What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-26 compared with 2022-04-26 · 73 added, 55 removed, 135 unchanged (49% of the section changed)

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Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations.

Factors that have impacted our cost of revenue for the three months ended April 2, 2022, and that we expect will impact cost of revenue in future periods, also include:

Factors that have impacted our cost of revenue for the three and six months ended July 2, 2022, and that we expect will impact cost of revenue in future periods, also include:

changes in the mix of products delivered, customer location and regional mix, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints or unfavorable changes in trade policies, investments to support expansion of cloud and customer support offerings as well as our customer success organization, changes in product warranty and incurrence of retrofit costs, amortization of intangibles, asset write-offs, support fees for silicon-related development work for our products, allowances for obligations to our suppliers and inventory write-downs.

Given the ongoing supply chain disruptions related to component shortages, longer lead times as a result of increased global demand for certain components and disruptions related to the COVID-19 pandemic, we have experienced and are continuing to experience product supply delays and related challenges, and we expect these delays

and related challenges to persist in the foreseeable future.

we expect these delays and related challenges to persist in the foreseeable future.

Similarly, challenges in supply chain logistics have persisted due to greater global demand for transport services as well as labor shortages and resulted in increases in our global freight charges.

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The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict, particularly as variants of the coronavirus continue to spread around the world.

In March 2020, we instituted office closures, travel restrictions and a work-from-anywhere policy for substantially all our employees due to shelter-in-place mandates.

In July 2021, we reopened our U.S.

offices to fully-vaccinated employees, who choose to work in the office, and we lifted certain travel restrictions.

The COVID-19 pandemic has had a prolonged impact on our supply chain operations due to restrictions, reduced capacity and limited availability from suppliers on whom we rely for sourcing components and materials and from third-party partners on whom we rely for manufacturing, warehousing and logistics services.

Although demand for our products has been strong in the short-term as subscribers seek more bandwidth and better Wi-Fi, customers’ purchasing decisions over the long-term may be impacted by the pandemic and its impact on the economy, which could in turn impact our revenue and results of operations.

Furthermore, our supply chain continues to face constraints primarily due to challenges in sourcing components and materials and managing global logistics and transport services for our products due to shortages and delays.

Our supply chain continues to face constraints primarily due to closures affecting suppliers and manufacturers in China that have led to challenges in sourcing components and materials.

Shortages and delays relating to our components and materials have also caused, and may continue to cause, difficulties in managing global logistics, and transport and warehousing services for our products.

The prolonged impact of COVID-19 could exacerbate these constraints or cause further supply chain disruptions.

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Our critical accounting policies and estimates, which are revenue recognition, inventory valuation and supplier purchase commitments and income taxes, 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, 2021.

For the three months ended April 2, 2022, there have been no significant changes in our critical accounting policies and estimates.

For the six months ended July 2, 2022, there have been no significant changes in our critical accounting policies and estimates.

Recent Accounting Pronouncements

There have been no additional accounting pronouncements or changes in accounting pronouncements during the three months ended April 2, 2022 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2021 that are significant or potentially significant to us.

There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months ended July 2, 2022 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2021 that are significant or potentially significant to us.

Results of Operations

Comparison of the Three Months Ended April 2, 2022 and April 3, 2021

Comparison of the Three and Six Months Ended July 2, 2022 and July 3, 2021

The following table sets forth our revenue (dollars in thousands):

Three Months Ended

2022 April 3,

Three Months Ended Six Months Ended

2021 Variance

Dollars Variance

Percent July 2,

2021 Variance

Dollars Variance

Systems $ 191,195 $ 159,553 $ 31,642 20 % $ 365,621 $ 312,855 $ 52,766 17 %

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Services 5 % 5 % 6 % 5 %

Our revenue increased by $22.9 million for the three months ended April 2, 2022, as compared to the corresponding period in 2021 mostly due to higher systems revenue of $21.1 million, as compared to the corresponding period in 2021.

