Tom Dinges - IR Carl Russo - President & CEO William Atkins - EVP & CFO.

George Notter - Jefferies Simon Leopold - Raymond James Sanjeev Wadhwani - Stifel.

Greetings and welcome to the Calix First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A brief 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.

Tom Dinges. Thank you, you may begin..

Thank you, Matt, and good afternoon everyone. Today on the call, we have President and CEO, Carl Russo, as well as Executive Vice President and Chief Financial Officer, William Atkins. This conference call will last approximately 60 minutes and will be available for audio replay in the Investor Relations section of the Calix website.

Before we begin, I want to remind you that in this call we refer to forward-looking statements and actual results may differ materially from those contemplated by these forward-looking statements.

Factors that could cause actual results and trend to differ materially are set forth in today's earnings press release and in our Annual and Quarterly Reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements which speak only as of their respective date.

Also on this conference call, we will discuss about GAAP and non-GAAP financial measures. A reconciliation of GAAP and non-GAAP measures are included in our earnings press release available on our website at www.calix.com. All numbers referenced in today's conference call are non-GAAP unless otherwise noted.

As a reminder, our earnings press release, supplemental financial data, and an accompanying earnings release presentation are available in the Investor Relations section of the Calix website. At quarter ended March 26, 2016, Calix reported revenues with $98.4 million and a non-GAAP loss of $0.09 per share.

In just a moment, William will take you through the quarter in greater detail. And Carl will conclude his thoughts on Calix strategy and market outlook. This will be followed by questions from analysts. With that, I would now like to turn the call over to Calix's Executive Vice President and Chief Financial Officer, William Atkins.

William?.

Thank you, Tom. We last provided you with guidance regarding Q1 on February 9. And in that guidance recalled for revenue between $95 million and $99 million. Our gross margins are between 47% and 48% and operating expenses in a range of $52 million to $53 million. Including approximately $2.6 million of Occam litigation expenses.

Thus resulting in a net loss per share of between $0.15 and $0.11 or $0.10to $0.06 is Occam litigation expenses had been excluded Actual revenue for the quarter was $98.4 million and EPS was a loss of $0.09 per share including litigation expense. Four, a loss of $0.02 per share excluding litigation expense.

Revenues with upper end of guidance and the loss per share of both the top end of guidance. Gross margin was 48.1% and operating expenses came in at $51.7million.

At the gross margin level the largest drivers were the contribution from the impact of the first full quartered revenue from our previously announced turnkey network improvement project as well as product in customers mix. Operating expenses included higher than expected legal expenses, but nevertheless came in the low guidance.

The major factor was a moderation of our RMD expense growth. Good linearity of Q1 revenues combined with a strong focus on collections and shipments of the inventory related to orders received in Q4 and Q1 resulted in a positive operating cash flow of $5.3 million.

Our aggregate balance of cash and marketable securities decreased to $64.3 million from $73.6 million in the prior quarter, primarily due to share repurchases of $12.8 million and capital expenditures of $1.5 million. Offset by the positive operating cash flow I just mentioned.

As of the end of Q1 we completed the board authorized repurchase of $40 million of Calix shares. Getting into a bit more of a detail. Our $98.4 million in revenue for the quarter showed an increase of $7.3 million or 8.1% from last years as first quarter level of $91 million.

This marked the strongest year-over-year increase in revenue for the first quarter period over the past 3 years. At 11% of our Q1 revenues, international revenues was $10.5 million, slightly higher in absolute dollars from its 10.1 million or 11% level in Q1 of last year. We had two 1% of great customers this quarter.

This was the first quarter when we recorded more than one 10% or greater customer since our 2010 IPO. And it is the result of our focus on increasing penetration of larger customers. As I noted earlier at 48.1% Q1 first margin was above the upper end of guidance range. This gross margin in Q1was down from Q1 2015 at 49.2% level.

With this decrease driven in part while the turnkey network improvement project that I have discussed in our leasing financial results call. We expect the ramp of this project to keep margin somewhat in check relative to our long-term 50% margin target. But we expect that the drag should have bait later in 2016 as this program matures.

Q1 operating expenses at $51.7 million were up $3.5 million from the same quarter a year ago. But this year-over-year increase primarily due to additions in headcount particularly in research and development and by litigation costs.

