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CALX > SEC Filings for CALX > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for CALIX, INC

Form 10-Q for CALIX, INC


1-May-2014

Quarterly Report


ITEM 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statement of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing, any statements regarding product development, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the Risk Factors set forth under Part II, Item 1A below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ. Overview
We are a leading provider in North America of broadband communications access systems and software for fiber- and copper-based network architectures that enable communications service providers to connect to their residential and business subscribers. We enable CSPs to provide a wide range of revenue-generating services, from basic voice and data to advanced broadband services, over legacy and next-generation access networks. We focus solely on CSP access networks, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. We develop and sell carrier-class hardware and software products, which we refer to as the Unified Access portfolio, that are designed to enhance and transform CSP access networks to meet the changing demands of subscribers rapidly and cost-effectively.
We market our access systems and software to CSPs globally through our direct sales force as well as a limited number of resellers. At the end of the first quarter of 2014, over eighteen million ports of our Unified Access portfolio have been deployed at a growing number of CSPs worldwide, whose networks serve over 100 million subscriber lines in total. Our customers include many of the world's largest communications providers. In addition, we have enabled over 1,000 customers who have deployed gigabit passive optical network, Active Ethernet and point-to-point Ethernet fiber access networks.
Our revenue decreased to $85.8 million for the three months ended March 29, 2014, from $90.5 million for the three months ended March 30, 2013. During the first quarter of 2014, we experienced softness in our business, as expected, due to lower demand across multiple customer markets, which we believe was due to a slowdown in capital expenditures caused by budgeting delays by our service-provider customers. Continued revenue growth will depend on our ability to continue to sell our access systems and software to existing customers and to attract new customers, including in particular, large CSPs and customers in international markets. For the three months ended March 29, 2014, we had a net loss of $10.0 million. Our net loss was $6.2 million for the three months ended March 30, 2013. Since our inception we have incurred significant losses and, as of March 29, 2014, we had an accumulated deficit of $519.8 million. Revenue fluctuations result from many factors, including but not limited to:
increases or decreases in customer orders for our products and services, large customer purchase agreements with delayed revenue recognition, varying budget cycles and seasonal buying patterns of our customers. More specifically, our customers tend to spend less in the first fiscal quarter as they are finalizing their annual budgets. Customers typically purchase more products during our second and third fiscal quarters. Finally, in our fourth fiscal quarter, customer purchases typically increase as they are attempting to spend the rest of their budget for the year. As of March 29, 2014, our deferred revenue of $47.5 million primarily included certain contracts with customers who receive government supported loans and grants from the U.S. Department of Agriculture's Rural Utility Service ("RUS") that require installation services, as well as extended warranty services contracts that are recognized ratably over the period during which the services are to be performed. The timing of deferred recognition may cause significant fluctuations in our revenue and operating results from period to period.
Cost of revenue is strongly correlated to revenue and will tend to fluctuate from all of the aforementioned factors that could impact revenue. Other factors that impact cost of revenue include changes in the mix of products and services delivered to our customers and changes in the cost of our inventory. Cost of revenue includes fixed expenses related to our internal operations, which could impact our cost of revenue as a percentage of revenue, if there are large sequential fluctuations to revenue.
Our gross profit and gross margin have been, and will likely be, impacted by several factors, including new product introduction or upgrades to existing products, changes in customer mix, changes in the mix of products and services demanded and sold, shipment volumes, changes in our product costs, changes in pricing and the extent of customer rebates and incentive programs. We believe our gross margin could increase due to favorable changes in these factors, for example, increases in sales of our advanced E-Series Ethernet service access platforms, upgrades to our C7 platform, new introductions of our P-Series optical network terminals and reductions in the impact of rebate or similar programs. We believe our gross margin could decrease due to unfavorable changes in factors such as increased product costs, pricing decreases due to competitive pressure and an unfavorable customer or product mix. Changes in these factors could have a material impact on our future average selling prices and unit costs. Also, the timing of deferred revenue recognition and related deferred costs can have a material impact on our gross profit and gross margin results. The timing of recognition and the relative size of these arrangements could cause large fluctuations in our gross profit from period to period.
Our operating expenses have fluctuated based on the following factors: timing of variable compensation expenses due to fluctuations in order volumes, timing of salary increases which have historically occurred in the second quarter, timing of bonus expenses due to changes


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in the Company's performance, timing of research and development expenses including prototype builds and intermittent outsourced development projects. As a result of the fluctuations described above and a number of other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.
Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements will be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
Our critical accounting policies and estimates are described under "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2013. During the three months ended March 29, 2014, there have been no significant changes in our critical accounting policies and estimates.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) ("ASU 2013-11"), which provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists, with the purpose of reducing diversity in practice. Under the new standard update, with certain exceptions, the Company's unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. The accounting standard update became effective for the Company in the first quarter of 2014. As the Company's disclosures already conform to the required presentation, adoption of this standard does not impact the financial position or results of operations of the Company. Results of Operations
Comparison of the Three Months Ended March 29, 2014 and March 30, 2013 Revenue
The following table sets forth our revenue (in thousands, except percentages):

