David Allen – Director, IR and Treasurer Carl Russo – President and CEO William Atkins – EVP and CFO.

Amitabh Passi – UBS Doug Clark – Goldman Sachs George Notter – Jefferies Tim Quillin – Stephens Inc..

Greetings, and welcome to the Calix Q3 2014 Earning Conference Call. At this time, all participants are in a listen-only-mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Allen.

Thank you, and you may begin..

Thank you, operator, and good afternoon everyone.

Before we begin this call, I would like to remind you that this conference call contains forward-looking statements regarding future events, including, but not limited to the size of our funnel of our sales opportunities, long-term prospects for Calix, our expectations for the next quarter, our development of new products that will continue to help our customers transform their networks, future business and financial performance of the company and our expectations of revenue, gross margins, earnings per share, stock-based compensation and amortization of intangibles.

These forward-looking statements are based on estimates, judgments, current trends and market conditions and they involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements.

I would encourage you to review the Company’s various SEC reports, including our Annual Report on Form 10-K for the period ending December 31, 2013 and our Form 10-Q for the period ending June 28, 2014 available at www.sec.gov, in which we discuss these risk factors.

All forward-looking statements are made as of the date of this conference call and except as required by law, we do not intend to update this information. Also on this conference call, we will be discussing GAAP and non-GAAP results.

We are providing the non-GAAP estimates to enable interested parties to evaluate our performance in the same manner in which we evaluate our own operations.

These non-GAAP measures exclude certain charges and benefits which we do not consider to be a part of our ongoing activities or meaningful in evaluating our financial performance, including stock-based compensation, acquisition-related expenses if any, and amortization of acquisition-related intangible assets.

To help you better understand those results, we have included a reconciliation of our GAAP and non-GAAP results in our earnings press release. All numbers that are discussed in today’s conference call are non-GAAP unless otherwise noted.

This conference call will be available for audio replay in the Investor Relations section of the Calix website at www.calix.com.

In addition, our earnings press release, along with supplemental financial data has been posted in the Investor Relations section of the Calix website, which you may want to review in conjunction with our press release in conference call remarks. I’d now like to turn the call over to Calix President and CEO, Carl Russo.

Carl?.

Thank you, Dave and good afternoon everyone. Joining me on today’s call is William Atkins, our Executive Vice President and Chief Financial Officer. I’m happy to again report that the Calix team performed well achieving record revenue for the quarter.

As you will hear in William’s remarks, our crisp execution was reflected in the excellent quality of our earnings. In addition, and the excitement in the market around fiber-based high-capacity service offerings continued to accelerate this quarter. I will come back with some more observations on the market and thoughts on what’s ahead.

However, I would now like to turn the call over to William to review Q3 in detail and share our guidance for Q4.

William?.

Thank you, Carl. We last provided you with non-GAAP guidance regarding Q3 on July 29th, and in that guidance we called for revenues between $102 million and $106 million, a gross margin of between 44.5% and 46%, and operating expenses in a range of $42.5 million to $43.5 million, thus resulting in a EPS of between $0.05 and $0.10 per share.

Actual revenue for the quarter was $105.8 million and EPS was $0.09 per share, both at the top end of our guidance. Gross margin was 44.8% and operating expenses came in at $42.7 million, both metrics also in line with our guidance.

As noted in our last quarterly results call, the business continues to be cash generative, Calix ended Q3 with total cash and marketable securities of $87.8 million, up $8.8 million from Q2’s $79 million.

Revenue for the quarter was a record $105.8 million, an increase of $2.1 million from last year’s third quarter level of $103.6 million, and up 8% sequentially from this year’s Q2 $98 million figure. International revenue was $13.8 million in Q3, up from $10.7 million in Q3 in 2013, and up from $12.6 million in Q2 of this year.

We had won 10% or greater customer again this quarter. At 44.8%, Q3 gross margin was at the lower end of guidance and reflected the impact of changes in customer and product mix, and inventory write-downs with deferred and recognized revenues coming in line with expectations.

The gross margin in Q3 was down from Q3 2013’s 48.1% level and from Q2 2014’s 47.7% level. The inventory write-downs related primarily to lower than anticipated growth in sales of the BLM product line, acquired from Ericsson in 2012.

Q3 operating expenses at $42.7 million were at the bottom end of our guidance range, but up from the prior quarter by $1.1 million, this sequential increase was primarily due to an increased compensation expenses.

OpEx was up $2.4 million from the same quarter a year ago, primarily due to increases in personnel expenses, largely consisting annual compensation adjustments, and also due in part to additions in year-over-year headcount which also increased slightly from Q2 of this year.

Turning now to the balance sheet, we ended the quarter with total cash and marketable securities of $87.8 million, an increase of $8.8 million in the quarter. We continue to expect the remainder of the year to be cash flow positive. Receivables DSOs were 39 days, compared to 38 days in the previous quarter.

