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Calix Files for an IPO

Why wait for 2012? The end of the world is starting right now: Calix Inc. (NYSE: CALX) has filed to go public.

We'll repeat that while you get your jaw off the floor: Calix has filed to go public.

Light Reading has been running stories about theoretical Calix IPOs since the dawn of time (or maybe 2004). There was the time the hot access equipment startup sought an executive "to prepare the company for Sarbannes/Oxley compliance." (See Calix Picking Public Beancounters.) There was the time when sources swore that IPO paperwork was all but complete. (See Calix IPO Talk Resurfaces.) There was the CFO hiring early last year, surely a sign that something was imminent. (It wasn't.) (See Calix IPO Still on Hold.)

And don't mention all those appearances on our Top Private Companies lists. (See Light Reading's Top Ten Private Companies.)

Over the years, CEO Carl Russo has repeatedly told Light Reading that he relishes the life of a privately held company. (See Full Transcript of LRTV’s Interview With Carl Russo, CEO, Calix .) But he usually added that an IPO, someday, wouldn't be out of the question.

Of course, the fun of an IPO filing is that you get to see how much money Calix has been making -- or not. Here are the numbers from its S-1 filing today.

Table 1: Calix's Financials
2006 2007 2008
Revenues ($M) 203.6 193.8 250.5
Net income (loss) ($M) (19.5) (24.9) (12.9)
Income (loss) per share ($4.17) ($4.64) ($2.85)
Source: Calix.




For the nine months ended Sept. 26, 2009, Calix is reporting revenues of $144.6 million and net losses of $28.3 million, or $4.69 per share.

Today's filing is a preliminary one, providing no specifics on the total number of shares to be offered. For purposes of calculating the registration fee, Calix wrote $100 million as a maximum price for the offering.

The underwriters are Goldman Sachs & Co. , Morgan Stanley , Jefferies & Co. Inc. , and UBS Investment Bank .

— Craig Matsumoto, West Coast Editor, Light Reading

bollocks187 12/5/2012 | 3:52:07 PM
re: Calix Files for an IPO

Tellabs-AFC has a legacy base that will be replaced with Adtran, Occam, Pannaway, Calix etc. in the future this will primarily due to new fiber builds and potentially upgrades to VDSL technology. However the 20% you speak of is imo spread over a very large number of small line count IOC's and they are less motivated to upgrade with out govt. money. The major and progressive IOC accounts have already switched out AFC-Tellabs in favor of the new players. 


With Calix and others sitting at margins below 30% then these accounts will be even lower margins going forward for anyone to win the remaining 20%. 


The net for Calix and others is they have no where to go with 3GDLC technology in NA they lack an international market presence so they are a function of the IOC growth which is flat, they lack product innovation hence the massive brain drain to Cyan and others.


Not sure what Adtran is going to do.....they are cheap tho while they don't have the product line items shown by Calix, I am sure they can compete effectively.

paolo.franzoi 12/5/2012 | 3:52:07 PM
re: Calix Files for an IPO

 


OSX,


2 Things:


1 - Grants.  As I said, the grants are new money for the Tier 3 Telcos NOT the loans.


2 - Non-Telcos.  Many of the companies applying are not wireline (note some of Dan Jones' stories about Wireless submissions).  Those companies won't buy from Calix, Adtran, or Occam.


Again, the Tier 3 Telcos are not upping their budgets by BILLIONS of dollars to buy more access gear.  They are trying to get more equipment bought for the SAME budget dollars.  RUS Loans do not do that.  They already use this vehicle.  Only the grants do that.


seven


 

OSXman 12/5/2012 | 3:52:08 PM
re: Calix Files for an IPO

Tellabs may be "out of the market" but my data shows them to have a 20% share based on legacy run rate stuff.  That 20% is up for grabs in my opinion. 


 


As for Adtran, they don't even make a separate line item in the numbers that I have seen, but I am sure that will change shortly.

bollocks187 12/5/2012 | 3:52:09 PM
re: Calix Files for an IPO

While most industries  charge for service & support etc. Calix has made "no significant revenue" with service contracts according to the S1 filings.


This implies that they provide "service and support" for FREE to customers.


A novel approach I wonder if they also provide "free lifetime product warranty as well" and how that is accounted for in the financial fillings - normally you need to have some cash reserves set aside for this type of deal. 


