First of all, I want to remind everyone to register for my Webinar that I am sponsoring with Business Design Corporation. They have an offering and can help people apply some of the techniques from the E-Myth to your business. The webinar will be recorded, so I can send it to you even if you can not attend. THIS is a link to register for that event!
On to the major topic of the day. Calix reported results that were a bit down but still not awful. I did not listen to their call but read the transcript. I need to say one thing here that may not be clear to you if you have never done one of these. Quarterly Conference Calls are Sales Events. They are designed by the companies to announce factual data and mix it with the “Company View” of what is going on. The view is designed to give you a good reason to invest in the company. There is nothing wrong with that, but for those unskilled in listening they may not know it. Also, if you are going to listen to conference calls (something I highly encourage) there are some language issues that you may not know. There is a lingo that you can pick up by listening to multiple calls. That will help you separate the analyst lingo from the company or industry lingo. The cadence and tone of callers will sound friendly and inside – lots of what sounds like winks and nods. I can tell you that this is the furthest thing from the truth. Company Executives have to work to keep things upbeat and friendly. It is often hard and requires incredible personal control.
The results themselves are very familiar to me. Anybody who wants to can take a look at AFC in say 2002 and get approximately the same results. That is Calix’s problem. The Tier 2/3 Access Market supports a firm of about $350M – $450M a year. It supports some other firms business as well. This has been true for about 20 years. Really the only issue is can you make it a good business? Calix at the moment is making it a business around break even. Not horrible, but people will push for growth. There are few to choose from and we analyzed them in the 2001 AFC Business Planning process. AFC was more profitable and had more cash so it had more flexibility in choices. Calix has been pursuing International Business and I can tell you that is a hard slog. Outside the US the desire to invest in wireline networks is smaller than it is here. On top of that, the Chinese show up as powerful competition. There are large tempting markets, but getting needle moving results is hard.
And by the way, “needle moving” is one of those things that you need to think about in your own business. For Calix, it is not thinking about going from $400M/year to $410M/year. It is about getting to $550M – $600M per year. On that scale, you can see that finding the places that you might be able to get another $200M a year in revenue is an issue. Which leads to the second problem that Calix has and that is R&D spending. Right now Calix invests about 20% of revenue in R&D. That is a signal to the market that the company believes there is significant revenue growth coming. Yet there is little to show that such revenue growth is really happening. A typical sustaining percentage would be 5%. Right now, R&D spending is about double the growth rate. That means Return on R&D is bad and Calix needs to do something about that. Either change the spend to lower it or change it to invest in new revenues. Either way it needs to change.
This has been a big week on the Net Neutrality front with Netflix. I will post about that on Friday.
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