Item 1. Business
ITEM 1. Business
Company Overview
Calix was founded in 1999. We develop and market cloud and software platforms, systems and services to enable CSPs of all types and sizes to innovate and transform their businesses. These platforms empower our CSP customers to utilize real-time data and insights to simplify their businesses and deliver an increasing array of services to excite their subscribers. We believe these insights enable CSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities.
This is our mission – to enable CSPs of all sizes to simplify, excite and grow.
We believe our platforms offer a competitive edge to CSPs at a critical time of increasing competition from over-the-top device providers as they expand their reach and focus on owning the connected home experience. For example, these device providers are entering the home by offering Wi-Fi enabled devices, and then leveraging the behavioral insights to expand their direct relationship and brand with the subscriber by offering additional consumer services. Over time, we expect this competition can erode a CSP’s brand and relationship with their subscribers, by reducing broadband to an easy-to-replace commodity, which can increase churn and reduce revenue. Our platforms enable CSPs to compete with higher value managed services offerings for their subscribers.
Innovative CSPs, who are embracing our platforms, understand this competitive threat and that their brand’s central position in the home is a strategic ground they must protect and expand continually. Our Intelligent Access EDGE network solution and Revenue EDGE subscriber solution are designed to allow the CSP to simplify their business and reduce operating expenses, or OpEx, while launching exciting new services in weeks instead of years. Our role-based clouds enable CSP teams, such as operations, marketing and support, to leverage real-time behavioral analytics to anticipate the subscriber’s needs, whether that is optimized broadband speed or a new service offering. The CSP’s teams can then utilize these insights to offer new and innovative services to those subscribers who have the propensity to buy, thereby growing revenue as they deliver a connected home experience at significantly lower OpEx. To expand our reach in the market, w e will continue to pursue strategic technology and distribution relationships that align with CSPs’ strategic priorities. At the same time, we offer our Calix Customer Success and Support Services that provide the CSP with best practices and programs to strengthen and grow their brand with their subscribers, thereby increasing subscriber loyalty and opportunities to grow their subscriber base.
Strategy Overview
Our strategy is to position Calix as the key partner providing cloud and software platforms, systems and services to enable and facilitate the transformation of CSP networks into networks that utilize real-time data generated in the access network and subscriber home network in order to provide an exceptional broadband experience for their subscribers. Most CSPs will require significant transformation of their business and operations in order to become an essential provider of data-driven, high value managed services to their subscribers. The principal elements of our strategy are:
Building and evolving our platforms – Our product strategy centers on our strategic platforms. These platforms simplify CSPs’ businesses by delivering intelligence and automation across the entire subscriber facing network – from the data center edge to the subscriber’s devices. Our platforms also enable critical functions within a CSP’s business, such as marketing, support and operations, to leverage real-time data to continually understand and optimize the experience for their subscribers. Our strategy is to continually augment and extend these platforms with features and services directly or through partners to allow our customers to deliver cutting-edge services to their subscribers.
Engage Directly with Customers – We continue to invest in our direct sales capabilities so that we can engage deeply with our customers to help them understand the differentiable value that our platforms provide. As we deploy new solutions, we are building the expertise of our team by adding specialized resources in areas such as marketing, cloud platforms and network operations. Our direct model is complemented with selective programs for our channel partners, who have established local market expertise and have demonstrated the ability to generate new market opportunities and support sales of cutting-edge technologies for CSPs.
Expand Customer Footprint Across Our Total Addressable Market – Our total addressable market includes CSPs of any type and size, including local and competitive exchange carriers, cable multiple system operators, or cable MSOs, wireless internet service providers, or WISPs, fiber overbuilders such as municipalities and electric cooperatives and hospitality providers. In 2020, despite limited face-to-face interaction, we added 87 CSP customers purchasing directly or through our partners. Our
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diverse and growing customer footprint is a critical source of our future growth as we expand our portfolio and sell additional platforms to both new and existing customers. Our platforms expand our total addressable market and recurring revenue streams by allowing us to address the needs of not only traditional wireline-focused CSPs, but also emerging service providers. As such, we intend to continue to engage emerging providers that are creating entirely new customer segments, including fiber overbuilders, utilities and municipalities. We will also continue to pursue service provider segments where our current share is relatively low, such as cable MSOs, large CSPs and international markets.
