Prepared remarks
Greetings, everyone, and welcome to the Calix Fourth 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, Nancy Fazioli, Vice President of Investor Relations. Please go ahead.
Thank you, Latanya, and good morning everyone. Thank you for joining our fourth 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 close, Calix issued a news release, which was furnished on a Form 8-K, 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. Before I turn the call over to Michael for his opening remarks, I want to remind everyone that on this call, we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy and market outlook, and that 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 fourth 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 on 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 fourth quarter 2024 letter to stockholders. Unless otherwise stated, all financial information referenced on this call will be non-GAAP. With that, Michael, please go ahead.
Thank you, Nancy. As I stated at ConneXions, the industry is at a crossroads. A broadband provider must decide if they remain a speed-based network operator, risking commoditization, or embrace differentiation through broadband experiences. The fourth quarter delivered strong results as our business model was embraced by a growing number of broadband experience providers to meet the needs of the entire community: consumer, small business, education, MDU, government, and the municipality. By doing so, the experience provider becomes a community brand that wins. One such story is MGW SmartTown Network in Virginia. MGW utilized their network to provide secure WiFi across multiple towns, transforming how residents work, play, learn, and communicate. During Hurricane Helene, MGW's SmartTown network ensured seamless outdoor WiFi aiding in disaster recovery. This highlighted MGW's commitment to their community and ensured their brand is synonymous with the communities they serve, going way beyond speed and price.
Our mission remains aligned to help our customers win for 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 evidenced in our results in the fourth quarter. Cory, over to you to cover the quarter.
Thank you, Michael. We saw strong demand during the fourth quarter and delivered revenue of $206 million, which is at the high end of our guidance range we provided in October and represents 2.6% sequentially quarterly revenue growth. Demand for our Platform Cloud and managed services was strong once again and is best evidenced by growth in our RPOs, which grew 10% sequentially to $326 million and increased 34% year-over-year. Our current RPOs were $121 million, up 10% sequentially and up 27% year-over-year. This strength in our platform cloud and managed services led to record non-GAAP gross margin of 55.5% in the fourth quarter. As we have said all year, our focus remains on landing new footprint. And in the fourth quarter, we added 18 new ESP customers. The overwhelming majority of these customer wins were competitive takeaways. On the expansion front, 21 customers adopted our platform, 15 customers started with Calix Cloud, and 32 customers deployed to managed service for the first time.
These are all examples of customers partnering with Calix to cross the chasm and become broadband experience providers to win in their markets. Our balance sheet metrics remain pristine. After purchasing $7 million of our common stock during the quarter, we ended the year with record cash and investments of $297 million. DSO remained an industry best at 36 days. Inventory turns were 3.1, and if you exclude component inventory, inventory turns were over 4. This compares to our target range of 3 to 4 turns. Inventory deposits decreased by $4 million, bringing our inventory deposits to $63 million, down from a peak of $78 million a year ago. Coupled with operational discipline, management of our working capital remains a focus to enable consistent quarterly double-digit free cash flow. Moving to guidance, for the first quarter of 2025, our revenue outlook is between $204 million and $210 million, which at the midpoint would represent a sequential increase in revenue.
For the first quarter of 2025, non-GAAP gross margin is expected to remain flat to slightly up due to product mix as we continue to see a shift toward subscriber systems. For 2025, we anticipate annual gross margin improvement will be at the lower end of our target financial model of 100 to 200 basis points. We expect clients' margins to be a headwind to overall margins due to a mix shift towards subscriber systems and an increase in revenue from medium and large customers as we land new footprint. Regarding non-GAAP operating expense, we plan to continue to hold our 2025 operating expenses flat to slightly up compared with 2024 in terms of absolute dollars. In summary, our visibility continues to improve. Our objective is to implement our strategy with discipline, helping our customers become broadband experience providers who deliver value to their subscribers and succeed in the marketplace, to continue to increase our footprint by landing new broadband service providers and to continuously expand our platform, cloud, and managed services with each of our customers. Michael, back to you.
