It was the best of times. It was the worst of times. It could be the “Tale of Two Cities” or it could be the Q1 Earnings report from Calix. The raw numbers are that the company had $117M in Revenue and lost $0.57 per share (non-GaaP). We need to dig a bit into these numbers to understand where the company is and what it is up to.
The $117M in revenue is up significantly from the past year. The challenge is that it includes $26M of Service Revenue up from $6.6M the Q1 of last year. This left the Product Revenue almost completely flat. Additionally, this Service Revenue comes at what is an apparent Gross Margin of less than 1%. But this can be deceiving and may not actually represent the actual Costs here. One of the challenges under Sarbanes-Oxley is that you report Cost of Goods Sold (COGS) when they happen. You recognize the Revenue when the customer accepts the service. This means that there can be a delay from the reporting of Costs to the recognizing of Revenue. The conference call stated that there will be a decline in this type of Revenue in Q2 and that it should return to more historical levels. This implies that the Cost and the Revenue all happened in Q1, but I don’t think this is as clear as it should be.
Now, I would generally rail against adding in a 0% Gross Margin business. It certainly should not be the cause for celebration and growth pinned to it is disingenuous in its marketing of the results. However, we know that Calix is in very competitive situations at its major customers with Adtran. If this was a way of securing a chunk of footprint for later additional work, then it is a good deal. I need to caveat this now. Calix’s primary products are chassis that generally are installed partially filled. The sale of add-on cards is a great deal of the Gross Margin of this kind of business. If this was about securing footprint for that kind of work, then this was a great move. If on the other hand it was for the box products that are complete as installed, then I think we need to view this business with great concern. The analysts on the call should have pursued this but did not. In the latter case, it would say that this kind of work is what keeps Calix competitive. If true, then that is a problem.
The real downside comes on the Operational Expense (OPEX) front. The company $67M in OPEX, including a 50% jump in year over year R&D expenses. This is coupled with a $10M decline in Gross Margin from Systems to make the company extremely unprofitable in Q1. This wiped out about 50% of Calix’s cash reserves. The Q2 guidance suggests that this should reverse based upon the growth in Accounts Receivable in Q1. There is supposed to be growth, but I will want to see growth in Systems and not in Services in Q2. We shall have to see how this works out, but the company is spending too much money based on the return this is bringing shareholders.
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