CALX - Calix: Leveraging On Subscriber Experience With Strategic Partnerships

Summary

• Calix attributed its 37% (YoY) revenue increase and 65% (YoY) growth in remaining performance obligations (RPOs) to the increasing provision of managed experience.
• Calix's All Platform model drove robust demand, including an increase in bookings in Q3 2022.
• Calix has held back its share repurchase program since its announcement in Q2 2022.

The share price of cloud and software company, Calix, Inc. ( CALX ) has surged 28.05% (YoY) and dropped 16.50% ((YTD)). The year 2022 was a tough year for technology stocks, with the Dow Jones U.S. Technology Index ( DJUSTC ) also losing 19.82% (Y/Y). This index tracks major technology companies, especially in the U.S. and it showed an extended downturn in the year. However, the slump was not that bad, with signs of economic recovery still in the offing. Tech-focused Nasdaq ( NDAQ ) gained 6.33% (YoY) but many will argue that this period has been equally tumultuous, similar to the recession of 2008 and the dot-com bubble burst witnessed in the late 1990s to 2000.

Thesis

Calix is growing its strategically aligned communication service base that will integrate with its platform and increase its revenue. The provision of broadband-as-a-service by broadband service providers (BSPs) using the company's cloud service will be a game-changer in the long run. This progression stems from the fact that BSPs can understand the extent of subscriber experience with a particular focus on small businesses and homes.

Calix attributed its 37% (YoY) revenue increase and 65% (YoY) growth in remaining performance obligations (RPOs) to the increasing provision of managed experience. Calix took the step of transforming the marketplace of service providers from creators of “dumb pipes” to providers of managed experience. Through the experience scorecard, Calix can obtain quantified data to persuade subscribers to advance their broadband speeds or upgrade their wireless technology. This strategy is different from the traditional direct-to-customer service approach employed by industry peers Netgear ( NTGR ).

According to me, this managed experience score appeals to even the smallest broadband service provider. It reduces the deployment of technicians while increasing the first-call resolution rate ((FCR)) as part of its customer relations management. We must also consider the new cross-selling opportunities to be found in the adoption of wireless connectivity for homeowners and business premises. Ingredients of advanced technology such as WiFi 6E and mesh networking not only give a significant broadband component, but also uncompromised security.

CALX's emphasis on a small business can be understood from the fact that 79% of its $236.33 million revenue realized in Q3 2022 was attributed to small businesses. Medium-sized businesses accounted for 14% of the total revenue, while large businesses recorded the remaining 7%.

Diversified Product Offerings

Calix's All Platform model was credited for driving robust demand, including an increase in bookings in Q3 2022. The company gave guidance on attaining more than 90% of its bookings from the All Platform, cloud, software, and associated systems/ services as part of its transformative matrix. Calix expanded its product portfolio in H2 2022 including the GigaPro u6he, Calix GigaPro GPR8802x, and Calix GigaSpire BLAST u4g.

The first, Calix GigaPro u6he provides an expansion to the Wi-Fi 6E class systems operating for the Calix Revenue Edge Platform. Since its launch in 2020, the Wi-Fi 6E, has supported 6 GHz, a new frequency band, unlike other standards like Wi-Fi 6 or 5G that only support 2.4 GHz and 5 GHz. The Wi-Fi 6E can hit data rates as high as 9.6 Gbps. What this means for BSPs is that by using this platform, they can be able to market with more coverage area as compared to traditional Wi-Fi systems. Another advantage is the reduction of back-office procedures, deployment time, and market expansion.

While still looking at market penetration, Calix also introduced the GigaPro GPR8802X as well as the GigaSpire BLAST u4G before 2023. The GigaPro GPR8802X has 8 configurable Ethernet ports, 8 analog voice ports, and a provision for automated service. It provides BSPs with seamless support with power over Ethernet (PoE) provision and is most appropriate for community settings. BSPs can manage it as a single system due to its seamless WAN integration while giving end-to-end visibility. On its part, GigaSpire is specific to multi-dwelling units. It combines the GPONONT and the residential gateway feature into one integrated functionality. BLAST u4g helps BSPs to extend coverage outside the home premises when paired with the mesh system. All these systems integrate into the Revenue Edge platform and help the company compete in the broadband market.

With the constant additions and upgrades of the Calix Revenue Edge platform, it came as no surprise when Calix announced that Highline- a leader in BSP was leveraging this platform’s managed services. Like Calix, Highline goes beyond providing high-internet speeds, but also builds subscriber experiences. The latter is Highline's core strategy, and it made good on its promise as subscribers into 2023 grew 56% (YoY). Highline's customer satisfaction ((CSAT)) rating also rose to 93 indicating a successful integration of the Calix Edge Revenue and Calix Premier Success Platform.

As noted in Q2 2022, Calix is partnering with Fiber Company, Brightspeed in its quest to increase its fiber rollout across the US. An important facet of this deal is the fact that Calix is attracting medium-sized companies, since its revenue structure is dominated by small-sized businesses and homes.

Market Considerations

The US broadband market has had a surge in the number of growing subscribers over the decade.

Market leader Comcast Corp. ( CMCSA ) recorded about 31 million internet subscribers into 2022 as it accounts for up to 40% of all broadband internet subscriptions in the US.

Overall, managed services have helped users to decrease their recurring in-house expenditures IT. Companies such as Calix ensure the IT services run at optimal efficiency, including allowing business automation. The global market size for managed services is expected to reach $731.08 billion by 2030. It is forecast to grow at a CAGR of 13.6% from 2023 to 2030.

Risks to Consider

Calix increased its cash position by 4.4% (QoQ) to $234.7 million. Total current assets rose 16.14% (QoQ) to $535.2 million against a 37.6% (QoQ) increase in current liabilities. Calix maintained its revenue guidance for the fourth quarter of 2022 at a range of $237 million to $243 million, similar to that of the third quarter. The company is also expected to record an increase in operating expenses from guidance ranging from $96 million - $99 million to $107 million to $110 million.

In Q3 2022, there was a 38% (YoY) increase in GAAP operating expenses and a 35% (YoY) increase in operating expenses. The rise was attributed to headcount growth in sales and marketing. The company also raised its investment in research and development, seeing that it was investing in more sophisticated IT systems. However, Calix has reiterated that the added investments were necessary to support the expected future demand for its All Platform Offering as well as the Revenue Edge Platform.

Calix is yet to actualize its $100 million share repurchase program after it made the announcement back in Q2 2022. The buyback was also not included in the cash flow statement for Q3 2022 meaning it may occur in 2023. It appears the company is waiting for a decline in the share price to actualize the repurchase. Albeit, the company reduced its negative cash flow in investing activities by 79.20% which may likely free up some cash for the repurchase program when it occurs.

Bottom Line

In my view, Calix performed fairly in the quarter, recording marginal increases in sales and cash. The company is slated to release its Q4 2022 results on January 26, 2023. It realized a 78% increase in net income despite growth in operating expenses. Additionally, the company has increased its investments in new product offerings, especially on subscriber experiences meant to expand the company's reach in the broadband market. However, these products are still new to the market, and we are yet to see tangible results. The company has also delayed its cash buyback program, which according to me signals its anticipation of a lower buy. Still, this idea stems from speculation and I recommend a hold rating of the stock in the near term.

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