Prepared remarks
Greetings. Welcome to the Calix Second Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Nancy Fazioli, VP of Investor Relations. Thank you. You may begin.
Thank you, Darryl, and good morning, everyone. Thank you for joining our second quarter 2025 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 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 second quarter 2025 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 second quarter 2025 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 in our last earnings call, the investments we made in 2024 to manage through the post-pandemic period are yielding results and the market is evolving as we predicted. Cory will cover our exceptional second quarter, which is a testament to our long-term strategy, our Calix team, the incredible customers we serve and the partners who support us. As I continue to state, the industry is at a crossroads. A broadband provider must decide if they will retain the legacy mindset of a speed-based network operator who tries to cut costs to grow while being commoditized. As our homes passed is not a measure of success as it does not guarantee a revenue-generating subscriber, while the successful broadband provider is the one that delivers incredible experiences across all segments, thereby establishing a brand that is loved by the communities they serve. The result is higher revenue per customer across all segments: residential, business and municipality, higher Net Promoter Scores, which yield customer loyalty and lower churn.
That experience-based success is what Calix enables as we always think subscriber in, not network out. Our mindset is grounded in the experiences beyond the undifferentiated speed of a pipe via our unique appliance-based platform, cloud and managed services model that helps our customers transform with the support of our industry-leading customer success team. Our press releases frequently highlight our customers' ability to use differentiated experiences to deliver value for members and investors as evidenced by a discussion I had with a medium-sized customer last month. That customer launched SmartBiz in late 2024 and saw a 250% increase in revenue per small business subscriber by delivering a better experience. Experiences are the future of broadband, and our platform is unique in that it can address residential, small business, MDU and municipal needs with the same appliances cloud and managed services, which brings me to the second even larger disruption that the world is paying attention to, artificial intelligence.
Since late 2023, our team has believed that the long-term impact of AI is significant and represents the next critical component of the Calix platform. More importantly, we have ensured that our teams do not underestimate the pace of change. This is not a normal technology curve. The pace of change in AI is staggering. The difference between short term and long term is going to be radically shorter than any technology before it, as evidenced by the fact that Netflix took a decade to get to 100 million subscribers, while ChatGPT took 2 months, and is now approaching 1 billion users. It is useful to note that both Netflix and ChatGPT stand on the shoulders of the platform known as the Internet. Since 2007, we have been investing in our platform, cloud and managed services to transform the entire broadband market. In 2016, we launched our second-generation platform, which introduced several key components, two operating systems for network and premises appliances that are extracted from the chips, enabling local applications with rich telemetry and policy management capabilities.
We also introduced our persona-based cloud and managed services model, which now serves residential, small business, MDU and municipal use cases on the same appliances. We have invested more than 15 years and almost $2 billion into our platform. As of the second quarter, we have enabled 1,116 broadband providers to deliver a differentiated experience to ensure their brand is front and center as they delight the communities they serve, including a new large cloud customer who selected us in the quarter. In late 2023, we recognized the emergence of AI would be an incredible opportunity to address the largest constraint that our customers face, the capacity to transform across operations, marketing and service. To meet that need, we began investing in our third generation of the platform. And in the second quarter, it went into preproduction for a second half launch in 2025. Beginning with the upcoming release of our third generation mobile application in August, CommandIQ, which is a valuable brand portal to end subscribers.
The third-generation Calix platform has three goals: First, we expand our platform, cloud and managed services to allow us to meet the needs of local geographies through sovereign data centers. Second, we gain the ability to serve large customers with private clouds. Last and most important, we evolve our platform architecture to speed our capabilities with agentic AI across our solutions to allow the Calix team to move from success advice that a customer may or may not implement to success advice enabled through execution capacity with the legion of Calix AI agents. While we remain the only organization in this industry with a substantial investment and customer success teams to support transformation, it does not overcome the very real capacity challenge that our customers face. For example, many leaders prioritize new installs over adding a new experience campaign such as outdoor Wi-Fi, despite the very real truth that this campaign could add $10 to $50 of incremental revenue per month per subscriber and is wildly sticky, which reduces churn.
