Earnings call: Calix reports record margins, forecasts steady growth

Calix, Inc. (NYSE: NYSE:) delivered a solid third quarter in 2024, marked by a slight revenue increase and record non-GAAP gross margins. CEO Michael Weening and CFO Cory Sindelar outlined the company’s achievements and future prospects during the earnings call, noting a 1.4% sequential revenue increase to $201 million and a non-GAAP gross margin peak at 55.4%. The company’s Remaining Performance Obligations (RPOs) also showed robust growth, signaling strong future demand for Calix’s services.

Key Takeaways

• Calix’s Q3 2024 revenue reached $201 million, a 1.4% increase from the previous quarter.
• Non-GAAP gross margin hit a record high of 55.4%.
• RPOs grew to $296 million, up 11% from the previous quarter and 35% year-over-year.
• Thirteen new customers were added, with increased deployments among existing clients.
• Q4 2024 revenue is projected to be between $201 million and $207 million.
• The BEAD program is expected to drive growth, with initial orders in Q1 2025 and shipments later that year.

Company Outlook

• Calix anticipates modest revenue growth in Q4 2024 as appliance buying patterns normalize.
• The BEAD program is slated to contribute to growth, with initial bookings in Q1 2025 and shipments to follow throughout the year.

Bearish Highlights

• New contracts are initially yielding minimal revenue due to deployment costs.

Bullish Highlights

• Strong demand for Calix’s platform and managed services is reflected in the sequential growth of RPOs.
• The company is well-positioned to support customers’ transition to comprehensive broadband experience providers.
• The BEAD program’s bipartisan support suggests resilience against potential political risks.

Misses

• No specific misses were discussed in the call.

Q&A Highlights

• Executives addressed competition from major players like Amazon (NASDAQ:) in the BEAD space, viewing it as a validation of the market’s competitiveness.
• Concerns about potential political risks affecting the BEAD program were dismissed due to bipartisan support.
• The importance of customer success initiatives, such as sales training, was emphasized.

In the third quarter of 2024, Calix saw its RPOs notably increase, a sign of strong platform adoption and larger managed services contracts. The company’s strategy to aid broadband providers in evolving from network operators to comprehensive experience providers appears to be resonating with the market, particularly as competition intensifies. With 55 out of 56 states and territories approved for the BEAD program, Calix is preparing for a gradual ramp-up in orders starting in the first half of 2025.

The company’s leadership remains confident in the face of challenges, such as the entry of Amazon into the BEAD space, and sees this as a wake-up call for providers to enhance their service offerings. Calix’s growth projections remain optimistic, with a 1% to 5% sequential growth rate expected each quarter into 2025 and beyond. This outlook is supported by the company’s focus on customer success initiatives, including sales training and market strategy development.

In conclusion, Calix’s third-quarter performance coupled with strategic initiatives and a favorable outlook on the BEAD program positions the company for continued growth in the broadband market. Upcoming investor events will provide further insights into the company’s plans to support broadband providers in enhancing their market presence and operational effectiveness. Details of these events will be available on Calix’s Investor Relations page.

InvestingPro Insights

Calix’s recent financial performance and future outlook can be further contextualized with real-time data from InvestingPro. Despite the company’s optimistic projections and strategic positioning in the broadband market, some financial metrics reveal challenges that investors should consider.

InvestingPro data shows that Calix’s revenue for the last twelve months as of Q3 2024 stood at $890.13 million, with a concerning revenue growth decline of -12.68% over the same period. This decline is even more pronounced in the quarterly figures, with Q3 2024 showing a -23.84% revenue growth compared to the previous year. These figures align with the InvestingPro Tip indicating that analysts anticipate a sales decline in the current year.

On a more positive note, Calix’s gross profit margin remains robust at 50.94% for the last twelve months, which supports the company’s report of record non-GAAP gross margins in Q3 2024. This strength in margins could be crucial as the company navigates through a period of revenue challenges.

An InvestingPro Tip highlights that Calix holds more cash than debt on its balance sheet, which could provide financial flexibility as the company prepares for the BEAD program’s impact and continues to invest in customer success initiatives. This strong liquidity position is further supported by another tip indicating that Calix’s liquid assets exceed short-term obligations, potentially offering a buffer against near-term market uncertainties.

For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 11 additional InvestingPro Tips available for Calix, which could provide valuable perspective on the company’s financial health and market position.

