George Notter from Jefferies. Thank you very much. I follow the communications infrastructure sector here at Jefferies on the research side. We're really pleased to have the Calix folks with us here today. To my right, we have Michael Weening, the CEO, and we've got Jim Fanucchi, he runs IR as well. Thank you guys very much for attending. We appreciate it. Thanks for having us. Given that we're at a software conference, maybe the way to start, I think, is to have you, maybe do kind of a quick description of the software side of Calix. I realize, it's probably a lot to tackle here, but, you know, for people that maybe aren't as close to the company, can you just give us a quick sense of what you guys are doing in software? Sure. The best way to think about it is from a compare point of view, is to look at, say, cyber providers, right? What they do is they build an appliance, and then they build an operating system on top of it. They connect that up into a cloud, and then they look for incremental monetization through the incremental services that they provide, and that's literally what we've done. Over the last 12 years, we've invested $1.2 billion and a lot of hard work to transition the organization from a hardware-based company, and I think the best way to think about our old hardware legacy model was that we were a... It was like a calculator. You have a chipset, you hard integrate everything in it, and it's really difficult to change, to moving into this more of a software model. That's the company that we've become. I think the success is evident as, you know, this year is gonna be a very interesting year for us. We will cross organically $1 billion worth of revenue, that's what we put out in the marketplace, which is what 1 in 400 companies do. We're really proud because, as Carl, our Founder and CEO, would say, the $350 million-$400 million hardware company that we were, we basically shut that down and took it down to $0 of revenue while building up this massive software and next generation company, which is a great thing. Got it. Obviously, there is a hardware component here. Obviously. Of course. ... an enabler. Oh, right. for what you guys do. An appliance. -software side. Yep. Agreed. Absolutely. Okay, super. I'm gonna jump ahead to my most interesting question, here, and- We'll be to the judge of that, right? Right, group? All right. I was prepping for this meeting, and I was looking at your 10-K filing, and I noticed that you disclosed the number of employees. You have, I think, 1,426 employees as of year-end, if memory serves. You grew the company and revenues about 28% last year. You grew employees 50% last year. Right. Right, which is, which is a real statement. I guess the question for you here is: What's driving that? Where are you investing? Help us think about that 50% employee growth. We're very transparent about the operating model that we have, which is, you know, around the 41% of revenue is what we invest back into the business, and one of the challenges that we had is that we weren't investing to the right level to the fulsomely to actually get there. From a growth point of view, it was actually about getting the right employees, hiring them at a very fast pace, bringing them in to allow us to get to that model, and at this point, we're now at that model. Where are we hiring? If you go back in the 2021, 2020, there was a big jump on the sales and marketing side to get that organization investing to the proper level. Through the pandemic, what we really focused on was making sure that R&D, who was chronically behind on hiring, was investing and hiring at a fast pace. You saw a big step up in R&D, and honestly, as we go through this year and actually the end of the year, it's been really great. The R&D team is finally opening or closing job recs in 90 days, versus it was taking us, honest to goodness, 9, 10 months to get an employee. If you remember, there were a lot of companies who were over-hiring and didn't manage their businesses well, they laid them all off, and that represents a good opportunity for us. The last part is that, look, we're a company, and as one of our new board members stated, "We're the most interesting cloud company that most people don't know exists," right? In Silicon Valley. We're proud to say that we were just awarded, about a month ago, the best place to work in Silicon Valley. Which again, who? Calix. Like, best place to work from a cloud and software point of view. Then we were just for the third year in a row achieved the best place to work with regards to everything that's going on in Glassdoor and those areas. So our brand is really starting to resonate with employees, who honestly are looking for a purpose-driven job. You know, the purpose for us is everything around our culture. Our culture is a 4.9 out of 5 on Glassdoor. The reason why is bluntly because of our customers. Our customers are the lifeblood of North America. They're the ones who are making significant investments into rural markets to transform those communities, and it's our technology to help them move at a really fast pace to make that happen. As one customer said, "The investments that we're making in our market will have a multi-generational impact on the 13th poorest region in the United States," and our team members really find that. You know, they're very proud of that they get to contribute to that. Yeah, it's a very altruistic and good cause, I agree. You guys have been spinning