We have invested in R&D to support our systems and software platforms to capitalize on a significant growth opportunities we see starting later in 2016 and beyond. In 2015 we launched the largest number of new systems and platforms in the company's history. So far in 2016 we are seeing solid momentum from these launches.

Expenses related to Occam litigation amounted to $3.4 million or $0.07 per share in Q1 2016 compared to $1.7 million or $0.03 per share in Q1 2015. This was higher than our guidance for $2.6 million as we incurred additional expenses ahead of trail.

You would seem from our SEC filing of April 18 that we have signed a memorandum of understanding regarding a settlement in principal the litigation. Under the terms of the settlement Calix does not make any contribution to the settlement. And Calix will receive $4.5 million in cash as partial recovery of cost incurred equivalent to $0.09 per share.

This cost recovery is likely to be more than the total of the Occam litigation expenses that we expect to incur in Q2 and Q3. We anticipate at that Q2 Occam litigation expenses will be at the order of $2.4 million or $0.05 per share. Before taking into account any impact from a $4.5 million contribution should at occur MQ too.

This settlement result in positive outcome for Calix and more importantly puts an end to the litigation. Turning now to the balance sheet. As noted earlier we ended the quarter the total cash from marketable securities of $64.3 million. A decrease of $9.3 million in Q4 and the decrease of $33.5 million from last years Q1 level.

The primary driver in both the year-over-year and sequential decrease in cash as our share repurchase program. Joining the quarter we repurchased 1.8 million shares using $12.8 million of cash.

At an average prices as of the $7.16, as of the end of Q1 we completed our board authorized share repurchase program having spent $40 million and having repurchased 5.3 million shares. Receivables DSOs were healthy 38 days, up 3 days compared to the previous quarter and up 1 day from the 37 days in Q1 2015.

The copy of receivables and our collections performance remain strong. Inventory levels decreased to $41.1 million in Q1, down from Q4's $47.7 million level and up slightly from $40.6 million in Q1 2015. This follows the typical declined that they usually see in the first quarter. And it's commensurate with our sequential change in revenues.

Inventory returns decreased to 3.9 times in Q1 from 4.1 times in Q4 and increased from Q1 2015 3.6 times. Now, let me turn to guidance for the second quarter of 2016. We expect revenues to be in a range of between $104 million and $108 million. With a midpoint therefor a $106 million, up 7% from a $99 million level of Q2 2015.

At the mid-point first half 2016 revenues will increase 7.5% year-over-year. This will be the first year since 2013 that our first half revenues will have grown at this stronger pace relative to the prior year. Your guiding gross margin to a 46% to 47% ranged for Q2, down from last year's Q2 level of 51%.

With this decline relative to Q2 of 2015 largely driven by the continued ramp of our previously announced turnkey network improvement project. As well as by our expectation of slightly less favorable products and customer mix relative to Q2 2015.

I would note that 51% gross margin reported in Q2 of 2015 coincided with a lowest reported level of international revenues since we acquired the Ericsson assets in late 2012. In terms of operating expenses. I'm going to go into a bit more detail with guidance for this quarter. Given the litigation settlement we entered into a couple of weeks ago.

Operating expenses including litigation are expected to be in the range of $52 to $53 million, up from last year Q2 level of $47.3 million. Reflecting some incremental hiring costs, annual year increases and the incremental litigation extent.

While we have announced the settlement and principal the Occam litigation, we expect a record litigation related expenses for Q2 of approximately $2.4 million. Compared with less than $200,000 in Q2 2015. Therefore excluding litigation expense, operating expenses are expected to be in the range of $49.6 million to $50.6 million.

Importantly, the recently file settlement brings an end to this litigation and we except no further meaning full litigation expense after Q2. Based on 48.4 million shares.

The expectation that are just taking you through resulting a guidance range for Q2 of a net loss of $0.09 to a net loss of $0.05 per share or a loss of $0.04 to $0.00 per share or break even, excluding litigation related expenses. These estimates do not include any benefit from the $4.5 million of litigation settlement proceeds.

On current expectations as that these proceeds will settle either late in Q2 or in Q3 which is why we are excluding the settlement proceeds from our Q2 guidance. Importantly the settlements will more than offset on litigation costs and either Q2 or Q3 and will result in positive benefit of operating expenses the quarter when recorded.

