July 26, 2021

Fellow Calix stockholders:

As vaccinations continue to rollout, economies around the world are starting the process of reopening and attempting to return to some semblance of pre-pandemic activity. For some industries, there likely may not be a return to pre-pandemic or normal activity. While for other industries, the new normal will likely look a lot like the near-term normal. While vaccinations remain on an upward trajectory, we are still far from levels needed to resume all normal social activity across the globe. The challenge of balancing the pace of reopening of the global economy with the pace of vaccinations has been felt across nearly every industry. Shortages of labor and materials have caused prices for both to increase and supply availability to be challenged. We have been directly impacted by these effects; however, our team continues to execute well in order to meet the needs of our customers.

Our view remains unchanged regarding the benefits of the new hybrid work environment, and we have aligned our real estate, investments in business systems and human resources accordingly. We shifted to a work from anywhere model one year ago, and despite many of the challenges stemming from the pandemic, our team has executed well throughout this past year and continued to do so this quarter. For Calix, our focus remains on the health and welfare of our employees and their families so that they may, in turn, execute on our mission and support our customers through these challenging times.

As we discussed last quarter, our business is driven by the secular change in the communications space, and our All Platform offerings are the basis for our growth. Our results in the second quarter reinforced this fact.

Our missionis to enable our broadband service provider (BSP) customers of all types and sizes to simplify their business, excite their subscribers and grow their value. As our BSP customers utilize the greater capabilities of our All Platform offerings and grow the value of their businesses, we believe over the long-term they will share a portion of that value with us. This will increase our revenue visibility and create a more valuable business for Calix. BSP customers deploying our All Platform offerings have reported dramatic improvements in key metrics, including increased average revenue per user, lower subscriber churn, reduced truck rolls and increased net promoter scores, thanks to our Intelligent Access Edge and Revenue Edge platforms. We continued to add new BSP customers of all types this quarter, setting a second quarter record and nearly eclipsing the all-time new customer adds for a single quarter. As the economy continues to reopen, we will expand our customer engagement and further increase our ability to demonstrate the value of our All Platform offerings.

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Increasing customer adoption of our product and service offerings enabled us to deliver record second quarter revenue that was up nearly 42% from last year. Performance in the quarter was led by strength in our small- and medium-size customers with growth across our All Platform offerings and legacy systems products. For the third consecutive quarter, no customer accounted for greater than 10% of revenue in the quarter, reflecting the growing diversity of our revenue and increasing robustness of our business. Despite higher component and logistics costs, we delivered record second quarter gross margin as our All Platform offerings continued to increase as a percentage of our overall revenue. We maintained our disciplined operating expense investments while at the same time making targeted investments to capitalize on the opportunity ahead of us by adding key talent to the organization. This combination of higher revenue, increased gross margin and disciplined operating expense investments led to record second quarter GAAP net income. We start the third quarter of 2021 in the strongest financial position in our history and believe we are perfectly placed to execute on the opportunity ahead.

As a communications cloud and software platform business, we continue to believe our financial performance improvement will manifest across four measurable metrics over the long term:

  • Deliberate revenue growth
  • Gross margin expansion
  • Disciplined operating expense investment
  • Increased predictability

Examples of our progress made in the quarter were:

  • Added 43 new BSP customers of all types in the quarter.
  • Set a new second quarter record for new Calix Marketing Cloud customers with total customers increasing by 70% compared to the year ago quarter.
  • Record quarter for the EXOS platform with revenue up more than 275% compared to the year ago quarter as both new and existing customers accelerated deployments of the Revenue EDGE solution.
  • AXOS platform revenue increased by more than 75% compared to the year ago quarter driven by both new and existing customers' continued adoption of the platform.
  • Enhanced Calix Premier Success Services for Marketing, helping our BSP customers improve marketing campaign ROI through more effective use of social media and digital marketing channels.

Our near-term focus is on serving the needs of our BSP customers, while our long-term focus remains on finding like-minded BSP customers regardless of their type, size or location. Furthermore, we remain committed to aligning our investments to our mission, vision and strategy and maintaining strong discipline over our operating expenses. Over the long term, we believe this focus will drive continued improvement in our financial performance.