Full transcript – Calix Inc (CALX) Q3 2024:

Operator: Greetings, and welcome to the Calix Third Quarter 2024 Earnings Conference Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow a brief prepared remarks. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Fazioli, Vice President of Investor Relations. Please go ahead.

Nancy Fazioli: Thank you, Rob, and good morning, everyone. Thank you for joining our third quarter 2024 earnings call. Today on the call, we have President and CEO, Michael Weening; and Chief Financial Officer, Cory Sindelar. As a reminder, yesterday, after the market closed, Calix issued a news release, which was furnished on a Form 8-K, along with our stockholder letter and was also posted on the Investor Relations section of the Calix. Today’s conference call will be available for webcast replay in the Investor Relations section of our website. 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 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 third quarter 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. A reconciliation of GAAP to non-GAAP measures is included in the third year 2024 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead.

Michael Weening: 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 Moline from Allo and Scott Hendricks from Tom Bebe 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 calix.com. As I stated at connections, the industry is at a crossroads. A broadband provider must decide if they remain a speed-based network operator, risking 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 third quarter. Cory over to you to cover those results.

Cory Sindelar: Thank you, Michael. We are pleased by the disciplined execution in the third quarter. We delivered revenue of $201 million, 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, so still modest in the near term. Once again, we achieved a record non-GAAP gross margin of 55.4% in the third quarter. Remaining performance obligations or RPOs grew to $296 million at the end of the third quarter. This is an increase of $29 million or 11% sequentially and an increase of $76 million or 35% year-over-year. Our current RPOs were $110 million, 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. We added 13 new customers in the third quarter all existing service providers and, therefore, examples of landing new footprint. On the expansion front, there were five customers that started their first cloud Calix 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 Calix to win in their markets. Non-GAAP operating expenses were $105 million, up $1 billion from the prior quarter related primarily to marketing expenses. Considering our guidance for the fourth quarter, we are on track to keep 2024 operating expense investment in line with 2023. Our balance sheet metrics remain pristine. Cash and investments were a record of $288 million at the end of the third quarter, representing a sequential increase of $26 million, 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 million, bringing our total inventory deposits to $67 million. Coupled with operational discipline, management of working capital remains a focus to enable consistent quarterly double-digit free cash flow. Moving to guidance. For the fourth quarter of 2024, our revenue outlook is between $201 million and $207 million, which at the midpoint would represent 1.5% sequential growth. This is consistent with our expectations for the second half of 2024 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. We believe this will be a multiyear lens-shaped rollout. There has certainly been a positive momentum with the BEAD 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 that the vast majority are 9 to 12 months away from making their awards. As such, we expect to see initial bookings in the first quarter of 2025 with shipments occurring later in the year. Our focus on executing our strategy with discipline allows us to help our customers win in the marketplace. Michael, back to you.

Michael Weening: Thank you, Cory. As we stated at connection, the industry is in the midst of a disruption and broadband providers are out of crossroads. They will either remain network operators who sell speed and suffer the fate of commodity mobile operators who faced declining revenue and margins or cross the chasm by becoming broadband experience providers 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 of 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. Nancy, let’s open the call for questions.

Nancy Fazioli: Thank you, Rob, can go ahead.

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] And our first question today comes from the line of Scott Searle with ROTH Capital Partners. Please proceed with your questions.

Scott Searle: Hey, good morning. Thanks for taking the questions. 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 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?

Michael Weening: I think we declared that last earnings call, did 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. And as we come out of Connections, you saw that from an RPOs point of view, RPOs 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. Line 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 it can become a high-value, high-margin, high-revenue experience provider. And frankly, Calix is the only solution in that scenario. So — and that was reflected in our POs. Anything to add, Cory?

Cory Sindelar: Yeah, 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.

Scott Searle: Great. And if I could, just to quickly follow up on BEAD. We’re almost through every entity besides Texas and $3 billion being approved. It sounds like you guys are still talking about some of the early orders may be coming through in the first quarter, first half of ’25. But it sounds like you might actually have some shipments in ’25, 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 ’25 and ’26. And as part of that, how your customers are positioned? It feels like it 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 BEAD. Thanks.

Michael Weening: It’s a good question. Look, like we’ve always said is that Carl has always said this, right, is if 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’ve 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. 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 half years since everybody has been saying, it’s going to come early. It’s going to come early. And we’re 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 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. So Cory, anything to add to that?

