Tom Dinges – Director, Investor Relations Carl Russo - President and Chief Executive Officer William Atkins – EVP and Chief Financial Officer.

Simon Leopold - Raymond James George Notter - Jefferies Paul Silverstein - Cowen and Company Meta Marshall - Morgan Stanley Tim Savageaux - Northland Capital Markets.

Greetings and welcome to the Calix Third Quarter 2015 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] I would now like to turn the conference over to your host Mr. Tom Dinges. Thank you, you may begin..

Thank you, Karen, and good afternoon everyone.

Before we begin the call, I want to remind you that in this call we’ll refer to forward-looking statements regarding future events, and expectation, including, but not limited to statements about our anticipated growth and growth drivers, our development of new products and product features and the success into our market adoption of our products, our future performance and our expectations related to our financial condition and results of operation including revenue, gross margin and earnings per share.

We have based these forward-looking statements on our current expectations, assumptions and projections.

These forward-looking statements are subject to risk and uncertainties that may cause our actual results or actions to differ materially as described in our filings with the securities and exchange commission including our most recent annual report on Form 10-K and our quarterly report on Form 10-Q to be filed shortly after this conference call.

All forward-looking statements are made as of the date of this call and we do not intend to update this information. Also on this conference call, we will be discussing both GAAP and non-GAAP financial measures.

We are providing the non-GAAP estimates to enhance in understanding of our operating performance excluding certain items such as stock based compensation expense and acquisition related expenses, which we believe are not indicative of our core operating results.

We use these non-GAAP financial measures to evaluate our ongoing financial results and to establish our operational goals. These non-GAAP measures are used in addition to and in conjunction with our results presented in accordance with GAAP.

A reconciliation of our GAAP and non-GAAP results are included in our earnings press release available on our website at www.sec.gov. All numbers that are discussed today in the 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, supplemental financial data, our earnings presentation and a brief [Indiscernible] on AXOS, our new architecture has been posted in the Investor Relations section of the Calix website, which you may want to review in conjunction with our press release and conference call remarks.

I would now like to turn the call over to Calix’s President and CEO, Carl Russo.

Carl?.

Thank you, Tom, and good afternoon everyone. Joining me on today’s call is William Atkins, our Executive Vice President and Chief Financial Officer. We just returned from our 2015 User’s Group and there is a lot to discuss.

After William’s remark I will cover all the exciting news, highlighted by the announcement of our breakthrough operating system, AXOS, which marks the beginning of the era of Software Defined Access. Before I turn it over to William there are a few items that I would like to highlight upfront.

In Q3, we were encouraged by the progress across our markets and the Calix team executed well again this quarter delivering revenues of $112.3 million and earnings of $8.3 million. While we saw good performance from our larger customers in Q3, some of them have been cautious in their communications of their remaining CapEx plans.

Therefore I would like to caution you that we see Q4 revenue being down from our strong Q3 results. We also note that one of our existing customers has engaged Calix to execute a number of turnkey network improvement projects that we expect will result in significant revenues over the course of 2016.

This engagement continues the expansion of our professional services team which focuses exclusively on the project management and implementation of networks based on Calix products.

With that, I will now turn the call over to William to cover further details after which I will discuss the announcements from our user group as well as provide more detail about software defined access and the revolution that AXOS brings. William..

Thank you, Carl. We last provided you with guidance regarding Q3 on the 28th of July. And in that guidance we estimated revenues of between $107 million and $111 million, a gross margin of between 49% and 50% and operating expenses in the range of $50 million to $51 million thus resulting in an EPS of between $0.05 and $0.09 per share.

Actual revenue for the quarter was $112.3 million and EPS was $0.16 per share with revenues above the top end of our guidance and earnings per share also above guidance. We incurred some expenses in relation to our Occam litigation, and EPS would therefore have been slightly better at $0.17 per share if we exclude these litigation expenses.

Driven by product and customer mix, gross margins came in at 49.3% and compared favourably to Q3, 2014 level of 44.8%. We continue to be pleased with the continuing growth in our gross margins. With 2015 year-to-date gross margins of 49.8% being above last year’s year-to-date gross margins of 46.1%.

We remained focused on growing gross margins over time, but we also reiterate our view that there are likely to be fluctuations in those margins from quarter to quarter.

