Calix Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 11 speakers on the call.

Operator

Greetings, everyone, and welcome to the Calyxt First Quarter 2024 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, Melissa, and good morning, everyone. Thank you for joining our Q1 2024 earnings call. Today on the call, we have President and CEO, Michael Beeney and Chief Financial Officer, Corey Sindelar. 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 and 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 2024 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.

Speaker 1

A reconciliation of GAAP to non GAAP measures is included in the Q1 2024 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non GAAP. With that, it is my pleasure to turn the call over to Michael. Michael, please go ahead. Thank you, Jim.

Speaker 2

Our results in the Q1 demonstrated the continued execution and strength of our strategy. Our platform, cloud and managed services are enabling our broadband customers to succeed against their competitors every day. Their success delivers value to their stakeholders and in turn to Calix. Our unique broadband business model delivered record gross margins as BSP's deployment of the Calix platform, cloud and managed services continued unabated. However, our appliance business remains challenged in the same way the market is with larger customers reevaluating their CapEx plans.

Speaker 2

This trend continued into the Q2, which we did not forecast. Now that we understand this larger customer dynamic, we have adjusted our expectations accordingly. At the same time, however, it highlighted the ongoing strength of our smaller BSP customers. While growth in this set of customers is muted by new build indecision around bead, the business as usual part of their operations, completing existing network builds and filling those networks by winning new subscribers remains robust. Leading indicators from infrastructure vendors that deploy fiber combined with breed shoots in our customer base lead us to forecast that the 2nd quarter will be the bulk of our appliance revenue.

Speaker 2

Regarding 15 years. Recently, you saw us create a for 15 years. Recently, you saw us create a partnership with industry leading funding solution provider ready.net. This partnership enables us to leverage ready.net's tools as part of our existing funding consult program connecting our more than 1600 Calix customers with a streamlined portal to apply for and win grant funds, secure capital and adhere to public funding requirements. Earlier this month, we announced that 74% of federally funded VSPs use CALAS

Speaker 3

for their broadband speed test. This is a

Speaker 2

significant indicator of future success as any BSP who receives government stimulus must routinely report back on the speed they are delivering to their customers. This is a complicated undertaking that we've made simple via our platform cloud and managed solutions. We expect that 74% figure to grow. While the largest government stimulus program is soon to be here, we've been actively landing new footprint as our consolidated network delivers the lowest cost per bit per mile infrastructure and up to 80% month reduction in operating expense as demonstrated at Verizon. Unlike in times past when many new accounts were startups, the 10 new accounts recorded in the Q1 all came from existing service providers.

Speaker 2

We intend to maintain our aggressive stance in the market at this critical time. Finally and most importantly, the wave of disruption is speeding up. Larger service providers are engaging in conversations with Calix to help them build a more valuable business by avoiding commoditization. Two examples from the 1st weeks of Q2 include signing the largest cloud deal in our history and a larger service provider selecting Smart Bids. Both are indicated that we are crossing the chasm in this disruption.

Speaker 2

With that, I'd like to turn it over to Corey to review our financial results for the quarter.

Speaker 3

Thank you, Michael. The Q1 represented another quarter of deliberate and disciplined execution. We delivered revenue of $226,300,000 which was within the guidance range we provided in January. Against the crosswinds prevalent in our industry, the continued growth in our platform cloud and managed services drove record non GAAP gross margin of 54.9%. In the Q1, we saw platform adoption with 18 customers beginning their platform journey with us and 27 customers deploying a managed service for the first time.

Speaker 3

In the Q1 of 2024, non GAAP operating expenses were $108,400,000 down 1 point $6,000,000 from the prior quarter. The decrease is attributed to our connections event, which occurs each year in the Q4. As we talked about in our last call, our plan is to keep 2024 operating expense investments relatively consistent with 2023, as we continue to believe that this level of investment represents a great opportunity for us to grow our footprint ahead of the U. S. Government broadband investment.

