What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-24 compared with 2023-07-24 · 82 added, 59 removed, 139 unchanged (50% of the section changed)

25 unchanged sentences

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 and six months ended July 1, 2023, or 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 nine months ended September 30, 2023, or 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, investments to support expansion of cloud and customer support offerings as well as our customer success organization, changes in product warranty, incurrence of retrofit costs, amortization of intangibles, support fees for silicon-related development work for our products, changes in trade policies, allowances for obligations to our suppliers and inventory

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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, 2022.

For the six months ended July 1, 2023, there have been no significant changes in our critical accounting policies and estimates.

For the nine months ended September 30, 2023, 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 six months ended July 1, 2023 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2022 that are significant or expected to be significant to us.

There have been no additional accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2023 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2022 that are significant or expected to be significant to us.

Results of Operations

Comparison of the Three and Six Months Ended July 1, 2023 and July 2, 2022

Comparison of the Three and Nine Months Ended September 30, 2023 and October 1, 2022

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

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 October 1,

2022 Variance

Dollars Variance

Percent July 1,

Percent September 30,

2023 October 1,

2022 Variance

1 unchanged sentence

Revenue $ 263,835 $ 236,334 $ 27,501 12 % $ 774,859 $ 623,324 $ 151,535 24 %

Our revenue increased by $59.0 million and $124.0 million for the three and six months ended July 1, 2023, respectively, as compared to the corresponding periods in 2022.

Our revenue increased by $27.5 million and $151.5 million for the three and nine months ended September 30, 2023, respectively, as compared to the corresponding periods in 2022.

The increase in revenue was primarily due to higher revenue from our growing base of small and medium BSP customers and the continuation of BSPs seeking to provide their subscribers a better experience by adopting our platform and managed services.

During the second half of 2022, we added a new medium-sized customer that began to receive significant shipments during the second half of 2022 and the six months ended July 1, 2023.

For the three and six months ended July 1, 2023, revenue generated in the United States was $232.4 million and $460.4 million, or 89% and 90% of our revenue, compared to $183.9 million and $349.6 million, or 91% and 90% of our revenue for the same periods in 2022.

International revenue was $28.6 million and $50.7 million, or 11% and 10% of our revenue, for the three and six months ended July 1, 2023, as compared to $18.1 million and $37.4 million, or 9% and 10% of our revenue, for the same periods in 2022.

No customer accounted for more than 10% of the Company’s revenue for the three and six months ended July 1, 2023 and July 2, 2022.

During the second half of 2022, we added a new medium-

sized customer that began to receive significant shipments during the second half of 2022 and the nine months ended September 30, 2023.

For the three and nine months ended September 30, 2023, United States revenue was $235.1 million and $695.5 million, or 89% and 90% of our revenue, compared to $215.9 million and $565.4 million, or 91% of our revenue for the same periods in 2022.

International revenue was $28.7 million and $79.4 million, or 11% and 10% of our revenue, for the three and nine months ended September 30, 2023, as compared to $20.5 million and $57.9 million, or 9% of our revenue, for the same periods in 2022.

No customer accounted for more than 10% of the Company’s revenue for the three and nine months ended September 30, 2023 and October 1, 2022.

Gross Profit and Gross Margin

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

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 October 1,

2022 Variance

Dollars Variance

Percent July 1,

Percent September 30,

2023 October 1,

2022 Variance

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Gross margin 53.3 % 50.2 % 52.3 % 49.8 %

Gross profit increased to $136.5 million and $264.5 million for the three and six months ended July 1, 2023, from $100.2 million and $192.0 million during the corresponding periods in 2022.

The increase in gross margin of 270 and 220 basis points for the three and six months ended July 1, 2023, respectively, compared to the corresponding periods in 2022, was mainly due to increased contributions from our platform and managed services, product mix and an easing of the excessive prices paid from purchases made on the secondary market during the supply-chain disruption partially offset by excess and obsolete inventory charges.

Gross profit increased to $140.5 million and $405.1 million for the three and nine months ended September 30, 2023, from $118.6 million and $310.5 million during the corresponding periods in 2022.

