We have formally entered Earnings Season and this week we look at the Earnings of Calix. Quarterly Revenue was a record $131.8M and Earnings were a loss of $0.23 per share. There was also a loss (smaller) in non-GaaP results. The stock has been taking a beating on these results with the share price as I type of $6.90 per share down about 9.8%.
So, what is going on and why is the company being beat up so much? The up front problem is in Gross Margins but there is a secondary problem with Operating Expenses (OPEX). We will look at both.
On the Gross Margin Front, the company averages in the mid-40% gross margin range (44% – 46%). Q4 ended with Gross Margins of just over 40%. This gap (let’s call it 5% for round numbers) equated to about $6.6M of loss earnings. Now, this is not enough to make the company profitable, but it would be close to breaking even with this additional money. The company said most of the change in Gross Margins was attributable to Services. Services are people working to engineer, install, and maintain the product. Most of the salaries of those involved are part of Gross Margin so these tend to be lower margin than Products. We also know that the absolute maximum revenue for Services is $13.2M. The CFO claimed they would break out the Gross Margin numbers if Services was 10% of Revenue. If we assume at least $3.3M of this gap is attributable to Service then this implies a Gross Margin of no more than 20% for these Services. Not great, but if there is little to no additional OPEX associated with this work then they are still bringing value to the bottom line.
The problem is that in the Q1 guidance the CFO was revenue of $110M to $114M Revenue and 30% to 34% Gross Margin. I will use mid-point range numbers to elaborate here as the Gross Margin change is significant. If I used 45% as the normal Gross Margin, the gap created is $14.56M in Gross Margin. If Service remains below 10%, this implies that these Services are being sold at an absolute loss. George Notter questioned this on the call but received a non-answer for it. The implication behind it is that we have entered a period of somewhat lower Product Margins and that this may extend for a time into the future. All of this does not include Verizon, which was silent during this period.
But there is a second problem and that is Operating Expense. In Q4, OPEX grew annually over $8M or about 12.5%. This is troubling because it means that the company is becoming less efficient in order to win the business it is trying to pursue. Think of it this way. It is having to charge less (or deliver more value) for its products and it is having to spend more money to run the company. This is a bad position. It may not be permanent, but this is what the market is reacting to.
Outside of the activity in Verizon, there are technical issues that the company is claiming are making it more competitive. Well, it will have to show better results if it wants the investing world to buy into that notion.
Jim Sackman
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