                           Three Months Ended
                                         Variance    Variance
           March 29,      March 30,         in          in
              2014           2013        Dollars      Percent
Revenue   $    85,820    $    90,548    $ (4,728 )     (5 )%

Our revenue decreased to $85.8 million for the three months ended March 29, 2014, from $90.5 million for the three months ended March 30, 2013. During the first quarter of 2014, we experienced softness in our business, as expected, due to lower demand across multiple customer markets, which was due to a slowdown in capital expenditures caused by budgeting delays by service providers, especially some of our largest customers in some territories.
Our revenue is principally derived in the United States. During the three months ended March 29, 2014, revenue generated in the United States represented approximately 88% of our total revenue. During the three months ended March 30, 2013, revenue generated in the United States represented approximately 86% of our total revenue. Notwithstanding that our revenue decreased domestically and internationally compared to last year, we expect international and overall revenue to grow as we expand our international markets.


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Cost of Revenue and Gross Profit
The following table sets forth our cost of revenue (in thousands, except
percentages):
                                                    Three Months Ended
                                                                 Variance     Variance
                                     March 29,     March 30,        in           in
                                       2014          2013        Dollars      Percent
Cost of revenue:
Products and services               $  46,806     $  47,345     $   (539 )      (1 )%
Amortization of intangible assets       2,088         2,088            -         -  %
Total cost of revenue               $  48,894     $  49,433     $   (539 )      (1 )%
Gross profit                        $  36,926     $  41,115     $ (4,189 )     (10 )%
Gross margin                               43 %          45 %

The decrease in cost of revenue during the three months ended March 29, 2014 compared with the corresponding period of fiscal 2013 was due to a $0.5 million decrease in products and services cost, which was primarily related to decreased revenue and lower margins from the recognition of several RUS-funded projects. The amortization of intangible assets remained at the same level. Excluding amortization of intangible assets, gross margin decreased to 45% during the three months ended March 29, 2014 from 48% during the corresponding period of fiscal 2013, primarily due to a combination of product and customer mix, deferred and recognized or shipped revenues and movements in inventory reserves.
Operating Expenses
Research and Development Expenses
The following table sets forth our research and development expenses (in thousands, except percentages):

                                           Three Months Ended
                                                        Variance     Variance
                            March 29,     March 30,        in           in
                              2014          2013         Dollars      Percent
Research and development   $  19,630     $  20,171     $    (541 )     (3 )%
Percent of total revenue          23 %          22 %

The decrease in research and development expenses of $0.5 million during the three months ended March 29, 2014 compared with the corresponding period of fiscal 2013 was primarily due to a decrease in compensation and employee benefits expenses of $0.4 million resulting from the reduction in number of U.S. employees year over year and severance expenses incurred in the first quarter of 2013; as well as a reduction in previously acquired facility related expenses by $0.1 million.
We are continuing our strategic investments in our Unified Access portfolio. We intend to continue to dedicate significant resources to research and development and to develop new product capabilities to support the performance, scalability and management of our Unified Access portfolio. Sales and Marketing Expenses
The following table sets forth our sales and marketing expenses (in thousands, except percentages):

                                            Three Months Ended
                                                        Variance      Variance
                            March 29,     March 30,        in            in
                              2014          2013         Dollars      Percent
Sales and marketing        $  17,390     $  15,801     $    1,589        10 %
Percent of total revenue          20 %          17 %

The increase in sales and marketing expenses during the three months ended March 29, 2014 compared with the corresponding period of fiscal 2013 was primarily due to a $1.1 million increase, in compensation and employee benefits-related and travel and entertainment costs due to increased headcount resulting from the hiring of additional employees to pursue our international expansion.
We will continue our investments in sales and marketing in order to extend our market reach and grow our business in support of our key strategic initiatives.


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General and Administrative Expenses
The following table sets forth our general and administrative expenses (in
thousands, except percentages):
                                               Three Months Ended
                                                            Variance      Variance
                              March 29,      March 30,         in            in
                                 2014           2013         Dollars      Percent
General and administrative   $    7,251     $    8,131     $    (880 )     (11 )%
Percent of total revenue              8 %            9 %

The decrease in general and administrative expenses during the three months ended March 29, 2014 compared with the corresponding periods of fiscal 2013 was mostly due to a $0.9 million decrease in stock-based compensation primarily due to executive equity awards that completed vesting in 2013. Provision for (benefit from) Income Taxes The following table sets forth our provision for (benefit from) income taxes (in thousands, except percentages):

                                                        Three Months Ended
                                                                         Variance         Variance
                                  March 29,           March 30,             in               in
                                    2014                 2013             Dollars         Percent
Provision for (benefit
from) income taxes            $          110      $           357      $      (247 )         (69 )%
Effective tax rate                      (1.1 )%              (6.1 )%

