Well, it is back to earnings season and both Calix and Enphase reported yesterday. I am going to start this quarter with Calix.
Let’s start with the numbers. Revenue was up over last year by 8% to $98M and the company lost $0.22 a share. That latter number was about the same as last year. The stock has done reasonably well since the announcement and is up 10% today. The conference call was a relative non-event. There were some detailed questions trying to get a view forward of a part of the financials (that I will cover later). The rest of this was all about the Connect America Fund (CAF) Calix has said that at this point it views the CAF as primarily substitutive. That means that people are using CAF money to build networks instead of their own money. These loans (low cost especially for larger carriers) and grants (only available to smaller ones) help lower the cost of rural buildouts. The money takes marginal business cases and makes them acceptable. We will never get 100% build of broadband this way, but incrementally it gets better (see my Friday postings on Net Neutrality about this topic).
Anyway, one thing that I wanted to cover is about the conference calls and guidance. If you read the news reports, the comment on Calix’s quarter says: “4:01 pm Calix Networks beats by $0.03, beats on revs”. That sounds good, but what does it mean. It means that Calix was able to earn more money than it predicted it would in the call where it reported Q4 2015 revenue. Does this mean on its own that Calix is doing really well? No. The idea from a management team standpoint is to do better than you said you were to show that you are doing a great job executing against the plans that you set. It says nothing about how your execution compares against other investments that you might choose.
The real energy around the call was brought up by Simon Leopold. He was trying to suss out what the latter part of the year looks like from a profitability standpoint. To do this, he was going after the Operating Expense (OPEX) numbers. Given that the company does not guide that far ahead there was no direct answer, but I want to make sure that you know what he was going after. Right now, there is about $2.5M of extraordinary legal expenses a quarter that is going away. That means in the long term that OPEX looks to be around $50M a quarter. If you are going to be a company at 46% Gross Margin this means that $108M is a baseline to break even. It is probably a bit more than that, as costs tend to rise (commissions/travel/other customer facing expenses) as revenue rises. The thing is that we need to see what a reasonable Price to Earnings ratio (P/E) is to justify the stock price for a company that is not growing rapidly. If we give Calix a P/E ratio of 30, which is really high for the state of the company, Calix needs to earn $0.25 a share for a year or about $0.06 per quarter or about $3M. This puts the revenue required to hit this level at $115M (approximately). This is why the litigation expenses are a big deal. The expenses are about the same as the profit required to get to a P/E of 30 if we get to break even.
This is why Calix’s stock has gone up a small bit after the announcement. There was not a big wave of euphoria over the prospects as articulated. This was a holding pattern quarter from that standpoint. But they will earn about $10M a year more, by spending less on lawyers.
Have a great day!
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