Extend Portfolio of Calix Services – Our services team, Calix Services, support our CSPs as they define their transformation strategies, build new skills, implement new technologies and deploy new subscriber services. Calix Services’ capabilities address a CSP’s entire network and service delivery lifecycle. These services allow CSPs to benefit directly from our deep expertise working with service providers to optimize their operations and leverage our advanced analytics to improve the operational efficiency of their teams.
Pursue Strategic Relationships – We will continue to pursue strategic technology and distribution relationships that help us align with CSPs’ strategic priorities. We continue to invest to provide interoperability across the ecosystems that support our customers’ most critical business processes through our partner programs. By adding new solutions to our platform ecosystem, we significantly enhance the value that our platforms deliver to CSPs.
Product Overview
Our product strategy centers on increasing the market adoption of our three product platforms - Calix Cloud ® , which comes in three role-base editions: Calix Marketing Cloud, Calix Support Cloud and Calix Operations Cloud; EXOS ® , which is marketed as the Experience Innovation Platform; and AXOS ® , which is marketed as the Network Innovation Platform. These platforms are sold independently and are also offered as two strategic solutions that make CSP adoption simple and quick: the “Revenue EDGE” and the “Intelligent Access EDGE.”
The Revenue EDGE
The Revenue EDGE is a subscriber experience solution designed to enable CSPs to rapidly deploy new subscriber services to grow their business. The solution is built on EXOS, our carrier class premises operating system, and fully integrated with our GigaSpire ® family of systems to be ready for deployment as a complete subscriber experience solution for a CSP’s residential and business subscribers.
The Revenue EDGE also integrates real-time subscriber insights via our Calix Marketing Cloud, Calix Support Cloud and Calix Operations Cloud offerings, which are configurable to display role-based insights. These insights enable CSPs to anticipate and target new revenue-generating services and applications through our mobile application, CommandIQ ® , and expanding EDGE Suites offerings.
We offer additional cloud-based services with the Revenue EDGE, which we refer to as EDGE Suites. Today they include features for network security and parental controls. We will continue to expand these services with integrated third-party cloud offerings from our ecosystem Revenue EDGE partners such as Arlo Technologies, Inc., or Arlo, and Service Lee Technologies Private Limited, or Servify.
Finally, we offer Revenue EDGE Enablement resources to provide CSP teams with resources to quickly deploy, manage and monetize the services that they provide to subscribers. These resources include marketing content that can be easily customized with on-line tools, training programs, success services and professional services.
The Intelligent Access EDGE
The Intelligent Access EDGE solution is built on the award-winning Calix AXOS software platform and redefines the access edge of the network by simplifying its architecture and operations. AXOS is implemented in our E-Series family of modular, non-blocking systems, enabling our customers to meet a wide variety of deployment scenarios.
The Intelligent Access Edge allows customers to collapse multiple network elements in the access network into a single system and by using specialized software modules to add functionality and remove complexity, the solution reduces the total cost of ownership and the time to market for new services.
In addition, Intelligent Access EDGE Insights enable CSPs to more effectively monitor network performance and more efficiently address performance issues. Intelligent Access EDGE Enablement services are designed to ensure CSP teams are fully enabled to deploy and manage next generation networks. We offer a range of training, professional and success services to assist CSPs in every domain of network management from strategy to deployment and management.
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Traditional Products
We continue to support and offer customers our traditional family of EXA and GigaCenter ® Systems that are widely deployed in customer networks, primarily in North America. We expect that these products will continue to be utilized in our customers’ networks for many years to come.