And we'll be need for $0.09 per share on a per share basis. When the settlement is deemed accepted by the course and recorded. At this point let me hand the call over to Carl.

Carl?.

Thank you,William. Predictable, profitable, growth. Those were the words I used at our investor day and mid March to describe our goal for the years aghead. In last quarters conference call I stated that while our revenue continue to grow over these last three years the rate of growth have slowed.

and the reacceleration of our growth rate was a key goal for 2016. We have made meaningful investments in research and development and it is time to reap the rewards. With this in mind, the first quarter was a good one for Calix, the 8% year-on-year growth we achieved was driven by activity across all of our customers and products.

Given our guidance we are looking forward to a strong second quarter and if we execute well, this remark the strongest first half revenue growth in the past three years. While I am encouraged with our performance on gross margin. I believe our caution on guidance is prudent and correct.

As you may remember, two quarters ago we announced a turnkey network improvement, professional services win with one of our existing customers. We believe the team is executing well on this project and our professional services business overall is growing.

However, as we built this business it has a downward effect on gross margin which used to be reflected in our guidance for the second quarter. as you should expect, we have an appropriate focus on lowering the cost structure to deliver these services and on raising profitability through the remainder of 2016.

Also encouraging with the results from our focus on gaining leverage from our investments in OpEx. Excluding litigation expenses, our OpEx in the first quarter was $48.3 million which increased 4% year-over-year. Delivering 8% revenue growth and 4% OpEx growth represents good progress and our focus on operating leverage will remain strong.

However, OpEx will likely be a little noisy throughout the year, as we complete major product development efforts, converge our resources on our compass and AXOS software platforms and further invest and expanding our focus on larger current and perspective customers. I am glad that any noise stemming from the Occam litigation will leave behind us.

We saw CAF II orders grow in the first quarter and that momentum is continuing into the second quarter. While we remain I have to believe that CAF II will be mostly substitutive to our customer's CapEx plans. We do believe that it establishes a base to our business as it provides dedicated funding for access the network investments.

On a related note we are pleased that the CAF rules for the rate of return carries in essence the other half of CAF have now been finalized. To be clear, the rate of return carriers are smaller in size and many are long time Calix customers.

This now brings to a close the multi-year effort to transform the universal services fund which from many decades was a subsidy to provide Voice services into the Connect America fund which is an incentive to the deploy broadband services.

We believe the finalization of the entire CAF program is a positive for our customers and the positive for Calix.

However, we were caution that there are many aspects of this plan that must first be sorted through by our customers and we expect it will take into next quarterly earnings conference call to give more insights into this significant development.

Our global traction continues to improve and I'm encouraged with both our international business and our Ericsson partnership as we had numerous wins in the quarter. Our GigaCenter family combined with our COMPASS application continue to strong growth as our customers look to our new subscriber experience.

Likewise, the interest in next generation technologies such as NG-PON2, G.Fast continues to grow. And although we do not produce 5G products the advent of ever higher stood wireless systems will clearly have an impact across the entire access infrastructure. We believe we are well placed to benefit from all of these new technologies.

In fact, we are seeing the highest level of activity and inbound interest in our history. To be clear, this comes from customers and prospects both large and small. In closing I would like to take a moment to discuss the rates of industry change. From the subscriber to the cloud and all of the service provider business models in between.

This is the highest rate of change I have seen in my career. I believe that this increased rate of change is why we’re seeing interest in software defined access and the early traction for our access extensible operating system AXOS. There is enormous need for a fast, horizon and simple unified access infrastructure and AXOS meets the challenge.

Now that AXOS is well and truly in the market it is growing at a good pace and over 25 service providers have deployed the AXOS platform in production networks. With that I will open the call for questions.

Matt?.

Thank you. At this time we will be conducting a question and answer session. [Operator Instructions] Our first question comes from Meta Marshall from Morgan Stanley. Please go ahead..

Hi this is Eugene on for Meta. Thanks for taking my question. I was hoping to get your comments on the pockets of weakness we’re seeing from some of your peers.