Thank you, Cory. We're in the early stages of this once-in-a-generation opportunity as the broadband industry disrupts. The Calix broadband platform, cloud, and managed services enable network operators to cross the chasm and become broadband experience providers that win in the communities they serve. We are excited about the opportunity ahead in 2024, and we thank our team, our customers, our partners, and shareholders for their support. Nancy, let's open the call for questions.
Thank you. Latanya, we're ready to start.
Questions and answers
At this time, we will conduct a question-and-answer session. Our first question comes from Samik Chatterjee with JPMorgan. Please proceed.
Hey, good morning. Thanks for the question. This is Joe Cardoso on for Samik. I guess, maybe just for the first one. You had the large increase in RPO this quarter, which was pretty impressive following similar step-ups the last couple of quarters. I think in both from the prior quarters, you referenced large deals that were closed and called them out. Just curious, was the increase this quarter a function of another one of these large deals coming through and you guys closing? And then how are you guys thinking about momentum continuing in 2025 on the RPO front just given the success you have had over these past couple of quarters in these large increases? And then I have a quick follow-up.
As we approached the fourth quarter, we held our ConneXions event, which took place just before the last earnings call, and we emerged from that with a lot of momentum. A key aspect of this was the attendance of over 300 CEOs and General Managers, our largest turnout ever. We engaged in many discussions about the industry's disruptions and the necessary changes. There was a notable shift in mindset where customers, who previously were hesitant to alter their business models, now expressed a need to embrace transformation. This is reflected in our RPO growth, as these customers are adopting new managed services and experiences that drive incremental revenue. Cory highlighted this in his opening statement when he mentioned the 32 new customers who launched managed services for the first time. We anticipate this momentum to continue.
I would like to add that the fourth quarter is usually our strongest period because many companies finalize their contracts in line with their operational plans for the upcoming year. Therefore, we typically witness robust performance. Since our platforms generate revenue based on new subscriber additions, as these customers transition to becoming broadband experience providers, we anticipate this momentum will persist moving forward. While the rate of growth may vary, we expect it to continue to rise as we progress.
Got it, guys. Thanks for the color there. And then for my next question, obviously, there's this lingering narrative around the risks around for government programs or broadly coming under increased scrutiny, the new administration coming in. Maybe you can just share your thoughts on these concerns or updated thoughts on these concerns, and the conversations that you're having with customers which may be making you less concerned of the perceived risks from the investment community? Thanks for the questions, guys.
Yes, there is a lot of noise and no news. So we run our business based upon facts and things changing. And therefore, as the facts evolve, we'll adjust our strategy accordingly. But at this point, we have no comment because it's just a lot of noise.
Understood. Thanks, Cory. I appreciate it. Sorry, thanks, Michael. Appreciate it.
Thanks, Joe. Next question, operator?
Next question comes from Ryan Koontz with Needham & Company. You may proceed.
Great, thanks. Really nice RPO number. Maybe step back big picture here, given all the noise about the beat you mentioned. And I think as a lot of the traditional infrastructure suppliers, you're nervous about that. But your primary business is really built on subscriber connections. Can you maybe speak to how the company is focusing on targeting and monetizing the installed base of fiber-served homes and businesses? That would be great. Thank you.
Thank you, Ryan, for the great question. I want to point out that the term 'beat' doesn't appear in our letter at all because the core of our business model is that we will succeed regardless of government funding. The foundation of Calix, which we’ve been investing in for 13 years with $1.4 billion, is about creating a broadband platform that enables our customers to monetize their subscribers. Our main focus is on expanding our fiber network and enhancing connections to subscribers. We aim to help service providers differentiate themselves in an increasingly commoditized market and successfully attract subscribers to generate revenue. Additionally, we want to increase Average Revenue Per User through additional services that encourage customer loyalty. This was the central theme of my keynote at ConneXions, where I shared my own experience with a service provider. They reduced my fiber connection rate from $80 to $54, and then for three to five months, I was on a free trial when I should have been generating revenue between $100 and $150 a month.
