We are back to earnings season and this week I am posting about Calix’s Q4 earnings.
The numbers are pretty basic with Revenue of $104M and a GAAP loss of $0.19 per share. Revenue was down slightly for the quarter, but up 2% for the entire year. The interesting thing out of the numbers is that compared to Q414 Revenue was down $7M and Gross Margin was down by $5M. That means that most of the lost revenue was more profitable than average. This was explained on the call by an uptick in International and Professional Services Revenue.
I want to jump to a question that came in at the end of the call. The analyst asked what was going to set Calix on a road to significant growth. The answer that was received must have been underwhelming because the stock is off from just over $7 per share before the call to just under $6 per share today. I agree with that assessment. I want to cover the answer to this question and where I think growth might come from.
The answer that was given was that growth was going to come from Calix’s new software platforms and from the relationship with Ericcson. This latter was discussed as primarily impacting International. But let’s go back to that first comment. The software that Calix has offered and its architecture is really just a promise. This software is a promise that if some significant change comes to a Service Providers network that Calix will be able to adapt its products more rapidly than its competitors and at a lower cost. I am very familiar with this promise as it is the same one we made at AFC, only there we talked about it in Hardware terms. The idea is that customers don’t have to consider replacing gear or buying specialized replacements. They can simply get the latest upgrade to the existing box and use it. Great way to lock in your existing customers. I don’t think it is a great path to breaking into large carriers. Those companies buy new products when they have new networks. They are not greatly concerned about re-use of their existing networks.
The other part of this is a little more interesting and more deceptive. I agree that the Ericcson relationship has potential for Calix. However, I do not believe that this is going to work as well Internationally as Domestically. This is true in particular with AT&T. To understand my reasoning, you have to know that Alcatel-Lucent was the dominant player in the US large carrier access space. Outside the US, the Chinese (Huawei for example) play a much larger role. Well, Alcatel-Lucent is now part of Nokia. That change presents an opportunity for Ericcson to displace Nokia in some parts of AT&T. This has been a problem for Ericcson as they have never been successful in deep penetration in the US Access Market. They are a big AT&T partner and with turmoil in the other camp, maybe there is an opportunity. Outside the US, I see nothing that says that the Chinese will not continue to be the big player where Calix can expand.
So, what does this all say? You have to watch for announcements out of Ericcson and AT&T. Other than that, there is no growth engine that is obvious today at Calix. They are a solid company and are not going out of business anytime soon. But growth has essentially halted, with the exception of what might happen with the new Frontier lines picked up from Verizon. This is as much danger (as Nokia as a major player there) as it is potential upside.
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