The Company has significant accumulated net operating losses which are subject to a full valuation allowance and, as such, has not received a benefit for these losses.
The income tax provision for the first three months of 2014 consisted primarily of state and foreign income taxes. The Company continues to carryforward the alternative minimum tax net operating loss acquired from Occam Networks, of approximately $5.1 million as of March 29, 2014, which will be used to offset future alternative minimum tax taxable income. The income tax provision for the first three months of 2013 primarily consisted of federal and state alternative minimum tax and state and foreign income taxes. The effective tax rates differ from the U.S. federal statutory rate of 34.0% due primarily to the tax affected change in the valuation allowance against our deferred tax assets.
ASC Topic 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company has established and continues to maintain a full valuation allowance against our net deferred tax assets, with the exception of certain foreign deferred tax assets, as we do not believe that realization of those assets is more likely than not. As of March 29, 2014 and December 31, 2013, the Company had unrecognized tax benefits of $14.4 million, none of which would affect the Company's effective tax rate if recognized.
Liquidity and Capital Resources
We have funded our operations and investing activities primarily through cash generated from operations and the 2010 initial public offering of our common stock. At March 29, 2014, we had cash and cash equivalents of $75.2 million, which consisted of deposits held at banks and money market mutual funds held at major financial institutions.
Operating Activities
The net cash used in operations of $5.2 million for the three months ended March 29, 2014 consisted primarily of net loss of $10.0 million and a decrease of $6.0 million reflected in the net change in assets and liabilities, partially offset by $10.8 million increase of non-cash charges. Non-cash charges consisted primarily of $4.6 million of amortization of intangibles, $2.3 million of depreciation and amortization and $3.9 million of stock-based compensation. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of a $12.3 million decrease in accounts payable due to payments to our manufacturers, a $5.8 million decrease in deferred revenue due to RUS-funded contracts recognized during the quarter and a $6.0 million decrease in inventory due to the absorption of the in-transit inventory in our books in December 2013. In the three months ended March 30, 2013, operating activities provided cash of $2.4 million. Non-cash charges were $12.8 million (the majority of which consist of depreciation and amortization expense and stock-based compensation expense). Cash outflows from changes in operating assets and liabilities included primarily an $11.2 million increase in net accounts receivable due to the timing of shipments and a $5.3 million increase in deferred cost of revenue primarily related to the increased deferred revenue from certain RUS-funded contracts. Cash inflows from changes in operating assets and liabilities primarily resulted from a $10.4 million increase in deferred revenue as a result of increased shipments relating to certain RUS-funded contracts and a $4.1 million decrease in inventory due to improved inventory management.


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Investing Activities
Our cash used in investing activities in the three months ended March 29, 2014 consisted of capital expenditures of $1.9 million primarily as a result of leasehold improvement, purchases of test equipment, computer equipment and software.
Our cash used in investing activities in the three months ended March 30, 2013 consisted of capital expenditures of $1.3 million primarily as a result of purchases of test equipment, computer equipment and software. Financing Activities
Our financing activities used cash of $0.5 million in the three months ended March 29, 2014, which consisted of a $0.5 million payment of payroll taxes for the vesting of performance restricted stock units.
Our financing activities provided cash of $42 thousand in the three months ended March 30, 2013, which consisted of proceeds from the exercise of stock options by our employees.
Working Capital and Capital Expenditure Needs We currently have no material cash commitments, except for normal recurring trade payables, expense accruals, operating leases and firm purchase commitments. In addition, we believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory. In the event that our revenue plan does not meet our expectations, we may eliminate or curtail expenditures to mitigate the impact on our working capital.
We have a credit facility with an aggregate principal amount of up to $50.0 million. The credit facility matures in July 2016, but may be extended up to two times (each extension for an additional one-year period) upon mutual agreement with the Lenders. Proceeds of the credit facility may be used for general corporate purposes and permitted acquisitions. As of March 29, 2014, there was $50.0 million available for borrowing under this credit facility. As of March 29, 2014, we had restricted cash of $0.3 million to collateralize outstanding letters of credit with Silicon Valley Bank.
We believe based on our current operating plan, our existing cash, cash equivalents and amounts available under our credit facility will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the acquisition of new capabilities or technologies and the continued market acceptance of our products. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be harmed. Contractual Obligations and Commitments
The Company's principal commitments consist of obligations under operating leases for office space and non-cancelable outstanding purchase obligations. These commitments are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, and have not changed materially during the three months ended March 29, 2014 except for the following agreements entered into during 2014.
On March 4, 2014, we entered into a new commercial lease for our facility in Santa Barbara, California. The lease is set to commence on July 1, 2014 and expire on June 30, 2019. The total minimum future payment commitment under this lease is $1.0 million. In connection with this lease, we received an incentive consisting of $0.4 million that can be used for leasehold improvements. On March 20, 2014 we entered into a new commercial lease for our facility in Richardson, Texas. This lease is set to commence on August 1, 2014 and expire on January 31, 2022. The total minimum future payment commitment under this lease is $1.5 million. In connection with this lease, we received an incentive consisting of $0.4 million that can be used for leasehold improvements. Off-Balance Sheet Arrangements
As of March 29, 2014 and December 31, 2013, we did not have any off-balance sheet arrangements.

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