The increase in gross margin of 310 and 250 basis points for the three and nine months ended September 30, 2023, respectively, compared to the corresponding periods in 2022, was mainly due to increased contributions from our platform and managed services, a shift in product mix and the sell through of a lower amount of excessively priced components acquired in the secondary market during the supply-chain disruption partially offset by excess and obsolete inventory charges.

Operating Expenses

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

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 October 1,

2022 Variance

Dollars Variance

Percent July 1,

Percent September 30,

2023 October 1,

2022 Variance

2 unchanged sentences

Percent of revenue 20 % 20 % 20 % 20 %

Sales and marketing expenses for the three months ended July 1, 2023 increased by $13.5 million compared with the corresponding period in 2022 primarily due to increases in personnel expenses mainly related to sales headcount and higher sales incentive compensation of $9.4 million, stock-based compensation of $2.2 million and travel expenses of $0.9 million.

Sales and marketing expenses for the six months ended July 1, 2023 increased by $29.2 million compared with the corresponding period in 2022 primarily due to increases in personnel expenses mainly related to sales headcount and higher sales incentive compensation of $20.0 million, stock-based compensation of $4.2 million, travel expenses of $2.3 million and marketing expenses of $0.9 million.

Sales and marketing expenses for the three months ended September 30, 2023 increased by $6.2 million compared with the corresponding period in 2022 primarily due to increases in personnel expenses of $5.8 million mainly related to sales headcount and higher sales incentive compensation and in stock-based compensation of $1.3 million, partially offset by lower marketing expenses of $1.4 million.

Sales and marketing expenses for the nine months ended September 30, 2023 increased by $35.5 million compared with the corresponding period in 2022 primarily due to increases in personnel expenses of $25.8 million mainly related to sales headcount and higher sales incentive compensation, stock-based compensation of $5.4 million and travel expenses 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 Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 October 1,

2022 Variance

Dollars Variance

Percent July 1,

Percent September 30,

2023 October 1,

2022 Variance

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Percentage of gross profit 33 % 28 % 33 % 30 %

Research and development expenses for the three months ended July 1, 2023 increased by $14.9 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $9.0 million, stock-based compensation of $2.6 million, prototypes and test equipment expenses of $1.0 million, outside services of $0.8 million and depreciation and amortization of $0.8 million.

Research and development expenses for the six months ended July 1, 2023 increased by $28.3 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $17.2 million, stock-based compensation of $3.2 million, outside services of $2.6 million, prototypes and test equipment expenses of $2.3 million and depreciation and amortization of $1.6 million.

Research and development expenses for the three months ended September 30, 2023 increased by $13.8 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $10.7 million, stock-based compensation of $1.4 million, prototypes and test equipment expenses of $0.9 million, and depreciation and amortization of $0.9 million.

Research and development expenses for the nine months ended September 30, 2023 increased by $42.0 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $27.9 million, stock-based compensation of $4.6 million, prototypes and test equipment expenses of $3.2 million, depreciation and amortization of $2.4 million and outside services of $1.9 million.

We expect our investments in research and development to increase in absolute dollars, but remain relatively consistent as a percentage of gross profit, as we seek to 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 Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 October 1,

2022 Variance

Dollars Variance

Percent July 1,

Percent September 30,

2023 October 1,

2022 Variance

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Percent of revenue 10 % 8 % 9 % 9 %

General and administrative expenses for the three months ended July 1, 2023 increased by $5.8 million as compared with the corresponding period in 2022 mainly due to increases in stock-based compensation of $2.9 million and personnel expenses of $2.5 million.

General and administrative expenses for the three months ended September 30, 2023 increased by $6.1 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $3.2 million and stock-based compensation of $2.3 million.

We plan to continue to invest in our information technology infrastructure and headcount due to the growth of our business.

General and administrative expenses for the six months ended July 1, 2023 increased by $12.9 million as compared with the corresponding period in 2022 mainly due to increases in stock-based compensation of $6.0 million, personnel expenses of $5.8 million and outside services of $1.1 million.