They do not have the marketing capacity to build and execute campaigns, nor installer capacity as they have not embraced the high satisfaction driving self-install model. Agentic AI changes that as it will enable our customers to move faster, a force multiplier for action. Calix AI agents learn across our unique end-to-end platform and aligned with our customer success teams will allow a capacity-constrained customer to leap over the case. Our fast-growing legion of agents will speed opportunities to simplify, which improves margin; innovate, which increases revenue and reduces churn; and grow to meet the financial goals of our customers, members and investors. In short, more than 15 years of investment in building a unique end-to-end platform does more than enable an incredible second quarter. We are poised to enable an industry-wide transformation that we have always envisioned for all broadband providers regardless of size or geography.
Platform-based Agentic AI will enable network operators to become experience providers that dominate the markets they serve as the concept of customer success moves from advice that a BXP needs to prioritize and build capacity to implement to the push of a button by our BXP team member to approve the actions of a quickly expanding and evolving legion of Calix agents. With that, I'll hand it over to Cory who will cover our second quarter financial performance and third quarter outlook and ongoing investments to transform and lead the broadband industry. Cory, over to you.
Thank you, Michael. We saw a very strong and broad-based demand environment during the second quarter, which allowed us to deliver revenue of $242 million, which represented 10% sequential quarterly revenue growth. Our record RPOs grew 2% sequentially to $347 million and increased 30% year-over-year. Our current RPOs were $134 million, up 5% sequentially and up 30% year-over-year. This metric is a strong indicator of the strength we are seeing from our platform, cloud and managed services model. This strength led to another quarter of record non-GAAP gross margin of 56.8%, representing a 60 basis point sequential increase and is related to customer mix and our BXP customers winning new subscribers as they continue the adoption of our platform. In the second quarter, we added 18 new BXP customers that were largely competitive takeaways as we continue to focus on landing new footprint. Our balance sheet metrics remained outstanding.
We marked our fifth year of quarterly free cash flow and generated record free cash flow of $36 million in the quarter, our ninth consecutive quarter generating eight-digit free cash flow. We ended the second quarter with record cash and investments of $299 million, even after utilizing $33 million for share repurchases during the second quarter. DSO was a record 24 days, down 6 days sequentially and down 14 days from a year ago. Inventory turns was 3.4%, down from 3.6% in the first quarter. As we noted last quarter, we have a diversified supply chain and manufacturing presence. The data and direct relationship we have with our customers, combined with our strong balance sheet, allows us to make intelligent investments in critical areas such as component inventory and incremental finished goods, thereby ensuring supply for our customers. So far this year, the impact by tariffs has been minimal.
And if the situation in this dynamic environment changes, we will do our best to minimize the impact to our customers. Moving to guidance. Given the broad-based demand picture, we believe we can continue to grow sequentially even with the big step up from this quarter, specifically for the third quarter of 2025. Our revenue outlook is between $243 million and $249 million, which at the midpoint would represent a 2% sequential increase in revenue. Our non-GAAP gross margin guidance at the midpoint would represent a slight increase from the second quarter and reflects our expectations regarding customer and product mix. For 2025, we anticipate annual gross margin improvement will be at the higher end of our target financial model from 100 basis points to 200 basis points. And regarding non-GAAP operating expenses, we continue to restrain our OpEx investments until we are back into our target financial model.
That said, we expect a slight increase in the third quarter as we made some incremental investments in sales and marketing. However, as a percentage of revenue, operating expenses will continue to decline as our revenue grows each quarter. Michael, back to you.
Thanks, Cory. Nine years ago, I joined Calix because Carl Russo painted a vision, where Calix would transform from a network system company into a platform company that would get ahead of the disruption he saw in 2007, the end of legacy network operators and the rise of broadband experience providers. With agentic AI on our unique end-to-end platform, an important piece falls in place, the ability to automate action to drive the success of our broadband experience customers as they expand across residential, business and municipal in the communities they serve. This next step will see Calix leverage our platform in more than 15 years of investment to evolve into an AI as a service platform company. I'm excited to lead the team forward at this truly amazing time. In closing, I'd like to thank our team, our customers, our partners and investors whose passion and grit over 15 years, trust and partnership have brought us to this exciting next stage in the Calix journey. Nancy, let's open the call.
Darryl, we are ready to take some questions.
Questions and answers
Our first questions come from the line of Scott Searle with ROTH Capital Partners.
