What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-23 compared with 2023-02-21 · 54 added, 83 removed, 148 unchanged (48% of the section changed)

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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.

We are the leading global provider of a broadband delivery platform (cloud, software and systems) and managed services that enable service providers of all types and sizes to innovate and transform their businesses.

We develop, market and sell our platform (cloud, software and systems) and managed services that enable service providers of all types and sizes to innovate and transform their businesses.

For our customers to successfully transform their businesses into the innovative BSPs of the future, they require actionable data for critical business functions such as network operations, customer support and marketing.

However, this data is often trapped in disparate systems or departmental silos.

Our Calix platform, which includes Calix Cloud, Revenue EDGE and Intelligent Access EDGE, gathers, analyzes and applies machine learning to deliver real-time insights seamlessly to each key business function.

Our customers utilize these data and insights to simplify network operations, marketing and customer support and deliver experiences that excite their subscribers.

Our platform, which includes Calix Cloud, Revenue EDGE and Intelligent Access EDGE, gathers, analyzes and applies machine learning to deliver real-time insights seamlessly to each key business function.

Our customers utilize these insights to simplify network operations, marketing and customer support and deliver a growing portfolio of SmartLife managed services and experiences that excite their subscribers.

This enables BSPs to grow their brand through increased subscriber acquisition, loyalty and revenue and to reduce their operating costs, creating value for their businesses and the communities they serve.

We market our Calix platform and managed services to communication service providers globally through our direct sales force as well as select resellers.

Our customers range from smaller, regional service providers to some of the world’s largest service providers.

We have enabled approximately 1,900 customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.

We market our platform and managed services to communication service providers globally through our direct sales force as well as select resellers.

Our customers range from smaller, regional service providers to some of the world’s largest service

Customers are defined into small (less than 250,000 subscribers), medium (250,000 to 2.5 million subscribers) or large (greater than 2.5 million subscribers).

We have approximately 1,600 active customers that have deployed passive optical, Active Ethernet or point-to-point Ethernet fiber access networks or our subscriber premise systems.

Our revenue and potential revenue growth will depend on our ability to develop, market and sell our platform and managed services to strategically aligned customers of all types such as WISPs, fiber overbuilders, cable MSOs, municipalities and electric cooperatives in the United States and internationally.

Our growth is also highly dependent on the speed and willingness of customers to adopt the Calix platform and managed services.

Our growth is also highly dependent on the speed and willingness of customers to adopt our platform and managed services.

Revenue fluctuations result from many factors, including, but not limited to:

increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions, non-availability of products due to supply chain challenges, including component and labor shortages and increasing lead times as well as disruptions as a result of COVID-19 outbreaks, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers.

increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions, non-availability of products due to supply chain challenges, including component and labor shortages and increasing lead times as well as disruptions as a result of pandemics or natural disasters, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers.

More specifically, our customers have in the past spent less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure.

Our revenue is also dependent upon our customers’ timing of purchases, capital expenditure plans and decisions to upgrade their networks or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base.

In recent years, as our revenue from our large customers decreased, we have experienced less year-end volatility due to capital budgetary spending or freezing.

This, combined with an increase in recurring revenue, has resulted in smaller seasonal fluctuations, and we expect this trend to continue.

Our revenue is also dependent upon our customers’ success in growing their subscribers, timing of purchases, capital expenditure plans and decisions to upgrade their networks or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base.

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, 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-

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.

Similarly, while on-going challenges in supply-chain logistics have improved to an extent, delivery timelines remain elongated.

Factors that have impacted our cost of revenue, or that we expect may 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, 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 write-downs.

In addition, we periodically elect to ship by air versus by ocean in order to meet delivery commitments to our customers, which is more costly.

Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if our revenue declines.

Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory or accrual for supplier commitments) and have in the past been negatively impacted by increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.

Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory or accrual for supplier commitments) and have in the past been and may be negatively impacted by increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.

Our operating expenses fluctuate based on the following factors among others:

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We generally determine stand-alone selling prices based on the prices charged to customers or our best estimate of stand-alone selling price.

Our estimate of stand-alone selling price is established

considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices.

Our estimate of stand-alone selling price is established considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of targeted customers and pricing practices.

The determination of estimated stand-alone selling price is made through consultation with and formal approval by management, taking into consideration the go-to-market strategy.

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In addition, from time to time, we procure component inventory primarily as a result of manufacturing discontinuation of critical components by suppliers.

