What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-29 compared with 2024-07-23 · 88 added, 71 removed, 169 unchanged (48% of the section changed)

27 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 six months ended June 29, 2024, or that we expect may

impact cost of revenue in future periods, also include:

Factors that have impacted our cost of revenue for the nine months ended September 28, 2024, 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.

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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.

Furthermore, as a result of the global pandemic-induced supply chain challenges, we have purchased, and may continue to purchase, excess components from our suppliers and consign components back to our suppliers to be consumed on future finished good builds.

Furthermore, as a result of the global pandemic-induced supply chain challenges and supply assurance plans, we have purchased, and may continue to purchase, excess components from our suppliers and consign components back to our suppliers to be consumed on future finished good builds.

We regularly monitor inventory on-hand and record write-downs for excess and obsolete inventory.

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Factors that could influence management’s assumptions and judgements include changes in economic conditions, competitive dynamics, winning or losing a key customer, changes in our customers’ capital expenditures, government investment programs, technology changes, new product introductions and supply-chain lead times.

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 consistent with the valuation of our excess and obsolete inventory and future production requirements.

We also evaluate our supplier purchase commitments and record a liability for excess and obsolete components consistent with the valuation of our excess and obsolete inventory and future production requirements.

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 a pivot in customer demand to our newer all-platform model from our older legacy product family.

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If inventory is written down, a new cost basis is established that cannot be increased in future periods.

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

Recent Accounting Pronouncements

There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months ended June 29, 2024 as compared with the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2023 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 28, 2024 as compared with the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2023 that are significant or expected to be significant to us.

Results of Operations

Comparison of the Three and Six Months Ended June 29, 2024 and July 1, 2023

Comparison of the Three and Nine Months Ended September 28, 2024 and September 30, 2023

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

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 28,

2024 September 30,

2023 Variance

Dollars Variance

Percent June 29,

Percent September 28,

2024 September 30,

2023 Variance

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$ 200,945 $ 263,835 $ (62,890) (24) % $ 625,394 $ 774,859 $ (149,465) (19) %

Our revenue decreased by $62.9 million and $86.6 million for the three and six months ended June 29, 2024, respectively, as compared to the corresponding periods in 2023.

The decrease in revenue was primarily due to what we believe were delayed purchasing decisions of our appliances as our customers evaluate and prepare for various government stimulus programs, customers adjusting their purchases due to our shortened lead times and a small set of significant customers that slowed purchases while we believe they reevaluate their investment priorities.

In the second quarter of 2024, we also had one small customer grow its subscriber base such that it is now a medium-sized customer.

For the three and six months ended June 29, 2024, United States revenue was $182.7 million and $392.8 million, or 92% and 93% of our revenue, compared to $232.4 million and $460.4 million, or 89% and 90% of our revenue for the same periods in 2023.

International revenue was $15.4 million and $31.7 million, or 8% and 7% of our revenue, for the three and six months ended June 29, 2024, as compared to $28.6 million and $50.7 million, or 11% and 10% of our revenue, for the same periods in 2023.

The decrease in international revenue for the three and six months ended June 29, 2024, as compared to the same periods in 2023, was mainly due to lower shipments to Europe and to a lesser extent the Americas outside the United States.

No customer accounted for more than 10% of the Company’s revenue for the three and six months ended June 29, 2024 and July 1, 2023.

Our revenue decreased by $62.9 million and $149.5 million for the three and nine months ended September 28, 2024, respectively, as compared to the corresponding periods in 2023.

The decrease in revenue in the large- and medium-customer segment was primarily due to a small set of significant customers that slowed purchases while we believe they reevaluate their investment priorities.

The decrease in revenue in the small-customer segment was primarily due to what we believe were delayed purchasing decisions of our appliances as our customers evaluated and prepared for various government stimulus programs and customers adjusting their purchases due to our shortened lead times.

For the three and nine months ended September 28, 2024, United States revenue was $187.1 million and $579.9 million, or 93% and 93% of our revenue, compared to $235.1 million and $695.5 million, or 89% and 90% of our revenue for the same periods in 2023.

International revenue was $13.9 million and $45.5 million, or 7% of our revenue, for both the three and nine months ended September 28, 2024, as compared to $28.7 million and $79.4 million, or 11% and 10% of our revenue, for the same periods in 2023.

The decrease in international revenue for the three and nine months ended September 28, 2024, as compared to the same periods in 2023, was mainly due to lower shipments to Europe and to a lesser extent the Americas outside the United States.

