passed. You know how much it costs you to do a home connected, almost double that. So it's great that you've gone and passed all these homes. You're still going to have to spend another $500,000 to $1,000 to connect the home. But more importantly, you actually have to spend the marketing dollars so they give a hoot and they want to change.

Speaker 2

So that's kind of long answer to a short question. But the great thing is crisis is here and they're listening. And we have a customer success army that's massive, that's ready to help them do that.

Speaker 7

Okay. Thanks very much.

Operator

Thank you. Our last question is from the line of Ryan Coats with Needham and Company. Please proceed with your questions.

Speaker 8

Good morning. Thanks for the question here. Nice to see your top line predictability improve and the sizable RPO growth really starting to look more like software company you're becoming. So how do you think about the RPO contribution and trajectory across your small, medium and large segments? And is there any color you can give us on that strong RPO bookings in the quarter in terms of mix of new contracts, new customers versus expansions?

Speaker 8

Thanks.

Speaker 2

Yes, Ryan. Consistent with what we've said in the past, the strongest drivers for growth are new subscribers being added, followed by new applications, so expanding to new applications and then finally that from new customers. A brand new greenfield customer that would sign a contract with us is going to produce very little revenue upfront because you have to deploy the platform cloud and managed services and have to sit on hardware or an appliance. And so that just takes time. So every one of these new contracts, new subscription layers in another little micro stream of revenue.

Speaker 2

And so it's not that you're going to get any kind of step function from any new customer. And so it's just going to continue to increase and it has a slight little bend in it as you see some acceleration as you continue to layer in not only new customers being added, but existing customers expanding with new applications. And obviously every day they are taking more subscribers away and expanding their businesses and growing with Calix.

Speaker 8

Got it. You've just a follow-up there. You've talked about some opportunities where you come in as a new experienced provider on top of a legacy broadband transport even wireless applications. Is that meaningful at all within RPO yet? Or is it that more still very niche?

Speaker 2

Well, it depends on the customer, right? So it would be it depends on the size, right? So if they're massive, then yes, it would be larger. And if they're small, then you're going to see a small amount added on the 1st contract and then they add more and add more, right? And so the key thing is you got to get the momentum out of them, right?

Speaker 2

And then I know that doesn't answer your question because you're trying to model out what's the RPO growth going to be on based upon it, but different customers go different ways. Sorry, that's a hard it's a hard question to answer because they can do like that one customer did and start with Engagement Cloud or they could start as Corey said during the pandemic, they were generally starting with the network, right?

Speaker 8

Got it. And maybe a quick follow-up on your comments around the customer success additions. I think you guys had a press release recently about this. Any specific kind of go to market motion you can highlight that is working well for you? That'd be great.

Speaker 8

Thanks.

Speaker 2

Yes, that's a great question. Actually on the customer success side, what's really interesting to us and should frankly should have been forecasted. So John Durocher came on 2 years ago and as he's worked through the business, he's transforming it pretty significantly with his leadership team. And what we just recognized, same thing that he and I talked about a lot when we were both at Salesforce is that our customers really need assistance to transform. And so the one that we were talking about and if you watch John's keynote on stage and to some extent Matt's keynote, one of the things that they talk about is that, Matt and his organization were really helping our customers around scaling marketing and John's team executing that.

Speaker 2

And now John's team is also executing on the sales motion. So helping our customers learn how to sell. And while we have a portion of the customers who have that capability, we come to a realization and this actually came out of our leadership advisory board. So I have about 52 CEOs and general managers who I work with on a quarterly basis and there were a portion of them that actually have a business go to market, but and therefore they understand sales, but there's a whole bunch of them who are cooperatives. They've never actually deployed something as simple as quotas or variable compensation.

Speaker 2

So for example, their salespeople don't even have a quota or upside. And so as we went through that advisory board meeting, which was in June, a bunch of them said, hey, we'd really like you to work out how to actually build out a customer success go to market on teaching us how to sell. And so at Connections on Sunday mornings, we actually ran this session that had room for 200 people and supposedly it was like standing room only like 300 people there. It was packed to the gills and why which shows demand, they really want us to teach them how to sell. It just so happens from my background, that's what I did at Salesforce.

Speaker 2

My entire career has been around sales transformation and someone else on our team who's working closely with John, we go build all that out and it's second nature to us because we did it at Salesforce. So we're going to help them become the best. Matt and his organization with the success team has helped our customers build the greatest go to markets. We now have over 10,000 pieces of content in our electronic ECB content builder, which they can with 2 clicks, they can put their brand and their coloring on it. They can have Instagram and Facebook posts and great websites.

Speaker 2

In fact, our agency has built out all these amazing content, so they can do that really quickly. And now we're going to help them learn how to sell. And frankly, that makes me excited because that gets me away from sitting in P and L reviews with Cory and instead I get to go into the field with customers and help them learn how to sell. So that's a great example. And a good example is that has nothing to do.

Speaker 2

We don't have a CRM. We don't have a sales cloud, But this is where we can help our customers. And if we do the right thing and help them become transform into a better broadband experience provider, we win because we're a true partner. So there's a great example. That's a good question.

Speaker 8

Thanks. That's really great. And that's been a weakness for the telecom industry for decades.

Speaker 2

For sure. Look at mobile sales. And so again, if you go on, if you watch my keynote at connections, what I walk through is how a fiber provider, it's got a house and there's a fiber provider and they went from $80 down to $54 that was they had $80 per gig and they took me down to $50 $4 ARPU. We're selling strategy on the planet where I should have been between $110 $150 of ARPU. And so I would encourage everybody on the call to watch the keynote and they will see the challenge because most fiber providers have some really good ones, but most couldn't sell a brick and a rye and we're here to help.

Speaker 8

Great. That's all I've got guys. Thanks so much for the color. Appreciate it.

Operator

Thank you. We've reached the end of our question and answer session. And now I'd like to turn the call back over to Nancy Fazioli for closing remarks.

Speaker 1

Thank you, Rob. TELUS will participate in several investor events during the Q4. Information about these events, including dates and times and publicly available webcast will be posted on the Events and Presentations page of the Investor Relations section of calus.com. Once again, thank you to everyone on this call and webcast for your interest in Calus and for joining us. This concludes our conference call.

Speaker 1

Have a good

Operator

day. You may now disconnect your lines at this time.

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Calix Q3 2024
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