Speaker 3

Our debt free balance sheet remains strong. At the end of the Q1, cash and investments were nearly $240,000,000 representing a sequential increase of $19,000,000 This was our 4th consecutive quarter of double digit free cash flow. During the Q1, our supply chain continued to normalize. We exited Q1 with purchase commitments falling another $29,000,000 from year end to $147,000,000 Inventory deposits declined by 2,000,000 dollars and our inventory turns were 3.1 down from 3.3 last quarter as our component inventory increased. Excluding component inventory, our inventory turns would have been greater than 4.

Speaker 3

Furthermore, we expect these reductions in working capital requirements combined with continued profitability will result in consistent quarterly double digit operating and free cash flow. During the Q1, we repurchased $4,000,000 of our common stock bringing our total common stock repurchases over the last year to $89,000,000 Our repurchase program remains in place with approximately $110,000,000 available at the end of the Q1. Now let's discuss our revenue guidance for the Q2. As Michael has discussed, there currently are several crosswinds in our industry. As a result of these factors, our Q2 of 2024 outlook is for revenue to be between $197,000,000 $203,000,000 The forecasted decline in revenue from the Q1 is mostly due to the continued delay of purchasing decisions at a few of our medium and large customers.

Speaker 3

Looking out a bit further, we believe the June quarter will set the bottom for revenue as revenue from a few significant customers will have diminished to a point where there is limited downside risk. When you combine the green shoots from our smaller customer base with footprint expansion, we believe we will return to revenue growth. In summary, while crosswinds affect our top line in the near term, our platform, cloud and managed services will continue to grow unabated and drive gross margin expansion. And with the industry's strongest balance sheet, we have the financial resources to invest in our operations and grow our footprint in advance of the U. S.

Speaker 3

Government broadband investments. Michael, back to you. Thank you, Cory. As I

Speaker 2

have shared, I meet with broadband customers and their investors constantly. It is clear they are understanding the disruption that faces legacy network operators, which is critical to our crossing the chasm from early adopters to winning an early majority. With more than 1,000 customers deploying our platform, it is no surprise that we are engaging with ever larger prospects who are interested in how our BSP customers are achieving their incredible revenue, margin, cash flow and customer satisfaction results. The entire Calix team remains energized by the opportunity to expand our platform cloud and managed services business. At the same time, with more than 60,000,000 new fiber connections forecasted in the next 5 years, we have a once in a generation opportunity to land new network footprint and enable our BSP customers to win new subscribers, thereby filling those networks with an expanding portfolio of managed services.

Speaker 2

This will be supercharged by the BEAT funds that begin in 2025. While only one state has completed all 10 steps in the BEAT process, 42 other states have completed 9 of the 10 steps to begin funding. In closing, I want to reiterate that we are confident in our long term outlook. We have a talented and motivated team executing our strategy every day. We have unique technology that positions us to surf this wave and take advantage of new network builds.

Speaker 2

We have the financial strength and balance sheet that allows us to avoid any distractions. Therefore, we intend to keep a steady and disciplined hand on our operating expense investments as we maximize this opportunity and help our customers win. Jim, let's open the call for questions.

Speaker 1

Thank you, Michael. Melissa, please open the call for questions at this time.

Operator

Thank you. Our first question comes from the line of Ryan Kuntz with Needham and Company. Please proceed with your question.

Speaker 4

Hey, thanks for the question. Just unpacking your customer segments there a bit, it looks like your Tier 3s are the smaller customers relatively stable here, but the medium to large really hurting. How should think about the trajectory of those segments going forward here into 2Q? And then how do you think about them in the second half at this kind of early stage from a high level? Thanks.

Speaker 3

Yes. Thanks, Ryan. Thanks for the question. As we outlined in our letter, we're continuing to see green shoots coming out of that smaller customer base. And the decline from Q1 to Q2 is really focused on those medium and large customers.

Speaker 3

Kind of to put a point on it, that segment those segments in the Q4 were $77,000,000 of revenue and the Q1 they turned out to be about $43,000,000 We didn't expect continued deterioration a quarter ago, but clearly they are still stuck in their capital planning processes. And we're now forecasting them to be have to get from that 43% level. So those segments really have not much more further to go. And so we think at this point why Q2 has bottomed. And we're confident that from here on out we ought to be able to grow.

