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

Paul Silverstein - Cowen and Company George Notter - Jefferies Meta Marshall - Morgan Stanley Tim Savageaux - Northland Capital Markets Maurizio Nicolelli - Raymond James Greg Mesniaeff - Drexel Hamilton.

Welcome to the Calix Q4 and Fiscal Year 2016 Earnings Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Tom Dinges, Director of Investor Relations. Thank you Tom, please go ahead..

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

Before we begin I want remind you that in this call we refer to forward-looking statements which include all statements we make about our future financial and operating performance, growth strategy and market outlook. And actual results may differ materially from those contemplated by these forward-looking statements.

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

Also on this call we will discuss both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in our earnings press release and available on our website.

As a reminder our earnings press release, supplemental financial data and an accompanying earnings release presentation are available on the Investor Relations section of the Calix website. For the quarter ended December 31st, 2016, Calix reported revenues of $131.8 million, a GAAP loss of $0.23 per share and a non-GAAP loss of $0.14 per share.

In just a moment, Carl will begin with opening remarks, followed by William, who will take you through the quarter and fiscal year in greater detail and Carl will conclude with his remarks on Calix's growth 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 President and CEO, Carl Russo. Carl..

Thank you Tom. 2016 was a year of significant achievement for Calix. Our fourth consecutive year of growth, accelerating to almost 13% compared to 2015. This growth, unusual in our space, is being driven by the investments we have made over the last few years.

In 2016 we invested in our products and services, resulting in several innovations that enable our customers to win.

From our E-Series systems to our GigaFamily of premises products, from our SDA innovation, AXOS, the operating system for access, to our second generation of Calix Cloud Analytics offerings, these products enable our customers to utterly transform their business models, while transforming their access infrastructure.

We stood up our professional services organization and made significant investments in scaling it, to take on growing demand from customers. These ramp costs increased notably in Q4 as the pace of services accelerated. And we expect they will continue into early Q2.

However, we entered 2017 with a robust services capability led by Greg Billings, an industry veteran, who was tasked with transforming our services into strategically aligned offerings that complement our products and allow you are customers to continue to transform their infrastructure and business models.

This is why our customers increasingly choose Calix, why our employees are exceptionally motivated to realize this future and why we look forward to 2017 as another exciting year of growth. I will come back after William concludes his financial discussion, to give you more details on the year ahead. William..

Thank you Carl. We last provided you with guidance regarding Q4 on November 1st. And in that guidance we called for estimated revenue of between $127 million and $131 million.

A non-GAAP gross margin of between 44.5% and 45.5%, non-GAAP operating expenses in the range of $58.5 million to $59.5 million and non-GAAP net income of between a loss of $0.04 and breakeven or $0.00 on a per share basis. Relative to that guidance our actual revenues for the quarter were $131.8 million, above the upper end of our guidance range.

Non-GAAP gross margin was 40.4%, below the low end of our guidance range. Non-GAAP operating expenses came in at $60.7 million, above the upper end of our guidance range. Non-GAAP EPS was a loss of $0.14 per share, below the low end of our guidance range.

At the gross margin level, the largest drivers in the shortfall relative to guidance, were higher than anticipated costs associated with the year-end acceleration in activity for turnkey network improvement projects, including CAF II related projects to meet deadlines; and the increase of services revenues in proportion to total revenues, as we continued to ramp our services business which carries lower margins than our systems product revenues.

To a lesser degree, gross margins were also negatively impacted by product and regional sales mix in the fourth quarter.

Operating expenses were higher than our guidance and increased compared to the year ago quarter, as we increased investments in R&D head count, as well as prototype builds to support new opportunities with both existing and prospective customers.

Getting into a bit more detail, revenues of $131.8 million for Q4 mark a new quarterly record, representing an increase of 26.8 million or 25.5% year-over-year. This marks the strongest quarterly year-over-year revenue growth since the third quarter of 2013.