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Second Quarter 2021 Financial Results

Actual GAAP

Actual Non-GAAP

Guidance Non-GAAP

Revenue

$168.7M

$168.7M

$157M - $163M

Gross margin

53.1%

52.8%(1)

51.0%

- 53.0%(1)

Operating expenses

$69.1M

$63.2M(1)

$64.0M

- $67.0M(1)

Net income per diluted

$0.30

$0.38(1)

$0.24

- $0.28(1)

common share

Free cash flow(2)

$21.8M

Positive

  1. Non-GAAPexcludes items such as stock-based compensation, U.S. tariff refunds and intangible asset amortization. See GAAP to non-GAAP reconciliations beginning on page 16.
  2. Free cash flow defined as operating cash flow minus purchases of property and equipment.

Results for the second quarter of 2021 broke a number of second quarter records and were better than our financial guidance provided last quarter. Overall demand was robust, and our supply chain outperformed despite the continued challenging global environment for component sourcing and supply chain logistics. Total revenue, which was above the high end of our guidance range, increased 42% compared to the year ago quarter. This strong performance was driven by demand for our All Platform offerings along with an increase in purchases of our legacy system products. Revenue growth was again led by our small customers along with a continued recovery in investment by our medium customers, which more than offset the lower second quarter revenue among our large customers. Non-GAAP gross margin was near the high-end of our guidance owing to favorable product and customer mix. Meanwhile, our non- GAAP operating expenses were below the low-end of our guidance. The combination of the above resulted in record second quarter net income per diluted common share on both a GAAP and non-GAAP basis. Finally, our continuing focus on balance sheet discipline resulted in the fourth consecutive quarter of positive free cash flow, and the highest reported cash balance in our history.

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Systems revenue for the second quarter of 2021 increased 44% compared to the year ago quarter with continued strong demand for our All Platform offerings along with increased purchases of our legacy systems as service providers continue to respond to higher demand for

bandwidth on their networks. Compared to the prior quarter, systems revenue increased 4%, as we saw increased demand and our supply chain team outperformed expectations. Services revenue increased 11% compared to the year ago quarter and 4% compared to the prior quarter due to the continued ramp of our next generation services. We continue to align our services business with our All Platform model through the introduction of higher differentiated-value services.

Domestic revenue was 79% of total revenue in the second quarter and increased 23% compared to the year ago quarter due to strong demand for our platforms and increased shipments of legacy systems. Sequentially, domestic revenue was essentially flat as strong demand for our platforms was offset by a decline in purchases of our legacy systems. International revenue was 21% of total revenue in the second quarter and increased more than 220% compared to the year ago quarter due to program ramps with specific customers across multiple regions as well as demand carried over from the first quarter due to logistical challenges and component supply limitations. Sequentially, international revenue increased 28% due to program ramps with specific customers across multiple regions as well as demand carried over from the first quarter due to logistical challenges and component supply limitations.

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Revenue from small customers was 84% of total revenue in the second quarter of 2021 and up from 72%, or an increase of 64% in absolute dollars, compared to the year ago quarter due to strength in demand for our All Platform offerings along with increased purchases of our legacy

systems. Revenue from medium- sized customers was 8% of total revenue in the second quarter of 2021 and up from 7%, or an increase of 60% in absolute dollars, compared to the year ago quarter reflecting a continued rebound in investment across this customer base. Revenue from large customers was 8% of total revenue in the second quarter of 2021 and down from 21% of total revenue, or a decrease of 42% in absolute dollars, compared to the year ago quarter primarily due to lower shipments to Lumen Technologies. We will continue to

focus on finding strategically aligned customers of all types and sizes for our All Platform offerings.

Driven by favorable product and customer mix, both GAAP and non-GAAP gross margin set second quarter records. Specifically, GAAP gross margin increased 570 basis points year over year to 53.1%, and non-GAAP gross margin increased 260 basis points year over year to

52.8%. On a GAAP basis, systems gross margin increased 570 basis points compared to the year ago quarter due to favorable product and customer mix as well as a credit for previously paid U.S. import tariffs, refundable due to the subsequent export of the tariffed products from the U.S. Sequentially, systems gross margin on a GAAP basis was essentially unchanged as higher component and logistics costs were offset by the U.S. tariff refunds. On a non-GAAP basis, systems gross margin of 54.0% reached a second quarter record

and reflects an increase of approximately 220 basis points year-over-year. The principal drivers of the year-over-year increase in non-GAAP systems gross margin were the continued growth in our All Platform offerings as a percent of revenue along with favorable product, customer and

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Calix Inc. published this content on 26 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 July 2021 21:09:07 UTC.