General and administrative expenses for the nine months ended September 30, 2023 increased by $18.9 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $9.0 million, stock-based compensation of $8.2 million and outside services of $1.1 million.

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

Interest and Other Income (Expense), net

Interest and Other Expense, net

The following table sets forth our interest and other expense, net (dollars in thousands):

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 October 1,

2022 Variance

Dollars Variance

Percent July 1,

Percent September 30,

2023 October 1,

2022 Variance

Dollars Variance

Interest and other income (expense), net $ 2,418 $ (32) $ 2,450 7,656 % $ 3,891 $ (65) $ 3,956 6,086 %

Interest and other expense, net $ 2,214 $ 461 $ 1,753 380 % $ 6,105 $ 396 $ 5,709 1,442 %

Percent of revenue 1 % — % 1 % — %

Interest and other income (expense), net increased by $2.5 million and $4.0 million as compared with the corresponding periods in 2022 mainly due to a higher rate of interest earned on our cash, cash equivalents and marketable securities as well as a growing cash balance.

Interest and other expense, net increased by $1.8 million and $5.7 million as compared with the corresponding periods in 2022 mainly due to a higher rate of interest earned on our cash, cash equivalents and marketable securities as well as a larger cash and investments balance year over year.

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

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 October 1,

2022 Variance

Dollars Variance

Percent July 1,

Percent September 30,

2023 October 1,

2022 Variance

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Effective tax rate 6.6 % 34.3 % 17.9 % 27.2 %

For the three and six months ended July 1, 2023, our income tax expense was $4.9 million and $6.7 million for an effective tax rate of 34.1% and 26.0%, respectively, which differed from the statutory rate of 21% primarily due to state taxes, the inclusion

of income from certain foreign operations and the effect of non-deductible stock-based compensation for executive officers offset by U.S.

federal research tax credits and excess tax benefits from stock-based compensation.

The effective tax rates for the three and six months ended July 1, 2023 are higher than the similar periods in 2022 primarily as a result of a lower excess tax benefits from stock-based compensation.

For the three and nine months ended September 30, 2023, our income tax expense was $1.2 million and $7.9 million for an effective tax rate of 6.6% and 17.9%, respectively, which differed from the statutory rate of 21% primarily due to state taxes, the effect of non-deductible stock-based compensation for executive officers offset by the favorable impact of U.S.

federal research tax credits, excess tax benefits from stock-based compensation and the U.S.

tax impact of foreign operations.

The effective tax rates for the three and nine months ended September 30, 2023 are lower than the similar periods in 2022 primarily as a result of additional U.S.

federal research tax credits and the U.S.

tax impact of foreign operations.

For the three and nine months ended September 30, 2023, we recognized a tax benefit of $3.6 million related to the finalization of our 2022 tax returns.

Our income taxes may be subject to fluctuation during the year and in future years as new information is obtained.

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For the past few years, we have generated cash flow from our operations as our business has grown.

As of July 1, 2023, we had cash, cash equivalents and marketable securities of $264.1 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S.

As of September 30, 2023, we had cash, cash equivalents and marketable securities of $250.1 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 $25.6 million for the six months ended July 1, 2023 and consisted of net income of $19.0 million and non-cash charges of $41.0 million offset by cash flow decreases of $34.4 million reflected in the net change in assets and liabilities.

Net cash provided by operating activities was $41.3 million for the nine months ended September 30, 2023 and consisted of net income of $35.9 million and non-cash charges of $63.4 million offset by cash flow decreases of $58.0 million reflected in the net change in assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation of $50.1 million and depreciation and amortization of $12.2 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 $26.1 million mainly due to advanced payments to supply chain partners, the renewal of a software contract and reclassification of contract assets from deferred revenue;

a decrease in accounts payable of $6.3 million due to the timing of inventory purchases;

an increase in inventory of $4.2 million to improve our responsiveness to our BSPs’ subscriber demand;

an increase in accounts receivable of $3.2 million in line with our revenue growth;

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in prepaid expenses and other assets of $48.5 million mainly due to advanced payments to supply chain partners, an increase in prepaid taxes and reclassification of contract assets from deferred revenue;

a decrease in accounts payable of $19.8 million related to the timing of vendor payments;

and a decrease in accrued liabilities of $3.8 million due to the payout of incentive compensation and payments related to our Calix ConneXions 2022 Customer Success and Innovation conference.