Definitely appreciate your perspective on that and just from your added things like what you’re seeing out there if there is any incremental weakness since the beginning where do they might be or might not be? Thanks..

Eugene, just a curiosity when you say some of our peers, is there a particular area that you can point me to to maybe help me answer your question..

No I think just generally a lot of the optical players and a lot of people in the carrier space that they’re reporting weakness since for the first quarter..

Yeah. So okay so I didn’t understand how broader or narrower you’re looking for. So I think there’s been some weaknesses in different areas and some I guess expectations that looking out will reset.

We’re seeing reasonably good strength in the access space and I think that speaks to what we have spoken to for a long time which is ultimately the access space is what connects the subscriber to the cloud and therefore the service provider that’s essential.

We’ve seen positives at some of our service provider customers have looked at their investment portfolio and reset it or rejiggered if you will. I can’t speak directly to other spaces because to be broad we have enough to do focus on our own space. But right now in our space we see a solid investment set going on with our customers.

Other questions, Eugene? Matt I think next question then..

Okay. The next question comes from George Notter from Jefferies. Please go ahead..

Hi there, thanks a lot guys.

I wanted to - I guess I kind of ask about the new CAF II rules that are out there for the rate of written carrier you referenced that it’s going to take some time to kind of understand how customers are looking at those rules and how it impact their investment plans and can you kind of walk through sort of the puts and takes there with the positive scenario for you guys and all this or would be the negative scenario how do you kind of view it in terms of the potential well cards for your business?.

So let’s start with the negative scenario and the negative scenario is prolonged uncertainty. That would always be negative to our customers.

However I think we feel differently about the rate of return scenario and here’s why? Our customers have been in a situation of prolonged uncertainty as they knew these rules were going to be renegotiated and reset as they got converted into CAF and now actually the plans are out there. So I'm heart press to see a negative in this regard, George.

As you look at the details one of the negatives could have been had they done the rules differently they might have actually set the rules up to penalize our men out. Those service providers that were more aggressive in their broadband build out.

But in fact they’ve given two different plans that the rate of return carriers can choose from and as narrow as we can see looking at it. We believe people like to choose one or the other or both going to be happy and that’s the early feedback we are getting from our customers.

So actually we see it as mutual to a net positive the only thing that is going to take some time is people are going to go choose the plans and the SEC is going to look who chooses it and come back they have a 91 day period, I think that ends in July and that may come back and make further adjustments so it may take one or two cuts at this to get it all sorted and agreed.

But we don’t see a negative to this half of CAF..

Got it. Okay.

And then the other question I wanted to follow up on you made an interesting comment earlier you said you’re seeing more interest I guess inbound in the Company from customers and you’ve seen in your history and I’d be curious what exactly are you talking about there is that totally inbound phone call, some customers., is that trial, is it an evaluation would hit on the website.

Give us a sense for what exactly are you saying? Thanks..

Good question. So let me characterize it this way. Clearly we’ve been expanding our reach and our channels globally and so when I say inbound actually what I was sort of alluding to was as we’re reaching out we’re actually finding some service providers of different types reaching back towards us.

And I think the reason is that fundamentally the industry has been to a set of consolidative events that as service providers are now looking at these next generation technologies.They are just a lesser number of players for them to go look out and times pass they may have overlooked us and times present it seems that we are in the mix.

So we’re actually seeing both us reaching out to them and them reaching back to us.

Does that help?.

Yes, it does. Thanks very much guys..

Thanks, George.

Matt?.

[Operator Instructions] And our next question comes from Simon Leopold from Raymond James. Please go ahead..

Great. Thank you, couple of questions I wanted to ask.

One just from trying to straighten out the noise from litigation, can you talk a little bit about how you’re budgeting operating expenses for the second half of the year, should we be thinking about something like 51-52 million a quarter one through the litigation is that the right way to think about it?.

Well first --- we don’t go out obviously beyond one quarter. So we came in at 51.7 including litigation or 48.3 for Q1 right.

If you look at what we’ve said about Occam related litigation expense, we’ve called historic for Q1 3.4 million, we’re talking about 2.4 million incremental for Q2 and we’re saying there’s not going to be any meaningful expense thereafter. Okay. So that’s basically $5.8 million of Occam litigation expense in Q1 and 2.