Great job on the quarter and the outlook. Just a quick clarification. I'm not sure if I heard a normalized number as you reclassified one of the customers from a smaller to a larger customer. I wonder what the growth was sequentially for the smaller customers on an organic basis without that adjustment. And then Mike, maybe to dive in on the agentic front. I'm wondering if you could talk a little bit more detailed in terms of the impact from an OpEx standpoint. It sounds like you're going to keep that pretty constrained in the near term until you get to some target operating margin levels? But how do you expect costs to trend on that front? And the actual impact then from an ARPU standpoint, as you start to look at the customer base and how you monetize that? I know it's going to come from improvements in general in terms of your efficiency. But in terms of rollout of new services and adoption, are we starting to think about ARPU levels from value-added services at a higher level as you start to implement agentic on a more broad-based basis?
Yes, Scott. We haven't really specified what that impact is, but it's mid-single digits.
Now regarding your questions, I noted them down to address them. The first one concerns the impact of costs. Are you inquiring about the internal costs or the expenses related to our investment in artificial intelligence?
Sorry about that, Mike. Your investment, right, in terms of what's going to happen to your R&D and OpEx, does it start to require a little bit more of an inflection as you start to move down that path?
Good point, okay. Good question. So with regards to investments, we have a model that we've identified, and Cory mentioned now we've constrained OpEx with regards to it because until we get our revenue to a certain point. Cory, why don't you take a few seconds to remind all investors about our model with regards to R&D, it is?
29% of gross profit.
Correct. There will be instances where we need to act more quickly due to the unprecedented pace of change with AI. It's important to note that our approach to artificial intelligence isn't merely a new addition layered over our existing systems. This is the third generation of our platform, building on a strong foundation that enables us to integrate this capability effectively, enhancing what we do for our customers. Carl began envisioning this back in 2007, and it took until 2019 to launch the first generation. Since then, we introduced the second generation, which has evolved over the past six years. We are now entering the third generation, developed over an 18 to 24 month cycle, showing that our investments have made us progressively more efficient. As we look forward, this integration is unique in helping our customers capitalize on the shift from network operators to providers of broadband experiences without requiring excessive capital investment.
When it comes to monetization, for our customers, it means being able to launch new campaigns even without sufficient marketing resources. Our cloud-based capabilities now enable teams to go from advising on micro-segmentation and campaign building to executing the campaign directly. With AI, multiple agents can handle various aspects of this process, from segmentation to campaign execution and analysis, allowing broadband companies to conduct focused marketing that was previously too challenging. For instance, I should be able to micro-segment a pool of 50 or 75 customers and run a $3 social media campaign, achieving a return on investment through upsell or acquiring new subscribers. The challenge has been scaling this approach without needing to hire more employees. The monetization strategy not only transforms how our customers operate but also aligns with our philosophy that we only profit when they do.
This approach enables them to acquire more subscribers and increase their average revenue per user through enhanced integrations. These enhancements act as force multipliers, which we've often discussed. Recently, Carl shared an article about private equity exploring legacy businesses for investment opportunities, leveraging AI to unlock their potential value. This has been our belief for 15 years—that broadband is undervalued, with significant monetization prospects following infrastructure investments. Our third-generation platform enables our customers to generate more profit quickly and outperform competitors, of which we receive a share. That's the essence of our strategy.
Mike, then just to follow-up, and I'll get back in the queue. You're accelerating your customers' time to market in terms of their ability to deploy value-added services and campaigns. How quickly can that get deployed then in the customer base with the third-generation platform? And when do we start to see that, I guess, ramping up as part of your current RPOs?
Yes, so that's 2026. And the platform rolls out, as I said, it's in preproduction right now. We put it into preproduction in the second quarter. We have the first component of that launching in August, which is our third generation mobile app, which actually there are multiple iterations of that. There's a consumer mobile app, there's a small business mobile app and then there's an installer app. We just showed it to 30-plus CEOs 3 or 4 weeks ago and walked them through where we're going with the mobile app to support a brand portal, frankly, for customers. They were blown away because all the things they've been looking for us to do are implemented in that mobile app. On top of that, that becomes the portal upon which AI has a profound impact on the end subscriber. So we see that impacting through 2026. And then the other part of that is, as I said in my opening remarks, there's three facets: One is helping our existing customers succeed.
The other two are facets of our platform, which we have been very thoughtful about what markets we expand to. This evolution to this third generation also enables us to do private cloud for large customers and allows us to eliminate the geographic constraints that we have because privacy and data control and sovereignty of data has been a significant constraint for us regarding our ability to go into new markets. And we will now be able to set up sovereign data centers and eliminate that issue as we go through 2026. Long answer for a short question.
Our next questions come from the line of Samik Chatterjee with JPMorgan.