No customer accounted for more than 10% of the Company’s revenue for the three and nine months ended September 28, 2024 and September 30, 2023.

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 28,

2024 September 30,

2023 Variance

Dollars Variance

Percent June 29,

Percent September 28,

2024 September 30,

2023 Variance

2 unchanged sentences

Gross margin 54.8 % 53.3 % 54.4 % 52.3 %

Gross profit decreased to $107.6 million and $230.2 million for the three and six months ended June 29, 2024, from $136.5 million and $264.5 million during the corresponding periods in 2023.

Gross profit decreased to $110.0 million and $340.2 million for the three and nine months ended September 28, 2024, from $140.5 million and $405.1 million during the corresponding periods in 2023.

These decreases were mainly due to the corresponding decreases in revenue.

The increase in gross margin of 200 and 240 basis points for the three and six months ended June 29, 2024, respectively, compared to the corresponding periods in 2023, was mainly due to the continued growth in our platform, cloud and managed services as well as being a greater percentage of our total revenue.

The increase in gross margin of 150 and 210 basis points for the three and nine months ended September 28, 2024, respectively, compared to the corresponding periods in 2023, was primarily related to a mix shift of hardware sales towards small customers, which generally have higher gross margins, from large- and medium-sized customers and to the continued growth in our licenses, cloud and managed services as well as being a greater percentage of our total revenue.

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 28,

2024 September 30,

2023 Variance

Dollars Variance

Percent June 29,

Percent September 28,

2024 September 30,

2023 Variance

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Percent of revenue 26 % 20 % 25 % 20 %

Sales and marketing expenses for the three months ended June 29, 2024 decreased by $2.4 million compared with the corresponding period in 2023 primarily due to decreases in personnel expenses of $2.0 million and stock-based compensation of $0.9 million.

These decreases were partially offset by an increase in marketing expenses of $0.9 million.

Sales and marketing expenses for the six months ended June 29, 2024 decreased by $0.3 million compared with the corresponding period in 2023 primarily due to decreases in personnel expenses of $0.9 million, stock-based compensation of $0.4 million and outside services of $0.4 million.

These decreases were partially offset by increases of marketing expenses of $1.2 million and $0.4 million in allocated common costs.

For the three and six months ended June 29, 2024, sales and marketing expenses as a percentage of revenue increased to 26% from 21% and 25% from 21%, respectively, due to lower revenue compared to the same periods in 2023.

We expect our investments in sales and marketing will be relatively flat in absolute dollars in the short-term as we look to land new customers and expand our platform, cloud and managed services.

Sales and marketing expenses for the three months ended September 28, 2024 decreased by $0.1 million compared with the corresponding period in 2023 primarily due to decreases in personnel expenses of $1.0 million and outside services of $0.4 million.

These decreases were partially offset by increases in marketing expenses of $0.7 million, travel expenses of $0.4 million and stock-based compensation of $0.3 million.

Sales and marketing expenses for the nine months ended September 28, 2024 decreased by $0.4 million compared with the corresponding period in 2023 primarily due to decreases in personnel expenses of $1.9 million and outside services of $0.8 million.

These decreases were partially offset by increases of marketing expenses of $1.9 million and depreciation and amortization of $0.6 million.

For the three and nine months ended September 28, 2024, sales and marketing expenses as a percentage of revenue increased to 26% from 20% and 25% from 20%, respectively, due to lower revenue compared to the same periods in 2023.

We expect our investments in sales and marketing will be relatively flat in absolute dollars, except for our annual Calix ConneXions Innovation and Customer Success conference held during the fourth quarter, in the short-term as we look to land new customers and expand our platform, cloud and managed services.

Research and Development Expenses

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 28,

2024 September 30,

2023 Variance

Dollars Variance

Percent June 29,

Percent September 28,

2024 September 30,

2023 Variance

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Percentage of gross profit 41 % 33 % 39 % 33 %

Research and development expenses for the three months ended June 29, 2024 decreased by $1.2 million as compared with the corresponding period in 2023 mainly due to decreases in prototypes and test equipment expenses of $1.0 million, outside services of $0.9 million and stock-based compensation of $0.5 million.

These decreases were partially offset by increases in allocated common costs of $0.5 million and depreciation and amortization of $0.5 million.

Research and development expenses for the six months ended June 29, 2024 remained relatively unchanged compared with the corresponding period in 2023.

Increases in personnel expenses of $1.7 million, allocated common costs of $1.2 million and depreciation and amortization of $1.2 million were offset by decreases in prototypes and test equipment expenses of $2.4 million and outside services of $1.4 million.