Operating expenses came in at $47.2 million, below the bottom end of our $50 million to $51 million guidance range and up $4.5 million from the same quarter a year ago, with this year-over-year increase primarily due to additions in the headcount particularly in research and development.

We recorded $0.6 million of Occam litigation related expenses in the quarter with operating expenses therefore being $46.6 million without taking into account these costs. A slower than anticipated pace of hiring contributed to our undershooting OpEx guidance.

We do not break out cost that relates to turnkey network improvement projects, but I also note that we do defer cost directly attributable to these projects and that these will be reflected in our gross margins rather than in our operating expenses as we close out those projects and recognize the related revenues and the associated cost of revenues.

We ended the quarter with a total of $93.9 million in cash and marketable securities, down from Q2’s $99.5 million figure. Q3 operating cash flow was in line with guidance at a positive $5.5 million. The primary driver of our overall use of cash in the quarter was our share repurchase program which amounted to $7.7 million of investments in our stock.

We expect to continue to repurchase Calix shares under that share repurchase program, and we also expect neutral operating cash flow in Q4. Revenues for the quarter were $112.3 million, an increase of $6.5 million, or just over 6% higher than last year’s third quarter level of $105.8 million.

International revenues were $14.4 million in Q3 up from $13.8 million in Q3, 2014. International revenues were 13% of Q3 total revenues and 11% of year-to-date total revenues. We had one 10% customer in the quarter.

We have also seen increased demand from one other existing customer for the turnkey network improvement project that Carl and I noted earlier.

With the revenue impact from those projects likely to be more heavily felt in 2016 we believe these projects will generate meaningful business and that this will also result in deferred revenues which will be recognized as they close out.

Turning now to our balance sheet, receivables DSOs reminded at the same healthy 37 day level as in each of the first two quarters and were slightly better than the 39 days recorded for Q3, 2014. Inventory levels increased to $43.8 million in Q3 from Q2’s $40.7 million level and were in line with last years’ Q3 level of $43.8.

Inventory turns increased to 4.6 times in Q3 from 4.0 times in Q2 and were equal to Q3 2014’s 4.6 times. During the remainder of the year you were likely to see an increase in inventory from its current levels as we continue to ramp up to meet the needs of turnkey network improvement projects.

As expected and as per federal government guidelines all broadband stimulus projects were completed in Q3. I will now review how Calix performed over the first three quarters of 2015 relative to the same period last year. Year-to-date 2015 revenues increased by $12.9 million to $302.5 million or up 4.4% from last year’s $289.6 million level.

And gross margins came in at 49.8% versus 2014’s number of 46.1%. Operating expenses increased by $17.6 million to $142.6 million for the first three quarters of 2015 versus 2014’s year-to-date level of $125 million.

After deducting Occam litigation expenses of $2.4 million, the 2015 year-to-date operating expense figure would have increased by $15.2 million to $140.2 million figure up from an equivalent figure for last year of $125 million. Year-to-date 2015 earnings per share were $0.15 per share versus last year’s first nine months equivalent EPS of $0.16.

Without the Occam litigation expense 2015 year-to-date EPS would have been $0.20. I’m now going to turn to our Q4 guidance and to its implications for the full 2015 year.

Revenues for the fourth quarter are expected to be in a range of between $102 million and $106 million, with the resulting midpoint of $104 million being down 6% from the $111.6 million level achieved in Q4 of 2014. We are guiding to a 47% to 48% range for Q4 gross margins, broadly equivalent to last year’s Q4 level of 48.1%.

2015 Q4 gross margins will be impacted amongst other factors by customer and product mix and by our ability to close out some of the projects that we described earlier in this call. Operating expenses are expected to be in the range of $51.5 million to $52.5 million, up from last year’s Q4 level of $47.1 million.

Occam litigation related expenses that will not be reimbursed by its insurers are expected to be approximately $1.5 million.

Please note that a significant portion of the sequential increase versus Q3, 2015 $47.2 million is comprised of the usual one-off year end expenses that we incurred in Q4, including yearend sales commissions accelerator, the cost of our annual user group conference and an adjustment to reflect the alignment of our financial calendar with calendar year end.

Over the past three years Q4 expenses have been 2% to 10% higher than in Q3, but these types of specific year end factors driving a lot of this increase.

As evidenced by our announcements earlier this year, regarding G.fast and NG-PON2 and by our recent announcement of the new AXOS system architecture we continue to invest in incremental R&D resources to position ourselves to take advantage of the transformation that is underway in our sector and Carl will take you through our recent product launches later in this call.