So, to your point, our growth strategy, reflected in the RPOs, focuses on helping our customers gain more subscribers, no matter the network they use. That's why we talk about 'crossing the chasm.' We feel confident that we've passed through the product adoption phase with early adopters and are now moving into the early majority stage, as indicated by ConneXions and our RPOs showing that more customers are making that transition. Cory, do you have anything to add?
No, I think you covered it, Michael.
Great. And maybe we can double-click on the smaller customers. It looked like they were pretty weak relative to recent trends going back for a while here. How do you think about that particular market, the U.S. Tier 3s kind of getting going again relative to their greenfield projects? Do you have much hope that that's going to pick up this year? Or did you think about that as upside to numbers? Or how should investors think about that core market of yours? There's talk about ACAM and the CPF awards may be starting to help that segment. Thanks.
Yes, Ryan, we see strength across the board. Everything has returned to more normal ordering patterns. Looking at that chart, it can be a bit misleading because two large and two medium-sized customers significantly drove the growth in the quarter. One of those customers, compared to the same period last year, was classified as small and became medium during the past year. Therefore, comparing those figures directly can be like comparing apples to oranges. If you were to categorize that customer back as small, the growth wouldn't seem as dramatic as it appears now.
Got it. And is that a U.S. or international customer, can you tell me?
International.
Perfect. All right. Great, thank you.
Yes, I would like to emphasize that there is a seasonal aspect to this. In previous quarters, when there was a significant decline, I wouldn't read too much into the quarterly mix. To Cory's point, performance has been strong across both segments.
All right, thanks, guys.
Thank you.
The next question comes from George Notter with Jefferies. Please proceed.
Hi, everyone. Thank you. I'd like to begin by inquiring about your tax rate guidance for the year. I understand you mentioned the growth of international customers, which suggests there is substantial strength internationally that might increase that tax rate. It seems I’m inferring that this customer, along with other international customers, will continue to perform well for a significant part of the year. Can you walk us through the dynamics you’re observing there? Additionally, could you share any insights about new customer acquisitions or the growth of existing customers in the international market?
Yes, George, on the international side, it's going to be fairly consistent. So this is one of those things where I think as we've all seen in the past, those international costs of customers can be lumpy, right? If you were to go back, there would be a quarter or two it be up, and then it goes back down. I suspect you're going to see the same thing as we look at 2025. Overall, I don't think international will grow disproportionately to the United States. And so therefore, I think it will be relatively the same as you look at it for the whole year. So I think that's it. I wouldn't characterize that you're going to see an increase in international. It's certainly not going to grow faster than what's going on in the United States. Does that make sense? What was your second part of your question?
Yes, I assume the tax rate was part of this. Why is the tax rate higher, I guess is the question?
We were able to take advantage of some tax credits, but those are diminishing now. As a result, our effective rate has normalized to a slightly higher level. We had some recapture of prior tax credits last year that lowered the effective rate, but those have expired. This reflects our more typical rate moving forward.
Got you. Okay. And then I think each of the last two quarters, you talked about a large new customer coming on board. I think maybe more in the context of the cloud offerings. But was that part of the RPO strength this quarter? Or is that still to come in terms of the RPO improvement? Thanks.
Yes. You're right. When we were talking about the largest deal signed in the second quarter and then topped it in the third quarter, that was related to our cloud, our Platform Cloud in managed services. In the fourth quarter, there was no such large contract.
We had no large contract.
So there are lots of medium-sized contracts, and it was broad-based across many customers. Go back to our opening statements. We had the reason why Q4 was strong, and the makeup of that was a very strong diversified business, which we're very proud of, which is 31 net new customers or 32, who launched their first managed service. And when they launched that managed service, they sign up with us for a multi-year contract and with a ramp or however we end up doing it with them depending on the deal specifics, and that was a makeup of the fourth quarter strength. So a good thing and what makes Cory and I very confident and happy about the quarter with RPOs is that it actually wasn't one deal. It was strength across the board.