Inventory level fell to $43.8 million in Q3 from Q2’s $45.9 million, due in part to the increase in inventory reserves that I noted earlier. Inventory turns increased to 4.6 times in Q3 from 3.9 times in Q2 while decreasing from Q3 2013’s 5 times.

Deferred revenue was $38.9 million, down from $45 million in the prior quarter, and from $63.4 million in Q3 of 2013. We closed out deferred revenue in line with our expectations and we continue to expect the completion of the bulk of our remaining broadband stimulus projects by the end of this calendar year.

We see the substantial balance of those BBS related deferred revenues being recognized in our P&L by year end. And for BBS projects to no longer be at discernable component of our revenues in 2015. In terms of guidance for the fourth quarter of 2014, we expect revenues to increase over Q3. We also expect to be profitable and cash flow positive in Q4.

Our guidance for Q4 is as follows; revenue for the fourth quarter is expected to be in a range of between $107 million and $111 million, gross margin is expected to be up this quarter, , and we do not currently expect increases in inventory reserves similar to those that we took in Q3.

Our expectations for deferred revenue recognition were met in Q3 and we are therefore tightening guidance for our gross margin in Q4. We are guiding to 46.5% to 47.5% range for Q4.

Operating expenses are expected to be in the range of $44 million to $45 million with a sequential increase over Q3 primarily due to sales and marketing expenses related in part to our Calix user group conference which we hosted in Las Vegas earlier this week, and due to increased depreciation expense related to facilities improvement.

The expectations that I’ve just finished taking you through resulted in a guidance range for Q4 earnings per share of $0.10 to $0.14. Given that we are now close to year end, it’s appropriate for me to tally our actual year-to-date results and our Q4 guidance to give you the resulting implied guidance for the 2014 year.

Revenues would be in these $396.6 million to $400.6 million range, up from 2013’s $382.6 million level. Annual gross margins should be in the 46.2% to 46.5% range. And annual operating expenses are expected to be in the $169 million to $170 million range. At this point, let me hand the call back over to Carl.

Carl?.

Thank you, William. Last quarter I spoke of the enormous secular opportunity in front of us, stated simply, enabling our customers to provide high performance broadband services to their device enabled subscribers, whether they are at home, work or play, represents a significant shift in the Access Infrastructure opportunity.

The most recent example of our pursuit is the brand new Calix GigaCenter Solution. In concert with our campus software offering, the new GigaCenters changed the paradigm in wireless premises solutions. And now it’s at the very end of Q3, the GigaCenters have gotten off to a very fast start with shipments beginning on time last week.

I just left the 2014 Calix Users Group, and while there is lot of other thing we have for our entire portfolio products. If the excitement for the GigaCenters translates into orders, the GigaCenter will likely set a new record for the fastest growing product in our history.

It is clear that just as our execution has been improving, the addressable market for Calix is growing. To prepare for this opportunity we have continued to add strength to our leadership team and to our Board of Directors. And if we match our market expansion with continuously improving execution, then the future will be bright indeed.

And with that I would like to turn the call over for questions.

John?.

(Operator Instructions) Our first question is from Amitabh Passi of UBS. Please state your question..

To clarify the deferred revenue comment you made, I think you ended around $38.9 million, should we expect that number to trend down towards the $26 million, $27 million range by 4Q and does that – is that partially helping your fourth quarter outlook?.

Our over thing is that we’re expecting them to – deferred revenues to no longer be a major component of our P&L after your year-end Amitabh.

We don’t guide to specific numbers Q-on-Q but what I will say is that, I think as we flagged for you back in Q2 the deferred revenues came at a bit below our expectations and so we were widening our gross margin guidance just in case we had a bunching of deferred revenues.

And what we’re saying is in fact, deferred revenues came in line with our expectations, so we’ve seen them moving through the remainder of the year, pretty much in line with what we’ve seen previously and you don’t expect them to spill over substantially into 2015..

Okay.

So then is there a possibility that 1Q 2015 all things being equal, just optically on numbers it may look a little sub seasonal just because of this deferred revenue movement that’s going on in the fourth calendar quarter?.

So you are saying optically our numbers may look – I couldn’t hear it out last..

That’s a little sub seasonal in 1Q just because 4Q you get the deferred revenue balance but then that all sort of goes away, so 1Q 2015, we should be sort of modelling off, sort of edging up the deferred rev benefit in 4Q and then thinking about seasonality into one, I just want to make sure we set a trend and model 1Q 2015 has properly given the deferred rev..

The short answer is yes, basically..

Okay..

William’s not giving guidance for Q1 currently..

I understood Carl. And Carl, just from your perspective, I mean the term sounds a little more constructive, lastly wouldn’t get a budget flush, I think we are seeing sort of a gradual improvement and progression through the year.

