First, I hope to see many of you either tomorrow at the YPN Professional Day or next week at the Santa Rosa Chamber’s Business Showcase. I will be there at both events and look forward to talking to new friends and old.
It is that time of the quarter again and my friends at Calix reported their earnings yesterday. The earnings themselves were rather straightforward. They had revenue of $91M, up from $86M in Q1 last year. They lost money this quarter to the tune of $0.07 a share on a non-GAAP basis. I am not going to use the GAAP numbers as they are not more meaningful for shareholders.
The stock is down about 10% this morning. The results themselves would not drive this behavior. There was modest year over year growth and Gross Margin took a nice uptick. The problem was the conference call. There is a transcript for the call on the Calix Investor Relations site, in case you wish to read it. So, what is problematic about the call: Guidance for Q2 is slightly down year over year plus Operating Expenses are up dramatically year over year (well above 10%) plus the company announced a Stock Buyback. The company announced it saw a significantly bigger second half of the year but provided no logical basis for that commentary. On top of that, International Revenue was slightly down year over year.
So, what does all that mean? Let’s start with the Buyback. This is a reasonable way for a company like Calix to give value back to the Shareholders. It can’t really do a regular dividend, and it is signaling that it does not need cash to buy anything. The choices left to it are limited. One thing would be to do a 1 time dividend. At $40M (the size of the Buyback), that would be about $0.80 a share. But the Buyback has an advantage. It is not mandatory like a Dividend. It simply allows the company to buy shares if it thinks this is a good idea. This means on a day like today it can buy some to support the stock price. But if things go well, they can just do nothing. There is also a psychological signal that the company feels it is undervalued and the stock is a good buy. This also helps keep the stock price up.
The real problem lies with the uptick in Operating Expenses (OPEX). The announcement said essentially, “We are investing more in the business and we don’t have anything immediate to show for it. Trust us it will be better in the future.” The problem is that the last two future plans have not worked out to what the company intimated. That would be International and Broadband Stimulus. On the International front, business was flat year over year and no growth has been seen since the initiative was announced. The company said that it was essentially done with Broadband Stimulus projects, and that has not provided an uptick either. So, the analysts and investors are asking what is different this time?
The problem is that the answer to that question is not obvious. To grow the company significantly, there will need to be a large uptick in some customers or some significant new customers. The only thing that is obvious on the horizon is the sale of lines from Verizon to Frontier (a non-Calix customer to a Calix customer) announced earlier this year. It is not clear to me that this is not more of a challenge than an aid. These new lines come from FiOS heavy properties and Alcatel-Lucent will instantly become a significant competitor in Frontier. There are likely to be some good rural upgrades, but these will be split with Adtran. So, probably good but later and maybe problematic.
The newer technologies (Next Generation PON and G.fast) don’t seem like they are going to be entry points into new customers either. All the competitors domestically and internationally have planned products in these spaces as well. So it is not clear that these technologies will be ways into new customers.
That wraps it up. Company spending more and risk into the future has increased. That is why the stock is down. But Calix will soldier on. It will be around for quite awhile, but I suspect Management will be under pressure in the near future to deliver on some growth results. If there is not a big uptick in the 2nd half, then expect the CEO to come under increasing pressure.
Have a great day and again hope to see you over the next week or so!
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