The expectation that I’ve just finished taking you through results in a guidance range for Q4 earnings per share of negative $0.07 to negative $0.03. If you were to exclude anticipated Occam litigation expenses EPS for Q4 would be negative $0.04 to $0.00 per share.

Having issued guidance for Q4, I can therefore now share with you the implied outturn for the full 2015 year. For 2015, revenues will be in the $404.4 million to $408.4 million range, up from 2014 $401.2 million level. Gross margins should be in a 49.1% to 49.4% range, up from 2014’s 46.7%.

And annual operating expenses are expected to be $194.1million to $195.1 million up from 2014’s $172.1 million level. At this point, I’m handing the call back over to Carl..

Thank you, William. Before I discuss AXOS I would like to update you on the bevy of new products coming from Calix. We added our new gigahub and gigapoint products to compliment our very successful GigaCenter solution available in November, our giga family of premises solutions can now tightly address very indoor deployment scenario globally.

To this we added new powerful compass software applications that as part of the GigaCenter Solution allow our customers to deploy winning services to their subscribers as they converge unlicensed wireless edge.

Fresh from its launch at the Society of Cable Television Engineers Expo in New Orleans, just two weeks ago, the revolutionary E3-8G remote optical line terminal was a big hit.

The E3-8G allows our customers to deploy fiber much deeper in their networks, thereby dramatically increasing their serving radius from the head end, Central office or data center. Fully hardened and completely sealed, the E3-8G can be strand mounted, pole mounted or placed under grade. Now, there really is no limit to what a -- can do.

We've launched a series of new VDSL2 vectoring enhancement.

Too humorous to mention here, however, as our customers have grown to expect, Calix delivered innovation to this product base as well, showing our breakthrough in system level vectoring technology allowing 96 ports of VDSL2 to be vectored in a single rack unit E7-2 all without the cost or incumbent of a separate vectoring engine.

As we have seen all summer leading up to the user group G.fast is hot. Our customers have the opportunities to lay hands on our G.fast system for both indoor and outdoor deployment as well as a complementary set of G.fast enabled Giga-family solutions to complete the subscriber experience.

We even demonstrated bonded G.fast, which allows our customers to deliver 1.5 gigabits per second over two -- pairs. As exciting as these product innovations are, there was a much larger revolution demonstrated at the user group. And that was a beginning of an entirely new era. The era of software defined access.

Last quarter I shared with you how the architectural concept of SDN and NFV that are currently driving significant change in the datacenter, but ultimately affect every networking sector. At the intersection of Unified Access and SDN is something entirely new and that is software defined access.

And AXOS was built from the ground up beneath this demand. To be clear this is not about taking our existing system, adding a Shim [ph] and making them SDN or NFV compatible. This is about creating an access infrastructure that is fact allowing our customers to event and prioritize new service in week.

Always on, eliminating downtime due to system failures or scheduled maintenance, and simple, creating an access infrastructure that can run itself. This is the combination of our decade long pursuit of the Unified Access Infrastructure and as such it is the most significant platform announcement in our Company's history.

And AXOS enabled Unified Access Infrastructure will seamlessly connect the device enabled subscriber to applications and content in the cloud and we'll place the communication service provider at the forefront of subscriber demand and content suppliers. Thereby enabling our customers to built high value businesses. AXOS meet this challenge.

AXOS or Access eXtensible Operating System is the first open Linux based network operating system and software application platform built for Access. AXOS is completely hardware independent thereby allowing all software to be developed and run independently.

AXOS fully abstract all network services into separate processes and a consistent set of APIs enabling soft containment in isolation without any impact to other processes. AXOS is state full as it maintains system state separate from the processes themselves which allows for powerful self auditing and self healing capabilities.

Furthermore, this enables individual processes to be upgraded on the ply without impacting the system, the network or subscriber services. In short a 'fast' always on in simple network for our customers to provide services to their subscribers.

AXOS is open component-based architecture combined with its powerful portability and programmability across all layers allows for optimizations in multiple dimensions.

We can choose where a given service run, thereby allowing the entire access infrastructure to be optimize on a real time basis from the subscriber edge all the way back to the datacenter. Finally, the open component-based architecture all manifest in a single software image allowing for maximum reuse.