I’m just curious, conversations you’re having, at least from a headline perspective, we’re seeing a lot of movement around Gigabit.

Are you more optimistic as you look out to 2015, do you feel like you have enough in your funnel and pipeline to make 2015 a pretty decent year in terms of growth?.

I think I have been accused of being optimistic in the past. I don’t know frankly how you do this job without being an optimist but as I said in my comments, I’m excited about what I’m seeing from our customers, from our prospects in the market.

The shifts, I think we are well placed to go take advantage of this, and we’ll see as we go through the year. I think job one for us is to continue to build and understanding what’s going on out there and share it with our investors in a credible fashion.

William, do you have any color you care to add?.

No, I mean the only color I would add there is that what we see is obviously that the classic quarter-to-quarter seasonality that occurs during the year but what we’re aiming to do here is to avoid the trend you see among vendors to sometimes back end load there orders in the quarter, and we therefore see it as an elimination of that behavior, for example, giving customers favorable terms to meet any notional revenue target that people may or may not have in the quarter.

And so we’re seeing this basically on one level amount of demand if you will during the course of the quarter. Now that’s a good point because that natural demand, if we don’t get in the way of it, it yields the quality of earnings that you’ve been seeing, improved in Calix over the last three quarters.

And to your question about next year, that’s really a statement of how do we feel about our products and the demand in the marketplace. So the coupling of those two things together, I’m certainly looking forward to next year but right in front of us right now is Q4..

Yes, we’re not going to go any further up than that..

Okay. You know what guys, I’ll step back in the queue and come back later at this time. Thank you..

Thanks, Amitabh..

Thank you. Our next question is from Doug Clark of Goldman Sachs. Mr. Clark, you may state your question..

Great, thanks a lot. This question is regarding your fourth quarter guidance, certainly sequentially.

I’m wondering how much of that or what your expectations are for year-end budget flushes amongst your customers? Kind of what is implicitly within your guidance in terms of potential budget flush?.

We’re not forecasting any budget flush in those numbers, we’re not assuming any implied budget flush in those numbers. So the short answer is no, we’re not seeing it..

Okay.

And to change the gear a little bit, on the international, obviously up nicely sequentially and year-over-year, can you talk a little bit about what drove that and then similarly what your expectations are for the fourth quarter in terms of international growth?.

In terms of international, we don't guide specifically to a number for Q4, but in terms of sequential growth, we see international being pretty much across the board. We didn't see any specific region or any specific customer type lead us one way or the other. It's just good across-the-board growth in international. That's how I would explain it..

I guess the color I would add is the 2014 user group over the 2013 user group, we see more focus on allowing the world and so I had a chance to meet with a number of our international customers one-on-one at the user group and to me what’s exciting is what we’ve been alluding to you now for a couple of quarters, it’s putting pins on the math, we’re seeing more and more new customers coming in, more and more excitement about the product offerings that we have.

And so I want to make sure the team stays focused on adding new customers and I believe that ultimately that will flow through into the growth statistics accordingly..

Great. And then if I could sneak in one more quick question.

Can you quantify the impact of the inventory write-down on gross margins?.

William Atkins :.

Great, thank you very much..

Thanks, Doug..

Thank you. Our next question is from George Notter of Jefferies. Mr. Notter, you may begin..

Thanks very much. I guess I wanted to go back to the question about just visibility of business and kind of outlook into Q4. I know that one of the goals of the company is to try to run more backlog driven business, maybe extend lead times little bit and have more visibility as you roll from quarter-to-quarter.

I guess I’m wondering in the context of the guidance for Q4, you do expect to continue to be able to improve visibility in backlog levels relative to the quarters that you’re pruning. And the same question I think for just Q3 printed, were you able to improve kind of the backlog given nature of the business or not? Thanks..

George I’d like to come back and add some color to this but let me let William address the question directly..

I think, George, it's almost the inverse in the sense of talking about beginning quarter backlog. It's more about eliminating that end-of-quarter spike, and so, inevitably, that means you're going to have a leveling of bookings and of revenues during the course of the quarter.

That starts to mean as you get toward the quarter-end, you are obviously going to have some bookings flow over into the next quarter. But I don't want to guide on a specific detail on backlog or book-to-bill ratios or anything like that.

We are just simply trying to create a more normalized level of business, and we are seeing customer behavior actually adjust as well, in line with that. I don't know, Carl, if you want to add some color to that. .

George, a lot of this comes, frankly, out of vendor behavior, not customer behavior, and let me approach it from a different perspective. If I think about what we have been trying to do since the beginning of the year, and specifically with William's help, customers deploy products every day of the year.

They build new networks, they add line cards, they deploy new services. Our behaviors can sometimes get in the way of that natural demand flow. When I think about it operationally, we have been very focused on trying to get everything out of the way of that natural demand flow, and when you do that, good things ensue.