For the three and six months ended June 29, 2024, research and development expenses as a percentage of revenue increased to 41% from 33% and 38% from 33%, respectively, due to lower revenue compared to the same periods in 2023.

Research and development expenses for the three months ended September 28, 2024 decreased by $1.5 million as compared with the corresponding period in 2023 mainly due to decreases in personnel expenses of $2.2 million, prototypes and test equipment expenses of $1.2 million and outside services of $0.3 million.

These decreases were partially offset by increases in depreciation and amortization of $1.2 million and stock-based compensation of $0.5 million.

Research and development expenses for the nine months ended September 28, 2024 decreased by $1.5 million as compared with the corresponding period in 2023 mainly due to decreases in prototypes and test equipment expenses of $3.6 million, outside services of $1.7 million and personnel expenses of $0.5 million.

These decreases were partially offset by increases in depreciation and amortization of $3.2 million and stock-based compensation of $0.3 million.

For the three and nine months ended September 28, 2024, research and development expenses as a percentage of revenue increased to 41% from 33% and 39% from 33%, respectively, due to lower revenue compared to the same periods in 2023.

We expect our investments in research and development to remain relatively flat in absolute dollars in the short term as we seek to expand the functionality and capabilities of our platform, cloud and managed services.

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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 28,

2024 September 30,

2023 Variance

Dollars Variance

Percent June 29,

Percent September 28,

2024 September 30,

2023 Variance

2 unchanged sentences

Percent of revenue 12 % 10 % 12 % 9 %

General and administrative expenses for the three months ended June 29, 2024 decreased by $2.1 million as compared with the corresponding period in 2023 mainly due to decreases in professional services expenses of $1.6 million, stock-based compensation of $1.0 million and allocated common costs of $0.7 million.

These decreases were partially offset by increases in depreciation and amortization of $0.6 million and personnel expenses of $0.3 million.

General and administrative expenses for the six months ended June 29, 2024 increased by $1.1 million as compared with the corresponding period in 2023 mainly due to increases in personnel expenses of $2.1 million, depreciation and amortization of $1.3 million and equipment expense of $0.5 million.

These increases were partially offset by decreases in allocated common costs of $1.9 million, professional services expenses of $0.8 million and stock-based compensation of $0.8 million.

For the three and six months ended June 29, 2024, general and administrative expenses as a percentage of revenue increased to 11% from 9% and 12% from 9%, respectively, due to lower revenue compared to the same periods in 2023.

General and administrative expenses for the three months ended September 28, 2024 decreased by $2.1 million as compared with the corresponding period in 2023 mainly due to decreases in professional services expenses of $1.2 million, stock-based compensation of $0.5 million and personnel expenses of $0.4 million.

General and administrative expenses for the nine months ended September 28, 2024 decreased by $1.0 million as compared with the corresponding period in 2023 mainly due to decreases in professional services expenses of $2.0 million and stock-based compensation of $1.3 million.

These decreases were partially offset by an increase in personnel expenses of $1.7 million.

For the three and nine months ended September 28, 2024, general and administrative expenses as a percentage of revenue increased to 12% from 10% and 12% from 9%, respectively, due to lower revenue compared to the same periods in 2023.

We expect our general and administrative investments to be fairly constant in absolute dollars in the near term and potentially decline as a percentage of revenue over time in relation to anticipated longer-term increased revenue.

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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 28,

2024 September 30,

2023 Variance

Dollars Variance

Percent June 29,

Percent September 28,

2024 September 30,

2023 Variance

2 unchanged sentences

Percent of revenue 2 % 1 % 1 % 1 %

Interest and other expense, net increased by $0.3 million and $1.3 million as compared with the corresponding periods in 2023 mainly due to a higher rate of interest earned on our cash, cash equivalents and marketable securities.

Interest and other expense, net increased by $0.9 million and $2.2 million as compared with the corresponding periods in 2023 mainly due to a higher rate of interest earned on our cash, cash equivalents and marketable securities as well as a larger cash and marketable securities balance.

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

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

September 28,

2024 September 30,

2023 Variance

Dollars Variance

Percent June 29,

Percent September 28,

2024 September 30,

2023 Variance

2 unchanged sentences

Effective tax rate 49.1 % 6.6 % 26.1 % 17.9 %

For the three and six months ended June 29, 2024, our income tax benefit was $0.7 million and $0.4 million for an effective tax rate of 8.3% and 4.4%, respectively, which differed from the statutory rate of 21% primarily due to state taxes and the effect of non-deductible stock-based compensation for executive officers offset by the favorable impact of U.S.