Domestic revenues were 88.6% of our Q4 revenues, representing an increase of $27.1 million or 30.3% year-over-year. International revenues were 11.4% of our Q4 revenues, representing a decrease of $332,000 year-over-year. As I noted earlier, at 40.4%, Q4 non-GAAP gross margin was below our guidance range and was down from the 46.5% level in Q4 2015.

This decrease and the shortfall relative to guidance were primarily driven by higher than anticipated costs associated with the year-end wrap of turnkey network improvement projects to meet deadlines, along with less favorable product and customer mix.

In the fourth quarter, the amount of services work accelerated significantly, driven primarily by project site schedules requiring us to deploy added resources to complete work and increasing overall project costs.

Q4 non-GAAP operating expenses at $60.7 million were up $10.1 million from $50.6 million in the same quarter a year ago which included approximately $850,000 of Occam litigation-related expenses.

The year-over-year increase primarily reflects higher headcount and outside contractor costs, particularly in Research and Development; and higher costs for more prototype builds, in association with our focus on leveraging and promoting newer technologies to secure new, larger customer opportunities.

We continue to make strategic investments in our platform, systems and software, as well as in our information technology systems. With these investments focused on a number of opportunities with large operators here in North America, as well as on growing our market share amongst small and medium-sized operators.

The closeout of Q4 gives us the opportunity to review 2016 in full. 2016 revenues increased by $51.3 million to $458.8 million or up 12.6% from last year's $407.5 million level. This marks our strongest full year revenue growth since 2013.

We had two customers each represent 10% or greater of an annual revenues in 2016, primarily the result of our focus on increasing our market share of larger accounts.

CenturyLink accounted for $97.7 million in total for 2016, while approximately 21% of our 2016 annual revenues, while Windstream accounted for $69 million in total for 2016 or approximately 15% of our 2016 annual revenues.

In 2016, domestic revenues were approximately 90.6% of our total revenues, while international revenues were approximately 9.4% of our total revenues. GAAP gross margins came in at 43.9% for 2016 versus last year's 46.7%. Non-GAAP gross margins came in at 44.9% for 2016, versus last year's 49%.

With this decrease primarily due to the increased mix of services as a percentage of our revenues and the higher costs in services. GAAP operating expenses increased by $12.4 million to $229.3 million or 50% of revenues, versus last year's $216.9 million or 53.2% of revenues.

Non-GAAP operating expenses increased by $20.4 million to $213.7 million or 46.6% of revenues versus last year's level of $193.3 million or 47.4% of revenues. This is inclusive of $1.7 million in 2016 and $3.3 million in 2015, in net expense related to the Occam litigation which concluded in 2016.

Excluding the net Occam litigation expense, non-GAAP operating expenses would have increased by $22.2 million to $212.2 million or 46.2% of revenues from last year's $190 million level or 46.6% of revenues.

With this increase primarily due to increased headcount, predominantly in R&D, to support growth initiatives, increased use of outside R&D contractors and costs for prototypes. 2016 GAAP EPS was a loss of $0.56 per share, versus last year's full year GAAP EPS of a loss of $0.51 per share.

2016 non-GAAP EPS was a loss of $0.14 per share, versus last year's full year non-GAAP EPS of a positive $0.12 per share. This is inclusive of $0.03 per share in 2016 and $0.07 per share in 2015 in net Occam litigation expense.

Excluding the net Occam litigation expense, 2016 non-GAAP EPS was a loss of $0.11 per share, versus last year's full year non-GAAP EPS of positive $0.19 per share.

Turning now to the balance sheet, we ended the quarter with total cash and marketable securities of $78.1 million or $1.59 on a per-share basis, up from $61.3 million or $1.24 on a per-share basis in Q3 and an increase of $4.5 million from the year ago quarter.

The primary drivers in the year-over-year increase in cash were positive operating cash flow in the fourth quarter of $19.2 million, due to improved working capital velocity and customer prepayments. Offset by higher capital expenditures to support ongoing activity.