This translates into maximum agility and minimum operational expense for our customers, while at the same time yielding maximum R&D efficiency for Calix.

To reiterate, as all access infrastructures converged into a single architectural approach we believe a new access operating system is required to enable the winner communication service provider of the future.

From the subscriber premises all the way to the access edge of the datacenters, the operating system for access is AXOS and saving the best for last, AXOS is available now in several of our products including our new G.fast system. Let the future begin, Darren..

Thank you. [Operator Instructions] Our first question is from Simon Leopold with Raymond James. Please state your question..

Thanks for taking my question here. So guidance is somewhat surprising to me. And I guess the simple question is where is the CAF II money? I thought that was going start flowing in.

So, your tone sort of sounded like you're trying to be conservative given a lack of visibility, but this is very unseasonable for you , so I need to better understand what going on in the fourth quarter?.

So, let me address then I'll let William add some comments. Simon, the CAF II actually this is sort of the front end of exactly that question. So here's what's happening with our customers. We now know how much all of our customers are taking from CAF II.

And in fact what we're seeing is they are now down into such detailed planning that it's actually had a negative effect on their year end spending. So, yes, we are very encouraged by CAF II and what we're seeing into 2016, but it's actually had a slowing affect in Q4 and that's being called out.

In addition, we've had some of our customers as you’re probably aware just on their last quarterly conference calls change their CapEx for Q4. So, it’s a combination of those two things. William, is there anything you want to add..

Not really. I think, the only thing I would elaborate on in terms of Carl’s response in CAF II is as you know we see CAF II as being substitutive rather than incremental. It does take time for the operators to formulate and then essentially procure for their rollout plans, because it is such a granular process.

It literally is down to a zip plus four type postal code designation for the work. And so that does take time. So there may be a CAF II planning element to the conservatism that we're demonstrating here together with some of the noise that you and others are being hearing coming out of the sector..

And we may very well see orders, but that's not revenue..

And then the other point I would make is that, while it’s more of 2016 event than a 2015 these turnkey network improvement projects that we've been asked to undertake, because they inherently involve a deferred revenue and deferred cost element, are going to be recognized as and when those projects close out.

So we're working on stuff now that is going involve subsequent revenue recognition, that's the best way I can characterize it..

So, that planning aspect make sense to me, but it then begs the question of timing, do we see a March quarter that is exhibiting a lack of seasonality and therefore should be let’s say flattish or possibly even up from your December quarter given the shift out in the timing?.

It's frankly too soon to tell. I mean, if we could guide out that far we would. I understand what you're driving at. Remember CAF II is a multiyear process, right. We're talking about a six-year program. So, we can't really call Q1 one way the other, we see this as a sustained spend over that period of time.

Carl?.

Just briefly, I think the challenge is, the timing in the quarters in 2016 we can't call yet. But I would reiterate that as we've said before we certainly see CAF II as putting a floor underneath CapEx and reducing the variability going forward. We're encouraged by what we're seeing, but we just don't have enough yet to be able to call that, Simon..

Okay. And then, AXOS, it's really intriguing, so I'm kind of interested in trying to get a better understanding and probably could ask a ton of questions, but maybe let me just go with the simple one. It seems to invite the opportunity for some displacement sort of the White Box alternative.

And so I'm just wondering how you think about the potential that you get into a software business and customers procure elements from White Box unbranded ONTs, ONUs, just sort of help us understand that what the broader implications are to the business model?.

Okay. So, let me give it to you at a strategic level, I can't tell you - I can't break it down for you in a margin or revenue piece, but let me help you understand what we're doing here and what it's about. So to your point, AXOS is in fact completely hardware independent.

There is an enforced flat hardware abstraction layer that allows us to move the operating system over top of any hardware. Therefore it dramatically speeds our ability to come to market. So that's the first piece. The second piece is, as you asked, yes, we can put it on hardware that we would not have put it on before including White Boxes.

Now let me give you the contrary. The access space is not as big nor is it as congruent as the data center where it's easy to build white boxes. In the access space we still have stuff that, well, recently was under water in South Carolina. So yes, there's going to be white boxes we think over time.

But let me give you a slight different example of what we have done. For those of you who are more –astute observers of our leadership page, you may have noticed two years ago that we actually separated hardware from our systems organization.

