I want to thank everyone who attended my last Webinar. You can find a recording of it on Youtube. This month on August 26th at 9AM, I will be having a “Goals Setting Webinar”. You can register for this Webinar HERE. In a study done by Harvard on their MBA Students, the 3% of the students that had written goals earned 10x the other 97% over 10 years. So, writing down your goals is an important feature in your life and in your business. So, register and attend to achieve your dreams.
Its that time of the quarter where we get the earnings of those companies I post about. First up is Calix Networks, who reported last week.
Overall, the earnings report was reasonably positive. Revenue was up a bit and the company was profitable on a non-GAAP basis. The items to make the earnings GAAP looked to be recurring but not real (anything that is called Intangible is not real). Fundamentally, Calix is in a steady state. I recognize it because we were in the same state at AFC. They are now fighting hand to hand for deals at the most contested accounts. There is theoretical upside, but the competitors are fighting hard. I think of a wrestling match (Olympic Style) as markets in that condition. Makes it hard to grow revenue a lot. Little bits at a time is the way to think about things.
To me, the more interesting part of the call was the model that Calix is trying for – 50/30/20. This means that they want 50% Gross Margin, 30% Operating Expenses leaving 20% Net Margin (aka Operating Profit). Okay from this quarters numbers Calix is at 48/42/6. Note, I am rounding numbers and will continue to do so. Arguing about 0.1% is just silly.
I am going to grant that Calix is close enough to 50% Gross Margin that I think they can get there. Just add some software products and poof they will be at 50%. The bigger issue is getting the Operating Expense down to 30%. There are two ways to change that percentage. First, you can raise Revenue and keep Operating Expenses flat. It is almost impossible to do, but we will explore those numbers as a way of getting to an answer. The second way is to lay off enough people. We can explore those numbers as well. Normally, a combination of these methods will be used.
So, let’s start with revenue. If I hold Operating Expenses flat at $41.6M per quarter, revenue would need to be about $139M per quarter. This is an increase of about 40% over where the company is today. Given the state of the market, this seems unlikely. On top of the normal competition, Cisco entered the GPON market this quarter. This will put more pressure on the market making this unlikely.
This leaves layoffs as a more likely option. So, let’s explore the limit here. If Revenue is flat at $98M per quarter, one would need to have Operating Expenses at $29M. This would mean a layoff of almost 30%. That is a BIG number. A more likely alternative is a cut of 10% and an attempt to grow Revenue to about $125M. Again that increase in Revenue seems unlikely, but a CEO might be able to think that it might work.
I am not sure what to expect the company to do, but I would say they are a LONG way from achieving that model. Good news is that they will have a solid business as they work at it. Next week is my report on Cyan.
Have a great day!
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