off press releases about all the awards you've won for, I feel like, years and years, so this is not entirely new, but, Well. Kudos to you guys. ... they have to understand what we do, right? Hey, you know, you come out of university, you're gonna go for Google, Facebook, all those kind of folks, and then you find out that a company like Calix, actually, we're one of the innovators on doing virtual internships. You know, we started that in 2018. We're an all-virtual company, we will remain an all-virtual company. And I think we've demonstrated that while everyone else is forcing people back in the office, all-virtual can work, as evidenced by a 4.9 out of 5 and, you know, 3 years of 25% growth. I think that's a pretty good indicator it works. You know, you have to educate those people, so all those press releases on that is actually about recruitment. The other side of it is that they start to see what our customers are doing and how they transform their communities, and they get really excited to be part of the team, which we're really proud of. That is very cool. I agree. Maybe we can go back to the 1,400 plus employees. I think what you said earlier is there was some catch up, you know, relative to the under hiring in prior years. I get that. It also seems like, you know, there ought to be an effect where, you know, as these people come up to speed inside the company, become more productive, there ought to be some real benefits in terms of top line and margin and, you know, more broadly, your penetration of the end markets, right? I mean, are those the metrics you're using to kind of, you know, assess the efficacy of all these hires, or how do you think about it? Absolutely. Again, if we were a spurt company and saying, "Hey, we're going to have a spurt, you know, over a two-year period," then obviously we'd be curtailing those kind of things. We're not. We actually look at this as a long-term investment, and as we look at the business of where we are today in 2023, we still feel like we're just starting. The value of making that investment is that we are going to be a long-term, significant growth company who completely transformed this industry. When they come in, it's all around how do we make them productive? Internally, we have various rigorous processes with regards to how we look at people's contribution. In the first 90 days, they get a very, you know, rigorous assessment as to whether or not they're contributing. Are they the right cultural fit? All those different things. We look at everybody, honestly, myself, as the CEO, every 6 months, I go through every single organization, top to bottom, with regards to low performers, high performers, middle performers. That's something that we've been doing since I got here. It's something I introduced, which is an end-to-end scrub, because, again, we want everybody to be contributing. Got it. Okay, that's really interesting. Where are the incremental hires going? I guess if I step back, you know, you guys have talked about the land and expand model. You guys have talked about, gosh, I think almost 1,000 customers now deploy the operating systems... 988, I think was the last number, right? 988. Yeah, thank you. Obviously, you've got the clouds, which have been penetrated, I think, into 800 odd customers, managed services, 300 odd customers, if I remember correctly. It's a penetration game, I think. Is that where all these hires are going, just trying to drive? Across the board. ... success Yeah. Well. Tell us about it. If you go back to where we were when I started seven years ago, we were a $400 million business. We're now over $1 billion and a software business, and you know that actually to go into a customer and move from we are someone who sells you a box, and then we hope you're successful. The extent of my interactions with customers, if I was selling to them when I was a sales rep selling a box, it would be: Do you need more? Do you need more, right? This new model, where we're actively involved in looking at how they run their call center, how they run their operations, how do they drive marketing, including market segmentation, how do they use social media to drive upsell, cross-sell, reduce churn? These are all things that we are actively involved with them every single day. That's, for example, our customer success organization. We built that from scratch. It didn't exist five years ago. We expanded that out because as people, if you look at it from a model point of view, you know, the Salesforce of the world, which is where I came from, that was all around you don't just give technology to customers and hope they're successful. You actually have to have deep analytics and understanding of what they're doing. Then have your customer success and sales organization right beside them the whole time, pushing on them, helping them succeed, because the way we get paid is when they add a subscriber, we get a percentage of that monetization. We're right beside them, and that creates a great win-win. Look, we've built a platform, and the expanding opportunity is the monetization in adjacent markets, right? A good example of that would be small business, where there's this huge underserved market, which our customers have been pushing us towards. "I never want to buy these legacy products anymore. I never want to buy enterprise and try and sell it to the baker. I'd really like you to take your software platform, extend it into a small business, and then start