Cable Tech

Calix IPO Talk Resurfaces

After years of speculation about its financial plans, broadband access equipment supplier Calix Inc. (NYSE: CALX) could finally file for an IPO in the next few weeks.

Two industry sources, one with ties to Wall Street, say Calix is set to file its S-1 paperwork with the Securities and Exchange Commission (SEC) , within the next few weeks.

This certainly isn't a shock. Calix is venture-backed, successful, and in need of an exit if its investors are ever to see a profit. It's thought to be too expensive a company for any large sized equipment vendor to buy right now. But it does have a healthy, steady business and may be looking to the public markets to add to its arsenal.

Additionally, Calix has been running itself like a public company from the inside for the last few years, so IPO talk of this sort has come and gone before.

One analyst, who asked to not to be named, estimates that a Calix IPO could value the company at $300 million to $500 million, based on the assumption that Calix forecasts 2008 sales at around $100 million.

"Access companies tend to have low valuations," says the analyst, "but since [Calix is] an innovative company and has a pure-play technology, on the high end they could be in the range of two to three times 2008 sales, with the potential for half a billion dollars."

Calix has long been regarded as a potential IPO candidate, and currently holds the No. 2 position on Light Reading's Top Ten Private Companies, our most recent -- and now somewhat dated -- list, which ranks the hottest IPO or acquisition prospects in the telecom industry.

Calix achieved that position by aggressively tuning up its broadband product portfolio in early 2006, adding Ethernet functionality, and improving its passive optical network (PON) story with the acquisition of OSI. (See Calix Goes to the Node and Calix Completes OSI Buy.)

Since then, Calix has announced a number of customer wins and, according to one research firm, was second only to Alcatel-Lucent (NYSE: ALU) in numbers of DSL ports shipped in the fourth quarter of last year. (See Calix Wins Canadian Deals, Calix Wins at Oneida, Calix Wins in Trinidad, Calix Picks Up FDN Deal, and Calix Claims #2.)

That strong position comes from consistent success with Tier 2 and Tier 3 carriers in North America, where it boasts more than 400 service provider customers and claims to serve 12 of the top 20 U.S. incumbent local exchange carriers (ILECs).

However, that market segment has a limited value. According to one analyst, the North American broadband access market opportunity will be about $800 million in 2007, "and the non-RBOC market is about 30 percent of that, or about $250 million," he estimates.

As a result, Calix's growth opportunities are limited unless it can break into the Tier 1 telco market or expand internationally. Calix "may have a good growth forecast for the next year or two, but it needs to break into Verizon Communications Inc. (NYSE: VZ) or AT&T Inc. (NYSE: T) or go overseas," says a terribly publicity-shy Wall Street analyst.

Morgan Keegan analyst Simon Leopold calls this the "AFC playbook." Before being acquired by Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Leopold notes, Advanced Fibre Communications began by selling to small, individual carriers.

"AFC won fiber-to-the-home business with Verizon and realized they bit off more than they could chew," Leopold says. "Doing business with Verizon and AT&T is a big leap" from the Tier 2 or Tier 3 carriers AFC had been dealing with.

Even so, Leopold says going public won't dramatically improve Calix's prospects with Tier 1 carriers. He points out that if a company can demonstrate it can compete in the Tier 1 space, it doesn't matter whether it is public or private.

"I'm not sure if an IPO will help Calix" compete for Tier 1 business, Leopold says, but he offers an alternative reason for an IPO: "My sense is, the main reason for them to go public is if they need equity to make acquisitions."

Calix declined to comment for this story, but Calix's CEO, Carl "Soup's On" Russo, has addressed the topic earlier, on LRTV. (See Full Transcript of LRTV’s Interview With Carl Russo, CEO, Calix .) In a 2005 interview, Russo listed a lot of disadvantages to being a public company, but acknowledged that Calix would be ready to go public when the time is right:

The first is, if you’re public, your numbers are in public, your business model is public. I love quarterly reports because you get a chance to see how your competitors are doing. I’d much prefer them not to see how we’re doing. It is seriously a burden. But, we’re actually very tightly run financially and as you pointed out, I think, on Light Reading, we have a compliance officer here, and so we’re putting ourselves in a position that if we chose to go public to go public. But there’s no reason to go public today.

In a BusinessWeek interview that same year, Russo was a bit more concise: "The only thing that would cause me to go public is if we wanted to go do an acquisition. I don't know why else I'd do it."

— Ryan Lawler, Reporter, Light Reading

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sjd6 12/5/2012 | 3:10:11 PM
re: Calix IPO Talk Resurfaces Do they still have 3 different platforms?
Yeah they need to buy another company and have
4 platforms.
digits 12/5/2012 | 3:10:11 PM
re: Calix IPO Talk Resurfaces So who would you buy if you were Carl Russo and you had a pile of greenbacks from an IPO?

and a different question:

What SHOULD Calix buy if it raises enough cash from an IPO to make a significant acquisition?
OSXman 12/5/2012 | 3:10:10 PM
re: Calix IPO Talk Resurfaces In the past Lightreading has reported that Calix hit $100mm in revenues in 2005.

