Well, its earnings season and I am starting my posts with Calix. I want more time with the 10-Q from Enphase but what I have to say about Calix is unequivocal. Since reporting, the stock is up considerably. This is due to the 4Q guidance, but what I have to say I think eclipses that.
Let’s talk numbers first. Revenue was $128M of which $106M was product. The company with that lost $0.35 per share. The guidance for Q4 was Revenue of between $140M – $145M and a loss of $0.10 – $0.15 per share. The company lauded this set of results and predictions as substantially on track with their plan and how things should be.
I completely disagree. If you look at the numbers, the Product Revenue was down year over year on a quarterly basis. From my time in the industry, I know Q3 is a big quarter. That represents a huge problem for me. Secondarily, they have been increasing revenue year over year with services. In this case, they are losing $6M on the services at Gross Margin. This compares to essentially breakeven last year. This means to get the business associated with these services that Calix had to give its customers a $6M discount. Now, to complete this thought we need to come back to the R&D expenses. Right now, if you ask Calix I am sure they would say they are spending about 25% of Revenue on R&D. The reality is that this R&D has to do with product and not services. That means that really that is more like 30%. That is an extraordinarily high number for a company that is flat this year for Product Sales. Add into that that they had to give a discount, you get real problems. If you are building such great and valuable products with all of that R&D, why did you have to give your customers a discount?
Now the stock has done well post-announcement. I see a completely different story than the one the company tried to sell. The analysts were all over the service margin issue, but I don’t believe that anybody tied it up in a bow for you like this.
My view is quite simple. This is the third or fourth major growth initiative from Calix that has gone essentially nowhere. That is a problem from not recognizing that strategic situation and dealing with it correctly. To me that starts at the top and the Board of Directors should do something about it. Yes, I think it is time for Carl Russo to go. Look the company is substantial and not going away anytime soon. But they clearly need a new path forward as the last several have not worked. That is why you need a change of leadership. They have turned over just about every other position in the leadership. And yet the problem remains. Now it is up to the Board to act.
Have a great day!
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