But I know that this is an imprecise measurement and I suspect William will scowl at me when I say it. He already is. Look, from my layperson's balance-sheet analysis, I look at DSOs when I'm trying to understand how a company is doing from a quality of earnings standpoint. I think if you look at DSOs, these are very low DSOs.

It's hard to get there without having pretty good linearity, and I think that linearity speaks more to the naturalness of us meeting the customer's demand. So that's a long-winded way of saying I think you're going to see a continued improvement of quality of earnings, albeit they are pretty high quality right now. .

Got it.

And then just to extend upon that, is it fair to say that you were able to further improve that linearity in Q3 or was most of the improvement looking back really in Q2 or Q1?.

Carl Russo:.

Yes, we’re continuing to see improvement in that George and I’m just cautious as we’re again coming over to year end and we’ll see how things go over year end but quarter-to-quarter we’re still seeing a better result for flattening that demand curve, I guess it’s the way I would put it there..

Great. Okay, thank you very much..

Thanks, George..

Our next question is coming from Tim Quillin of Stephens Inc. Mr. Quillin, please state your question..

Hi, good afternoon, nice result.

With regards to write-down on the BLM series, not particularly surprising, not selling a lot of that product but what kind of success are you having or do you feel like you can have in converting that customer base over to your E-Series platform?.

I’m going to ask William just to add color if he would like at the end. It’s a great question because I think in William’s comments you heard sort of the notion of the growth is less than we thought. So I want to frame it under those terms, the growth is less, not shrinking but it’s growing less fast.

And it speaks directly to your question Tim and again I just got back from sitting across the table which is always interesting with customers. It’s very clear two things; number one, our customers that have BLM are comfortable that we’re continuing forward with it and they will continue to deploy it, so that’s number one.

But what’s driving in my opinion, the flattening of the growth rate is actually their excitement for the E-Series products. They are increasingly comfortable with E-Series and what it means to them going forward, and we’re seeing more and more pins on the map on the E-Series, as well as BLM customers adopting the E-Series.

So actually it’s a good news story but it has – but pressing effect on that growth rate. And so I think William actions in the quarter were appropriate. William, I don’t know if you want to add….

I think you’ve said it all Carl..

Yes, that makes sense.

And William, in the 10-Q you’ll breakout deferred revenue by product and services, would you able to give us what that number was at the end of 3Q, I think it was $23.5 million at the end of 2Q?.

I mean you’re talking about deferred revs and excluding the extended warranty component and looking at the others a proxy for movements in broadband stimulus..

Where precisely?.

We were $23.5 million in Q2 and it looks like we’re going to end up around $17 million to $24 million for Q3..

Perfect. Okay, great. Thank you. And then Carl, just kind of a big picture, and probably a long question but I was wondering if you could comment on some of the big opportunities ahead of you.

And I guess maybe an order of timing that you might see those – I think you’ve talked about maybe a relatively large international win, a relatively large cable win, or a relatively large Tier-1 U.S.

service provider win, what kind of progress you’re making towards the eventual achievement of those big events for you?.

Tim you’re right, that was a long question. I guess I can’t just say no comments, right. So, but I am going to sort of hijack your question a little bit. As you know we make it a policy not to talk about any particular customers situations. I think you’ve been kind enough to phrase it in the terms of large opportunities.

There are clearly specific large customer opportunities that exist that we are pursuing, some of which we’re avoiding, some of which we’re pursuing. And we think we are better and better priced overtime to pursue them. Beyond that I would not comment.

However, I would like to take large opportunity and change the dimension of it for a moment away from our specific customer situation and into a market situation because we do perceive there are being a seen change in how networks are going to be structured in the Access Infrastructure.

And back to that GigaCenter comment I made earlier, as a sleeping market statement we think there is a large opportunity which will be made up of many sizes of customer opportunities in this next shift in the network.

So while we are as excited about the opportunities in front of us at any one customer, and we believe we are making good progress, I’m frankly even more excited by just the sweep of the market and how our customers and prospects are perceiving it, and I had the chance to get this little sense for that at the user group, and watching the body language of how customers were responding to this.

We are definitely on the right track..

Perfect. Thank you very much..

Thanks..

(Operator Instructions) Mr. David Allen, there are no further questions at this time.

Would you like to make any closing remarks?.

Thank you, operator. Calix will be participating in three investor conferences in the fourth quarter, Stifel Nicolaus One Conference on November 13th in Chicago, the UBS Global Technology Conference on November 18th in Sausalito, California; and Goldman Sachs U.S. leading growth conference on November 20th in New York City.

We look forward – information about these events will be posted on the events page in the Investor Relations section of calix.com. We remain focused on executing against the opportunities ahead of us and we look forward to meeting with you at one of these upcoming events. Once again, thank you for joining us today and goodbye for now..

Operator:.