We regularly monitor inventory quantities on-hand and record write-downs for excess and obsolete inventory based on our estimate of demand for our products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price.

We also evaluate our supplier purchase commitments, which have increased significantly due to extended lead-times in the current supply-chain environment, and record a liability for excess and obsolete components based on our estimated demand of our products, potential obsolescence of technology and product life cycles.

These factors are impacted by market and economic conditions, technology changes and new product introductions and require estimates that may include elements that are uncertain.

Furthermore, post the global pandemic-induced supply chain challenges, we have purchased, and may continue to purchase, excess components from our suppliers and consigned back to our suppliers to be consumed on future finish good builds.

We regularly monitor inventory on-hand and record write-downs for excess and obsolete inventory based on our estimate of demand for our products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price.

We also evaluate our supplier purchase commitments, which remain elevated due to extended lead-times created by pandemic-induced supply-chain challenges, and record a liability for excess and obsolete components based on our estimated demand of our products, potential obsolescence of technology and product life cycles.

For example, during the fourth quarter of 2023, we wrote down excess and obsolete inventory and accrued a liability for components at suppliers primarily related to the wind down of our legacy product family that existed before our shift to an all-platform model.

These factors are impacted by market and economic conditions, competitive dynamics, technology changes and new product introductions and require estimates that may include elements that are uncertain.

Actual demand may differ from forecasted demand and may have a material effect on gross profit.

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The sale of previously reserved inventory has not had a material impact on our gross margin.

We evaluate our tax positions and estimate our current tax exposure along with assessing temporary differences that result from different book to tax treatment of items not currently deductible for tax purposes.

These differences result in deferred tax assets and liabilities on our Consolidated Balance Sheets, which are estimated based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences reverse.

In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our Consolidated Statements of Comprehensive Income become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized.

Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.

We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance.

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

In the third quarter of 2021, we reversed the majority of our valuation allowance and recorded on our balance sheet U.S.

federal and certain state deferred tax assets of $162 million.

As of December 31, 2022, we determined that positive evidence continues to outweigh negative evidence and concluded that it was more likely than not that our U.S.

federal and state (with the exception of California) deferred tax assets are realizable.

We currently maintain a valuation allowance of $29.9 million for certain U.S.

federal and California deferred tax assets.

Recent Accounting Pronouncements Not Yet Adopted

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Revenue $ 1,039,593 $ 867,827 $ 171,766 20 %

Our revenue increased by $188.4 million, or 28%, during 2022 compared to 2021.

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.

In particular, we added a new medium-sized customer that began to receive significant shipments during the second half of 2022.

Our revenue increased by $171.8 million, or 20%, during 2023 compared with 2022.

The increase in revenue was primarily due to strength in shipments to one of our large customers, continued shipments throughout 2023 from a new medium-sized BSP customer that we added in the third quarter of 2022 and higher revenue from our growing base of small and medium BSP customers as they expand with our platform and managed services to simplify their operations, excite their subscribers with better experiences and grow their value to the communities they serve.

Our revenue is principally derived in the United States.

Revenue generated in the United States represented 91% of revenue in 2023 and 91% in 2022.

Our primary focus has been and in the near term will continue to be the United States and Canada given our large, direct sales and marketing presence and the amount of government stimulus being invested into underserved and not-

served areas of these countries.

Our primary focus has been, and in the near term will continue to be, the United States and Canada given our large, direct sales and marketing presence and the amount of government stimulus being invested into underserved and not-served areas of these countries.

In 2022, we introduced our platform to the United Kingdom.

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Gross margin decreased to 49.9% during 2023 from 50.2% during 2022.

The decrease in gross margin of 230 basis points was mainly due to higher component and logistics costs from the COVID-19-pandemic-induced, supply-chain disruption, which more than offset the increase in gross margin due to increased software and subscription contributions.

Going forward, we expect that the effects of the global supply-chain disruption will continue to normalize in 2023, and we expect the software and subscription contributions will grow, resulting in potential gross margin expansion.

The decrease in gross margin of 30 basis points, compared to the corresponding period in 2022, was mainly due to charges of $28.7 million recorded in the fourth quarter of 2023 as we wrote down obsolete inventory and accrued a liability for components at suppliers primarily associated with our legacy product family that existed before our shift to an all-platform model.

During 2023, customers moved to our platform model at a faster rate than originally anticipated, leaving us with excess finished goods and related components at suppliers.

This decrease was partially offset by 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.

