Calix is a company with a promising future in the broadband service provider (BSP) industry. CALX’s next-generation products enable its customers to compete effectively against incumbents while maintaining a lower cost structure.
Demand for CALX products is evident through its historical growth rates, customer operating metrics improvements, and adoption by major players like Verizon. Despite a recent slowdown due to temporary headwinds, CALX is expected to return to growth as these challenges subside.
Calix Business Model
Calix provides BSPs with hardware, cloud, and software platforms, systems, and services that gather, analyze, and return data from their subscriber bases. This data offers direction for BSPs to improve customer experiences and reduce operating expenses.
CALX primarily focuses on the US market, deriving over 90% of its revenue from there as of FY23. Its core customers are small BSPs, which account for 81% of total revenue, each with fewer than 250,000 subscribers.
CALX as a Disruptor in a Mature Industry
The broadband service provider industry is mature and commoditized, with service offerings often indistinguishable. Historically, BSPs differentiated themselves by bundling on-demand video and live sports, an advantage largely available to larger players. However, the rise of over-the-top players like Netflix and Disney+ has diminished this advantage.
CALX’s next-generation products are disruptive, providing BSPs with a means to differentiate themselves through simplified hardware platforms and software-defined networking.
Key products include AXOS, EXOS, and Calix Cloud. AXOS and EXOS virtualize various hardware functions, offering significant benefits such as greater network reliability, faster upgrades without disruption, and hardware agnosticism, allowing BSPs to switch vendors easily. This results in substantial cost savings and improved competitive positioning.
Calix Cloud further enhances BSP capabilities with marketing and support clouds, leveraging network and subscriber behavior data to drive revenue growth and customer service improvements. This results in reduced operating costs and increased customer satisfaction.
Evidence of Demand and Product Efficacy
Demand for CALX products is reflected in its financial performance, with revenue growing from $294 million in FY19 to $764 million in FY23. Customer operating metrics improvements and adoption by tier-1 BSPs like Verizon also attest to the effectiveness of CALX’s products.
Recent Slowdown: Causes and Outlook
The market recognizes CALX’s disruptive potential, as evidenced by the stock’s surge from sub-$10 to $80 between 2020 and late 2021. However, growth has slowed recently due to high interest rates increasing capital costs for BSPs and delays related to the BEAD program.
These are temporary headwinds, and growth is expected to resume as the macroeconomic environment improves and the BEAD program progresses.
1Q24 Results and 2Q24 Expectations
In 1Q24, CALX reported revenue of $226 million, in line with consensus estimates. The gross margin was 54.9%, slightly beating expectations, and the EBIT margin was 7%. Despite the challenging environment, CALX added 10 new BSPs and secured its largest-ever cloud deal.
For 2Q24, no major turnaround in demand is expected, given the current economic situation and management’s guidance for further slowdown.
Valuation
Based on research and analysis, the target price for CALX is $64, similar to levels seen in early 2023. The slowdown in growth is viewed as temporary, with revenue expected to rebound in FY25 and beyond.
For FY24, revenue is projected at $826 million, assuming a flat performance for the rest of the year. EBITDA margins are expected to remain subdued but should recover to mid-teens levels post-FY24.
CALX’s valuation is already reflecting some recovery expectations, trading at its average multiple. The stock’s upside will primarily come from EBITDA growth rather than multiple expansion.
Risks
The main risk is industry consolidation. If tier-1 customers acquire CALX’s lower-tier customers, there is a possibility they will cease using CALX products. Additionally, the current macroeconomic turmoil could take longer to resolve, delaying the expected recovery and potentially impacting the stock.
Conclusion
Calix, Inc. is a promising investment due to its disruptive potential in the mature BSP industry. Its next-generation products improve customer service, reduce churn, streamline operations, and lower operating costs for BSPs. Although recent growth has slowed, this is attributed to temporary headwinds.
As these challenges are resolved, CALX is expected to return to growth, making it an attractive investment opportunity.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