Speaker 4

Got it. Thanks, Corey. And a quick follow-up if I could please on your product mix here in terms of revenue edge, Intelligent Access Edge. Should we think of that intelligent access edge as the trajectory for your new footprint gain? I actually thought it might be a little worse than that and might see a kind of more of a mix toward sell in and revenue edge, but how should we interpret those 2 product segments?

Speaker 2

Well, so on the Intelligent Access Edge, that's a mix of new network gains, but also our existing customers filling out the network builds that they currently have. And so as we said, we saw some real you see the continued strength in our rural customers who are in the smaller segment who continue to build out those networks successfully and that's why you see that underpin strength. And I would say that as we go forward and you start to see those $60,000,000 fiber lines start to get build out that you're definitely going to see the Intelligent Access Edge search. On the revenue edge side, that is the business as usual part of our business, where that's what they use to acquire new subscribers. And so you're going to see that continue on.

Speaker 2

And in fact, as we took 10 customers last quarter from and therefore those ones are generally caps and grows where they're saying, I have an existing fiber network, I'm worried about commoditization, I need to differentiate my business in markets and Calix is best positioned to do that.

Speaker 4

Got it, Michael. So it's fair to say that the intelligent access edge number includes a healthy component of sell in, fill in, edge out from existing networks, but entirely new footprint is down much more than that?

Speaker 2

For sure. And that's back to the indecision with regards to decision making as they work through, do I invest my dry powder and the capital that I have in a new network build or do I use the funding that's now almost say 6 months, 7, 8 months out and the B funding and go after that instead of using my existing capital. So in the future, you will definitely see a swing up on the network side as they begin to deploy those beat funds and we take footprint.

Speaker 4

Got it. Great. I'll pass it off from here. Thank you.

Speaker 3

Thanks, Ryan.

Operator

Thank you. Our next question comes from the line of George Notter with Jefferies. Please proceed with your question.

Speaker 5

Hi, guys. Thanks so much. I wanted to ask the bead question. I think you said 6 to 8 months out. Look, I know the bead program is a little bit controversial in terms of the process and the potential for delays.

Speaker 5

Is there can you handicap the BEED process? Do you really think that the monies are flowing by year end then, the 6 to 8 months out? Or do you think it's a program that has the potential to slip?

Speaker 2

It's a good question. We have everybody's asking that question. And so over the last 3 years, others have been asserting that it would be coming earlier. We've been very consistent with regards to our views that would take significantly longer and to arrive. And then when it does arrive, it's going to be a lot larger than people anticipate.

Speaker 2

So what's our view on it is we see it as 2025. In early 2025, we think that you'll start to see some trickles and then it'll go from there. 2025 is the year.

Speaker 3

Yes, Ryan, you could see from the NTIA's website that they made some good progress in terms of getting states approved through the volume 1 or the challenge process. If you include the territories, they went from 29 last quarter to 47. I would expect that the NTIA will start working more on the volume 2 and getting more states approved. But you're right, so you start seeing those states get approved, this can continue to slip. So, like any government funds and that's where I'm continuing to launch that.

Speaker 3

I'm encouraged by what I saw happen in the last 90 days and we'll see what the next 91 days brings.

Speaker 5

Got it. And then just as a follow-up, I think you guys were talking about the overhang associated with bead. How many we talked about kind of network planners kind of going offline as a result of the wait for effect associated with bead. Is that you talked about the strength in your smaller customers. Is that something that you're seeing right now in the smaller customer base?

Speaker 5

Or is that something you're looking at more prospectively as the year goes on? Or how do you think about that effect and how it layers into your business timing wise? Thanks.

Speaker 2

When we identified that in January of this year, we stated that it would be this is going to be an impact through first half, right? And so we saw that in Q1 and we see that in Q2. You see a profound impact on some of the larger customers as they're working through this. With our existing customer base, they still are going through that decision making process. So a portion of them are have made a decision to not apply for B, but there are a portion of them that are continuing on, therefore are pursuing BEAT.