For the three and nine months ended September 28, 2024, our income tax benefit was $3.8 million and $4.2 million for an effective tax rate of 49.1% and 26.1%, respectively, which differed from the statutory rate of 21% primarily due to 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 six months ended June 29, 2024 are lower than the similar periods in 2023 primarily as a result of negative pre-tax earnings with a relatively consistent level of non-deductible expenses offset by lower excess tax benefits from stock-based compensation.

The effective tax rates for the three and nine months ended September 28, 2024 are lower than the similar periods in 2023 primarily as a result of negative pre-tax earnings with a relatively consistent level of non-deductible expenses offset by lower excess tax benefits from stock-based compensation.

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

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Liquidity and Capital Resources

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

However, for the past few years, we have funded our operations and investing activities from cash flow generated from our operations as our business has grown and became profitable.

As of June 29, 2024, we had cash, cash equivalents and marketable securities of $261.2 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.

For the past few years, we have funded our operations and investing activities from cash flow generated from our operations as our business has grown and became profitable and issuance of common stock under our equity incentive plans.

As of September 28, 2024, we had cash, cash equivalents and marketable securities of $287.6 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S.

government and its agency securities, corporate debt securities and commercial paper.

Operating Activities

Net cash provided by operating activities was $37.0 million for the six months ended June 29, 2024 and consisted of a net loss of $7.9 million offset by non-cash charges of $34.3 million and cash flow increases of $10.6 million reflected in the net change in assets and liabilities.

Net cash provided by operating activities was $53.0 million for the nine months ended September 28, 2024 and consisted of a net loss of $11.8 million offset by non-cash charges of $49.1 million and cash flow increases of $15.7 million reflected in the net change in assets and liabilities.

Non-cash charges primarily consisted of stock-based compensation of $48.7 million and depreciation and amortization of $14.8 million partially offset by deferred income taxes of $10.4 million and the net accretion of available-for-sale securities of $4.0 million.

Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $44.0 million and inventory of $19.5 million, both in line with our revenue decline.

Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a decrease in accounts receivable of $40.8 million and inventory of $32.4 million, both in line with our revenue decline, and a decrease in prepaid expenses and other assets of $7.7 million mainly due to a decrease in supplier deposits.

These changes were partially offset by a decrease in accrued liabilities of $42.6 million relating to various factors including a decrease in our liability for components, a decrease in incentive compensation related accruals and the settlement of a legal matter;

1 unchanged sentence

and a decrease in deferred revenue of $10.6 million primarily due to the recognition of previously deferred revenue and a trend to move customers to monthly from annual billing arrangements.

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;

and a decrease in accrued liabilities of $3.1 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.

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 2023 Calix ConneXions Innovation and Customer Success conference.

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.

Investing Activity

For the six months ended June 29, 2024, cash provided by investing activities of $27.0 million consisted of net maturities and sales of marketable securities of $17.4 million and capital expenditures of $9.7 million, consisting primarily of purchases of test and computer equipment.

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 nine months ended September 28, 2024, cash used in investing activities of $75.9 million consisted of net purchases of marketable securities of $63.0 million and capital expenditures of $12.9 million, consisting primarily of purchases of test and computer equipment.

For the nine months ended September 30, 2023, cash provided by investing activities of $38.5 million consisted of net maturities 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.

Financing Activities

Net cash provided by financing activities of $11.1 million for the six months ended June 29, 2024 primarily consisted of proceeds from the issuance of common stock related to our equity plans of $14.8 million partially offset by repurchases of our common stock of $3.7 million.

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 $21.7 million for the nine months ended September 28, 2024 primarily consisted of proceeds from the issuance of common stock related to our equity plans of $25.4 million partially offset by repurchases of our common stock of $3.7 million.

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.

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, we have a common stock repurchase program, which had $109.9 million available as of June 29, 2024.

Furthermore, we have a common stock repurchase program, which had $109.9 million available as of September 28, 2024.

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.

2 unchanged sentences

Contractual Obligations and Commitments

Our principal commitments as of June 29, 2024 consisted of contractual obligations under non-cancelable outstanding purchase obligations and operating lease obligations for office space.

The following table summarizes our contractual obligations as of June 29, 2024 (in thousands):

Our principal commitments as of September 28, 2024 consisted of contractual obligations under non-cancelable outstanding purchase obligations and operating lease obligations for office space.

The following table summarizes our contractual obligations as of September 28, 2024 (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.

1 unchanged sentence

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