Then you’ve got set against that the $4.5 million that we’re going to receive that could fall in Q2 it could also fall in Q3 and because of the uncertainty over the timing we’re specifically not guiding to any number that includes that $4.5 million coming in.

So the sum total of this and if you look at operating expenses for Q2 is we’re looking for operating expenses without litigation up being in the $49.6 million to $50.6 million mid point of roughly 50 million little bit above that. If you fold litigation into that that’s again 52 to 53.

So you can see that X litigation, operating expenses, mid-point is around 50 little bit north of that for Q2. I hope I haven't totally confused you by taking you through those numbers..

I followed you I think.

But I guess what I'm trying to get a sense of is Karl talked about some expense controls and it was in the context of gross margin I'm just trying to get a better idea of how to think about, how we should model operating expenses in the second half of the year whether they should be increasing with growing revenue which we’d assume or whether you’re going to try to hold operating expenses flat from the levels you forecast for Q2 excluding the litigation?.

Okay. Well I'm not going to guide you to the second half of the year but let me just give you some aggregate data for the first half, okay? We talked about revenues in Q1 growing at 8%. We've talked about OpEx going at 4%. So obviously that's the healthy trend.

If you aggregate our guidance for revenues at midpoints and our guidance for OpEx midpoint too and add those to the Q1 historics you are seeing operating expenses excluding litigation coming in as just over I think $98 million for the first half of 2016.

That also just under $94 million for the first half of 2015 that's roughly 5% growth year-over-year for the first half and we're also calling at the midpoint aggregate first half revenue growth of around 7.5%..

And let me add one comment Simon and again this is in our guidance. But you know this from following us for a while. Q4 has user group in it and it has commissions in it. So just be careful there please..

Now that's helpful, thank you. Now in the prepared remarks you've talked about the Ericsson partnership very briefly and some references to international which actually on a dollar basis looks stable with my formula updated correctly last quarter, which to me is pretty good given seasonality. So 11% of sales is still pretty modest for international.

I'd like to see if you can give us an update on your prospects and how you see this evolving over the course of the next one to two years..

So I would change nothing in what we said prior to this in the last quarter and that in the final stay in New York. We are very encouraged with how the relationship has continue to develop now both at a channel and at as strategic technical relationship.

In addition, we've been putting pins on the map and when you do that you get people already put more pins on the map. And the size of those accounts are starting to grow. So it's nothing going to happen overnight you are not going to see any big numbers pop up.

I think we're just going to see programmatic more wins and international growing at a good color. Whether or not it all grows North America and by how much it brings from we don't guide to that. The best I can give you is I now like what I am seeing..

And one last one, in regards to the rate of return CAF II program. I'm just wondering if you guys thought in terms of what technology those operators would push or preference for between fiber to the home or something like the G-Fast or BDSL to fiber to the nodes.

Do you have a feeling of how that mix might shape up within this program given that the requirement is only 10 meg..

So great question. And I'm glad you asked that. So I think the answer is all three. I do not think so if you hark in back to the days of broadband stimulus which you're old enough to remember. That was a dominantly fiber based initiative.

This is going to be something where you're going to see a mixture of fiber short loop technologies like G.Fast and longer loop technologies like VDSL-2. If you've been following us we've watched our portfolio not only continue to pursue aggressively the fiber based technologies. But also the short loop copper technologies from a G.Fast perspective.

But we have also now brought to market instead of [indiscernible] system level vector VDSL-2 solutions, that we believe if you look at them you'll see that they in fact are the best in the market. So we believe it's going to be mix of all three and we believe we are extremely well set and prepared for all three..

Great. Thank you for taking my questions..

Simon, thank you as always..

Thank you. Our next question comes from [indiscernible] from Cowen. Please go ahead..

Thank you for taking my call. Just a couple of housekeeping questions.

Can you remind us again what was your non-US revenue in the quarter?.

I'm sorry.

What was our what?.

Non-US revenue..

Non-US revenue as we called our revenues at 11% of total revenues. So if you look at quarterly revenues $10.5 million..

Sorry?.

$10.5 million I believe..

Yeah, 10.5 million..

$10.5 million.

and then also can you give us your updated headcount for the quarter?.

We don't updated our headcount other than in the K..