Speaker 2

Therefore, that indecision continues and you see it lesser in the smaller customer in the smaller customers and more profound in the medium and large. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Speaker 6

Hi, good morning and thanks for taking my questions. I did jump on a bit late, so if I if you answered this, please excuse me. But you did call out in 1Q as well certain significant customers that were pausing spend. You are calling that out as a headwind in this release as well. I'm just wondering when you look at the breadth of the customers sort of that are pausing, is that just expanding in terms of the breadth as you go into sort of the back end of the year?

Speaker 6

Is that really becoming sort of a more evident trend? Or it is typically sort of remaining constrained to a few? I think you had called out 3 significant customers last quarter that had pause. Is it remaining constrained to those? And I have a follow-up.

Speaker 6

Thank you.

Speaker 2

Corey, that's a great question for you to answer and identify the shift from Q4 to Q2 and how we did not anticipate it continuing in the second quarter. Yes,

Speaker 3

it is largely 2 customers

Speaker 2

that have continued to have

Speaker 3

delays in their capital decision. And so it's not a broadening, it's really more focused on those couple. And when you take a look at what they did, we were at $77,000,000 in Q4 of last year. It's $43,000,000 in the current and anticipated to be about half that in Q2. So no, I don't it's not broadening out, still tied to largely predominantly those 2 customers in particular.

Speaker 2

And that's why we feel confident in calling the bot. The small segment remains very robust. We've demonstrated that and while they may have some pause in their decision making, they continue to expand out with their initial or with their existing network builds and winning subscribers. We've seen green shoots in everything that we're doing. If you actually look at last year as inventory turns decline, we saw obviously our funnel decline in the same way and we've also seen that turnaround.

Speaker 2

Our funnel is now expanding and you also see lead indicators from fiber builders like DICOM who called out that they're starting to see those green shoots and they're also expanding. So that's why we feel comfortable calling the bottom and then in the second half we'll start seeing the expansion.

Speaker 6

Got it. And for my follow-up, one of the interesting things you highlighted in the shareholder letter is even as customers are pausing some of the new network builds, they're focusing more on subscriber trends and monetization of those subscribers, I assume, which leads me to think there should be more interest for your cloud platforms overall. But I know you outlined that in Q2, you will continue to grow them. But what are you seeing in terms of trends? Are you seeing in the accelerating trends just on account of then customers relying more on you for those services in the mean time as network builds get paused?

Speaker 6

I mean any insights on that because I would think that you would have a counterbalancing effect on the service on the cloud platforms there? Thank you.

Speaker 2

That's a great question, Samik, and a good insight. And in fact, it's exactly like that. I actually had a prospect who's never done business with us last week use the following term. He stated, we did not have the time over the last 3 years through the pandemic to pour a cup of coffee, let alone consider a different business strategy. But through this pause and some of the challenges that are going on in the industry, we actually took a step back and we started to look at you as an alternative.

Speaker 2

And through our conversation, we realized that you're not an alternative, that you're the choice that we should be making because you're not coming to us talking about building a dumb fiber network. What you're actually talking about is building out a diversified business strategy that is very comprehensive for the consumer, expands into small business and has a vision to go into medium. And then at the same time, differentiates the local brand with the community through assets like SmartCap. And so in this type of scenario where they did not have that breathing room to even consider it, they now do. And this represents what we've been stating in Q2, Q4 and now Q2 again that this represents a massive opportunity to surge through that, demonstrate the value that we can have to their business and set ourselves up for a decade to come.

Speaker 2

And so that's why we're so enthusiastic about the pause that's happening in the market right now. It creates an opportunity with those customers to actually take the time to think and recognize that there's a big shift happening and they have an opportunity to partner with Calix.

Speaker 4

Thank you. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Scott Wallace Searle with Roth MKM. Please proceed with your question.

Speaker 7

Hey, good morning. Thanks for taking my questions. Hey, Mike, maybe just to quickly clarify a couple of items. Looking at the down quarter into June and the weakness in the medium and large customers, are they entirely the cause of the downward sequential move from the Q1 to Q2 would imply another 40%, 50% sequential decline, similar to what we saw in the current March quarter. Or are you seeing some softening as well on the small business front?

Speaker 7

And as we look into the second half of this year, wanted to clarify that recovery, is it all small business driven? And when you say bead, in early 2025, I'm assuming that's the initial spending that you're talking about as opposed to awards. Just want to clarify that and then I had a follow-up.