Operating Expenses

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Percent of revenue 21 % 20 %

Sales and marketing expenses increased by $48.6 million during 2022 compared to 2021 primarily due to increases in personnel expenses of $33.6 million related to investments in sales headcount and higher sales incentive compensation, travel expenses of $5.7 million, stock-based compensation of $5.3 million and marketing expenses of $1.9 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 attempt to capitalize on Calix’s ability to enable new platform capabilities and managed services for our BSP customers.

Sales and marketing expenses increased by $40.0 million during 2023 compared to 2022 primarily due to increases in personnel expenses of $29.4 million mainly related to increased sales headcount and higher sales incentive compensation corresponding to our increased revenue, stock-based compensation of $5.0 million and travel expenses of $2.2 million.

We expect our investments in sales and marketing will increase in absolute dollars as we extend our market reach and grow our business in support of our key strategic initiatives.

Research and Development Expenses

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Percent of gross profit 34 % 30 %

The increase in research and development expenses of $30.2 million during 2022 compared with 2021 was mainly due to increases in personnel expenses of $15.5 million, stock-based compensation of $5.4 million, outside services of $4.5 million and depreciation and amortization of $1.5 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 plan to expand the functionality and capabilities of our platform and deliver new managed services.

The increase in research and development expenses of $45.8 million during 2023 compared with 2022 was mainly due to increases in personnel expenses of $31.7 million driven by increased headcount, stock-based compensation of $4.8 million, depreciation and amortization of $3.2 million, prototypes and test equipment expenses of $2.9 million and outside services of $1.2 million.

We expect our investments in research and development to increase in absolute dollars as we seek to expand the functionality and capabilities of our platforms.

General and Administrative Expenses

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Percent of revenue 10 % 9 %

The increase in general and administrative expenses of $20.5 million in 2022 compared to 2021 was mainly due to increases in personnel expenses of $8.7 million, stock-based compensation of $8.7 million and outside services of $2.5 million.

We made continued investments in our information technology infrastructure in 2022.

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

Restructuring Benefit

We initiated a restructuring plan in June 2020 to accelerate our platform future and to align with a work-from-anywhere culture.

We incurred restructuring charges of $6.3 million in 2020, consisting of facilities-related charges and severance and other termination related benefits.

In 2021, we reversed $0.8 million in facilities-related charges as a result of subleasing the abandoned portion of our San Jose headquarters.

See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Interest and Other Income (Expense), Net

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

The increase in general and administrative expenses of $24.1 million in 2023 compared to 2022 was mainly due to increases in personnel expenses of $10.8 million driven by increased headcount, stock-based compensation of $8.0 million, litigation settlement of $3.2 million and outside services of $1.0 million.

We expect our general and administrative investments to increase in absolute dollars as we support the business.

Interest and Other Income, Net

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

Years Ended December 31, 2023 vs 2022 Change

2023 2022 $ %

Interest and other income (expense), net $ 1,432 $ (1,284) $ 2,716 212 %

Interest and other income (expense), net increased by $2.7 million in 2022 compared with 2021 mainly due to income from marketable securities.

Interest and other income, net $ 9,172 $ 1,432 $ 7,740 541 %

Interest and other income, net increased by $7.7 million in 2023 compared with 2022 mainly due to income from marketable securities corresponding to an increase in interest rates.

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

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During 2023, our current tax expense was $6.1 million, and our deferred tax expense was $(0.7) million.

Our effective tax rate was higher than the federal statutory rate of 21% due to state taxes, Base Erosion and Anti-Abuse Tax and the impact of stock-based compensation, partially offset by research and development tax credits and stock option windfall deductions.

During 2021, we recognized an income tax benefit of $162.0 million offset by current income taxes, based on our reassessment of the amount of our U.S.

federal and other state deferred tax assets that are more likely than not to be realized, primarily as a result of actual and projected increases in U.S.

profitability in the current and future periods.

Our effective tax rate was lower than the federal statutory rate of 21% primarily due to research and development tax credits and provision to return adjustments, partially offset by the impact of stock-based compensation and uncertain tax positions.

During 2022, our current tax expense was $11.1 million, and our deferred tax expense was $1.9 million.

Our effective tax rate was higher than the federal statutory rate of 21% due to state taxes, the U.S.

tax impact of foreign operations, and the impact of stock-based compensation, partially offset by research and development tax credits and stock option windfall deductions.

We continue to maintain a valuation allowance of $29.9 million on certain U.S.

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As of December 31, 2023, we had cash, cash equivalents and marketable securities of $220.3 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.

government securities and commercial paper.

This includes $7.7 million of cash primarily held by our foreign subsidiaries.