Receivables DSOs were a healthy 33 days, down 4 days compared to the previous quarter and down 2 days compared to the year ago quarter. Inventory levels were $44.5 million in Q4, up from Q3's $40.2 million level and down from $47.7 million in the year ago quarter.

With revenues rising at a strong pace both year-on-year and sequentially, we're pleased with our team's performance in managing working capital. Inventory turns were 6.5 times in Q4, up from 5.7 times in Q3 and up from 4.1 times in the year ago quarter.

Now let me discuss guidance for the first quarter of 2017, as well as some initial thoughts on our operating performance for the remainder of 2017. As I noted on last quarter's earning call, we continue to see a strong pace of activity amidst an elevated level of investments by our customers in their access networks.

As our customers increase these investments with limited internal resources, we continue to see increased demand by our customers for turnkey services which are project-based engagements, including both systems as well as services such as network planning, all the way through to system installation and network turn-up.

As we're driving towards completion of the bulk of our activity on at least one major project this quarter and as other projects reach higher levels of activity, this shifts the mix of services relative to systems and software in our revenue mix in the first part of our in 2017 more towards services than has been the case previously.

For the first quarter of 2017, we expect revenues to be in a range of between $110 million and $114 million, representing growth of 12% to 16% from the $98.4 million for Q1 2016.

In addition to another quarter of solid year-over-year growth in systems and software, our guidance for revenues in the first quarter reflects our anticipation of a further accelerated pace of activity for turnkey network improvement projects to meet deadlines, with services activity forecast to more than double sequentially from Q4 to Q1.

We're guiding non-GAAP gross margin to a range of between 30% and 34% for Q1, down from last year's Q1 level of 48.1%. The decline relative to the year ago quarter is largely driven by the anticipated higher pace of activity in our turnkey network improvement projects.

And the commensurate increase of related professional services revenues as a percentage of total revenues.

As we've noted over the course of 2016, services generally carry lower gross margins relative to systems and as services have increased as a percentage of our total revenues, we will see incremental pressure on gross margins in Q1 due to the shift in mix.

In addition, we expect to continue at a higher cost run-rate for our services business through the first quarter as we complete project requirements.

Finally, while we expect to continue to incur costs associated with the ramp-up of our professional services business, we're also focusing on opportunities to streamline and to optimize the cost structure as we grow that business.

In terms of operating expenses, we expect non-GAAP operating expenses to be in a range of $61 million to $63 million, up from $51.7 million in the year ago quarter or $48.3 million on approximately $3.4 million of Occam-related expenses are excluded.

The increase in operating expenses compared to the year-ago quarter predominantly reflects incremental hiring and R&D costs to support our growth initiatives and our strategic investments to pursue broader opportunities in service providers.

Based on 49.5 million basic shares, the expectations that I have just finished taking you through, results in a guidance range for Q1 of a non-GAAP net loss of between $0.57 and $0.49 on a per-share basis.

We also anticipate negative operating cash flow in Q1, given the lower net earnings and working capital absorption related to the continued higher costs associated with our current turnkey network improvement projects. Before I turn it over to Carl, I want to give our investors some insight into the full 2017 year.

We continue to see a strong pace of activity across our customers as they accelerate investments in their access networks. We believe this trend will continue in 2017 and we're projecting full year revenues to increase by 10% or more in 2017.

In addition, we expect our normal seasonal pattern, with lower customer spending in the first quarter of the year contributing to second half revenue levels being higher than first half revenue levels. We also expect our net loss on a non-GAAP basis to be lower in 2017 than in 2016 for the following reasons.

Our revenues are expected to increase by more than 10% year-over-year. A top line expansion that is higher than the 5.9% compound annual growth rate that we have seen for the last five years.

As activity accelerates in several key projects to complete project requirements and meet project schedules, network turnkey improvement projects will be a larger portion of our revenue mix in the first half of 2017, than was the case in prior years.

With our expectation being that as these projects are completed, our revenue mix will see an increase in systems and software, while services-related revenues which are expected to have negative impact on our Q1 margins, will diminish as a percentage of our revenues as the year progresses.