Great, super. Thanks a lot. I appreciate it, guys.
Thanks, George.
The next question comes from Christian Schwab with Craig-Hallum. Please proceed.
Hey, good morning, guys. So in the letter, we again talked about this once-in-a-generation disruption in the broadband industry, and you said you guys are excited about your multiyear outlook for the business. Can you quantify what that multiyear outlook looks like, revenue and earnings potential over some type of multiyear time frame that you're running the business to? I don't know what you guys have talked about that recently.
No. We haven't provided any color out there, certainly over a multiyear period. If anything, I would fall back to our Target Financial Model, which says, hey, we can grow somewhere in that 10% to 15% range. At this point, we haven't provided anything over a longer term than that.
Okay. And then earlier this morning, very early, our time, can you did talk about the fact that they were shipping to some customers already in Q4. I know there's only been a few states that have released money, but have you seen any benefits from those few states that already got their money?
Yes. So in terms of what we see so far is, yes, we've received our first order out of Louisiana, albeit it's small. And in conversations with those customers, they're looking to do exactly what we thought they would do, which is continue to place orders in the first and second quarters. They'll have their first customer turnups in the third and fourth quarters, and so you'd expect delivery in the third and fourth quarters. So it's like what we expected would happen, and we're seeing it come to fruition.
Fantastic. No other questions. Thanks, guys.
Thank you.
The next question comes from Tim Savageaux with Northland Capital. Please proceed.
Good morning. Excuse me. This question kind of comes out of the comments around gross margins for the year or the improvement being at the low end of the range. And I guess, I want to kind of marry that up with revenue growth expectations. Given that you're talking about more medium to large carrier appliance growth, could we see somewhat of an offset, I guess, to the low-end gross margin guide in terms of stronger-than-expected revenue growth given those dynamics? And as you mentioned, the 10% to 15% range, I mean, do you think the company could be in a position? I know you got a tough comp for Q1 here in terms of the year, but in a position to return to that double-digit growth range by the end of calendar '25 or at some point in the second half given those dynamics you mentioned of larger revenue from larger customers and lower gross margins? Thanks.
Yes, Tim. So in a sense, if you look at what we just did in the fourth quarter, we grew 2.6% sequentially. If you annualize that, we're back to kind of a double-digit growth rate as it was. Now we're obviously not guiding for that in the first quarter. What we've said is that we will grow sequentially between 1% and 5% going forward. And we said that we expect to be in the middle of the range as we exit 2025. So as long as we can get back to that 2%, 3% growth rate sequentially, you're a double-digit grower. And so the answer to your question is, yes, we think that happens certainly by the second half of this year. And that's with no meaningful impact from be it in that number. So I think we'll do that just with what customers we acquired over the last year and the growth of our existing customers. As it relates to margins, though...
May I take that one? So I want to talk about mix?
What we identified regarding the margin at the lower end of the range is a result of a shift towards subscribers. As an investor, this is crucial to monitor because it highlights that our focus has always been on acquiring new subscribers. We achieve this through our customers gaining subscribers, deploying systems in homes and businesses, and then generating revenue from additional services. When I consider the lower end of the range concerning our margins, view it as our investment in expanding our footprint, which will yield returns over the long term. We see this as a significant positive throughout the year. While there may not be an immediate revenue increase, Cory did mention some opportunities for growth and that we are returning to double-digit growth. For us, this core strategy involves expanding our reach and monetizing enhancements, which is our primary focus and will create long-term value for shareholders.
Great. And if I could follow-up on the medium and large carrier front. I guess, would you characterize that growth that you expect is coming from existing or new customers? And in particular, do you have any more visibility here as we worked through the end of last year and into this year on prospects for growth at Verizon, given what's going on over there? Thanks.