Alright. Just also on the top 10 percent customers that 10% customers that you had this quarter.

is it fair to assume that these are the normal suspects that have been traditionally your 10% customers?.

We've only had one 10% or greater customer..

So if I go back it seems CentryLink and Frontier has amongst your customers.

I'm just asking is this a different 10% customer other than the usual suspects?.

It's from the same set of customers. I will be careful about the same ones. So I will give you that..

Alright, thank you..

Thank you, sir..

[Operator Instructions]. And our last question comes from Greg [indiscernible]. Please go ahead..

Yes, thanks. When you talk about the AXOS environment and how that's ramping as part of your overall system sales. What should we be thinking about as far as it's impact on your gross margin line in terms of.

In the short term?.

Yes two or three quarters..

Yes, so in the short term not at all. And let me explain to you why, it is a framework and operating system and the development impairment that as customer deploy it they're really deploying an architecture. So we believe that overtime and over a long time that that will have a positive effect on margins.

But I will displayed you to making any assumptions in the near term..

Okay. And just one quick follow up, the 11% outside of the US revenues. Should we assume that that's going to be more than likely the norm as far as higher levels north of 10% going forward..

It's going to choppy quarter-to-quarter inevitably. But we do expect our international revenues to grow. And overtime, they should grow faster than our domestic revenues. So therefore the answer must inherently be yes, but we can't really guide to this. that is what we see going on in our customer base..

Great. Okay, thank you..

Greg, thanks..

Our next question comes from Sanjeev Wadhwani from Stifel please go ahead..

Thanks. Hi, Carl. I suspect I know the answer of this question. But I thought I will take a shot. Any color on when you just look at CAF and if you look at your total revenues this quarter.

Anyway to kind of say 20% of the revenues came from CAF and that could go up to 30% over the next couple of quarters, Any sort of metrics that you might be able to share will be helpful thanks..

What's the answer you're thinking now ?.

The answer I thought you would give us we're not going to share those details, but maybe you want to give a percentage..

So I appreciate. No, we won't share it in that way. But let me go back to what we have talked about to this point. Again with CAF II to into the larger carriers to be mostly substituted.

Having said that as I said in my prepared remarks we are seeing continued growth of orders around CAF II and we actually to my response to Simon's question about technology as earlier.

We're actually very encouraged with our new technology set especially around VDSL-2 and G.Fast as it fits into that segment of the business if you will if you want to call CAF II such a things. So we won't break at our percentage wise. I do believe that's going to be mostly substitutive.

But let me just take the moments ago forward on the rate of return carriers. Because as I look it today I don't believe that that will be substitutive, I believe that that's actually good news in the long-term. Mostly the smaller carriers as you know are not public entities. So they have different pressures that they deal with.

And dividend is not one of them.

Secondly, the ones that have been more aggressive and have already been building broadband actually with this new program Frankly would be further incentive to continue down that path.So in that space we think it’s going to be a net positive so I know I'm not answering the question you asked, but I wanted to go back and atleastframe up more information around AR I hope that helps..

That helps actually.

So just for rate of return given that the rules have been just finalized I mean are you expecting some of the rate of return carriers to start using these cap funds perhaps in the second half or its more like a 2017 event?.

So a good question, as you heard me mention there is a 90 day review period and if they can’t get all the things that they want specifically SEC they may go for another one.

So I think if we’re going to be realistic about this I think we call this a 2017 event even though we might see orders that we sort of are tied to it or think they are coming from it, later on this year. but I think we should be safe at the day at the 2017 event..

Got it. Thanks so much..

Thank you, Sanjeev..

Thank you. There are no further questions, I’d like to turn the floor back over to management for any closing remarks..

Thank you Matt. Calix will report its third quarter fiscal year 2016 results on August 2nd after market closed. Our Annual Meeting of shareholders will take place on Wednesday, May 18th starting at 09:00 A.M. specific time. Management will be participating in a number of investor meetings and conferences during the second quarter.

Information about these future investor events is posted on the Events and Presentations page of the Investor Relations section of calyx.com. We remain focused on executing against the opportunity to have us and we look forward to meeting with you at one of these upcoming events.

Once again thank you for your interest in Calix and thank you for joining us today. Good bye for now..

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