So, Michel Langlois who actually heads up our Systems Products does not have Hardware reporting to him, nor has he for two years. It’s in fact handled by Mehdi Bradaran who has both Hardware and Product Operations. The reason I say this is we have actually been internally white boxing ourselves for some time..

Thank you. That's very helpful. I'll yield the floor..

Thanks Simon..

Our next question is from George Notter with Jefferies. Please state your question..

Hi. Thanks a lot. I guess I wanted to go back to the guidance for Q4.

Can you help me understand like how many customers we’re really talking about here, I mean, certainly I can put a circle around the CAF II customers and kind of figure out which ones are yours versus customers that haven’t traditionally sold into but is it just one or two customers that are causing the adjustment in guidance? And then also, I seem to remember that this happened last year to some degree as well.

I guess I'm wondering what kind of similarities we can kind of draw from this experience to last year and I guess I'm trying to just better understand why last year's numbers turn out to be quite a bit bigger I think in Q4 then the numbers you kind of contemplating here? Thanks..

Thanks, George. Let me just give you a high level from my perspective and then I'll let William make comment. So, to go back over, it is not a broad set of customers but it's more than a handful, but the impact is really driven by a smaller set in the big number.

So, as you know there are been some service providers that have actually gone out and made comment of tightening CapEx in Q4. That effect we have seen. But the secondary effect that I want to reiterate is also what William spoke to. The detailed planning around CAF II is now in full bloom. And it just ties people up.

And so what we're seeing is sort of this slowing before things start to move in our opinion, because as we look through the dollars that [we’re accepting] [ph] the time lines that they have to be deployed in and then turned up, it's very clear that there is a floor under 2016.

So it sort of feels like the car at the front of the line sort of tapping on the brakes and then they're going to go accelerate away while we are sitting here with little bent metal.

William?.

I think the only thing I would add to what Carl has said, George, it’s sort of a bit of an obvious statement but worth repeating which is the Q4 and Q1 are the two hardest quarters for us to forecast. With Q4 in some years we’ve seen a budget flush and others we haven't.

This year we're seeing people talking about essentially CAF II being substitutional but they are also taking time to roll out their plans. And then in Q1 as we saw earlier this year it takes time for people to pull together their CapEx plan. So, the next couple of quarters are the hardest ones for us to forecast..

Got it. Great. And I also wanted to ask about international.

So I guess it was a good chunk better this quarter, but can you kind of talk about where we're at in terms of international, the opportunity to get growth out of that side of the business? What sorts of things are you changing there from a selling and marketing perspective and anything changing there in terms of your level of investment?.

Actually, George, in this and up quarter and last quarter down quarter you're actually going to hear me say the same thing which is we set the level of investments that we are making and we're going to focus on productivity of that organization.

And look, we were encouraged last quarter and some of that came through this quarter and we'll see how it goes. We had a lot of international customers this year, a record at the user group. So there's a lot of good forward signs, but we're not changing. We set out our plans. We're executing our plans and that's what we're doing.

So William, I don't know if you could add..

I think, I would add there, George, I think I said to you and others, we see internationals being game of inches. Carl was careful to note when he describe some of our product rollouts for example, the GigaHertz and GigaPoint product as well as the GigaCenter is now been globally available.

That is a good very positive new development for us as a company and specifically for international operations.

You look at G.fast, I mean, that’s done with an eye to more densely populated regions, multiple unit buildings et cetera and these tend to be in this country more with the larger telcos and then internationally obviously countries have got a more densely populated demographic.

So, when we are doing our R&D that's obviously not just with a view to expanding our product portfolio, but also in terms of penetrating new markets and expanding our share of those markets.

Carl?.

Yes. One of the pace I'm finding it William, so it's turning it back to me. He's bringing up a really good point and we've talked about this for years. As we converge on what we call our strategy spine of products, specifically the E-Series, I'm now with AXOS and the GigaCenter family of solutions at the edge.

It's putting us in a situation where our products were taken up globally, so if you direct the user group you would see customers globally really talking about the same product families..

And that wasn't always the case in the past. Got it. Thank you..

Thanks, George..

Our next question is from Paul Silverstein with Cowen and Company. Please state your question..

Carl, as I've listen to these calls over the years I often think of the famous Rosanna [Indiscernible] it's always something.