putting on significant incremental value, such as cybersecurity capabilities, VPN, on and on and on." That's what we've done. In fact, we released our small business product a couple weeks ago, and it represents a massive growth opportunity. Where are we investing? That's where the R&D organization is hiring people from, you know, Ford and AMD and all these other places to join our organization and architect out those solutions. Got it. That's really cool. Maybe this is a related question, but where do you think the low-hanging fruit is for you, right? You know, just kind of listening to you kind of walk through the opportunity, it just seems like there are so many directions you can go, so many points of emphasis. You are resource-limited, despite all the hires, certainly. Oh, for sure. Where's the low-hanging fruit as you think about the next 12 months? You know, what are your KPIs that you want to see, you know, happen within the company in terms of adoption or penetration, or what products do you want to get behind? How do you think about that? I'm not sure that there is low-hanging fruit, because when you're engaging with a broadband provider who has a legacy mindset and you're trying to convert them, actually, you're teaching them how to change their business, right? For some of them, you're teaching based upon best practices and all those other things. There are about 25% of them who actively engage and are pushing us because they have really innovative ideas, and then we do it. If I think about the KPIs and the success as an investor, what you should be looking for, where we see the opportunity is you're going to see margin growth through ongoing software ads and how we help them succeed. 100% of our focus is actually sitting down with customers and saying: How are you going to grow your business? Let me give you a simple example. We had a customer who built to a town, they built out their Calix, you know, fiber-based network, which is very operationally lean to 20,000 homes in the town. They grew to about 12,000 of the 20,000 against a legacy competitor. We're doing quite well, they, you know, in the end of last year, they started to speak to us and say, "Hey, we're worried that our net new acquisition is slowing down." Again, you know, we got our customer success organization engaged, what we started to do was, "Okay, how are you doing market segmentation? How are you using Marketing Cloud to understand if there's upsell, cross-sell? What's your go-to-market strategy with regards to these ancillary services? We talked to them about launching Bark, which is around cyberbullying and partnering with the local school and the PTA, and getting that brand benefit to actually doing that partnership, right? We looked at how their website was actually. What were their pricing schemes, and how are they going to market? Did they put cybersecurity as something that was really important? Because most of the people don't understand how to do that in the home, right? Through that process, we completely changed their go-to-market strategy, and we're proud to say that after we did that workshop with them, brought all those best practices together, they went from 12,000 subscribers to 15,000 subscribers. That, you know, if I think of that, I don't think of that as low-hanging fruit, but I think of that as the repeatable playbooks that we can engage with our customers on every single day and have a tangible impact on their success. If they're successful, it just flows into us, and to you as an investor. It flows towards you because of the fact that, you know, we monetize a portion of that success. Got it. you know, you're the CEO of the company, you're sitting on top of this machine, you're driving customer engagement, and what KPIs do you have internally that you look at that maybe you don't expose to the street, but, that are your dashboard? Is there something that you're focused on? Well, I would look at a broadband provider because of the fact that we understand what they do, and I'm looking at how fast are they adding new subscribers, and then what are their success rate with the incremental monetization. We go, so broadband provider by broadband provider, and the idea being that as a coach and a partner, we can help them identify opportunities. The great thing is that when you have 988 customers, we have this broad subset of or broad view of all these customers that allows us to understand, "Hey, this one's succeeding and this one's not. What are you doing? And then how do we transpose wins and best practices over to them?" Which is what the customer success team does. Those are the KPIs myself and the entire team look at every day. Again, what should we actually do? How do we do self-installations faster? How do we actually help? A great example would be, we look at the KPIs by service provider on when they install a new subscriber, what% of those subscribers also turn up the mobile application with their brand on it at the exact same time? That's a leading indicator on the ability to sell incremental services, but also, more, as importantly, to keep costs down because of the fact that you don't want to be rolling a truck when they have a problem. If the consumer is using the mobile app, there's direct correlations to self, you know, helping themselves without calling in. That's a great example where we have a huge focus on making sure they're doing a great job there. I was kind of thinking you would say something