Calix: Absence Of Bad News Doesn't Guarantee Good News - Calix, Inc. (NYSE:CALX)

Calix set a 2Q19 earnings release date (July 23 2019) two weeks earlier than prior years. 2Q17 and 2Q18 earnings were into the first week of August.

The early date and lack of a negative pre-announcement cannot, however, be read as a trustworthy signal that Calix has overcome its 1H production problems.

For example Calix did not pre-announce ahead of its two worst recent calls - 4Q18 and 2Q17 results that drove the stock down -40% and -37% respectively.

News from customers Verizon, CityFiber, and CenturyLink has been encouraging, however. An absence of reported delays does suggest Calix may have resolved its 1H19 production problems.

If production is back on track, pent-up demand from delayed 1H19 orders should bolster an already-strong 2H19 outlook.  In that case, the July 24 call should be a positive catalyst.

When a company sets a firm earnings date, investors can usually reasonably conclude they will report results broadly in line with market expectations.

Calix (CALX) setting an earnings date two weeks earlier vs prior years would seem to further buttress that positive message. In 2018 and 2017, Calix held their 2Q call in the first week of August. In 2019, they are releasing results on July 23rd after the close, with a call on July 24th before market open.

I would caution against drawing a positive conclusion from Calix's call announcement and timing. In Calix's case, the absence of a pre-announcement has not been a reliable signal.

Calix largest recent negative post-earnings reactions came after quarters the company chose not to pre-announce. Calix's stock went down 40% after their 4Q18 call. CALX went down 37% after their 2Q17 call.

Neither were preceded by a pre-announcement. As evidenced by the massively negative post-call price reactions, market expectations differed substantially from actual results and guidance. Investors can usually count on a company to re-set such a wide divergence from market expectations ahead of a call.

Given Calix's track record of surprise disappointments, however, I would caution against drawing such a conclusion for this particular company.

Having said that, an absence of bad news from Calix's major customers does suggest Calix is working through its 1H19 production problems (see context on these customers and the production problems in my previous Seeking Alpha Calix note). Looking at what I believe to be their three largest 2019 customers...

Verizon's (VZ) 5G build, for which Calix is the sole supplier of fiber access gear, lit up two new cities at the end of 2Q19. Revenues from the June 27 Denver launch will probably come into Calix's 2Q19 results. Revenues from the July 1 Providence launch probably bolster the 3Q19 guidance. Per Verizon's release, the 5G build is accelerating and on-track. All of which suggests Calix isn't a supply constraint.

CityFibre (Private), the nationwide UK fiber builder where Calix is also the sole supplier of fiber access gear, also appears to be on track. Per their press release page, building seem to be moving apace. A search of UK industry news for delayed builds or other problems at CityFibre likewise draws a null result. The lack of bad news is probably good news.

CenturyLink (CTL) also seems to be coming back to life. Installation service provider Dycom (NYSE:DY) saw spending by CTL go up 17.8% YoY in 1Q19 per their transcript. There is no guarantee any of that spending is for Calix's gear, but it does suggest a reasonably healthy level of spending overall.

Also encouraging are signs that CenturyLink is not certain to spin off its consumer unit - implying they will actually follow through on the promise to continue investing in it. That consumer business is the primary driver of Calix's business with the company. See the article leader below.

This could just be one (fairly influential) analyst's opinion, but I think it also reflects behind-the-scenes messaging on the part of CenturyLink's management (expressed to and via this analyst). It certainly mirrors the multiple caveats about realizable synergies given by CenturyLink's CEO and CFO when discussing the spin off on their most recent earnings call. The sum of those caveats suggest CenturyLink is/was not convinced a spin-off would deliver much return. They seemed to be formally exploring a spin partly to mollify frustrated shareholders. All of which suggests they will continue to invest at a reasonable level until they do make a decision.

The two-week advance in the call date does suggest Calix has improved its internal financial reporting systems and procedures.

As a general rule, the faster a company releases results, the more streamlined and reliable their financial reporting systems are. More to the point, a 5 week delay between quarter close and earnings release suggests a lot of manual reconciliation that should not inspire confidence.

Calix hired a new CFO, Cory Sindelar, in October 2017. Coming up on his two-year work anniversary, we may be seeing the benefits of a refreshed financial reporting system. Seen in this light, I do read the early call date as an encouraging and much-needed sign of a more tightly run ship (at least in the Finance function). Lets hope that sets an example for improved execution across the rest of the organization.

I summarize the investment case below - see my prior note for more detail.

Calix consensus estimates reflect rising revenues with increasing gross margins on fairly flat operating expenses. Yet the stock is only trading at 0.74x 2020 EV/Sales and a 13.5x 2020 PE according to the Reuters Eikon consensus estimates. At the 2020 forward S&P 500 multiple of 17.5, Calix is a $9 stock on full year 2020 EPS and a $16 stock on consensus 2H2020 EPS.

The discounted valuation tells us investors have low confidence in Calix's ability to hit those consensus forecasts. Calix does have a track record of weak execution. Calix also has a thin cash cushion ($14m net cash in 1Q19 plus their $30m revolving credit facility). If Calix mis-executes or hits a negative macro shock, the company could face existential risk. All the above explains the discounted valuation.

If Calix does deliver over the rest of 2019, however, the balance of risks should shift to the more positive outlook embedded in those consensus numbers. Reported numbers and guidance should start to flip that equation with results from the July 23rd, 2019 earnings call.

Given the customer news above, I see good odds for a positive shift in perception/valuation. Admittedly, execution is not Calix's strong suit. But the most recent execution problems stem mostly from their contract manufacturer (per the 1Q19 transcript here). Contract manufacturers are generally competent, so a quick resolution is a safer bet than it may appear to be.

I consider this a high risk, binary bet. I do own the stock. I have no current plans to trade it. I am looking to their July 23rd results to start to resolve this binary one way or the other. Your personal situation and objectives must be the starting point for any investment decision you might make.

Disclosure: I am/we are long CALX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

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