Customers
We market and sell our cloud and software platforms, systems and services to CSPs of all types and sizes. To date, we have focused primarily on CSPs in the North American market. Our customers span all sizes of broadband subscriber count from a few hundred to more than six million. Our customers include: Allo Communications; CityFibre Holdings Limited; Cox Communications; Frontier Communications Corporation, or Frontier; Forked Deer Connect, LLC; Gibson Connect, LLC; Lumen Technologies, Inc. (formerly known as CenturyLink, Inc.), or Lumen; Sky Cable Corporation; TDS Telecommunications LLC; Windstream Holdings, Inc., or Windstream; and Verizon Communications, Inc.
We classify CSPs into large, medium and small based on the number of broadband subscribers they serve. Large CSPs are those with wide geographic footprints and broadband subscribers of 2.5 million or more. Medium CSPs also operate typically within a wide geographic footprint but are smaller in scale with broadband subscribers that range from 250,000 to 2.5 million. Small CSPs consist primarily of over 1,000 predominantly local independent operating companies, or IOCs, typically focused on a single community or a cluster of communities. They include a growing number of municipalities, electric cooperatives, fiber overbuilders and WISPs. These entities range in size from a few hundred to 250,000 broadband subscribers.
Historically, Lumen has accounted for more than 10% of total revenue, representing 18% of total revenue in 2018 and 15% in 2019. Our efforts to grow our product platforms, add new CSP customers and shift away from low value deployment services have all contributed to Lumen representing 11% of our total revenue in 2020. No other customer represented more than 10% of total revenue in 2020, 2019 and 2018. Sales to customers outside the United States represented 13% of our revenue in 2020, 14% of our total revenue in 2019 and 12% in 2018. Our sales outside the United States have been and are currently predominantly to customers in Canada, the Caribbean, Europe and the Middle East.
Customer Engagement Model
We market, sell and support the success of our cloud and software platforms, systems and services predominantly through our direct sales force, supported by marketing, product management and customer success personnel. We have expanded this model to include select channel partners in North America and more than a dozen international channel partners. Even in circumstances where a channel partner is involved, our sales and marketing personnel are generally selling side-by-side with the channel partner. We believe that our direct customer engagement approach provides us with significant differentiation in the customer sales process and customer engagement programs by aligning us more closely with our customers’ changing needs and successful implementation of our solutions.
Research and Development
Continued investment in research and development is critical to our business. We have made significant investments in our product portfolio, and we intend to continue to dedicate significant resources to research and development to develop, enhance and deliver new platform features and capabilities, including investments in innovative technologies that support our business strategy. Our research and development team is composed of engineers with expertise in software and cloud platforms, optics, wireless technologies and systems engineering. Our research and development team is responsible for designing, developing and enhancing our cloud and software platforms and systems, performing product and quality assurance testing and ensuring the compatibility of our products with third-party hardware and software products. Increasingly, our engineers are focused on enhancements to our cloud and software platforms. Our teams of engineers currently remain concentrated in San Jose and Petaluma, California; Minneapolis, Minnesota; Nanjing, China; and Richardson, Texas. We also outsource a portion of our software and cloud development to domestic and international third parties, and we depend on these partners to meet our development plans. In particular, certain of our research and development efforts may be extended by co-development partnerships with third-party developers such as Infosys whereby we can utilize their substantially larger product development teams to bring cutting edge, software-based products to market while creating new revenue opportunities for both parties.