Beginning in Q2, we will see the substantial portion of activity related to these projects diminish, as project requirements are completed and closed out. At this time, we expect turnkey network improvement projects to remain an ongoing component of the services that we offer to our customers.

As I noted earlier, while we continue to leverage our professional services business to meet customer demand for such projects, we also believe that we have opportunities to streamline our processes and to optimize the cost structure for that business.

We also see scope for realigning our operating expenses to allow for cost optimization in our traditional systems business, while increasing our focus on software-defined access and on expanding our customer base. At this point, let me hand the call back over to Carl. Carl..

Thank you, William. We entered 2017 with an array of solutions that position us to continue our double digit growth and as William discussed, we now have the service offerings ready to be honed, to help our customers deploy these revolutionary products.

One example is our very successful GigaFamily of premises products, that allow our customers to deliver a Best-in-Class subscriber experience, enabling them to raise ARPU and lower churn while decreasing costs.

Another example are our breakthrough systems, all modular and non-blocking which enable our customers to purchase only what they need when they need it, an industry first.

This began with the E7-2 some seven years ago, designed to help our customers transform their access infrastructure in the most efficient way possible, the E7-2 has now become an AXOS system, as just this morning we announced that we had demonstrated NG-PON2 in an AXOS E7-2, deployed in a live network at North Power in New Zealand.

In Q3, we announced the AXOS E3-2 intelligent PON node which brings the disruptive power of a remote OLT to all our customers. And in Q4 we announced the E9-2 intelligent edge system which completely redefines the access edge of the data center.

These three modular, non-blocking systems, the E9-2, the E7-2 and the E3-2, represent a revolution in access technologies unparalleled in the industry. All three demonstrate the capabilities and speed to market that AXOS, the world's only true software-defined access platform, enable.

Fast, always on, simple and secure, AXOS changes forever the way our customers build and deploy services and run their access infrastructure.

Natively Yang models, AXOS allows our SDN-enabled service providers to connect directly to their access infrastructure without any intermediate controllers and roll their Dev-ops ops techniques across their entire Company, from the data center, all of the way to the subscriber's device.

Standards-based, modular, fully containerized and staple, AXOS is unique in the industry and sets the bar for true software-defined access. In January, we revealed just how that bar is set when we released the AXOS Sandbox.

Demonstrating what true SDA is, Sandbox allows the fully extracted and hardware-independent AXOS software to run on a PC, thereby allowing our customers to fully test and integrate new systems, features and functions, in advance of purchasing any of the actual hardware.

In short, this is another example of how AXOS enables our customers to transform their entire Company into a Dev-ops environment. It does the same for Calix, enabling us to deliver an awesome array of new products quickly and efficiently.

Add the second generation role-based analytics of the Calix Cloud and our customers can now build an entirely new business model as they transform themselves into the winning service providers of the future. There is a wave of disruption sweeping over the communications industry and we're perfectly placed to ride that wave.

With that, I would like to open it up for questions. Operator..

[Operator Instructions]. And our first question comes from the line of Paul Silverstein with Cowen and Company. Please proceed with your question..

Carl and William, I recognize the model is changing and to that extent we're in uncharted waters but my simple question is, for these turnkey projects, can you give us some sense for what the all-in profitability is? Again, we haven't seen margins of this nature and I get it that it's related to the services piece and there's a reason you're doing this.

But it would be real nice to get a better understanding, in terms of the long term financial implications of these types of projects?.

Paul, I'll pick up the question. I am sure that Carl will want to amplify. In totality, these projects are a combination of the sale the underlying systems and the provision of services associated with installing those systems in our customers' facilities.

What I can tell you is that the margins that we have in the systems business are very much in line with what we see for our systems business overall.

And so therefore it goes back to the point that we have been making, both in this call and earlier which is namely the dilutive aspect of the services businesses drag on overall margins within those projects. It drags those projects down, as well as the overall business.