Services revenue increased by $1.8 million compared to the corresponding period in 2021.

100 % 100 % 100 % 100 %

Our revenue increased by $33.4 million and $56.2 million for the three and six months ended July 2, 2022, respectively, as compared to the corresponding periods in 2021 mostly due to higher systems revenue of $31.6 million and $52.8 million, respectively.

Services revenue increased by $1.7 million and $3.5 million, compared to the corresponding periods in 2021.

The increase in systems revenue was primarily due to higher revenue from our growing base of small, regional customers as BSPs continue to adopt our All Platform offerings and seek to provide a better Wi-Fi experience for their customers.

The increase in services revenue was due to the continued ramp in our service offerings aligned with cloud and software products for our customers.

For the three months ended April 2, 2022, revenue generated in the United States was $165.6 million, or 90% of our total revenue, compared to $139.3 million, or 86% of our total revenue, for the same period in 2021.

International revenue was $19.3 million, or 10% of our total revenue, for the three months ended April 2, 2022, as compared to $22.7 million, or 14% of our total revenue, for the same period in 2021.

No customer accounted for more than 10% of the Company’s total revenue for the three months ended April 2, 2022 and April 3, 2021.

For the three and six months ended July 2, 2022, revenue generated in the United States was $183.9 million and $349.6 million, or 91% and 90% of our total revenue, compared to $138.6 million and $277.9 million, or 82% and 84% of our total revenue, respectively, for the same periods in 2021.

International revenue was $18.1 million and $37.4 million, or 9% and 10% of our total revenue, for the three and six months ended July 2, 2022, as compared to $30.1 million and $52.8 million, or 18% and 16% of our total revenue, for the same periods in 2021.

No customer accounted for more than 10% of the Company’s total revenue for the three months ended July 2, 2022 and July 3, 2021.

Gross Profit and Gross Margin

The following table sets forth our gross profit and gross margin (dollars in thousands):

Three Months Ended

2022 April 3,

Three Months Ended Six Months Ended

2021 Variance

Dollars Variance

Percent July 2,

2021 Variance

Dollars Variance

Gross profit:

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Overall 49.6 % 53.1 % 49.6 % 53.2 %

Gross profit increased to $91.8 million for the three months ended April 2, 2022, from $86.2 million during the corresponding period in 2021 due to higher revenue for both systems and services.

The decrease in systems gross margin of 390 basis points for the three months ended April 2, 2022 compared to the corresponding period in 2021 was mainly due to higher component and logistics costs.

Services gross margin increased by 150 basis points for the three months ended April 2, 2022 compared to the corresponding period in 2021 as our service revenue reflects a greater contribution from higher gross margin services aligned with our platform offerings, which more than offset the investments in our customer success organization.

Gross profit increased to $100.2 million and $192.0 million for the three and six months ended July 2, 2022, respectively, from $89.6 million and $175.9 million during the corresponding periods in 2021 due to higher revenue for both systems and services.

The decrease in systems gross margin of 390 and 380 basis points for the three and six months ended July 2, 2022, respectively, compared to the corresponding periods in 2021, was mainly due to higher component and logistics costs.

Services gross margin increased by 160 and 150 basis points for the three and six months ended July 2, 2022, respectively, compared to the

corresponding periods in 2021, as our service revenue reflects a greater contribution from higher gross margin services aligned with our platform offerings, which more than offset the investments in our customer success organization.

Operating Expenses

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The following table sets forth our sales and marketing expenses (dollars in thousands):

Three Months Ended

2022 April 3,

Three Months Ended Six Months Ended

2021 Variance

Dollars Variance

Percent July 2,

2021 Variance

Dollars Variance

Sales and marketing expenses $ 41,138 $ 29,710 $ 11,428 38 % $ 77,229 $ 57,761 $ 19,468 34 %

Percent of total revenue 20 % 18 % 20 % 17 %

Sales and marketing expenses for the three months ended April 2, 2022 increased by $8.0 million compared with the corresponding period in 2021 primarily due to increases in personnel expenses of $5.9 million, mainly related to investments in sales headcount and higher sales incentive compensation, travel expenses of $1.1 million and stock-based compensation of $1.0 million.