Congrats on the quarter and the strong RPO. Maybe if I can start on the RPO growth that you had quite robust at 30 plus but I'm just trying to sort of match this up relative to the revenue growth acceleration that you've had this quarter. The RPO growth, in fact, decelerated modestly while still at a healthy level. Was there something different in terms of attach of platform services, etc., this quarter that would explain why probably the RPO numbers are a bit lower compared to the last quarter while your revenue growth is significantly better than the last quarter? And I have a follow-up.
It's important to clarify how RPOs function. When we sign a contract with a customer, we enroll them for a minimum number of subscribers. For instance, we might set a baseline of 1,000 subscribers each month under a 3-year contract. If their actual growth exceeds that, say reaching 1,500 or 1,700 subscribers, the additional 600 or 700 subscribers contribute directly to revenue but are not reflected in RPOs until the contract renewal. Customers can choose to renew at the end of the contract or, if their growth has significantly increased, they may wish to renegotiate for a better rate per month. As a company, we don't prioritize pushing for renewals because we gain revenue directly from that growth. This renegotiation can lead to an increase in the minimum subscriber count, which raises the RPO figures. This explains the fluctuations we see; RPOs are just one part of the growth we experience in our cloud services.
Okay. In that sense, please continue.
In the quarter, the acceleration that you saw really was on the appliance side. As you know, a large number of legacy vendors in our industry have been challenged. We anticipated that this would present us an opportunity to land new footprint, and it has. What we didn't anticipate was the speed at which these new customers would want to roll out Calix appliances.
Okay. Great. And maybe for my follow-up, if I can get a quick update on the current supply situation that you have? I think you had updated us that you're looking to move the supply capacity to Mexico. But what's been the progress on that front? Any update on that?
I mean at this point, we are, knock on wood, in a stable environment. We are okay where we're at from a manufacturing process perspective. And so we'll continue to build that. It will take time. So like we said, it feels like anywhere from 9 to 18 months to complete having the capacity in multiple locations. But at the moment, there is no need to make any real changes. We're okay as it is. So unless something changes, we're going to continue to do what we're doing with no real big modifications to our manufacturing footprint.
Our next questions come from the line of Michael Genovese with Rosenblatt Securities.
I just understand on this third-generation platform. This is just a software update, correct? I mean, do the appliances change at all? Or do you just press the button and then everybody has the third-generation platform?
Yes, I know it's exactly that. So it's a cloud upgrade, and like it's a transformation of the architecture of the cloud. And yes, everybody gets it; it actually goes back against all systems. That's the value when I talk about two operating systems. We have a network operating system that's unique in the industry. It allows customers to virtualize their networks, so access, aggregation, subscriber management and other provider edge functions into a single platform. And then we have our operating system that sits on top of a WiFi appliance, but we're agnostic to the hardware. So for sure, it's just press the button.
Sounds good. I have a couple more questions. Last quarter, there were some advance orders from a Tier 1 customer, and this category performed well this quarter. Did that customer's performance exceed your expectations for the second quarter? Also, regarding BEAD, what is your level of confidence that it will become a significant program for closing the digital provider gap in this country?
So on your first question, what's your first question?
It's the Tier 1 pull-in.
Yes, the increase was not due to strength from that customer, but rather a reclassification from the small customer segment to the large customer segment. When you take that into account, the actual strength from large customers in the first quarter is actually lower in the second quarter, which was expected. However, there was strength across the entire broad base that helped lift those numbers. As customers continue to transition and add more subscribers, we're observing this broad-based growth across our customer base.
Second one is BEAD.
Regarding BEAD, there is currently no update. It remains in a state of change, as they are going through a rebidding process at the state level. I won't speculate on when that will be resolved, but I believe it will take time. It's important to note that it is not included in our numbers, and when it eventually occurs, which will likely be later than anticipated, we will perform well.
It's the same thing we always say. I always quote Carl, our Chairman, who says it will always take longer than you expect. When it finally arrives, the rollout will be longer and larger than anticipated. We believe this program will move forward, but it's not reflected in our numbers because it's a political initiative. The positive aspect is that it has a bipartisan aim, as the country consists of both red and blue states. Those looking to get elected or reelected will definitely want progress. However, this process has been more challenging than previous ones, though some would argue it has been just as tough as before. The good news is that it's not included in our forecasts. Yes, it will materialize eventually, and when it does, we will be ready, allowing our customers to take advantage of it while we continue to engage with them and support their rebidding efforts.