Speaker 2

So Corey clearly stated that when revenue has declined from 77 to 43 in the medium large and then we're anticipating it having again in 2nd quarter that we fully attribute what's happening to that segment. And so and then as we stated in the investor letter, our small segment continues to be strong. And then we look at as they're going through this decision making process, as I just stated, as a significant opportunity for us to actually surge in where they have the mind share and the time to think where they can consider us as an alternative and our business model, which in the end is crafting the cause of chasm from us, moving from the really innovative folks like Allo and others who really get it and have already deployed and recognized that they want to build a different business to differentiate in their markets. So the network operators are now starting to see the challenges and looking to fill that network. So yes, it's attributed to medium and large.

Speaker 2

No, we do not see a shortfall in the small. In fact, we see them continuing to invest and grow and that will lead to strength in the second half.

Speaker 3

I think I answered this. And then the last question, Scott, you asked about Twist Round Beat. And yes, we're talking about not just awards, but revenue beginning in 2025.

Speaker 7

Okay, great. And if I could, just on the beef front, look, you're working with multiple customers, right now in terms of facilitating their process and obviously engaging with them. Is there a number in terms of the amount of requests that your customers have put in or some sort of magnitude help us understand what that dollar amount could actually look like. And I was wondering if you would clarify trickle in 'twenty five and where you think this could peak out in terms of annual contribution from bead funding as we get into 2026, 2027 and beyond? Thanks.

Speaker 2

No, we don't have a number affiliated with that. The only number that we will provide is that we've had well over 500 consults that we've engaged with customers and helping them understand where the different funds are. That's not only BEED, but it's also state level, that's tribal, all those different groups that we've been working with. I was at the tribal summit 2 weeks ago and there were 100 and 100 of tribes there who are contemplating that government funding, which is directed at their markets. So I would just say that we are incredibly active as I put in or we put in shareholder letter.

Speaker 2

We also have partnered with ready.net, who is very active with our customers and helping them understand where the B funding is, how to pursue it, what the maps are and where we see incremental value in that is as we've done with previous programs over the last 15 years, we see that as expanding beyond just the funding part of it, which is a great opportunity for us to partner with our customers into how do they stay compliant over the long term through the testing. Currently, as I stated earlier in my remarks, 74% of federally funded customers in the U. S. Today use us for speed test. That should be a very good indicator with regards to the capabilities that we provide a broadband service provider who pursues government funding on how to make it simple and successful.

Speaker 8

Thanks.

Operator

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

Speaker 8

Great, thanks. Thanks for the call. Thanks for all the points you're making, which are good. I just want to check first on a couple of more bare thesis points and just get your view on them. First of all, at OFC, Cisco was talking about basically going after the medium customer market with PON technology with a PON card hanging off a router similar to the Ciena solution.

Speaker 8

So just wanted to check if there's anything market share wise going on in the Tier 2 market or if this is all just customer valuation delays as you spoke about?

Speaker 2

There is a competitive thing going on. We're taking footprint. So that's what's going on. And so that being said, our acquisition of that footprint, like the 10 customers that we won in Q1, it takes time for them to actually burn through their previous inventory and make the transitions, all those different elements. And so those are the green shoots that we've been referring to with regards to other people coming into our market, bring it on.

Speaker 8

Great. Okay. And then on the kind of tier, large, medium, small customer question having to do with bead. There's just been some people talking about how and I don't know how they can predict this, but they are predicting that at the end of the day, and I don't know if this is correct, but people are saying, bead might go more towards the large and the medium customers and less towards the small customer base at the end of the day. And so I don't know where that call is coming from or how people could say that.

Speaker 8

You're working with all these customers. What's your confidence that your small customers who make up 80% of your revenues are going to be winners in the bead process? Like where does that just sort of detail where that confidence comes from and any data points you can give us there?

Speaker 2

Thanks. Well, to be clear though, bead we didn't say bead is going to go to small customers. We said actually bead is going to go to the market, small, medium and large. We called out that our medium and large segment is down as they go through their decision making process. But that should be an indicator that that should then swing back as they acquire that funding.