Verizon has been a customer for about six years now, and they have consistently invested in Calix technology, though at varying rates. I do not anticipate any major changes in how Verizon operates, and this trend will likely continue. Regarding customer acquisition, we recently launched Smart Business for Tier 2 and medium-sized customers, which was a significant achievement for us in the latter half of last year. This success serves as a strong example of how this segment, which typically moves more slowly compared to smaller customers, is starting to recognize the serious challenges posed by broadband commoditization and the need to adapt their operations. I believe there will be more opportunities for us throughout the year. I have been proactive in meeting with customers to discuss their businesses and concerns. A recurring theme is their perception of commoditization. They also mention a challenge referred to as convergence, which seems somewhat misleading as it really concerns bundling broadband and mobile services with discounts. They are grappling with these challenges and are looking for ways to compete, presenting a significant opportunity for Calix to assist them in transforming their go-to-market strategies and enhancing customer experiences.
Great, thanks very much. I will pass the line.
Appreciate your questions.
Scott Searle of ROTH Capital Partners. Please proceed.
Hey, good morning. Thanks for taking the questions. Nice job on the quarter. Mike, maybe to dive in a little bit deeper on the RPO front, significant growth on a sequential and year-over-year basis. You talked a little bit about some of the high-level reasons. I wonder if you could dive down a layer in terms of what services you're seeing the adoption for, where is the real interest there? And are you guys thinking about different metrics in terms of how you report that to us beyond just RPOs, for example, the number of different services that customers are using? And how should we be thinking about growth in 2025 and beyond given that now you're well above 20% growth the last couple of quarters on a year-over-year basis?
It's challenging to pinpoint a specific product or go-to-market strategy that's driving growth, as it largely depends on the maturity of our customers. Our customer success team has developed a strong maturity model that assesses stages from network operators, who are familiar with network installation and management, to full experience providers, like those we've seen on stage, including Brightspeed. For instance, Tombigbee, as a cooperative, has effectively implemented all our technologies across various go-to-market strategies. Our success organization, which is unique in the market with over 100 dedicated professionals, assists our customers in advancing through this maturity model daily, unlike competitors. In terms of excitement for different offerings, we don’t favor one over another since it ultimately relies on the customer’s stage, their leadership, market pressures, and brand strategy.
Recently, we launched our first managed services, which include basic fiber and WiFi management. The next steps may involve SmartTown or small business solutions, tailored to our customers' needs. We have a customer base of over 1,000 broadband providers, and while we can analyze our offerings — how many customers use one, two, or three services — there isn't a singular focus. However, we do have a clear roadmap we provide to customers on how to transition from network operators to highly profitable experience providers that outperform the competition.
Mike, maybe just to follow-up on that. Is what is that gestation period in terms of taking that customer from the initial nimble of managed services to a more deep penetration? And is that timeline shrinking now with the commercial success you're seeing with a lot of other BEP customers out there?
It really varies depending on the customer. Often, they observe their peers and think, 'That person is doing really well, and that one is being really innovative. I want to follow their lead.' This reflects a typical adoption curve. However, what truly influences timelines is the level of pressure they are facing. The more competition they encounter, especially when someone poses a significant challenge, it’s interesting to see the change. You might have a CEO who feels content, thinking they are doing enough with fiber and basic managed services, not engaging in additional ventures. But once competitors announce plans to expand into their territory, it's striking to see how their attitude shifts almost overnight as they realize they are at risk. Therefore, from my perspective, it’s crucial for us to keep educating and instilling a sense of urgency because, quite frankly, CEOs who wait for a crisis should probably reconsider their positions.