Sales and marketing expenses for the three months ended July 2, 2022 increased by $11.4 million compared with the corresponding period in 2021 primarily due to increases in personnel expenses mainly related to sales headcount and higher sales incentive compensation of $8.2 million, travel expenses of $1.5 million and stock-based compensation of $1.1 million.

Sales and marketing expenses for the six months ended July 2, 2022 increased by $19.5 million compared with the corresponding period in 2021 primarily due to increases in sales headcount and higher sales incentive compensation of $14.1 million, travel expenses of $2.6 million and stock-based compensation of $2.2 million.

We expect our investments in sales and marketing will increase in absolute dollars, but be relatively consistent as a percentage of revenue, as we extend our market reach and grow our business in support of our key strategic initiatives.

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The following table sets forth our research and development expenses (dollars in thousands):

Three Months Ended

2022 April 3,

Three Months Ended Six Months Ended

2021 Variance

Dollars Variance

Percent July 2,

2021 Variance

Dollars Variance

Research and development expenses $ 30,430 $ 25,716 $ 4,714 18 % $ 60,247 $ 50,080 $ 10,167 20 %

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Percentage of systems gross profit 31 % 30 % 33 % 29 %

Research and development expenses for the three months ended April 2, 2022 increased by $5.5 million as compared with the corresponding period in 2021 mainly due to increases in personnel expenses of $2.5 million and stock-based compensation of $2.2 million and outside services of $0.6 million.

Research and development expenses for the three months ended July 2, 2022 increased by $4.7 million as compared with the corresponding period in 2021 mainly due to increases in personnel expenses of $2.7 million, stock-based compensation of $0.6 million, depreciation and amortization of $0.4 million and outside services of $0.3 million.

Research and development expenses for the six months ended July 2, 2022 increased by $10.2 million as compared with the corresponding period in 2021 mainly due to increases in personnel expenses of $5.3 million, stock-based compensation of $2.8 million and outside services of $0.9 million.

We expect our investments in research and development to increase in absolute dollars, but remain relatively consistent as a percentage of systems gross profit, as we expand the functionality and capabilities of our platforms.

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The following table sets forth our general and administrative expenses (dollars in thousands):

Three Months Ended

2022 April 3,

Three Months Ended Six Months Ended

2021 Variance

Dollars Variance

Percent July 2,

2021 Variance

Dollars Variance

General and administrative expenses $ 18,911 $ 13,664 $ 5,247 38 % $ 34,942 $ 26,689 $ 8,253 31 %

Percent of total revenue 9 % 8 % 9 % 8 %

General and administrative expenses for the three months ended April 2, 2022 increased by $3.0 million as compared with the corresponding period in 2021 mainly due to increases in stock-based compensation of $1.8 million, personnel expenses of $0.6 million and outside services of $0.5 million.

General and administrative expenses for the three months ended July 2, 2022 increased by $5.2 million as compared with the corresponding period in 2021 mainly due to increases in personnel expenses of $2.4 million, stock-based compensation of $1.7 million and outside services of $0.7 million.

These increases were driven by continued investments in information technology infrastructure.

General and administrative expenses for the six months ended July 2, 2022 increased by $8.3 million as compared with the corresponding period in 2021 mainly due to increases in stock-based compensation of $3.5 million, personnel expenses of $3.0 million and outside services of $1.2 million.

These increases were driven by continued investments in information technology infrastructure.

We expect our general and administrative investments to increase in absolute dollars but decline slightly as a percentage of revenue over time as revenue continues to grow.