 

bollocks187 12/5/2012 | 3:52:10 PM
re: Calix Files for an IPO

Tellabs has been out of the market for some time - thanks in part to the idiots in Chicago and Texas.


Adtran(2), Occam(3) and Pannaway(4), Zhone(5) as well as Calix(1) of course have filled that gap nicely.  Max IOC market is $200M so it is pretty much saturated 


What is interesting in the S1 is  they don't mention that several of the Calix products are "rebranded" Chinese products.


 


 

OSXman 12/5/2012 | 3:52:10 PM
re: Calix Files for an IPO

The most interesting market share aspect is the big hole being left by Tellabs. 

bollocks187 12/5/2012 | 3:52:10 PM
re: Calix Files for an IPO I like the S1 reference to the competition: Other established suppliers with which we compete include ADTRAN, Inc., LM Ericsson Telephone Company, Motorola, Inc. and Tellabs, Inc. There are also a number of smaller companies with which we compete in various geographic or vertical markets, including Enablence Technologies Inc., Occam Networks, Inc. and Zhone Technologies, Inc. While most of these smaller competitors lack broad national scale and product portfolios, they can offer strong competition on a deal-by-deal basis.
bollocks187 12/5/2012 | 3:52:10 PM
re: Calix Files for an IPO

Here is the web site link to the S1 filing for Calix:


 


http://www.secinfo.com/d14D5a.s79yj.htm#1stPage


 

OSXman 12/5/2012 | 3:52:10 PM
re: Calix Files for an IPO

Yes, in my mind for each of OCNW and Calix it is about execution more than competition.  They should both do well. 


Calix's financials, while not pretty, are not as ugly as they seem.  They aren't that far from breakeven and a big chunk of the loss is non-cash stock option expense.

Toad680 12/5/2012 | 3:52:11 PM
re: Calix Files for an IPO

Thanks for explaining that earlier OSX.  It surely has sparked some interesting debate.  But I have to believe that with $28bn in applications, which are combinations of grants and loans and equity, that the RUS is going to be able to leverage the loan loss reserve.

So let’s say that the stimulus is $13 billion.  Not all of that will get spent on access gear.  Let’s assume that 15% does, which is probably low, but there will be wireless, etc.   That means that about $2 billion of funding will go toward access gear.

There has been a pretty clear trend in the applications toward tier 3 SPs and the bulk of that money is heading here.   Depending on whose estimate you look at for tier 3 access gear, the annual figure is ~$400-500 million.

That means a potential stimulus of 4-5x the size of the market being applied over the next 2-3 years.  I have Calix at 38% and Occam at 21% share of that market currently.  Both are going to do very well if these numbers are accurate and I don’t imagine there is going to be any near-term margin pressure.

Calix may finally actually make it public…

OSXman 12/5/2012 | 3:52:12 PM
re: Calix Files for an IPO

Both Seven and Niles make legitimate points, but I think Niles is looking at it correctly. 


The RUS has been undersubscribed in the past relative to its lending capacity, but how do you explain $28 billion of grant/loan applications? 


I think anyone who is applying based only on a 100% grant doesn't have a very good shot at financing.  The key is that these are grant/loan combos, which weren't previously available. 


Let's take a look at the West Kentucky Rural Telephone application.  They are an Occam customer.  They have a $123mm project.  They are kicking in $10mm of equity, asking for $28mm of grants and $85mm of loans.  They would not have done this in the absence of the grant component.

bollocks187 12/5/2012 | 3:52:12 PM
re: Calix Files for an IPO

Calix only options is to go and get an IPO as I am sure with them losing money on a regular basis the investors need an out or payback.


The challenge for Calix is can they be profitable !


Surely with this amount of revenue they can achieve this simply goal. Perhaps it is a simple case of "buying' the market up the VC money they have raised $500M I'm guessing please clarify if you know how much they have raised.


Now with market conditions and VC dry funds they are 'forced' to go to an IPO - not be design but out of survival.


 


 


 

Niles_3.0 12/5/2012 | 3:52:13 PM
re: Calix Files for an IPO Problem is, the only way to get a grant award from RUS is to submit an app with a loan component high enough to get approved. Apps requesting 100% grants are most likely dead in the water. The result should be a total spend larger than the original $7.2B headline number.