In terms of your follow-on question, as Carl referred to in his opening remarks, we have got somebody new who is in charge of that business and he will be focusing on honing that business, both in terms of its overall efficiency, as well as in terms of how we can work more closely with our customers in the more value-added elements of their network planning and strategy.

I don't know if you want to add anything to that..

That is it. His goal is to raise the strategic value of the services offerings and raise the discipline of the delivery.

So we believe that we're here and as William spoke to it earlier, we'll go through this in Q1 and a little bit into Q2 and then we think we'll progress to the point where obviously William's year-end guidance, in order to get to that, things look a bit different as you go throughout the year..

Again, I recognize that it's early, but is there any visibility at this point as to both timing and dollar magnitude at which the services piece that you're ramping becomes a non-loss-generating, if not actually a profitable piece of your business?.

So I think the only way I can answer that, is sort of to say, I think William sort of gave you the book ends, with Q1 and then the notion of what our growth rate is in 2017 as we see it today and the fact that we will be less loss-making in the year. I don't think I should do any more math in that regard. I'll leave that to you..

All right. If I may, let me ask one last question on this topic before I pass it along which is William, in your remarks, you referenced both a mix issue and the ramp in services, as driving to the point on the gross margin.

Can you give us some sense for, on the mix piece, for how much of the shortfall was due to the mix and what's going on there in particular?.

In my remarks I led with services very much, because that has been the main driver, Paul. And that's the impression I wanted to leave you with. For completeness sake, it was important to note that there was product and customer mix which is, as you know, something we say virtually every quarter, because inherently it must impact on systems margins.

That was there to make sure that you understood the additional factors. But really, it is the services business that is the major contributor to that performance..

And on the mix piece, is this just typical quarterly volatility or is there any sign of a secular change, in terms of what's driving the low margin related to the mix?.

I would put it down to quarterly volatility..

Our next question comes from the line of Greg Mesniaeff of Drexel Hamilton. Please go ahead..

Just two quick questions for now and then I'll come back later. The first is can you guys give us an update, if there is any on the Verizon NG-PON2 opportunity? And part two is, in the higher OpEx that you guys just reported, you mentioned the support of some prototypes. Were any of those prototypes earmarked for that Verizon opportunity? Thanks..

So Greg, thanks for asking the particulars that I'll do my best to give you color on and not speak directly to, because as you know, unless customers are willing to announce things or choose to announce things, we won't announce it for them. Here's the way I would characterize it.

As you know, NG-PON2 and we've spoken to it at length since we started down this path, is for us the ultimate physical infrastructure for a unified access that we have been in pursuit of for a decade or more now. So it is very important to us as we look at it as a technology.

Specifically at Verizon, things proceed apace, but I don't know that I would characterize anything more than that.

However, I would draw your attention to a significant development that was announced actually earlier this morning, where in fact we deployed NG-PON2 in a live network, at a service provider that we have worked with for a while in New Zealand.

This is the first time that I am aware of that NG-PON2 has ever been deployed in a production environment in the world. So I would draw your attention to that, to give you a sense for where things might stand.

And then the last piece is, William did mention prototypes and we did cover not only the E9-2 that obviously we announced in Q4, but also the E3-2. These are two major systems that are tied to the AXOS platform. So you can assume that the prototypes are probably spread more across those, than just on any one opportunity.

Is that fair?.

And our next question comes from the line of George Notter with Jefferies. Please proceed with your question, sir..

I guess I want to go back through why it makes sense to be committed like this to the services business and obviously it's a pointed question but frankly it seems like we've got a wealth transfer here from your shareholders, to CenturyLink or Windstream or whoever else you're doing this work for.

And I think Paul kind of touched on this question previously. I want to understand if this is a good business for you, it makes sense to be involved here. And there's a long term future for Calix in this business that has profitability tied to it.

So any additional thoughts you can provide would be awesome?.