Manufacturing and Supply Chain
We rely substantially on CMs, ODMs and logistics and other third-party partners for the supply and distribution of our products. We work closely with these third parties to source and procure materials, manufacture and deliver our products and, increasingly, provide hardware system design. Our global supply chain management organization consists primarily of supply chain managers, new product introduction personnel and test engineers. We tightly integrate our supply chain management and new product introduction activities with the activities outsourced to these third parties. We believe that our relationships with and our reliance on our CMs, ODMs and order fulfillment partners allow us to decrease new product introduction time, conserve working capital, reduce product costs and minimize delivery lead times while maintaining high product quality as well
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as the ability to scale quickly to handle increased order volume. Over the past two years, we have reorganized our global supply chain to better align with our platform strategy as well as to reduce the impact from the imposition by the U.S. government of tariffs on goods imported from China. Such changes include the transition of manufacturing previously conducted in China to different manufacturing partners outside China in Taiwan and Vietnam as well as shifting a higher proportion of hardware systems design, management of raw materials used for manufacture and transition of global supply chain operations to our ODM partners. Order fulfillment is performed primarily by our logistics provider located in Texas. We continue to qualify and utilize other vendors for various portions of our supply chain from time to time, including order fulfillment of our circuit boards, optics and cabinets.
As a result of global restrictions and uncertainty related to the COVID-19 pandemic, we have experienced product supply delays as we and our supply chain partners experience longer lead times and shortages of components and materials. We believe the impact of the COVID-19 pandemic and government responses to the pandemic will continue to impact the ability of our third-party manufacturers to supply products to us at the cost and in the time frames and volumes required by us.
Seasonality
Fluctuations in our revenue occur due to many factors, including the 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 capital spending budgets, and in certain regions, customers are also challenged by winter weather conditions that inhibit outside fiber deployment. Furthermore, we believe our customer deployments have benefited to some extent from higher demand for our products and solutions as a result of an increased reliance on CSP services due to the restrictions and uncertainty associated with the COVID-19 pandemic.
Competition
The communications software and systems equipment markets are highly competitive. Competition is largely based on any one or a combination of the following factors: functionality and features, price, existing business and customer relationships, product quality, installation capability, service and support, long-term returns, scalability, development and manufacturing capability.
We compete with several companies within the markets that we serve, and we anticipate that competition will intensify. Vendors with which we compete include ADTRAN, Inc.; Casa Systems, Inc.; Ciena Corporation; Cisco Systems, Inc.; CommScope Inc.; DZS Inc.; eero (an Amazon company); Huawei Technologies Co., Ltd.; Juniper Networks, Inc.; nest (a Google company); Plume Design, Inc.; Nokia Corporation and ZTE Corporation. In various geographic or vertical markets, there are also several smaller companies with which we compete. As we expand into adjacent markets, we expect to encounter new competitors. Many of our competitors have the financial resources to offer competitive products at a below market price, which could prevent us from competing effectively.
Intellectual Property
We rely on a combination of IP rights, including patents, trade secrets, copyrights and trademarks as well as customary contractual protections. These rights and protections are accomplished through a combination of internal and external controls, including contractual protections with employees, contractors, customers and partners, and through a combination of U.S. and international IP laws.
As of December 31, 2020, we held 125 U.S. patents and had four pending U.S. patent applications. As of December 31, 2020, we had no pending international patent applications. U.S. patents generally have a term of twenty years from filing. The remaining terms on our individual patents vary from two months to 17 years. U.S. patent, copyright and trade secret laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same extent.
We believe that the frequency of assertions of patent infringement has and continues to increase in our industry. Any claim of infringement from a third party, even claims without merit, could cause us to incur substantial costs defending against such claims, could require us to pay substantial damages or include an injunction or other court order that could prevent us from selling our products. In addition, we might be required to seek a license which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology, which would require significant effort and expense.
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Human Capital
We employ 785 employees globally as of December 31, 2020, with 74% employees located in the United States and 24% primarily in Canada and Nanjing, China. Except for one employee located in France and subject to customarily local collective bargaining arrangements, we do not have any employees represented by a labor union with respect to their employment with us. We have not experienced any work stoppages and consider our relations with our employees to be good. We consider our talent to be very important to our operations and execution on our business strategy as well as the overall success of our business. As such, we invest significant management attention, time and resources to attract, engage, develop and retain our talent. Our talent strategy focuses on our culture and core values, our talent programs and the overall wellbeing and safety of our talent.