That said, let me ask you on the access software, can you give us any additional color on – I know its early, I know you just started shipping, but I trust you had customers involved to some degree or another in the planning of the product in the conception, can you give us any color on customer engagements interest, involvement of the development, can you give us any color on visibility in terms of timing of impact, perspective revenue, again, I know its early, but also this has change the equation with respect to the other Tier 1s that you been appropriately cautious and engaging historically in terms of not trading off revenue at the cost of profitability, but I assume this should have a very high margins, software we're talking about, but any color would be appreciated? Then I've got a question on the turnkey that reference in your prepared remarks..

Look, this has been a little over four years in the making. This is not something that we started recently. We've been in pursuit of in essence unified access infrastructure that we felt would be worthy of what the next generation of communication service providers would want to deploy so that they could shift their business models. This does that.

It cuts right at the business model shifts that the service providers are pursuing. And so, having said that, the best way I can characterize and answer to your question regarding customers as you sort of have to look at the more forward looking ones that are trying to change their business models versus others, so that's the first piece.

The second piece is I would make no comment about customers at this point. I would only encourage you to stay tune, would be my best answer on that. And then, as far as the business model for Calix, let me – I mean, you have broad back on this industry let me tie out couple of pieces here.

There are many different directions we could go with the business model at Calix, because of AXOS. But that will be determined by customer readiness and market readiness to go forward. So, we will see which way folks want to purchase and how they want to deploy the system, but to your point this is pure software.

This is pure open programmable software. And on a personal note it’s a beautiful thing. That's how it structured and how it built. I pursuit something like this for my entire carrier so I'm certainly excited to be at this point, but 99.97% of the news about AXOS is front of us, not behind..

Carl, appreciate the excitement.

Can you – has this been through beta trials, has been through any customer trials?.

Yes. So it's been running quietly. We actually had networks running for more than 18 months now. We would not make this announcement unless we knew what we had and look we think we know we have, but there is nothing like putting environment and let see what we got..

All right.

But I guess that speaks to the issue of whenever we rollout a new product, regards of the product market, regards to the vendor there's always issues, but if you had this invaded for 18 months I trust you have a high degree of confidence that your works is advertise and you're not going to hit significant bumps on the road?.

We have a high degree of confidence that normally it works, but it works in fact as I advertise that it 'Fast'. That it is always on, that it is simple. In addition to that the new G.fast system that have come or coming to market are build on this with this operating system and it has been a remarkable undertaking to watch the speed of development.

So it not only meets the requirements of what we believe the next generation winning service provider will require, but it actually has dramatically change the way we do our own business..

All right. I mean, if I could ask you all on the turnkey that you reference, can you give us more color on what you're referring to, how big this project. I think you reference this projects or I assume these are derivative of CAF II related to CAF II..

Actually it's an unusual circumstance which is why we choose to highlight it. It is in fact as William said, it’s a turnkey project. So as you know we've been slowly but surely expanding our professional services and our consulting services organization to take on projects that can help our customers transform their networks.

As such we just recently reach an agreement with this particular customer. It is not CAF II related actually. It's an entirely separate item..

Okay.

And any sense for how large or that's not something you care to share?.

We see that the question we were prepared for. Now I think, Paul, appreciate the question and totally get it. But just given the nature of the project and the fact that there is sort of backend loaded within each project in terms of delivery of professional services and products et cetera we're just not at a stage where we can call out the size.

It's meaningful enough for us to call it out.

Its been something that you'll see move through financials not just our P&L but also our balance sheet over time and you're going to see us essentially indulging in this activity, but really its going to more of a 2016 event that its going to start to effect our numbers in 2015 which is why we wanted to call it out..

All right. And I apologize to my peers on the call, but one last question on this.

You're clearly indicating and here's the question that this all the things being equal for calendar 2016, that this particular customer engagement is incremental to your normal course business?.

That would be correct. But we're saying that it's another existing customer where I would put it. That's how I would phrase it. And we're calling up because of the nature of the project and its potential size, that's what I would say..

All right. I'll pass it on. Thanks guys..

Thanks. Paul.

Our next question is from James Faucette of Morgan Stanley. Please state your question..

Hi. It’s Meta for James. Quick question on a little bit more strategic of just what as the carriers are doing at CAF II planning, if you could just speak to what you're seeing as far as their decisions for vectoring versus VDSL versus G.fast, just what transit or speed you're seeing them kind of make? That will be helpful..