Yes, by the way, George, I think that's a great question and phrased correctly. I think that's the right question to ask. As you imagine, we ask that question ourselves every day as we look at our own businesses. But let me put it into a broader perspective and then work my way backwards.

It is very clear as, by the way, you and I have discussed personally, that the service provider business model must evolve, in order for it to be a competitive market-based entity in the future. That is the first piece. And as such they have to change their expense structure as they go and deploy and run their networks.

So something like these services is going to be required. Now let's go a step further and put that along with what we know is going on with the CAF programs. And by the way, in case you've missed the election, infrastructure, infrastructure, seems to be all the rage.

So we can anticipate that there's going to be continued investment in infrastructure and our customers are going to look to help them with these investments. Now, if I then go and couple that with the technology that we believe help our customers win in the future, with AXOS and Calix Cloud, then we obviously want to help our customers get there.

So what does it all comes down to? Do we believe it's a strategically aligned third leg to the stool of our offerings, i.e., Calix Cloud, AXOS systems and services and the answer is, we do.

So now what are we doing about it? I mean, obviously we're recruiting and we've brought Greg Billings on board, who is a world class leader in the services business, to raise that strategic value, as William said, hone, in essence, the cost structure. But really it's about raising that discipline of delivery.

And yes, we robustly believe that this a profit-making business going forward. If we did not, we could not project what we're projecting for 2017..

Is there something about the Q4 experience that was really abnormal? I mean, were you bringing in a whole bunch of contractors at expensive rates to complete projects? I guess I want to understand what was so abnormal about this quarter that really drove the loss and also for Q1?.

Yes, so to your point, you have hit on a significant portion of what we believe is the opportunity for Greg going forward. And yes, we ramped up very fast to take on these programs to achieve them in very narrow windows.

And so we do see, as we look through that, into now the businesses in a functioning mode, that there was a, sorry for using this phrase, but a surge to get it done. And that will go into Q1 and tail a little bit into Q2.

So William, do you want to add some color to that?.

Yes, just to sort of add some classic CFO-type detail, we ramped activity in Q4 to meet these year-end deadlines, for example, in addition with ramping overall activity as Carl has noted. You will recall, George, that on these projects you don't automatically recognize revenues in line with a surge of activity.

There tends to be a lag if you build your deferred revenues and deferred costs in your balance sheet.

So in Q1 you're going to see essentially two different complementary things happening, a continuing ramping of activity, but you're also going to see flowing into our P&L, those embedded deferred costs and deferred revenues, some of which will have lagged from Q4 of last year..

And some of which we were able accelerate into Q4 which had the unfortunate side effect of obviously having us miss earnings..

Any way to break out services and revenue and then margins on each side of the business? I mean, that might be another way, I think, to help investors kind of see what's going on here?.

That might be the case but I'm going to turn that over to our CFO..

As and when they have reached the 10% of revenue level, we will break them out..

Got it, okay. And then, I'm sorry, you said in the monologue earlier that the services business would be up two-fold in Q1.

Is that correct?.

That is what we said, yes..

And our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed..

A couple of questions, should we really think of it as, the investment on the gross margin line as all having to do with services and then the investment on OpEx is all having to do with Tier 1 opportunities? Or is there some kind of mixture of the two we should be considering? And the second question is just really, with some of these services projects getting accelerated or having deadlines early in 2017, are those having to do with certain CAF II cliff points? Or just what is the reason for some of those projects being accelerated? Or being accelerated to the original schedules? Thanks..

So let me answer the second part first. There are various triggers and cliff points that the customers may have. I won't comment on what the specific nature of them are. Okay. But to your point, are there timing requirements that are driving it? The answer is yes. Now let me go back to your first item.

Roughly speaking, you have characterized it almost perfectly correctly with just a little color. And here's the color. On the OpEx side, the R&D is most definitely into what we see as these future technologies. There are clearly anchor customers that we're working with, to pursue them.

But I would be remiss if I didn't broaden it and say that obviously we believe these aren't just for those customers. We have many hundreds, well, obviously we have over 1,000, all of whom we believe will deploy these technologies in one form or another.