With 25-30% of their customer base submitting apps in round one alone, I think Occam will be a beneficiary of the stimulus.
paolo.franzoi 12/5/2012 | 3:52:14 PM
re: Calix Files for an IPO

Niles,


You are making the same mistake that OSX is.  You are both assuming that the rural telcos are not spending due to lack of RUS loan availability.  This is simply NOT true.  These loans are not subscribed 100% for available funds.  Why?  The budgets of the these telcos ALREADY take the loans into account.  These budgets are not going to change.  That is why the GRANT money is the only real increase as this is an INCREASE to the budget dollars.  The loan money already exists.


If there are 1% loans already why not put $100T dollars on the table for loans?  That will make the market almost infinite right?  The reason is that the market for these loans is basically fixed.


seven

paolo.franzoi 12/5/2012 | 3:52:14 PM
re: Calix Files for an IPO

OSX,


Here is what you are missing on the RUS money.  The RUS COULD have loaned more last year but nobody applied for the funds as their budgets were tapped out.  So, the kind of carriers that bought money with RUS funds are already at 100% of spend with loans.  So allocated them $1T in loans and the gain is still 0.


The people that might go for loans from this money are not buying from Calix, Adtran or Occam because they are not Tier 3 telcos.  The tier 3s are already spending 100% of their budgets.  The Tier 2s and Tier 1s have already rejected these funds.


seven


 

Toad680 12/5/2012 | 3:52:14 PM
re: Calix Files for an IPO

OSXman, that is an interesting point you are making.  Would you mind explaining in english what a loan loss reserve means and how that can go from 500 million to 7 billion in funding?  Thanks.

Niles_3.0 12/5/2012 | 3:52:14 PM
re: Calix Files for an IPO According to Adelstein the historic default rate on RUS loans is very low, less than 1%. The subsidy rate is also very low as well, only about 7%. So, to loan $1mm to help fund a rural telco network project it really only costs the government about $72K.

OSXman is correct in that a $500mm reserve results in $7B or so in loans. This stimulus spend is actually going to be bigger than most people think.
OSXman 12/5/2012 | 3:52:14 PM
re: Calix Files for an IPO

Basically, the RUS is acting as a bank, allowing telcos to borrow at the treasury rate.  The only cost to the RUS is when carriers borrow and then subsequently default.  The RUS obviously doesn't know who is going to default, but hey have probabilistic experience based on the past and they can lend on this basis. 


 


Adelstein has basically said they will lever up about 14 to 1, which turns $500mm of loan loss reserve into $7 billion of actual loans.

danp5648 12/5/2012 | 3:52:15 PM
re: Calix Files for an IPO

"Many CSPs significantly decreased their capital spending in order to conserve cash and significantly reduced their orders for our access systems and software. our visibility into our projected revenue and cash flows declined and our expectations of growth decreased significantly As a result, the fair market value of our common stock decreased significantly between October 22, 2008 and January 27, 2009 orders for our access systems and software declined during the first and second quarters of 2009, and our revenue in the first and second quarters of 2009 declined over the corresponding periods in 2008 As a result, the fair market value of our common stock decreased between January 27, 2009 and July 14, 2009. On July 14, 2009, our board of directors determined the fair market value of our common stock was $3.49.  October 2009 CSPs’ capital spending generally began to increase. Our prospects and our expectations of growth improved and our third quarter revenue was flat from the corresponding period in 2008 (the same as Enablence) .



 





paolo.franzoi 12/5/2012 | 3:52:16 PM
re: Calix Files for an IPO

OSX,


The RUS already loaned money for Broadband Infrastructure - so the gain from the RUS loans = 0.  They loaned over $1B last year.


The gains are the grants + the NTIA money.


seven


 


 

OSXman 12/5/2012 | 3:52:16 PM
re: Calix Files for an IPO

Seven,


You are not correct.  RUS was allocated $2.5 billion capital of which $2b is grant and $500m is loans.  This is incremental.  Suggest you read some of Adelstein's testimony.  Lots on the web but let me know if you want a link.

OSXman 12/5/2012 | 3:52:16 PM
re: Calix Files for an IPO

The stimulus package is widely quoted at $7.2 billion.  The RUS has been allocated $2.5 billion of which $2 billion will be for grants and $500mm will be used as the basis for a loan loss reserve that can be levered into $7 bllion of loans.  That gets you to $9 billion or so from the RUS, before any equity component. 


The NTIA is $3.75 billion for infrastructure, to which you must add a 20% equity component which gets you a little shy of $5 blllion, and hence my $13-14 billion estimate. 


It is surprising to me how many people do not realize to what extent the RUS will be leveraging its capital. 