like, aggregate number of subs, you know, tied to the Calix infrastructure, or number of subs tied to, number of service offerings adopted, whether it's cloud. Well, that's- Support Cloud or Marketing Cloud, Well, I look at all of that, so. Depth of that. We look subscriber in, right? When we were a network company, we network out, we actually look subscriber in. The most important metric for us is how many subscribers are our customers adding. What that means is, if they're adding a subscriber, they're putting one of our appliances in the home, and that correlates to everything else going downstream, right? That's where it starts. How many subscribers are you adding, and then how are you monetizing it? If we do that at the customer level, then Calix just succeeds. Now, with regards to metrics, as an investor, what am I focused on? You see that in our investor letter, right? How many people have adopted our platform, one or either side of it. How many people are adopting one or more of our clouds, and then what are the managed services? On the managed services, that's a nascent part of the business. We're just starting there, but the big focus is get a ton of appliances into the home and business so that we can really monetize it. Basically, you're sending them out semi-naked to some extent, right? Then you get that $1-$10, as we've talked about, of incremental monetization from the services on top of it. I'm really looking at how big is that footprint that is waiting to be monetized. Your Chairman, Carl Russo, at one point told me that those partnerships, the managed services partnerships, were one of the biggest opportunities the company had. Agreed. Why do you think that? How do you think about that as you kind of noodle on that thought? Again, when we were a legacy company, our repeat monetization was about $1 per subscriber per year. If there's $1-$10 of incremental revenue for Calix per month at 90 points of margin, then it's pretty clear where the pot of gold is, right? The key thing that we have to do is get a big monetizable base out there that allows us to bring in all these incremental opportunities. Got it. Okay. Hey, I also wanted to kind of shift a bit here. I guess we should talk a bit about the hardware business. You know, one of the concerns I think investors have had, you know, is the environment. Obviously, interest rates are higher. There are some operators that are funded by debt. You know, those concerns are around. Are you seeing anything changing at all in terms of the macro environment, customers' appetites to invest, the CapEx picture? Yes, we're actually seeing legacy companies slow down because the legacy playbook is, I have a lot of public debt or, you know, I'm a public company. I have significant amount of debt. My margins, because I don't have a very interesting go-to-market, which is diverse and high margin, I'm seeing my margins decrease as I get into a commodity war or price war with somebody else. What that means is, if my, if my cost of debt goes up 3%, I... You know, this playbook's been played how many times? They cut headcount, they cut CapEx. If their margins are going down, they cut more to make up for the loss in profit to make their investors happy, which represents for our customers, who are generally. There are next generation broadband companies, in effect, attacking these legacy companies, it creates more opportunities. They're going faster. They're seeing it look, if they have a 55%, 60%, 65% margin business, they don't care about a increase in debt of 2% or 3%, because there's so much margin to be made and applied to their business. They're saying, "Look at that legacy company, pick out what markets they're in, and target them aggressively." In fact, they sat with a customer three weeks ago, and what he had done was laid out 10 towns around his build. This was a cooperative. Cooperatives are different because they have so much cash flow that they don't necessarily go for debt. One customer used cash flow to pay for a $300 million network build, right? Off cash flow. That's a pretty strong balance sheet, right? They looked at all around them, and they saw a bunch of these legacy providers in these different towns, and we together, we stacked ranked who should they attack first. CapEx becomes part of it, because if they're cutting back CapEx, let's go take them out. It's really interesting. I feel like your stock, other equipment vendor stocks, not that Calix is an equipment vendor exclusively, certainly, but, a lot of stocks have been under pressure, right? There's this kind of bigger view that there's all these negative data points out there. Like, you see, guys like Lumen, Frontier, Consolidated, AT&T Fiber, you've seen real slowdowns in some of these fiber builds, right? You know, I think many investors kind of get this picture of the end market is slowing down, there's something wrong, you're seeing interest rates go up. They're kind of correlating things. Like, you're actually on the other side of that. I mean, you would, at some level, maybe root for some of these smaller operators who are taking share or moving earlier to get into the markets. We don't root for them. Yeah. We actually make it possible so that a small service provider who has 5,000 subscribers can go into a town up against a big legacy company and literally rip them apart, limb from limb. Because the technology we provide, these guys are. You know, think of a big Gordian knot of technology. They