Calix (CALX) develops and sells software platforms, systems, and software for fiber and copper-based network architectures. The company’s offerings enable communication service providers [CSPs] to access networks. Calix’s technology helps power smart homes and smart businesses which are expected to grow at a compound annual growth rate [CAGR] of 13.5% through 2025. The company’s offerings allow for a wide range of subscriber services to be delivered on a single network.
Calix operates on a global basis and is the leading provider of cloud and software, and services for the unified access network (combines security, mobility, and intelligent network infrastructure to solve business problems and smart technologies for the future). The company’s mission is to connect everyone and everything. This gives Calix a strong growth opportunity as the Internet of Things [IoT] becomes more prevalent in homes and businesses over the next five or six years. The IoT market is expected to grow at a CAGR of 28.3% by 2025.
The company’s platforms include:
-
Calix Cloud – Cloud analytics platform that leverages network data and subscriber behavioral data to deliver analytics to communications professionals. The analytics are used for targeted services and experiences to build customer loyalty.
-
Experience eXtensible Operating System [EXOS] – OS designed to help CSPs deliver a managed experience for smart homes and businesses.
-
Access eXtensible Operating System [AXOS] – software platform for leveraging data center software design and network virtualization across the access network.
Strengths
Calix has a number of internal strengths that puts the company in a solid position for long-term growth.
-
Strong balance sheet – Calix has 1.95x more total assets than total liabilities. The balance sheet has 1.2x more current assets than current liabilities. The company has $46 million in total cash and $44 million in total debt. Calix also had positive operating cash flow of $4.7 million for 2019. The strong balance sheet and cash flow allows Calix to invest back into the company for continued growth.
-
High technological expertise – accomplished multiple tech innovations for other companies/organizations. This includes providing ‘always on’ and high 10G speed broadband services through Calix’s AXOS-powered network. It also includes Calix’s scalable Cloud and EXOS systems to support managed WiFi in fast growing cities. There are many other examples at the link above.
-
Increasing income leverage from higher gross margin and disciplined operating expenses associated with the company’s platforms as compared to the legacy business. Calix’s TTM gross margin was 44% over ADTRAN’s (ADTN) 40.7%. Calix increased their GM from their 5-year average of 43%.
-
Calix turned a profit in Q4 2019 after multiple quarters of losses. The company is expected to remain profitable in 2020 (consensus) and likely to grow earnings at an above average pace from here.
-
Strong customer focus to provide CSPs with innovative technology that benefits their businesses. Calix takes time to understand customers’ businesses and needs to deliver effective solutions that result in positive subscriber experiences. One example of this is Calix helping the company Cruzio who previously experienced a fiber cut that left the town of Santa Cruz without an internet connection. Calix provided Cruzio with their AXOS platform to provide an always-on internet experience.
Weaknesses
There are some internal weaknesses associated with Calix that can be improved upon over time.
-
High concentration of revenue from one customer. CenturyLink (CTL) accounts for about 19% of Calix’s total revenue. Verizon (VZ) comprises just under 10% of Calix’s total revenue.
-
High CapEx which sometimes exceeds operating cash flow. In 2019, Calix spent $13.4 million on CapEx which exceeded $4.7 million in operating cash flow. This results in the issuance of new debt. The company may need to continue this to grow.
-
Limited on the amount of customers since Calix only sells to CSPs. It may be difficult to diversify revenue sources as a result.
Opportunities
There are various strategies that Calix can implement to strengthen the company and to help drive future growth.
-
Broaden the amount of customers to reduce revenue concentration among largest customers.
-
The potential for new acquisitions can help the company grow. Calix hasn’t acquired another company since 2012. So, keeping an eye out for a strategic complementary business can help drive future growth when needed.
-
Continuous innovation to remain on the cutting edge of technology. Calix spends about 19% of total revenue on R&D. The focus on innovation can help Calix provide customers with effective solutions for developing technologies.
- Increase business to existing customers. Strive to secure business covering all of Calix’s offerings (cloud, EXOS, and AXOS) for complete solutions to enhance their customer subscribers’ experiences.
-
Grow business internationally: Take advantage of growing where governments are providing incentives for expanding broadband coverage.
Threats
Calix faces external threats that could have a negative impact on the company.
-
Calix’s global supply chain is at risk for government-imposed tariffs. This could reduce Calix’s net income.
-
The company depends on investments from CSPs. If the CSPs reduce investments for Calix’s businesses or seek solutions from other companies, the company could lose revenue.
-
Calix’s industry is highly competitive. Competition could cut into Calix’s market share: Calix’s competitors include: ADTRAN, Nokia (NOK), Arris Group (ARRS), Ciena (CIEN), Huawei, Dasan Zhone Solutions (DZSI), and ZTE (OTCPK:ZTCOF).
-
The company is subject to government imposed regulations in each country where they operate. Stimulus programs for broadband investments could be reduced or eliminated, which could slow Calix’s growth.
Calix’s Long-Term Outlook
Calix has a good track record of innovating and being the first in the industry with some of their technology. Although there are a limited amount of CSPs to become customers, Calix is working to broaden and expand their customer base. Global growth is a good opportunity to accomplish this.
Calix’s platforms are providing the company with increased margins, which has the company on track for growing earnings at a strong pace in 2020 and beyond. Continued earnings growth opens up new possibilities and puts the company in a stronger position to expand globally.
The growth in the smart homes and smart business fields are likely to keep demand strong for Calix’s platforms. CSPs will need the technological advances that Calix provides. The smart homes and business field has the potential to provide at least five years of strong above average growth for Calix.
The 2020s will see the transformation of the economy during the 4th Industrial Revolution. We are also running head first into a wave of demographic and debt driven problems that will need solving. A cautious, but forward looking approach, will be required to thrive in what could be a lost investing decade for many, much like 2000-2009.
Benefit from the insights of Kirk Spano, Dividend Sleuth and David Zanoni. Get exclusive investment ideas based upon in-depth and up close research that few others do.
Sign-up now for a free trial and 20% first year discount.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: The article was written by David Zanoni for Kirk Spano’s Margin of Safety Investing service [MoSI]. The article was available exclusively for subscribers on Feb. 1 – the stock increased over 11% in just a couple of weeks. Join MoSI to get an edge.
Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.