We'll see soon enough where the $$$ go.

paolo.franzoi 12/5/2012 | 3:52:17 PM
re: Calix Files for an IPO

 


OSX,


The Stimulus package is $7B not $13 - $14B and probably only about 30% will go to access equipment at best (probably only 15%).  Their will be money spent on "mid-mile" projects, wireless, networks for schools and libraries, for engineering and installation, etc.


Occam's issue is that very little of that is going to go to DSL.  Their GPON offering is not as good as Calix's and thus will not get very much out of this.  Calix should get more.


seven

paolo.franzoi 12/5/2012 | 3:52:18 PM
re: Calix Files for an IPO

 


OSX,


One other thing, the GM issue is huge in access.  People used to joke about AFC which ran in the mid-40s.  But Litespan (when it was public) was in the high-20s and low-30s.  Now Calix was never optimized for the small carriers and probably has more like Litespan style GMs.  They have yet to cost reduce their way out of it and maybe never can.


When AFC was running at its best financials it was running about 10% of revenue in R&D and about 27% of revenue in OPEX (use say 97 as an example).  Calix is likely well above that and probably needs to reduce Opex even more.


seven


 

paolo.franzoi 12/5/2012 | 3:52:18 PM
re: Calix Files for an IPO

OSX,


As one with odd views, I think the big winner of the stimulus is going to be....Cisco.  I think when all is said and done a lot of the money is going to get spent by governments and that is Cisco's home turf.


seven


 

OSXman 12/5/2012 | 3:52:18 PM
re: Calix Files for an IPO

Seven,



I count $13-14 billion in stimulus with about 20-30% going toward equipment.  That's about $3-4 billion over a 3-4 year period.  If Cisco got 100% of that business, which of course they won't, it will raise their revenues by about 2-3% in any given year.  They will be a big winner, but it isn't going to change the way anyone views them.  They are strong and profitable and they will continue to be strong and profitable. 


For Occam, if they were to retain their market share, they will get a huge bonanza that will potentially double revenues.  They will go from break even to strongly profitable.


 


 

OSXman 12/5/2012 | 3:52:19 PM
re: Calix Files for an IPO

So, who's going to be the biggest beneficiary of the stimulus?  I keep hearing Calix and Occam.  Adtran will get their share, and Zhone and a few others will pick up some scraps, but in the end the big winners will be Calix and Occam.  Anyone agree or disagree? 

Pete Baldwin 12/5/2012 | 3:52:20 PM
re: Calix Files for an IPO

Man, who had November 2009 in the office pool?  If so, nice call.


Actually, the real IPO probably won't go til 2010, so don't pay up yet. And of course, they could just scrap the whole thing.

OSXman 12/5/2012 | 3:52:20 PM
re: Calix Files for an IPO

Wow!  Christmas comes early.  I mean haven't we all been wanting to see what Calix's top and bottom lines were? 


A couple of observations:


1.)  This will be a high profile IPO.  Underwriters are Goldman Sachs, Morgan Stanley, UBS and Jefferies. 


2.)  Calix top line about what I expected and had been told, although I am a little surprised at the weakness in 2009.  I probably shouldn't be surprised, but I just never thought about it. 


3.)  Bottom line considerably worse than I thought.  These guys are bleeding like a pig.  Their expense structure seems out of whack and they don't seem to have been appropriately disciplined.  Looks like their breakeven is about $280mm. 


4.)  I hear the targeted valuation is $500-600mm.  That's a pretty generous valuation for a company that is losing money like this. 


 


The obvious conclusion is that they are using the broadband stimulus as a hook by which to go public.  I think it's a smart thing to do.  I think they are going to be a major beneficiary of the stimulus program and that in 2010 and 2011 their income statement is going to look a whole lot better and I think they'll be making a lot of money.  That being said, in order to really create some value, they should be more fiscally disciplined.  They shouldn't need $280mm of revenue to just break even. 


 


Looks like they are hoping to value the firm at 2x revenues or even more.  My feeling is the biggest beneficary of this IPO will be Occam shareholders.  I believe that Occam should have an enterprise value about 55-60% of Calix's.  They are about 40-45% of their size by revenue, but they have a superior gross margin, are sitting on the cusp of breakeven, and they have been gaining relative share, so I feel they should have some sort of valuation premium.  If Calix can successfully be brought public at a $500mm enterprise value, then Occam shares are worth $15-20, which is only about 4x or 5x where they are today.

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