It’s a complex situation, and we need to make them aware of the impending challenges and the need for change. I believe we are effectively doing this. My takeaway from the recent ConneXions conference was that a year ago, there was only a small group of CEOs leading the way in innovation, while the rest wished for market stability allowing them to perform basic tasks without confronting difficulties. However, this year, the conversation shifted to a recognition that merely meeting the basics isn't sufficient. It’s essential to perform well in those areas, but that should be considered fundamental. Companies must think beyond that. This is something we've advocated for a long time, which is part of the reason I joined the company nine years ago and why we’ve made substantial investments to simplify these processes. It's vital that we simplify things for our customers, as highlighted in the recent Brightspeed press release.
When Apollo acquired Brightspeed from Lumen, they inherited a decades-old back office that incurs significant IT costs, a common issue among large carriers. I often recall my time at Bell Canada when mentioning Amdocs would incur substantial expenses and lengthy project timelines. In contrast, Brightspeed successfully launched a new multi-gig service and integrated a new router in just 30 days, which is remarkable compared to industry standards. Their ability to introduce new services isn’t hampered by IT or technology constraints; it simply works due to our platform. Hence, the real challenge lies in shaping our customers into strong marketing and sales entities. This is where the gap exists. We must transition from having a great service and operational excellence to becoming the top sales and marketing organization in their markets, comprehending the value of their brand. Everything we have done aligns with this goal.
I take pride in our capability to guide customers in building a robust brand, as shown by the Digiday Award we received competing against leading companies like Sony PlayStation. The advertising we produce enables our customers to promote their brands effectively, which is exemplary across industries. We will continue to excel in this area, as that is where our focus lies. Apologies for the lengthy response to a brief question.
That's okay. There are no short questions. Mike, to clarify regarding Tier 2 and Tier 3 customers, aside from one customer graduating, it appears that channel and customer inventory has normalized, and we shouldn't expect any significant digestion periods as we look toward 2025. Also, on the competitive takeaway front, it seems many of your new wins came from competitive takeaways. Is there anything noteworthy about that? Thank you.
Yes, Scott. So here we are 91 days further along on this process, and our visibility has improved. And it looks like the normalization is completed. We don't expect any anomalies associated with inventory at customer level like customers.
Yes. Regarding the competitive takeaway, we've found that nearly all of our new customers are not just competitive takeaways, but rather they are choosing to adopt a new business strategy. These decisions are typically not related to the network itself. Most customers are indicating they have an existing network and wish to adjust their go-to-market model. They are opting to partner with us for the first time to benefit from our cloud solutions, go-to-market strategy, and behavioral analytics through Engagement Cloud. This shift in their business model could be viewed as a competitive takeaway, as we are indeed replacing someone else's Wi-Fi router. However, this is fundamentally about assisting customers in transforming their businesses for sustainable success. I believe we are distinct in this approach. Many others merely sell standard devices, as one customer expressed their astonishment that some businesses still focus solely on saving $20 on a router when making a decision that affects seven years of operations.
This short-term thinking results in lost incremental revenue, diminished customer satisfaction, and missed opportunities for initiatives like SmartTown, which enhances their brand and benefits the community through education and subscriber mobility. As we engage with more strategically minded customers rather than those focused only on immediate capital expenses, we can better educate them on effective strategies. This perspective aligns with my previous experience in a large telecommunications company, where I emphasized to my procurement team that cutting costs would not lead to growth. Instead, we invested wisely to boost average revenue per user, reduce churn, and enhance our brand, ultimately achieving a 25% increase in ARPU over three years following five years of decline. This is the mindset we instill in our customers and it reflects our commitments over the past decade and our ongoing investments.
Great, thanks so much.
Thanks.
Thank you. We have reached the end of our question-and-answer session. And I'd like to now turn the call back over to Nancy Fazioli for closing remarks.
Thank you, Latanya. Calix will participate in several investor events during the first quarter. Information about these events, including dates and times and publicly available webcast, will be posted on the Events and Presentations page of our Investor Relations section of calix.com. Once again, thank you, everyone on this call and the webcast for your interest in Calix and for joining us. This concludes our conference call. Have a good day.
Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.