These changes were partially offset by an increase in deferred revenue of $8.6 million primarily due to our platform subscriptions and support contracts and reclassification of contract assets to prepaid expenses and other assets.

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.

These changes were partially offset by a decrease in accounts receivable of $13.1 million, mainly due to increased linearity of shipments in the third quarter of 2023 resulting in higher collections in the quarter.

Net cash provided by operating activities was $21.1 million for the nine months ended October 1, 2022 and consisted of net income of $29.1 million and non-cash charges of $47.0 million offset by cash flow decreases of $55.0 million reflected in the net change in assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation of $31.5 million, depreciation and amortization of $10.8 million and deferred income taxes of $5.2 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.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in inventory of $52.2 million to improve our responsiveness to customer demand, an increase in prepaid expenses and other assets of $32.9 million mainly due to advanced payments to supply chain partners and an increase in accounts receivable of $15.3 million in line with our revenue growth.

These changes were partially offset by an increase in accounts payable of $36.2 million due to increased inventory purchases and an increase in deferred revenue of $9.1 million due to Calix Cloud and Revenue Edge subscriptions.

Investing Activity

For the six months ended July 1, 2023, cash used in investing activities of $18.8 million consisted of net purchases of marketable securities of $8.7 million and capital expenditures of $10.1 million, consisting primarily of purchases of test and computer equipment and software.

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 nine months ended September 30, 2023, cash used in investing activities of $38.5 million consisted of net purchases of marketable securities of $52.4 million and capital expenditures of $13.9 million, consisting primarily of purchases of test and computer equipment and software.

For the nine months ended October 1, 2022, cash used in investing activities of $17.2 million consisted of net purchases of marketable securities of $8.0 million and capital expenditures of $9.3 million, consisting primarily of purchases of test and computer equipment.

Financing Activities

Net cash provided by financing activities of $4.2 million for the six months ended July 1, 2023 primarily consisted of proceeds from the issuance of common stock related to our equity plans of $18.3 million.

This was partially offset by repurchases of common stock of $10.0 million and payments related to a financing arrangement of $4.1 million.

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

Net cash used in financing activities of $23.3 million for the nine months ended September 30, 2023 primarily consisted of purchases of our common stock of $42.4 million and payments related to a financing arrangement of $7.6 million.

This was partially offset by proceeds from the issuance of common stock related to our equity plans of $26.7 million.

Net cash provided by financing activities of $20.5 million for the nine months ended October 1, 2022 primarily consisted of proceeds from the issuance of common stock related to our equity plans of $21.5 million partially offset by payments related to a financing arrangement of $1.0 million.

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.

Furthermore, our Board of Directors has authorized a stock repurchase program for up to $100 million of our common stock of which $90.0 million remains available.

During the six months ended July 1, 2023, repurchases of $10.0 million were made under the program.

Furthermore, our Board of Directors has authorized a common stock repurchase program for up to $100 million of which $57.6 million remained available as of September 30, 2023.

Our stock repurchase program does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time.

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 generate sufficient cash flows or obtain other sources of liquidity, we will be forced to terminate our repurchase program, limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth.

If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to terminate our stock repurchase program, limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth.

Contractual Obligations and Commitments

Our principal commitments as of July 1, 2023 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 1, 2023 (in thousands):

Our principal commitments as of September 30, 2023 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 September 30, 2023 (in thousands):

Payments Due by Period

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(1) Represents outstanding purchase commitments to be delivered by our third-party manufacturers or other vendors.

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 outstanding purchase commitments related to our third-party manufacturers.

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 outstanding purchase commitments related to our third-party manufacturers.

(2) Future minimum operating lease obligations in the table above primarily include payments for our office locations, which expire at various dates through 2029.

3 unchanged sentences

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