Speaker 2

With regards to who's going to win, all three segments are going to compete for that money aggressively. But to be clear, Bede is focused on the really rural underserved customers. And in fact, when I've engaged with the NTIA around this, they are aggressively trying to ensure that small service providers do participate and then it just doesn't go to large because if the small teams do not actually participate in BEAT, that's going to be bad for America. Why? Because they're the ones who actually have invested in Nowhere USA because they live there.

Speaker 2

They love their community and they've done those investments with or without government funding and the NTIA is reliant on them continuing that community centric mindset to make very rural situations successful. So anyone who says that it's just going to be one segment or another that I don't agree, we don't agree. It's going to be all three segments participating at different levels. And in all three segments, we have good relationships and therefore we'll be able to support them all.

Speaker 8

Okay, great. And then finally for me, just looking past this, as we get to 2025, I know it's early to give an outlook for beyond 1 quarter or 1 year. But do you think that we could get back to a 10% to 15% type of growth rate in 'twenty five? Or do you think we'll be ramping towards that in sort of the first half of 'twenty five and maybe don't get there until 2026 on a full year basis? Just the long term kind of annual growth rate starting in 2025, how are you thinking about it?

Speaker 2

We did that consistently for 4 years and we expect that once we get through this peculiar indecision phase that we will get back to that. And as I stated in my opening remarks, the first thing I stated is that the fundamental underlying underpinnings of this business was our platform cloud and managed services remained strong. That's best evidenced by the fact that we've got cash flow and margins continue to grow, customers understand. And this indecision period as I stated is an opportunity for them to take a deep breath, consider their future and what do they want to do over the next 5 to 10 years as opposed to just what's in front of them. And this creates the opportunity to have a very different conversation around how do you build a higher value business for your stakeholders, which can be members if you're cooperative or shareholders if you're for profit.

Speaker 2

And this represents an opportunity for us to take footprint, which will then yield in 2025.

Speaker 8

Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Speaker 9

Hi, good morning. Couple of questions. And Michael, you hit on this briefly, but I want to go back to your green chute commentary and see whether you had any more color on that. It was really and I had another question about revisiting kind of the share gain efforts that were discussed on the last call. You seem to conflate those 2 and are there any other signs of positive activity throughout the customer base, small, medium or large that you would refer to or is green shoots or is it really your efforts to gain share?

Speaker 2

Well, so as we when you go back during the pandemic, our lead times were as high as 18 months. During that situation, we had deep insight into what a PSP was doing through because they actually had to give us their orders and therefore the pipeline was affiliated with that. And over time, as we've gone through that over the last 2 years, you've seen basically lead times go down to from 6 quarters down to in essence a single quarter. And therefore logically you would also see the pipeline affiliate with that also shift. And we're now at a place where things have stabilized and we are back to actually seeing from Green Juice point of view significant pipeline growth, which gives us confidence in what's going to happen in second half.

Speaker 2

At the same time, we continue to take footprint as evidenced by I talked about a larger customer selecting us with Smart Business. That's a significant win. That's a brand new business. And us closing not in Q1, but in Q2, in the 1st 2 weeks of the quarter, we closed our biggest cloud deal in the company's history. And so I go through those points, the pipeline growing, the strong closing the largest cloud deal and then a larger customer selecting us to actually go after their small business market, which is in essence brand new business for us.

Speaker 2

This represents a significant opportunity and gives us confidence in the second half.

Speaker 9

Great. And kind of following along from that even what's been maybe notable here in the last couple of quarters is that even with the revenue declines you've seen gross margins continue to tick up. I imagine there's a mix aspect of that with the appliance business. And I guess a couple of as that perhaps recovers into the second half, what sort of impact do you expect it to have on the gross margin side, which is could it blunt that sequential growth with hardware coming back? Or do you expect to see continued steady increases in gross margin throughout the year from greater software and service revenue?

Speaker 3

Yes, great question, Tim. As we said throughout, our platform cloud and managed services business is continuing to grow as our customers continue to take share and add new subscribers. And so you've seen that persist and we'll continue to do so. As the network new network builds come back, what you'll ultimately see is a shift in product back to more access, which has higher gross margins. So you won't see necessarily a decline in gross margins.