Our next questions come from the line of George Notter with Wolfe Research.
I just wanted to go back to the agentic AI discussion. I'm just curious about what elements of this are here to benefit the end subscribers? From what you've described, it sounds like it's more about operational benefits for the service provider. I'm wondering if there's also new offerings, new capabilities, new ARPU-enhancing things for the end subscribers that drive this as well.
Yes, my initial point was that the mobile application is the first component, serving as a brand portal for our customers to connect with their end subscribers. This application will feature many new capabilities, including agentic AI functions that enhance cyber capabilities and improve performance and analysis of home activities for better service. We have transitioned from machine learning to agentic AI, which includes troubleshooting help. For example, if I'm by the pool and my laptop isn't working, the system can diagnose the issue. There are numerous opportunities for advancement. Additionally, there are three key components to a broadband business: Operations, which improves efficiency and profitability; innovation, which draws in new subscribers with attractive capabilities. I previously mentioned how a customer using SmartBiz achieved a 2.5x revenue increase per subscriber, which was impressive. Thus, we will see various enhancements that benefit both subscribers and customers.
Got it. And then just as a quick follow-up. Was there any pull forward do you think from your customers around tariffs? I was just looking at how strong the hardware business looked in the quarter. Any benefits there?
No. We work closely with our customers with regards to like this concept of pull forward. I shouldn't have used that word because it's not true. What we do is we work really closely with our customers on how they manage their inventories and then we just move things around to help them meet the demands of their subscribers.
Our next questions come from the line of Christian Schwab with Craig-Hallum.
First, congrats on the better results and the material earnings leverage. My question has to do with given the better-than-expected results here this year as well as what appears to be improved visibility, as I look to 2026, last year, you guys talked about being able to drive double-digit top line growth. Should we assume that still is the expectation, given the better-than-expected results in the near term here in '25?
Yes, that is correct. We still think we can drive double-digit growth next year and improving margin and cash.
And improving margin. I mentioned the gross margin earlier, so thanks for reiterating that. My last question is about the different layers of agentic AI applications and how they help your customers. I understand that it's being rolled out and finalized throughout 2026. On a multiyear compound annual growth rate basis, do you expect this to positively impact your long-term growth rate? If so, could you provide an aspirational expectation?
There are no aspirational expectations. However, as I mentioned, there are three key components to what agentic AI and our third generation platform provide for Calix. The first component is our existing customer base. It enables us to help them acquire new subscribers more quickly. This benefits customers in two significant ways: firstly, they can greatly reduce operating costs and therefore improve their own margins, which is crucial. Secondly, they can attract new subscribers and sell at a higher average revenue per user. This is the first aspect regarding our existing customer base, which remains strong, and we will continue to succeed in those markets and grow alongside our customers. The second important aspect is the growth of additional segments. We recently announced the launch of our MDU initiative and are aiming to expand into the medium-sized business segment. Additionally, the agentic platform allows us to overcome geographical constraints related to data sovereignty and privacy regulations, opening doors to new markets.
Furthermore, we have historically not engaged with larger entities in our industry because, although we secured a major customer this quarter who purchased our existing services, many others operate under different business models. Therefore, a part of the evolution of our third generation architecture was to enable private instances for large companies, thereby expanding our total addressable market.
Fantastic. And then if I could sneak in one last question. Your commentary about security and software and cloud and being in a position to expand into international markets with a stronger presence. Can you just elaborate on what that means? Does that mean that you would expect over time to have a stronger presence in, say, Europe, for example, than you currently have? I guess that wasn't clear to me, I'm sorry.
The constraint we face is that data sovereignty is a significant concern for most governments. Given the political polarization happening globally, it's reasonable to assume that data privacy and sovereignty will become increasingly important for countries. Previously, we operated two data instances, one in the United States and one in Canada, which also served regions like the U.K. With our new third-generation platform, we can collaborate with our cloud partner to establish instances locally by country if needed. This does not strictly mean within the EU, although fragmentation there could make that feasible. Our discussion about this began in late 2023, focusing on the United States—a country where states might start implementing their own data privacy regulations. We recognized the potential for states to want sovereignty over their data, which led us to invest nearly $100 million to address these challenges. We can now set up operations in the EU and the Middle East without concerns about data privacy holding us back in many markets. The time for this is now.
Our next questions come from the line of Tim Savageaux with Northland Capital Markets.