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Our operating activities provided cash of $56.3 million in 2023 and $27.2 million in 2022.

The decrease in net cash provided by operating activities during 2022 as compared to 2021 was due primarily to unfavorable charges of $8.3 million in our net operating results after adjustment of non-cash charges and $21.4 million in our net cash outflow resulting from changes in operating assets and liabilities.

The increase in net cash provided by operating activities during 2023 as compared to 2022 was due primarily to an increase in our net operating results after adjustment of non-cash charges of $2.9 million and an increase in our net cash inflow resulting from changes in operating assets and liabilities of $26.1 million.

Non-cash charges consisted of stock-based compensation of $62.8 million, depreciation and amortization of $16.6 million and deferred income taxes of $0.7 million partially offset by net accretion of available-for-sale securities of $4.2 million.

In 2022, cash outflows from changes in operating assets and liabilities primarily consisted of increases in inventory of $60.3 million to improve our responsiveness to our BSPs’ subscriber demand;

in prepaid expenses and other assets of $38.4 million mainly due to an inventory deposit to a CM partner;

and in accounts receivable of $8.6 million due to increased revenue.

These changes were partially offset by increases in accounts payable of $12.1 million due to increased inventory purchases;

in accrued liabilities of $12.2 million, mainly related to accrued compensation and accruals for our Calix ConneXions 2022 Customer Success and Innovation conference;

and in deferred revenue of $9.1 million due to our platform subscriptions.

In 2023, cash outflows from changes in operating assets and liabilities primarily consisted of an increase in prepaid expenses and other assets of $60.8 million, mainly due to advanced payments to supply chain partners, an increase in prepaid taxes and reclassification of contract assets from deferred revenue;

an increase in accounts receivable of $32.2 million due to the timing of shipments;

and a decrease in accounts payable of $6.4 million due to the timing of inventory payments.

These changes were partially offset by an increase in accrued liabilities of $32.7 million, mainly due to an increase in the reserves for inventory at suppliers, a decrease in inventory of $16.2 million and an increase in deferred revenue of $2.9 million.

Investing Activities

In 2022, cash used in investing activities of $24.1 million consisted of net purchases of marketable securities of $10.0 million and capital expenditures of $14.1 million, primarily related to purchases of test equipment and computer equipment.

In 2023, net cash used in investing activities of $6.2 million consisted of capital expenditures of $17.9 million, primarily consisting of purchases of test and computer equipment and software, partially offset by net maturities of marketable securities of $11.6 million.

Financing Activities

In 2022, net cash provided by financing activities of $25.1 million primarily consisted of proceeds from the issuance of common stock related to our equity plans of $27.5 million.

This was partially offset by payments related to a financing arrangement of $2.4 million.

In 2023, net cash used in financing activities of $65.9 million consisted of purchases of our common stock of $86.4 million and payments related to a financing arrangement of $11.7 million, partially offset by proceeds from the issuance of common stock related to our equity plans of $32.1 million.

2022 Compared to 2021

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Working Capital and Capital Expenditure Needs

Our material cash commitments include non-cancelable firm purchase commitments, normal recurring trade payables, compensation-related and expense accruals, operating leases and revenue-share obligations.

Our material cash commitments include non-cancelable firm purchase commitments, normal recurring trade payables, compensation-related and expense accruals and operating leases.

We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory.

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

During the year ended December 31, 2022, no repurchases were made under the program.

Furthermore, we maintain a common stock repurchase program of which $113.6 million was available as of December 31, 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 execute on our current operating plan or continue to generate operating income and positive cash flows, our liquidity, results of operations and financial condition may 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.

There is no assurance that any other sources of liquidity may be available to us on acceptable terms or at all.

If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to 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 December 31, 2022 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation.

Our principal commitments as of December 31, 2023 consisted of our contractual obligations under non-cancelable outstanding purchase obligations and operating lease obligations for office space.

The following table summarizes our contractual obligations as of December 31, 2023 (in thousands):

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12,454 4,676 5,978 1,576 224

Revenue share obligation (3)

$ 232,443 $ 145,197 $ 75,123 $ 8,225 $ 3,898

$ 423,841 $ 328,232 $ 75,816 $ 12,623 $ 7,170

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

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See Note 5 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K 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.

The schedule reflects our expected revenue-share and true-up payments based on our revenue projections for the developed products over a sales period through March 2024.

If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due.

See Note 4 “Balance Sheet Details” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding liability.

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-K

Item 7. Management’s Discussion and Analysis