Cory Sindelar: Yeah. So with 55 out of the 56 states and territories being approved, we expect those first orders in Q1 for BEAD. And then shipments will continue to build over the course of 2025, right, all the way through 2031, right?

Michael Weening: As a 5 to 10-year program.

Scott Searle: Great, thanks so much. Nice job.

Michael Weening: Thank you.

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

Joseph Cardoso: Hey, thanks for the question. This is actually Joe Cardoso 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 ’25 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 ’25 itself. So as we think about the 55 approvals that we have to date 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 a pull forward? Or is there — isn’t there pull forward because this is more tracking in line with your expectations? And then I have a follow-up on this. Thanks.

Michael Weening: So by the way, from an expectation point of view, we always saw in November is kind of that looming deadline where we would see the state top line, right? And so — and they are. So we expected a bit of a hockey stick with regards to what’s happened for them all to rates 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 where we are, Cory commentary on that?

Cory Sindelar: Yeah. 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. 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 first quarter and then the shipments will ramp from that standpoint.

Joseph Cardoso: Got it. That’s very clear, guys. 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. I think that makes to back-to-back, which is obviously contributing nicely to the boost in RPO over the last six months. Can you maybe just refresh 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 are you guys’ actually seeing momentum build on this front? And thanks for the question, guys. Appreciate it.

Michael Weening: So the momentum that’s building is realized is a broader market thing. It has nothing to do with BEAD. In fact, as we stated we look at BEAD as — one investor set a call option and an 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 a large percentage of them, 95% will have access to fast broadband and in a scenario where fast broadband is ubiquitous and you have two or three 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 CEO 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, MDs in an effective way, which is constantly a challenge for these service providers because every MDU is different in size. 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 Timbigbee [ph] up there and Timbigbee 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 Timbigbee as part of the community. And that’s the conversation we’re having. So are we having momentum at that, because of 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 dumb pipe? And you literally heard the CEO of Bright speed, 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 much more than a dumb fiber connection. And so that’s the momentum. Everything that we’ve been seeing, and I’ve been here for eight years, we’ve been working towards this since Karl first saw this 13 years ago or $1.3 billion 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. So yeah, do we see momentum — just like we’ve been saying, we see momentum. And now 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. A long way of answering a short question, but it’s worth saying. So Cory?

Cory Sindelar: 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. So think of it just a simple mathematical formula, right? So when they first join us, they’re not on the platform, they’re getting started and they may have signed a contract and it represents $1 million, $2 million, $3 million in the first three years. By that time rate come back around for a renewal continuing on that same linear extrapolation, you get 4.6, you get more of a 2.5x the 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. And when they come back for the renewals, those renewals are obviously 2.5 times the original deal. So that’s why you’re seeing the continued growth in the RPOs as customers are seeing success with the Calix platform.

Michael Weening: 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 had been — who is now a customer, they were a prospect. They’ve been a broadband provider for 25 years. And last quarter, they made their first acquisition, 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, then they’ll look at transforming their go-to-market in small business and consumer and they’ll expand it again. And so you can expect that we have this nice long tail on how we do this as represented by RPOs. But 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 right beside them as they do that. And so that’s — this is the business that we do. Thanks, Joe.

Joseph Cardoso: Very clear. Hey, great. Thanks gentlemen.

Michael Weening: Great questions.

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

Michael Genovese: Great. Thanks a lot. Just a couple of quick clarifications first. Just on the OpEx for connections in the fourth quarter, should we think about OpEx being lower in the fourth — in the first quarter sequentially for that reason?

Cory Sindelar: That’s true. It will be consistent with what you’ve seen in prior first quarters.

Michael Genovese: Okay. Great. And then on the —

Cory Sindelar: I was going to say a similar step down from Q4 to Q1.

Michael Genovese: Okay. That’s great. On the RPOs, I mean over the last couple of quarters, you took last few quarters, you 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 this something special over the last two quarters?

Michael Weening: 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 BEAD and what was on the list Amazon. 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 four years that Euro and Amazon are the enemy of every broadband provider out there? So if you are a euro customer and Euro was a great company when it was euro, but as soon as they got bought by Amazon, they became the enemy. All those customers now come to the table because they finally realize that Amazon has actually come out of the Wolf but 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 that if we’re not transitioning from a dumb network operator who actually have one go-to-market, which is speed into a full experience provider for the entire community that there’s — they’re missing an opportunity. So as with regards to the future — of 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?