My congrats on the results and outlook as well. A question about some specific customer segments, even correcting for the reclass. Your large carrier revenue is up pretty good over what you saw last year. And that's true on the medium side as well. I wanted to kind of get your view on a couple of dynamics driving that. We heard from Verizon yesterday that they're ramping up their fiber build per their plan. And I assume that's part of it and also have a really second half loaded CapEx plan for the year. Of course, CityFibre just raised a bunch of money. I assume that's part of what's driving your dynamics near term. I wonder how both of those situations might affect your outlook for the second half. It seems like there's a lot of tailwinds there in those categories. And I'd be interested in your thoughts.
Tim, we're not going to get down into the customer-specific details of what's kind of happening at each level. Again, I'll come back to the demand environment we're seeing is broad-based. So we're seeing strength across the board. The revenue from those large customers that you've seen price in CityFibre and so forth are inherently lumpy and they come back and forth. And so we don't comment on kind of the quarter-to-quarter fluctuations. We just know that the demand environment is broad-based. And even with this large step-up in the second quarter, we can continue to grow sequentially from here. So it's not relying on either of those two customers.
In terms of demand, I want to revisit how smart broadband providers are choosing partners to navigate the significant disruptions faced by every industry. The potential impact of artificial intelligence is honestly underestimated. There’s a notable TED talk on YouTube by Schmidt, the former CEO of Google, who discusses how this technology has been overly hyped while actually being underappreciated. The changes coming in the next couple of years will be greater than what we saw during industrialization, affecting every aspect of society. It is crucial to understand that anyone who believes things will remain the same is mistaken. The landscape of winners and losers will completely change, and those we consider successful right now may not hold that status in the future. We need to identify the companies that are prepared to transform legacy industries using AI effectively, as this will define who succeeds.
During our recent meeting with over 30 CEOs, we revealed our strategy, which was met with relief as they realized they didn’t need to build AI solutions themselves; they recognized that Calix has the capabilities to handle this challenge. Since 2019, we have committed to our second-generation platform, which has proven beneficial for our growth, but this upcoming phase is revolutionary. They understood the importance of being proactive, as their success hinges on being at the forefront. We have been doing this for 15 years, and when it comes to demand, this isn't an afterthought; we have carefully developed our entire platform since 2019, adapting our operating systems over the past six years. In the last 18 to 24 months, we have made substantial investments to enhance our architecture for AI. I want to be clear about growth opportunities; I joined nine years ago with this vision in mind, and everything has led to this moment.
Our future growth will not be limited by geography, sovereignty, or the size of clients demanding dedicated solutions in their private clouds. Moving forward, this represents a significant advancement for us.
If I can just do a quick follow-up here. Michael, I think you mentioned also with a large cloud win with a two large customer or...
Brand new large customer. They became a cloud-only customer, which is great. They haven't been buying other technology and they bought our cloud. For us, I think that's our second-generation platform. But they know where we're going. I think that's a good indicator of what's coming.
Our next questions come from the line of Ryan Koontz with Needham & Company.
Just to clarify what Tim was asking out there, this large customer win is not related to the reclassification of small to large you talked about, or is it?
No comment.
Okay. Fair. The great gross margins here, and especially with the strength of the market in medium and large, obviously, a strong appliance shipping quarter in 2. So what are the mechanics behind that, Cory, in terms of your continued gross margin expansion? Is this purely software mix, anything going on in terms of hardware mix we should be aware of driving margins?
Yes, it is primarily just the continued adoption of the platforms and the growth that you're seeing there, and a little bit of favorability on customer mix.
Got it. And lastly, great DSOs there. It sounds like the quarter was done practically before you started. On the small customer growth rate there, maybe a little below expectations from investors. Do you expect that to improve as we go through the second half of the year, small customer cohort, at least on an organic basis?
For sure. I mean, again, my comments are that demand is broad-based, and we're seeing strength across the board. And so even with the reclassification of one small customer to large, that had the impact of still growing quarter-on-quarter, albeit at a more muted rate, but still, it's growing and it's broad-based.
Thank you. This now concludes our question-and-answer session. I would like to turn the floor back over to Nancy Fazioli for closing comments.
Thank you, Darryl. Calix will participate in several investor events during the third quarter. Information about these events, including dates and times and publicly available webcasts, will be posted on the Events and Presentations page of the Investor Relations section of calix.com. Once 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.
Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.