It's hard to believe that they haven't grown since then, so what are the revenues really?
OSXman 12/5/2012 | 3:10:09 PM
re: Calix IPO Talk Resurfaces BBND has 57mm shares outstanding but also 16mm options outstanding an a weighted average price of $2. At $19 per share, the adjusted market cap is about $1.4 billion. Adjusting for cash and option proceeds yields an enterprise value of about $1.2 billion.

The company is still in its quiet period so the underwriters can't launch coverage. As far as I know, the only estimate out there is from Morgan Keegan which estimates $240mm revenues for 2007 and $319mm revenues for 2008. This translates into an EV/Sales multiple of 5.0x and 3.8x respectively.

mocelet 12/5/2012 | 3:10:09 PM
re: Calix IPO Talk Resurfaces
Their revenue is probably higher than $100mil. My guess is somewhere between 150m and 300m. It's tough to be in access market. They won't get high revenue multiples, probably less than 5. However, it'd be interesting to see whether they could ride on the IPTV trend and get a higher multiple as Bigband has...

paolo.franzoi 12/5/2012 | 3:10:08 PM
re: Calix IPO Talk Resurfaces
My guess would be that Calix has over $250M in annual revenue at this moment. I think it has 4 challenges:

1 - Even though it bought OSI, Calix does not believe in the migration to FTTx. It is challenged to make an effective story that way. Calix does not win as good a percentage of FTTx bids as it does DSL bids.

2 - The FTTx business and Occam (and some smaller vendors) are eating into the available market. It still has competition from Tellabs which still rings up significant sales on its installed base.

3 - The platforms it does have and the way they come about were not originally optimized for the IOCs. Thus, it never has obtained AFC class gross margins, and has the Opex pressures of supporting all these platforms.

4 - Without a significant break into a Tier 1 account, revenues are basically capped. Again using AFC as an example, it did $317M in 97 and about $350M in 04. Not until the break into FiOS did Tellabs report significant growth of the AFC business.

So, what multiple would you put on say a company that has 30% GM, 25% opex and 5% net margin with single digit top line growth? I don't know that those are the numbers, but I bet I am not that far off. Winning Embarq was a big boost to revenues, but not much has happened after that.

mocelet 12/5/2012 | 3:10:07 PM
re: Calix IPO Talk Resurfaces
BBND's 06 revenue was $176.6M, with (25.5M) net income. Currently rev multiple is 6.9x. I don't expect it will go down less than 6x in the next two years though.

For Calix, situation is worse: ALU is 1.8x, NT 1.1x, ZTE 2.6x, Tellabs 1.6x, Ciena 3.9x, Adtran 3.6x, ECI 1.3x. In such market, can Calix get more than 4-5x TEV/revenue multiple even they win a Tier 1?
OSXman 12/5/2012 | 3:10:06 PM
re: Calix IPO Talk Resurfaces I think the two key issues when thinking of P/S multiples is revenue growth and incremental margins. Companies with a large legacy base will be more challenged to grow revenues because to a certain extent new product revenues will cannibalize legacy revenues. Telecom spending as a whole is only growing single digits so unless you're gainiing share it's going to be hard to drive sharp revenue growth. In my mind, that's why something like an Occam deserves a higher multiple and Tellabs, for example, deserves a lower one.
OSXman 12/5/2012 | 3:10:06 PM
re: Calix IPO Talk Resurfaces If Calix's income statement looks anything like you have suggested, it is substantially less attractive than what I would have thought. What one would pay for those types of numbers obviously depends on a number of factors, including whether there is significant top line growth and whether one can improve margins. If this is as good as it gets, then I would say about 1x revenues.

What do you think of Occam? The normalized business model calls for 42% gross margins and 13% or so operating margins. What do you think their chances are at Embarq?
MorningWd 12/5/2012 | 3:10:05 PM
re: Calix IPO Talk Resurfaces I don't see how Calix could be anywhere close to the $250M suggested. They made the big claim of #2 in NA's DSL market with a 125% year-over-year growth rate resulting in ~221K DSL ports shipped in the 4th quarter. I don't know what they shipped for the whole year (2006), but even if you give them 4X 4Q, that would be ~880K. Dividing $250M by that amount would be a per-port price of $284.

I understand that there many other things that factor into gross revenues for a company (OSP cabinets, services, support contracts, software, etc.) and that they sell more than just DSL (POTS, COIN, specials, etc.), but DSL is certainly their most popular "application" and I feel a good bench mark. Probably the biggest impact on revenues would be from an OSP cabinet standpoint, and they likely don't manufacture those themselves anyhow.

I frankly do not see any benefit in Calix going public at all. The only thing that it will do is open their books for everyone to see, and their employees would finally have an escape if they could unload their stock as well. I think that the idea of them raising acquisition capital as suggested in the article is insane.

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