Cory Sindelar: Yeah, Mike, I would add that RPOs in the first quarter grew 7% sequentially in the second quarter with 9%. And in this quarter, it was 11% sequential growth. As Michael said, we’re seeing this growth of our platform, cloud managed services are helping our customers win with the dealer lumpy.

Michael Genovese: 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? Thank you.

Michael Weening: No, we’re not worried. And we believe that the dramatic acceleration in approvals over the last six months is in part because of the impending election. But I will remind everybody that this was a bipartisan bill that everybody worked on. And whether it’s a restate or a blue state, everybody gets broadband and they’re all going to stay behind it because they want boats. So no, Cory?

Cory Sindelar: I agree. Do you mind?

Michael Genovese: Okay, perfect. That’s it for me. I appreciate it.

Cory Sindelar: Thanks.

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

Christian Schwab: Hey, good morning. Guys. So just as we kind of think about — thanks for the time. 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 ’25 and into ’26 and beyond, how we should expect sequential growth to continue on a multiyear basis as you kind of outlined in your letter. As the BEAD money rolls out is hopefully interest rates go lower as elections are over and people can get back to business here?

Michael Weening: So we’ve guided a 1% to 5% for 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 a cross the chasm and become an experience provider right? That decision becomes more and more challenging as time goes by. So the interest rate is actually being high, has actually made everybody kind of have a coming to use 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 market. And so what do I think as we come to the end of ’25? Well, as that kind of lands in the end of ’25 and goes into ’26, 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 in BEAD has been a boon for us. And will continue to be a boon as it shows up in the end of — in the second half of ’25.

Cory Sindelar: Christian, last quarter, we had said that we saw that we would grow from the second quarter on at 1% to 5% per quarter and 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. It creates that confidence in terms of the visibility that we’re starting to see. But as we look out to ’25, ’26, 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.

Christian Schwab: Great. And then can you remind us, you said lead times for appliances are 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? And that’s my last question.

Cory Sindelar: Yeah. So our lead times have been stable all year along here. But what you’re kind of getting at is the amount of inventory that customers are wanting to maintain. And so that has been at a slightly higher level than where we were pre-pandemic. So we are starting to see those customers come back and do their ordering. 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 a long headwind as we move forward. We’re in the new normal.

Christian Schwab: Great, no other questions. Thank you.

Cory Sindelar: Thank you.

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

Tim Savageaux: Hey, good morning. A 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 (NYSE:) 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 Calix on the one hand? And so it leads me to my next question, 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.

Michael Weening: 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 across the chasm. And Cory, you had questions about Q4 and whether or not there will be an impact, I’d say that it’s just lumpy.

Cory Sindelar: So Mike, maybe share a little bit of color on the engagement in large and medium customers that you’re now seeing as they make this transition.

Michael Weening: You — also on the large to 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 pool there in. Because that’s just buying another commodity unless a cross the chasm and become a broadband experience provider, which means you have to have a comprehensive business. 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 have an organization doing medium and then I 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 in a consumer, small business, medium business and an MDU and support community. 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. 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 turnaround a big truck or turning 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 we talk to leaders about helping them transform their business, and that will pay dividends for us as they also come into crisis. Cory, on Q4, yes, you said is there any imitation with regards to Q4?

Cory Sindelar: I would just say that we’re seeing early days of that segment improving.

Tim Savageaux: Yeah. And I guess that was less on Verizon in particular and more on just across the segments, small, medium, large, whether you expect any movement in the Q4 versus —

Cory Sindelar: Nothing significant.

Michael Weening: We see those as lumpy. Sometimes, as with Verizon. Sometimes, it’s been up, sometimes it down, but they’ve been good, consistent customers.

Tim Savageaux: 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 ’25, 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 term rebound?

Cory Sindelar: I think you will see progress on all customer segments as we move forward through 2025.