Speaker 3

I think you'll see the progression continue. The rate at which it changes from quarter to quarter will vary depending on those mixes. So for example, in the second quarter, the margin expansion is less than what it was in the Q1. And it has to do with a lot of the products swinging back to the premises side in the Q2. So and inevitably we think the margin will continue to progress.

Speaker 3

And I don't think you should think that'll pause because new network builds being decided.

Speaker 9

Okay. Thanks very much.

Operator

Thank you. Our next question comes from the line of Christian Schwab with Craig Hallum Capital Group. Please proceed with your question.

Speaker 8

Great. Hey, Cory,

Speaker 10

how long before the 2 large customers get back to 70 some million from 20,000,000 dollars?

Speaker 3

That's a great question. I'm not going to call that one. Obviously, last quarter I was surprised by thought they would get to where they would make some decisions. I wasn't anticipating the decline that we saw. So I'm not going to dare to go out on a limb and say when that will recover back.

Speaker 3

We know it will recover at some point, just don't know when.

Speaker 10

Okay. So I mean, we haven't done $200,000,000 in revenue in over 2 years, right? And we're going to keep spending almost $100,000,000

Speaker 2

Sorry, what was that?

Speaker 10

You haven't done quarterly revenue approaching $200,000,000 in 2 years?

Speaker 3

No, we did $265,000,000 in

Speaker 2

the 4th quarter. We did $225,000,000 in Q1.

Speaker 10

Yes. Q1 of $22,000,000 you had $202,000,000 and this quarter you're guiding to $200,000,000 at the midpoint.

Speaker 2

Yes, we did. We haven't done that in multiple quarters. We did

Speaker 3

$26,000,000 We haven't done $200,000,000 goes back 2 years. Yes. Okay. We understand what you're saying. Go ahead, Christian.

Speaker 10

You can look at it. The point is, is your OpEx is significantly higher, right? And I know we're going to invest for growth, but we talked about a trickle of beads starting in the beginning of the 'twenty five, but we have no idea when the large customers are coming back. How long do you hold this heavy OpEx on a quarterly basis?

Speaker 2

We understand that there's $60,000,000 new fiber in that line becoming. We also recognize as we've identified for you that, and you see that the fundamental business model is actually a growing margin and therefore it is strong. Customers are delaying for the very first time their decision making and they've got the time as I stated as it was so eloquently put to me last week where I can actually I couldn't actually have the time to pour coffee and now I'm willing to entertain these conversations. At this point in time, we will continue our OpEx investment because this is our opportunity to expand footprint as never before, ahead of one of the largest investments from the government in history. And to do anything but what we're doing would be wrong.

Speaker 2

And with our Board, our Chairman and our leadership team, we are confident in the opportunity to grow and that's going to yield significant returns. We are investing to win.

Speaker 10

Understood. Thank you. My last question is, with recent expectations for 2024 and a once in a generation of lifetime of bead and large customers who are significantly under spending, shouldn't the target growth rate for fiscal year 2025 be 20% or substantially higher than that on the top line?

Speaker 3

Possibly. That's why we're quite comfortable

Speaker 2

in 2020. That's why we stated that we see this 2024 as this oddity. And to your point, over the last 4 years, we've delivered 4 years of 20% growth and we see a return to growth in 2025. And we're working that right now. We see the green shoots and all those different elements.

Speaker 2

So we're not calling 25 at this point, but we were just asking the previous question, do we see the return to 10 to 15? Yes.

Speaker 10

Okay, great. No other questions. Thank you.

Speaker 3

Thank you, Christian.

Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Franke for any final comments.

Speaker 1

Thank you, Melissa. We will participate in several investor events during the Q2 and information about these events including the dates and times and publicly available webcast will be posted on the Events and Presentations page of our Investor Relations section of calyx.com. Once again, we want to thank everyone on this call and webcast for your interest in Calix and for joining us. And this concludes our conference call. Have a great day.

Operator

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

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Earnings Conference Call
Calix Q1 2024
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