Well, about CAF II as you know it's mostly a rural [ph] deployment and as such it is going to be almost exclusively the province of VDSL2 and loop shortening. There would maybe some other technologies deployed. But that's what you're going to see I would say over 90% of it, so the other things really not worth noting..

Okay.

But then where like are you seeing more G.fast kind of take place in more environments are you seeing those?.

G.fast would be away from CAF II and G.fast in its – so G.fast has an amendment -- first generation version which is we're demonstrating now has a very cleared deployment scenario which is in MDUs and MTUs where you are trying to get the last 100 feet, 200 feet, 300 feet or where you can't easily get a fiber lateral so in other words from the street to the building.

You can then deploy G.fast over 100 of meters and it yields very, very high speed, 100s of megabits or both and in the bonded case that we spoke to in our prepared remarks, 1.5 gigabits..

Great. And then…..

You want to add William..

I just wanted to add one thing if I could, sorry if I can just leap in. Just one thing I would say about G.fast is that in addition to being the kind of technology you can roll out on Greenfields or even Brownfield type development.

It’s a particularly relevant technology for operators who have already essentially laid fiber past buildings where they have not got that fiber drop into the building and to each individual unit as Carl indicated.

So it’s a great way for an operator who’s essentially already covered the neighbourhood with fiber to go back and take care sort of the narrow band islands that would otherwise exist within that neighbourhood..

Great. That’s helpful. And just one last question on the turnkey.

Understanding that you guys are kind of giving size -- but and but just given that you said it was backend loaded, you know does that mean that it won’t necessarily head early in 2016 we would hit a deferred revenue in early 2016 and we would see kind of more of revenue in late 2016 or did I miss here and its already kind of in 2015 and will hit early in 2016? Thanks..

Okay, what I would say - we were careful in our prepared remarks to refer to as an engagement for a series of projects. And towards the pace we mean is as we ramp that engagement and that series of projects it inevitably is going to be activity that’s not going to be recognized as revenues as we ramp up.

Once we ramp up, each of those individual projects will take maybe a few weeks, maybe a few months and at the end of that period of execution you will then see revenue recognition. So it’s not like its one big loved song that it’s going to be recognized at some point in 2016, it’s incremental sort of -- a project which is being ramped up now.

So initially, yes there is going to be an aggregate back and loaded as we go into 2016 from 2015 if you will. But once we are in 2016 you are going to see revenue recognition join the course of the year. While we can’t call out the pattern of that revenue recognition in terms of quarter to quarter type allocation of revenues.

Does that help?.

Yes. That’s very helpful. And I’ll hand it up. Thanks so much..

Thank you..

Our next question is from Tim Savageaux with Northland Capital Markets. Please state your question..

Hi, good afternoon.

A couple of questions that are sort of inter-related which is, I wonder if you could describe any trends that are notable amongst your kind of smaller carrier customers, sort of the tier 3 customer base and in terms of their overall activity levels and you know technology choices and what have you and then stepping back more broadly you’ve made reference to kind of the CAF II putting a floor under your customer spending plans.

You know I wonder if we might infer a floor under your current revenue run rate kind of as a base line and from that and whether as we look at the network project that you mentioned or overall growth potential in 2016 whether you might be able to make some comments on kind of overall market growth rates in the space and maybe your performance relative to that.

Maybe follow up with one, thanks..

Okay, thanks Tim. First of all let me address your tier 3 question. The Tier 3’s have been relatively consistent. I mean there are things that we see showing up in the regional spaces including unit [ph] and electric co-ops.

They have been consistent for quite a while now that there are a set of them that are moving forward and investing and they are consistent, we just literally left the unit group and obviously there were many there.

And they are consistent in their investment and they are consistently investing in fiber and they are pretty rapidly ramping up from a GigaCenter standpoint. Their desire to own the antenna that they provide their broadband over inside the premises for their subscribers. So that’s really consistent and hasn’t changed.

On CAF II without me trying to reduce it to numbers, you know I just look at variability of CapEx from our customers. And to me CAF II just puts the floor underneath the troughs. So, there is certain place where I can’t go below. That doesn’t put me in a position to say how high it might go. And I’ll let William make comment if he would choose.

And the only other thing I would say was I do think we are well positioned with our technologies and our products [Indiscernible] to do well in these markets and expand globally. So that would be my answer, anything you care to add William..

Nothing you summed it up very well Carl..

Okay.

Tim, are there questions?.

Yes, just to follow up if I might.