Our culture and core values. We believe that by nurturing a strong culture based on our core values we are able to attract, hire and retain a highly engaged team. Our cultural pillars – to collaborate, create and communicate – reflect the way we lead and work with one another internally as well as externally with our customers, partners, suppliers and other stakeholders. We seek to embed our core values to act responsibly and with integrity, to instill a sense of individual role and purpose at Calix, to communicate openly and honestly and to “take care of our own” in how we lead and conduct our business. Our culture of collaboration creates an inclusive working environment and inclusive engagement with our stakeholders; our culture to create encourages innovation from a diversity of experiences, backgrounds and characteristics; and our culture to communicate encourages open and honest discussion.
Our talent programs. We invest in talent programs to identify and hire candidates who embody our culture and core values and will further our mission. Our compensation and rewards programs are designed to foster a happy, engaged and high-performing workforce. We hire and compensate our talent based on their role, experiences, contributions and performance, regardless of their gender, race or ethnic background or other personal characteristics. For example, our current programs include cash incentive bonuses designed to reward corporate and individual performance and cash bonus opportunities for internal promotions to leadership roles. We offer two employee stock purchase plans, because we believe stock ownership rewards employees for corporate performance aligned to our stockholders’ interests. Our programs are regularly reviewed and adjusted based on benchmarks against competitive industry programs. We encourage open communications with our teams and conduct both internal and third-party run surveys to improve how we engage with and support our talent.
Our wellness, safety and health programs. A centerpiece of our culture is “taking care of our own,” which means we foster a collaborative and supportive environment so that every member of our team has the opportunity to thrive. This mindset starts with our CEO and is embedded in how we lead as well as in our wellness, safety and health programs. Our programs seek to support wellbeing broadly, with comprehensive health benefit offerings, a 401(k) plan for retirement savings available upon hire and with employer match in the U.S. and pension programs for most of our non-U.S. locations, sick leave days and leave programs, unlimited time off, disability benefits and reimbursements under our wellness fund and remote office program. At the outset of the COVID-19 pandemic, we increased support and attention for our team in Nanjing, China, closely monitoring wellbeing and providing flexibility and tools to enable business continuity, while keeping our team safe. With the global onset of the pandemic, we initiated CEO-led bi-weekly sessions in an open forum with all employees addressing the impact of the pandemic and our response to support our workforce and business. We host a communications hub to provide and to enable our teams to share, resources and information such as public health and safety updates, resources for self-care, managing education and school-related challenges and leading remote teams, as well as interesting articles related to the pandemic. We implemented work and safety protocols that put the health and safety of our team first and transitioned our remote work program to apply to all employees in the U.S. and Canada. While our U.S. facilities remained closed, we reconfigured our offices and adjusted our office and health screening protocols to create a safe place to conduct essential tasks. We supplemented our wellness fund to cover broader health and wellness services, including in-home programs and child/family care, and expanded our home office program with ergonomic furniture, collaboration tools, virtual learning resources and telecommunications services to enable our teams.
Corporate Information
Our principal executive offices are located at 2777 Orchard Parkway, San Jose, California 95134, and our telephone number is (408) 514-3000. Our website address is www.calix.com. We do not incorporate the information on or accessible through our website into this Annual Report on Form 10-K, and you should not consider any information on, or that can be accessed through, our website as part of this Annual Report on Form 10-K. Calix ® , the Calix logo design, AXOS ® , Calix Cloud ® , CommandIQ ® , EXOS ® , GigaCenter ® , GigaSpire ® and other trademarks or service marks of Calix appearing in this Annual Report on Form 10-K are the property of Calix. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property of the respective holders. The Securities and Exchange Commission, or SEC, maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. We post on the Investor Relations page of our website, www.calix.com, a link to our filings with the SEC free of charge, as soon as reasonably practical after they are filed electronically with the SEC.
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