The following table sets forth our income taxes (dollars in thousands):

Three Months Ended

2022 April 3,

Three Months Ended Six Months Ended

2021 Variance

Dollars Variance

Percent July 2,

2021 Variance

Dollars Variance

Income taxes $ 2,148 $ 207 $ 1,941 938 % $ 3,849 $ 357 $ 3,492 978 %

Effective tax rate 22.2 % 1.0 % 19.7 % 0.9 %

For the first quarter of 2021, we maintained a full valuation allowance against our deferred tax assets, resulting an income tax provision primarily due to state and foreign taxes payable.

For the first quarter of 2022, after having released the valuation allowance during the third quarter of 2021, our income tax expense was $1.7 million for an effective tax rate of 17.3%, which differs from the statutory rate of 21% primarily due to U.S.

We maintained a full valuation allowance against our deferred tax assets until the third quarter of 2021.

As such, for the three and six months ended July 3, 2021, our income tax provision was primarily due to state and foreign taxes payable.

For the three and six months ended July 2, 2022, our income tax expense was $2.1 million and $3.8 million for an effective tax rate of 22.2% and 19.7%, respectively, which differs from the statutory rate of 21% primarily due to U.S.

federal research tax credits and excess tax benefits from stock-based compensation partially offset by state taxes, the inclusion of income from certain foreign operations and the effect of non-deductible stock-based compensation for executive officers.

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We have funded our operations and investing activities primarily through sales of our common stock, cash flow generated from operations and various borrowing arrangements.

As of April 2, 2022, we had cash, cash equivalents and marketable securities of $213.1 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S.

As of July 2, 2022, we had cash, cash equivalents and marketable securities of $224.9 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S.

government agency securities and commercial paper.

Operating Activities

Net cash provided by operating activities was $7.4 million for the three months ended April 2, 2022 and consisted of net income of $8.1 million partially offset by non-cash charges of $14.7 million and cash flow decreases of $15.4 million reflected in the net change in assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation of $10.5 million and depreciation and amortization of $3.9 million.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $16.1 million to support revenue growth and to mitigate supply chain shortages and disruptions and an increase in accounts receivable of $2.7 million in line with our revenue growth.

In addition, there was an increase in prepaid expenses and other assets of $6.7 million mainly due to advanced payments to supply chain partners and a decrease in total accrued liabilities of $2.0 million.

These changes were partially offset by an increase in accounts payable of $8.2 million due to increased inventory purchases and an increase in deferred revenue of $4.0 million due to Calix Cloud subscriptions and support contracts.

During the three months ended April 3, 2021, net cash provided by operating activities was $9.9 million and consisted of net income of $20.6 million and non-cash charges of $9.2 million, consisting of stock-based compensation of $5.2 million and depreciation and amortization of $4.1 million.

This was partially offset by cash flow decreases of $20.0 million reflected in the net change in assets and liabilities.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $19.9 million to support revenue growth and to mitigate supply chain shortages and disruptions and a decrease in total accrued liabilities of $15.2 million, mainly related to incentive compensation payouts, rebate redemptions and a reduction of customer advance payments.

In addition, there was an increase in accounts receivable of $5.0 million, due to product shipment timing, and an increase in prepaid expenses and other assets of $1.3 million mainly due to prepaid software licenses.

These changes were partially offset by an increase in accounts payable of $16.2 million due to increased inventory purchases and an increase in deferred revenue of $5.4 million due to support contracts, extended warranties and Calix Cloud subscriptions.

Net cash provided by operating activities was $14.4 million for the six months ended July 2, 2022 and consisted of net income of $15.6 million partially offset by non-cash charges of $29.2 million and cash flow decreases of $30.5 million reflected in the net change in assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation of $20.5 million, depreciation and amortization of $7.7 million and deferred income taxes of $1.0 million.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in prepaid expenses and other assets of $23.3 million mainly due to advanced payments to supply chain partners, an increase in inventory of $9.4 million to improve our responsiveness to customer demand, a decrease in accounts payable of $6.1 million due to the timing of payments related to inventory purchases and an increase in accounts receivable of $0.9 million in line with our revenue growth.