Michael Weening: We expect — I keep going back to my statement. We are working towards this disruption in the crisis ahead. They’re finally because their businesses are struggling. 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 can raise $50 million, frankly. And so the bar was really low with regards to acquiring capital. And everybody was so busy that it was tough, if you had partners a new out of business strategy, you were just building as fast as you can in this concept of almost passed, right? And it’s fascinating to me that there are still legacy minded operators who still use the word homes path. Homes Path 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. And what’s happened is that now that they’ve gone and done a home on 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 Timbigbee, who’s over 60% or an — or some of these industry leaders, Lumos, or T-Mobile, 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 Carl often coaches on this. The difference between CEOs, there’s two types of CEOs. There’s a CEO who is a founder entrepreneurial mindset, and there’s a CEO who is a professional manager. 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 of the entrepreneur founder, who actually understands the trend that’s coming ahead we’ll 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? And if they are, we’ll help them win. And so as Cory 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 path doesn’t mean anything. A last comment on Home path, you go and they say, hey, it cost me $700 to do a home path, $1,000 to do our homes path. 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. We’re still going to have to spend another $500 to $1,000 to connect a home. But more importantly, you actually have to spend the marketing dollars so they give a hoot and they want to change. So that’s kind of a long answer to a short question, but the great thing is crisis is here, and they’re listing. And we have a customer success army, that’s massive, that’s right to help them do that.

Tim Savageaux: Okay. Thanks very much.

Operator: Thank you. Our last question is from the line of Ryan Koontz with Needham & Company. Please proceed with your questions.

Ryan Koontz: Good morning. Thanks for the question here. Next to your top line predictability improved and the sizable RPO growth really starting to look more like software company you’re becoming. So how do you think about the ARPU 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? Thanks.

Cory Sindelar: Yeah, Ryan. Consistent with what we’ve said in the past the strongest drivers for growth. Our new subscribers being added followed by new applications, so expanding to new applications and then finding that from new customers. A brand-new greenfield customer that would sign a contract with us, it’s going to produce very little revenue upfront as you have to deploy the platform cloud and managed services and has to sit on hardware or an appliance. And so that just takes time. So every one of these new contracts or new subscription players in another little micro stream of revenue. 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.

Ryan Koontz: Got it. You — 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 more still very niche?

Michael Weening: Well, it depends on the customer, right? So it would be — it depends on the size, right? So if they’re massive, then yeah, it would be larger. And if they’re small, then you’re going to see a small amount added on the first contract and then they add more and more, right? And so the key thing is you’ve got to get the momentum out of them, right? And then I know that doesn’t answer your question because you’re trying to model out what’s the RPL growth going to be on the audit, but different customers go different ways — sorry, that’s a this our question to answer. Because they can do like that one customer did start with Engagement Cloud or they could start. As Cory said, during the anemic, they were generally starting with the network, right?

Ryan Koontz: Got it. 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 would be great. Thanks.

Michael Weening: Yeah, 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 Roche came out years ago and has worked through the business, he’s transforming it pretty significantly with his leadership team. And what we just recognized the same thing that he and I talked about a lot when we were both at Salesforce (NYSE:) 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 are really helping our customers around scaling marketing and John’s team executing that. 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 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. 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 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 morning, we actually ran this session that had room for 200 people and supposedly it was like standing in the room only, like 300 people there was packed to the gills and why, which shows demand, they really want — know how to sell. It just so happens from my background, that’s what I did at Salesforce. My entire career has been around sales transformation and someone else on our team who is working closely with John, to 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-market. We now have over 10,000 pieces of content in our electronic ECB content builder, which they can with two clicks, they can put their brand and their coloring on it. They’re going to have Instagram and Facebook (NASDAQ:) posts and great websites. In fact, we — 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&L reviews, of course. 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. We don’t have a CRM. We don’t have a sales cloud this is where we can help our customers. And if we do the right thing to 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.

Ryan Koontz: That’s really great. And that’s put a weakness for the telecom industry for decades.

Michael Weening: Sure. Look at mobile sales. And so again, if you go on — if you watch my keynote at connections, what I walked 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 — now the $50 ARPU, we’re selling strategy on the planet, where I should have been between $110 and $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 are some really good ones, but most couldn’t sell brick in a riot. And we’re here to help.

Ryan Koontz: Great. That’s all I 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.

Nancy Fazioli: Thank you, Rob. How to participate in several investor events during the fourth quarter. 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 calix.com. Let’s again, thank you to everyone on this call and webcast for your interest in Calix and for joining us. This concludes our conference call. Have a good day.

Operator: You may now disconnect your lines at this time.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.