I mean I guess I’m trying to get towards sort of some sense of overall growth expectation for 2016, you know these last the Q3 report and the guide kind of represent you know two poles if you will in terms of growth and profitability, I don’t know whether its fair to expect you know something in between those poles in terms of a base line and kind of somewhat related to that I wonder if you can make any comments on kind of market share either at your largest customer throughout that tier 2 customer base and whether you see if there has been any changes there? Thanks..

So let me answer it this way. The growth is not what we would want, but we’re drilling. So I think that’s the easiest way to answer both of those questions. I don’t know what else more I get at that. I’m certainly very encouraged by our position in our customers and our prospects for expansion but it feels like 2016 looks pretty strong, but we’ll see.

William..

Yes, I mean what I would say this is as you know a tough business to forecast Tim. So, there is a reason again that we don’t guide that far out.

In terms of your question about market share, we’ll sort of know when the DOC [ph] settles and everybody publishes their 10-K in Q1 in terms of how we’ve done at our largest customer relative to our closest peer. You know we have one market share and every year I think at least for the past four or five years as far as I can recall.

There I think what’s going to happen overtime is that you may see that -- so the underlying business being done, whether its without the tick of the customer or elsewhere, increased being quite different all the time potentially and professionally services that we do is quite different from say some periods to -- business and the like.

So it’s going to be hard on hard potentially to compare the underlying businesses. So we’ll know in Q1 how we are doing on market share, we really don’t have any indications currently..

Okay. Thank you..

Thank you. Our next question is from George Notter with Jefferies. Please state your question..

Hi, thanks very much. I appreciate the follow up.

So, I just want to be clear on the professional services business that you are doing, is this Turfs [ph] business where you are doing installation type services or is it some other kind of consulting work, I guess I just want to make sure, I know exactly what you are doing here, and I guess I have heard from your commentary that’s going to be margin dilutive, is that the right way to look at this?.

Well thanks for reiterating so I can reiterate my reiteration. Our professional services operating and our professional services team is focussed on providing value added services to deploying Calix equipment only. We do not do Turf business, we will not do Turf business.

We have no value add in that business and as such that business we view is being very low margin. When it comes to our equipment where we can provide value add because we understand the equipment, we can help our customers, we understand their processes. It much higher margin than Turf business would ever be.

And as such when you look at the whole project and you add in the professional services and the equipment, it might be slightly below our corporate average margins but if it is, it’s not by anything that loose the model..

Yes it doesn’t move the needle George; I mean that’s the key point. Obviously that’s a professional services, I don’t [ph] remember the project substantially above delivering systems..

Got it.

Okay, fair enough and then as I step back and look at just the level of investment you guys have in the business this year as a percentage of sales, I think your R&D is going to be up you know a good chunk versus recent years and just thinking about you know all the new product what you got, here I guess it certainly makes sense, but do you envision a point where you start to get more leverage on the investment and on R&D going forward or do we continue to kind of invest aggressively from an R&D perspective.

I guess, I’m wondering if there is something about the industry or your business that’s requiring this level of investment or is it something that can relax going forward? Thanks..

Great question, George and so let me put it into few timed surges. First surge was obviously to get ourselves onto a platform and that platform is AXOS. As I alluded to in my comments about what we’ve been able to do on subsequent systems product development that are built on AXOS they are at a very different R&D efficiency.

But as you might imagine that’s only one part of our R&D stream. Now, having said that, we obviously intend to become the largest part of our R&D stream and ultimately all of our R&D stream. So as you flow that through, you are going to see increasing efficiencies.

What does that mean from an R&D standpoint? That R&D is -- you know the growth rate in R&D is going to slow, that’s for sure.

The other thing I would merely caution you on is there could be things in our future that might be market segment or of course specific customer driven that might cause momentary on -- but otherwise my expectation is that the growth in R&D will overtime. That’s exactly right..

Yes, thanks..

Thanks, George..

Mr. Dinges there are no further questions at this time.

Would you like to make any closing remarks?.

Thank you, Karen. Calix will be participating in the UBS Global Technology Conference on 18th of November in San Francisco and the Cowen [ph] Networking and Cyber Security on the 16th December in New Orleans. In addition, Calix is participating in a number of investor meetings during the fourth quarter.

Information about future events will be posted on the Events page in the Investor Relations section at calix.com. We remain focused on executing against 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. Goodbye for now..

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time..