have no ability. They're like a big ship. If they have to turn, it takes them three years to turn, and by the time they turn, they've already missed. If our small service providers are very agile, well-funded, and they have the best technology, because our technology is 50 times better than any legacy provider, which allows them to bring, you know, 10 managed services up against somebody who has a pipe as a go-to-market, that represents a huge opportunity for them to go way faster. We're enabling them to attack. You saw this in the Dycom note that came out on, I think it was on Monday, where they said... Because they were exclusively talking about the big providers, right? What did they say? "These regional providers and those folks, these fiber overbuilders, we see significant strength from them through the year." You know, what does Dycom do? Well, they're capacity-based. Capacity is freeing up from the legacy guys and transitioning to the people who are growing, and those people who are growing are powered by Calix. You're obviously way over indexed to that customer set, which is great. For sure. Again, to clarify, I just want to make sure everybody understands, when we call a small service provider, is from 0 to 250,000 subscribers. 250,000 subscribers at $100 a month, is $300 million dollar business. One of those small service providers I was with the other day, they just raised $520 million. Smart private investors, family investment funds, those kind of folks, are investing in broadband providers in the rural markets because they recognize that I go, if I'm an investor, I go and I invest in a broadband provider, I actually segment off a nice section of the market, and I get a 30-year cash flow with a great return, because the legacy guys aren't going to compete with them. It's an incredible investment. We, you know, everyone's asking about broadband funding and things like that. What's been charging all of our customers is, as I said, cash flow is their cooperative, private investment that's coming in like crazy. On top of that, over the next 10 years, there's $45 billion of funding that's going to come on, which I liken to pouring gasoline on a bonfire. There's this supercharging effect happening across America to inside our customers, and again, they're not small. That's a $300 million business. That's not a small company. Yeah, really interesting. The broadband mapping exercise was wrapped up. I heard. ... the other day. Yeah. Any thoughts about the findings, Chairman Rosenworcel's letter? It's, you know, I think it's great what's happening. It's a democratic process that has lots of contention in it, as it should, right? We don't live in a dictatorship. Fantastic. That means that everyone gets a voice, they fight it out, and in the end, that democratic process will result in the, hopefully, the best people getting in. There's a lot of lobbying going on, there's a lot of small folks who are being empowered to actually fight some of the big legacy lobbying. I think that what will come out, hopefully, is the right thing for the consumer and the rural market, the money will land in the right place. Yeah, I was interested to see that there were 8.3 million homes that just don't have broadband at all. I know, it's amazing, right? U.S. It's just, still a stunning statistic. Well, that's increased because you think about work from home. A lot of people left big cities... Yeah ... went out into these rural areas. That is also, by the way, that's why private investment is going into those areas, because all of a sudden you go buy a farm or you move into a small town, and you're like, Where's my broadband? The great thing is you're actually bringing your $150,000 job to a small town, which adds a tax base, makes it a more vibrant community. You know, 42% of our customers are cooperatives, and that's why they're investing, regardless of the government, because they know that if they actually bring these people into the town, put these types of infrastructures in place, more people will come, and they'll have a more vibrant community. Hey, as we wrap up here, I wanted to ask also, I'm shifting gears a bit, I realize that, but, you guys announced a $100 million share repurchase program the other day. There was a press release. You reiterated the Q2 guidance. Talk about the thought process behind the bigger repurchase program, and how do you think about capital allocation in the context of that and everything else you're doing? It's not a bigger, it's actually the same one. What we did was, when we first put it out, we put $100 million that could be available for share purchase. It actually, we just took the end date off of it and made it an ongoing program. That was the change. How we think about the share repurchase is that we have three buckets of capital. One is around operating capital, the second one is strategic capital for key acquisitions and those types of elements, and then the third is we have this flexibility, and we've created a very programmatic approach, based upon the amount of capital that we have and the stock at certain prices, which we'll buy it back. There's no, "Is the stock here? Is the stock there?" It's actually very programmatic, and it'll just kick in automatically. That's how we think about capital. Got it. Super, that's great. Well, Michael, thank you very much. We appreciate it. Thank you for coming out to the conference. Thanks, everyone. Have a great afternoon. Thanks, George.