So at the leading edge, yes, there are anchor customers, but these are market products, not a specific customer product..

And if I could just ask one more question, I know CenturyLink's guidance around CapEx has been a little light and I know in the past we've talked about it shouldn't impact access technologies; it should impact other areas.

But I just wanted to get a sense of as you head into 2017, have you detected any change to their spending pattern due to pending M&A? Thanks..

So the answer is no. And actually, we have been pretty clear throughout that we believe service providers will have to up their investments in accesses. In fact, that is their critical differentiating part of the network.

Specifically in CenturyLink's quarterly conference call, they actually spoke to access being slightly, either flat or slightly up, as I remember the comments in their conference call..

Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question..

Just a couple of quick questions, did you talk about or could you talk about your capital spending budget for 2017?.

The short answer is that we don't give guidance normally a full year out. For the first time we've done it and this would be the maximum level of detail that we would provide on CapEx. It's primarily an OpEx and gross margin story for this business, both currently and looking forward.

CapEx tends to be pretty flat in terms of its pattern over the course of the year. And that's pretty all I can help you with. I'm sorry..

That's fair enough. As we look, obviously you're expecting a pretty dramatic turnaround throughout the year and we'll work through that math in the future.

But overall, can you talk about, I guess, where you would expect, given significant losses in Q1 and I would imagine still some level of loss in Q2, where you expect your cash balance to bottom out? Do you have an overall estimate for that?.

We don't, again we won't provide that level of detail. But inherently as customer prepayments work their way through the system, that's why we start projecting negative cash flows for Q1 in response to that.

We did say that the growth in cash around year-end was related to working capital and inherently therefore that should reverse itself over the course of the first few months of the year..

Right, that's just coming off the balance sheet. But in addition to operating losses, I think that's potentially an area of focus. Okay. And then last question for me.

As you are addressing Tier 1 opportunities, such as Verizon, are you doing that directly or via larger partners such as an Ericsson?.

As we've announced, there are opportunities, Verizon, we're working together with Ericsson, that particular account..

Right. I wanted to confirm that. And if I can sneak in one more, if you mentioned 10% customers, either for the quarter or for the year number and maybe overall magnitude, if you have any color along that front? Thanks..

It was 21% and 15% for the year for CenturyLink and Windstream respectively..

[Operator Instructions]. We have a follow-up question from the line of Simon Leopold with Raymond James. Please go ahead..

This is Maurizio in for Simon.

On the Verizon next generation PON2 initiative, I know it might still be a little bit early in the game, but I just want to get a sense of any potential indications of your current position versus your competitors for the projects?.

Appreciate your asking and obviously we won't speak about the particular customer situations. Suffice it to say, again I would go back to Greg's question earlier. Obviously we're out demonstrating live NG-PON2 in a live network at North Power. So we're comfortable with how we're performing..

Then on the CAF II funds and the opportunity for the rate of return customers, can you give us an update on where that opportunity stands?.

That opportunity, so the model inside the rate of returns has been set and they all are starting to move forward. As a matter of fact I have just had a chance to come back, last week I was at the NTCA Our Time event, where many of our customers were present and these are our smaller rate of return customers.

And they have clearly now all come to the conclusion, that here's what the model looks like, here's what we're doing and they are now making their plans to go out and invest. So it is now in a move-forward mode..

There are no further questions at this time. I'll turn the call back over to management for any closing remarks..

Calix's next quarterly earnings report for our fiscal first quarter ending April 1st, 2017 will take place on May 9, 2017 after market close. In addition, management will be participating in industrial meetings and conferences during the first quarter.

Information about these future investors events will be posted on the Events and Presentations page of the Investor Relations section of Calix.com. Once again, thank you for your interest in Calix and thank you for joining us today. Good bye for now..

Thank you, ladies and gentlemen. You may now disconnect your line. We thank you for your participation today. Have a wonderful rest of the day..