We are starting earnings season today with a review of Calix. They released earnings last week and have lost about 20% of the value of the company due to the earnings call. To be clear, when I talk about company value I am talking about the value of the stock. As a reminder, I am posting about Calix as an investment. Calix is a profitable company with many fine products and some good people that I know. This earnings review is put in place to help average investors understand what is happening in the stock and why. This is also not an investment recommendation. I am simply trying to help people understand the market a little better.
Calix had Revenue of $112M and earnings of $0.16 per share (non-GAAP). Those results are somewhat better than Q3 last year by about 6%. The problem was that Revenue next quarter is projected to be about $104M and earnings had a wide range from losing money to about $0.07 per share. In the recent past, Calix has not seen a dip in Q4 like this and the lowered revenue caught the analysts by surprised. This is what drove the sell off of shares. One thing that is also true is that Operating Expenses were up year over year, particularly in Research and Development. I will focus most of this post on this last issue.
Before I get there, I want to explain a couple of things that drive the stock down when a company has a down quarter. Essentially, a company is a stream of Earnings. Revenue is crucial in having Earnings, but the Stock Market is looking for growth in Earnings over the Long Term. That is why Price to Earnings Ratio (Stock Price divided by the Earnings per Share) or P/E is a critical Metric. Analysts are trying to gauge what Calix’s P/E ratio will be for next year. I think a more important metric is P/E to Growth ratio or PEG. This is the P/E ratio divided by the Growth in Earnings. A PEG over 1.0 means that there is a bet on continued Growth in the Earnings and that the stock is priced with that in mind. A PEG of less 1.0 means that people think that the Earnings will not grow quickly. Something to look for in stocks you invest in.
I want to go back to that investment in R&D. In Q3, Calix put over $22M in R&D. This is over 20% of the Revenue of the company. For a Technology Company, an investor would like to see a significant (15% or so) growth in Revenue to match this investment. That has not happened here yet, and Calix says it is due to a long term investment in software called AXOS. The information around AXOS sounds very good in the articles that I have read. It seems to make sense to me to make a product like Calix’s easier to modify and maintain. The problem is that the CEO told us that the software has been working in networks for 18 months. Well, that is great from a product stability standpoint. What is not good for investors is that this has not seemed to make any difference to Revenue. On top of that, it has not reduced R&D spending to get this Revenue. I think this aspect of the call (and thanks to Paul Silverstein for asking about it) should have set off more warning bells than a blip in Revenue.
That blip in Revenue was attributed primarily to something called CAF-II which I will cover Friday in my Net Neutrality Blog.
So where does that leave us? Well, Calix seems to be stuck and not sure how to get to the next level of Revenue. I look forward to next quarter’s results from them. Next week, I will cover Enphase.
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