These changes were partially offset by an increase in deferred revenue of $8.7 million due to Calix Cloud and Revenue Edge subscriptions, and support contracts.

Net cash provided by operating activities was $33.4 million for the six months ended July 3, 2021 and consisted of net income of $41.1 million and non-cash charges of $19.1 million, partially offset by cash flow decreases of $26.8 million reflected in the net change in assets and liabilities.

Non-cash charges consisted of stock-based compensation of $11.4 million and depreciation and amortization of $7.7 million.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $24.9 million to support revenue growth and to mitigate supply chain shortages and disruptions

and a decrease in total accrued liabilities of $12.9 million, mainly related to incentive compensation payouts, rebate redemptions and a reduction of customer advance payments.

In addition, there was an increase in accounts receivable of $10.7 million, due to product shipment timing, and an increase in prepaid expenses and other assets of $6.4 million mainly due to advance payments to our supply chain partners for deposits, expedite fees and component surcharges.

These changes were partially offset by an increase in accounts payable of $21.9 million due to increased inventory purchases and an increase in deferred revenue of $6.2 million due to Calix Cloud subscriptions, support contracts and extended warranties.

Investing Activity

For the three months ended April 2, 2022, cash used in investing activities of $20.1 million consisted of net purchases of marketable securities of $16.9 million and capital expenditures of $3.2 million, consisting primarily of purchases of test equipment and computer equipment.

For the three months ended April 3, 2021, cash used in investing activities of $13.5 million consisted of net purchases of marketable securities of $11.2 million and capital expenditures of $2.3 million, consisting primarily of purchases of test equipment and computer equipment.

For the six months ended July 2, 2022, cash used in investing activities of $27.7 million consisted of net purchases of marketable securities of $21.8 million and capital expenditures of $5.9 million, consisting primarily of purchases of test equipment and computer equipment.

For the six months ended July 3, 2021, cash used in investing activities of $68.2 million consisted of net purchases of marketable securities of $64.3 million and capital expenditures of $3.9 million, consisting primarily of purchases of test equipment and computer equipment.

Financing Activities

Net cash provided by financing activities of $5.9 million for the three months ended April 2, 2022 and $8.6 million for the three months ended April 3, 2021 primarily consisted of proceeds from the issuance of common stock related to our equity plans.

Net cash provided by financing activities of $13.9 million for the six months ended July 2, 2022 and $12.6 million for the six months ended July 3, 2021 primarily consisted of proceeds from the issuance of common stock related to our equity plans.

Working Capital and Capital Expenditure Needs

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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 be required to curtail or eliminate expenditures to mitigate the impact on our working capital.

Furthermore, in July 2022, our Board of Directors has authorized a one-year stock repurchase program for up to $100 million of our common stock.

We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for at least the next twelve months.

If we are unable to execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may need to seek other sources of liquidity, including the sale of additional equity or borrowing, to support our working capital needs.

If we are unable to execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition will be adversely affected, and we may need to cease our repurchase program or seek other sources of liquidity, including the sale of additional equity or borrowing, to support our working capital needs.

In addition, we may choose to seek other sources of liquidity even if we believe we have generated sufficient cash flows to support our operational needs.

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Contractual Obligations and Commitments

Our principal commitments as of April 2, 2022 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation.

The following table summarizes our contractual obligations as of April 2, 2022 (in thousands):

Our principal commitments as of July 2, 2022 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation.

The following table summarizes our contractual obligations as of July 2, 2022 (in thousands):

Payments Due by Period

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(2) Future minimum operating lease obligations in the table above primarily include payments for our office locations, which expire at various dates through 2026.

See Note 6 “ Commitments and Contingencies ” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our operating leases.

See Note 6 “ Commitments and Contingencies ” of the Notes to Condensed

Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our operating leases.

(3) Represents remaining payments related to a revenue-share obligation, including imputed interest associated with developed software product and related enhancements by an engineering service provider.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis