Welcome, everybody. We're delighted to have Calix here today. For those who don't know me, I'm Meta Marshall. I head up the networking space here at Morgan Stanley. We're delighted to have Calix with us here today. We have Cory Sindelar and Carl Russo, CFO and Chairman. Bonus points that I get all the last names right, which I'm lacking in bonus points right now. But for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. So, Calix, it's been a minute since we've had you guys here. A lot has changed since pre-COVID when we had actively covered you. Can you take just a few minutes to talk about the evolution of the business and just how we should think about Calix today versus a couple of years ago? When we had actively covered us? Yes. You mean before you dumped me? Yeah. By the way. It wasn't personal. You're not the first woman that dumped me. All kidding aside. Look, as you know the story way back when, and we were working hard on building this appliance-based platform cloud and managed services company, it's taken a lot of time and a lot of effort. I think as a CEO, if you're not an optimist, you probably shouldn't be a CEO. Let's just say it took longer than I thought. What's changed? We are now a full-blown appliance-based, so our hardware is literally an appliance, and I'll talk about it in a moment. And then our platform's cloud and managed services sit on top of that appliance, more like a security type of company. And we literally rendered the whole subscriber-facing network into that appliance. In Q4, we actually basically shuttered all the old business. It It had wound down to single-digit%. And so now, as we go forward, you have to think of us basically as sort of an early-stage appliance company where software is the minority, the appliances are the majority. But it's a vastly simplified business from what a traditional communications system company would be. So I'll give you just one example. As a systems company, the software and the hardware is tied together. And so anytime you change one or the other, you're sort of changing both. And you end up with a lot of SKUs because of that. Calix, when you were covering us, we had 3,500 SKUs. Today, we have less than 200. And they actually cover more use cases and do so at higher performance than anything that we could have done before because of the platforms we've built. That's how much the business has changed. Where do you see it in the financials? Straight away, you see it in the financials, not only in growth, but the place where you see it the most is in the gross margin expansion. So maybe that's a good place to start. Yeah. No, that's excellent. As we read their investor letter, we noted the term BSP. Can you just kind of remind investors of what this is? So if you go back, let's go back 20 years. You had horizontal service providers. You had a cable provider. You had a wireless provider. You had a wire line provider. Each of those providers provided a service. It was tied to their own physical layer, so coax or twisted pair or wireless. It had its own protocols. It had its own legislative regimes. They were literally three different providers. A BSP, as we think of it, is a broadband service provider. What that means is they are building all services on top of a consolidated network. And the second part of that is because they are providing all services, because we now all have these things called iPhones, which sort of evolved and started to hit the market in 2006, 2007. So now I can get all services on a single device. I can be provided those services by my service provider. And I'm connecting to content and applications in the cloud. So you can look at that model, and you can say, well, OK, it's clear that the networks should consolidate. Now, what's my value? Am I a dumb pipe provider forever selling you a pipe for a price? Or can I do something different? And here's the second part of a BSP. If you realize where they are, they have first-party data. And they have it before anybody else does. The issue is, how do you mine it? How do you use it? How do you protect privacy? All of those things we've instantiated in our platform and present them back to the service provider to now become a full-fledged, subscriber-facing, market-driven, broadband service provider. Our customers that are winning aren't selling pipes for prices. They're selling services to subscribers. They even use different terminology. For those that have followed the service provider industry, what's the phrase they always use? Homes passed. That's a construction term. Our customers use subscribers served. That's how different it is. So does that help? Yeah. No, I mean, that helps. Just how do you think of the marketplace between—I mean, obviously, your customers are more focused on BSPs. But how do you think of the marketplace? How many are on this journey of BSPs versus still kind of this dumb pipe? Great question. Increasing number. But like all disruptions, they happen over the time frame of the market. So we went from a flip phone to an iPhone over the course of 2 years because the product lifecycle is short. In our industry, it's an infrastructure space. It's multiple decades. So where are we in that curve? For those of you who have read Geoffrey Moore's book on Crossing the Chasm, you're basically right now at the chasm. We have built an enormous number of early adopters that are clearly winning. And we are now having conversations with the medium and large service providers who are actually noticing that they're losing subscribers to these folks and want to understand what's going on. So I would say we're on this side of the chasm about to jump across. But that's literally what's going on. To that end, it's why you are graced with my presence and not Michael Weening, because Michael Weening, our CEO, is actually with customers today because it's very busy. Lots of conversations going on now. Does that give you a sense for it? If you haven't read Geoffrey Moore's book, I will call him and get you an autographed copy. All right. Well, I'm just delighted that we could have you here today and that your CEO is overseas. So all right. You've in the past highlighted kind of deliberate sequential growth as the strategy, which typically means high recurring revenue-based and visibility into customer spending. Just what has changed on that account? And what will be the right recurring revenue mix to think about? Yeah, it's a great question. Again, that early-stage appliance model. So the answer is, there's no right answer to this because the mix is changing. And it's changing if you can imagine if you'll allow me, let's go back and pretend we're all private equity investors. And Cory showed up with an appliance model company idea. And we decided to fund him. People used to do that back in the day. Yeah, I know. So we funded him. When you look at his P&L, what will happen? Well, the first thing will happen in the first quarter of revenue, you'll see appliance revenue, hardware, and no software revenue. In the next quarter, you'll see some software revenue from what was shipped and deployed and more appliance revenue. And so you know what happens over time is, as the company's growing, the mix is shifting. So we have a not insignificant minority of our business now is platform cloud and managed services. But the majority is still hardware in the form of the appliance. And every quarter, it just continues to shift. So we are still as much progress as we've made. And to your point, we're approaching 55% gross margins. That doesn't look like your traditional communications company, especially post-COVID, where they went into the 30s and low 40s. So you can see what's happening. But I'll tell you, we're just getting started with what we can do with our customers. So does that help? Yeah. No, I mean, that helps in just kind of talking about the install base and as we get larger attach rates. Another topic that's kind of talked about consistently around this space is government funding. Talked about this a lot many years ago when I covered you guys. It's not the first time that there's been investment in broadband, as I just mentioned. BEAD, we can talk about RDOF in the past or CAF funds or broadband stimulus. Just what's kind of the same and different as we've kind of moved through these generations of spend? It's nice to know that you remember Broadband Stimulus, CAF I, CAF II, RDOF. So it seems every number of years, the government says, we should invest in broadband. What's different is, if you go back and look at the programs, they learned from this one. Then they may be over-modulated and went over here and went too far this way. And so they keep learning from the programs. So what's happened with BEAD? It is more structured. It is more complex for a service provider to achieve. It is also much larger. So when you look at the size of the BEAD funds and the matching funds, it's a $60 billion-ish, if I can use the term "ish" after billions, type of funding program. It will take longer than we expect, just like every other one. It will take longer to finish than we expect, just like every other one. And it will actually end up having a bigger effect than the dollars that are laid on the table because it always draws additional dollars in the form of investors or other things going on. So each of those programs actually had their own investment and then additional investments that were drawn in because of it. So that's what's going on that's the same and different. Just to put a little more framing on it, it is a 2025 start. So you have one state, Louisiana, right? I think one state that's been through the process. You got another ten, 15 states that are, I think, eight or nine of the 10 steps through. This is to address BEAD because, by the way, sorry, I'm jumping ahead. BEAD is not being distributed federally. It's funds that are being distributed to the states. Then the states are deploying them. So each state has to go through an application process. Yeah. I mean, maybe this is a little bit of history. In the past, I think some of these programs we've seen as substitutional. It has largely maybe not been as big as investors thought because we were and maybe each subsequent addition of these has been less substitutional and more additive as we've gone along. Just kind of how do you think about how much of this is substitutional versus how much of that is additive? And I know there's no specific number. Just how do you think about that? I think I'm going to modify your word because substitutional is directionally correct. But if you actually go back to when you and I used to speak all the time, what we said was, it's not necessarily going to add dollars over some period of time as much as it'll probably pull forward some investments. And then there may, in fact, be a lessening investment out into the future. I think you still see some of that going on. The other thing, chatting earlier this morning, there's a governor on this. So it's not like we can hand $60 billion of capital to a set of service providers, and they're going to deploy it in 2025. There's not enough labor. And so you have choke points with planning. You have choke points with engineering. You have choke points with deployment. So I think with this one, to your point, it's going to roll out over time. I believe this one still, broadly wrought, is a pull forward, but a pull forward probably from 15 years out because these are starting to go after very rural areas. OK. I mean, it's a pull forward. But it's also a pull-in of different vendors who are coming into this space versus kind of where we've been before. So just how are you seeing kind of the provider environment or role of new entrants as some of these projects? So at the service provider side, up until so let's go back. For quite a few years, we saw a tremendous amount of Greenfield not Greenfield builds, Greenfield service providers, so literally startups. And so we saw a lot of startups coming in had nothing to do with BEAD. And that was being drawn by underserved communities from an internet standpoint. And they're very prone to starting with a BSP model from scratch because they're clearly going to provide the connectivity for that accordingly. We have seen that slow down. And over the last 6 quarters, probably, we've seen the number of new entrants from a service provider standpoint slow down as the investors looked at capital costs, risks, et cetera, and decided, you know what? Meta's got a service provider she started 3 years ago. Cory's got one he's trying to start now. This is a better risk-adjusted return. We're going to put more money into Meta's startup. So the Greenfields that were growing actually accrued more capital. So we're for sure seeing that. So the ones that got out of the gate and are demonstrating success basically can raise capital from any number of sources, from equity to debt to underwritten debt because of green bonds or whatever. Not a problem. OK. OK. So the space is diversifying. It's just maybe we're now kind of harvesting some of the green shoots from a couple of years ago. For sure. And it's, look, if you want to go back to infrastructure disruptions, my belief is you can go back to wireless. But really, the better analog is cable. Now, you're not old enough to remember this. I am. When the cable provider space started, and you had municipalities that would give licenses, and the Sindelar family decided, we'll take care of our town. And we decided our town. And the Roberts family started a town. And the Cox family had a town. And the Cox family bought a town next to them from a family. And I decided, hey, I'm getting older. I want to get out. I'll sell it to so-and-so. And I think what you're going to see is this continued sort of accretion, slow consolidation from winners buying up other properties, much like the cable space. It will take years. But I think you're going to see, in addition to investments going into builds, they will also look to acquire smaller properties that have already built in an architecture that they want. So let me be clear. Gone are the days where one of those folks is going to go buy a copper network or a coax network. And the reason is, it's cheaper just to overbuild them. So those days are gone. They will accrete other fiber providers. So does that make sense? Yeah, no longer trying to stick and glue together these networks. It's actually, if you look at the hairball that you can acquire now from a legacy provider, it's cheaper just to literally overbuild it. By the way, if you want an analog for that, look at the whole DOCSIS 3.0, 3.1, 4.0 versus fiber. Virtually all the small cable MSOs are just going straight to fiber because it just costs way too much to try and upgrade it. Done. OK. You mentioned a pause in your recent call as service providers take time to review in terms of BEAD. What are you hearing from customers just in terms of the BEAD process? And how are you preparing in advance for the funds to be released? And just how has that changed over the past couple of quarters? Well, on the last call, we talked about a lot of indecision due to BEAD. So one of the things that's hard to understand about service providers is how they actually function. So most service providers of some size have a planning organization. They plan out the new builds. They actually go out and stake out the routes. And they're sitting there on Google Maps. And they have all sorts of tools. And they're basically planning all the builds that are going off. When something like BEAD comes up, and you have this complicated application you have to do, it has to be planned. Guess what the planners are doing? They're actually filling out an application. They're not necessarily working on new builds. And so you see this whole indecision pause that was highlighted by Cory and Michael on last quarter's call. And I'll let Cory speak to the view going forward. But there's clearly somebody wrote a report saying, "Mind the Gap 2024. I think that was me. Might have been you. Yeah, yeah. It was a voluminous 155-page novel, which I read on a plane one day. Look, in many ways, your report, you're calling it correctly. This is going to be a gap year. That's the bad news. You want the good news? Any time you have gap years, winners separate from losers. There's a reason I'm sitting here. Michael's with customers. It's an enormous opportunity to go help customers understand what we're doing and expand our footprint. So that's what's going on. That said, this next year has some interesting challenges to it. So maybe, Cory, you want to add some color as to how you think about it? And so I think you're the one on the hook. Thank you. On the last call, we talked about kind of a macro general trend around indecision related to government stimulus. We also then specified a few significant customers that are hitting the brakes on their CapEx in Q1. The follow-on question to that is, we provided that we thought the following quarters would be sequentially up from Q1, that Q1 would be the bottom for the year. A lot of questions from investors on, what gives you that confidence? And so as we look at a number of variables, both positive and negative, we think there are more positives out there than negatives. If you take the indecision as a framework, and you have customers across the spectrum, some of them are going to decide that they're not going to go for BEAD. And they're going to then get back to their 2024 planning and building. Some portion of that will actually come into 2024. If you're looking at these specific customers, they're going to resolve their CapEx capital equation and decide what the new normal is in terms of how they move forward. That presents itself. Michael's on the road looking at footprint expansion opportunities. That presents another lever to the positive. We're also at that seasonal period where half the United States has frozen ground. And you're not actually deploying anything until May when the ground thaws. All of those factors kind of set up for us to think that Q1 should be the low point. We can progress through there. If I may ask, may I? You go for it. For me, you're always looking for signals, tea leaves, et cetera. The best publicly available data that I think all of us can look at to understand trends is to understand how networks are built and what follows what planners, engineering, building. Well, what gets built first? Fiber, Dycom. And in their call just this recent quarter, Steve Nielsen, who's their CEO, basically called the turn, his word, and sort of laid out not only Q1 but Q2 and said, look, here's what we see is coming. So that's another data point to understand. You don't put systems in prior to fiber. But you don't let the fiber sit there without putting systems on the end of it once you put it in. So it's coming. Yeah. We just had Corning an hour ago. They were much more optimistic about kind of fiber returning. Who was here from Corning? Ed, the CFO. So echoes your comments just an hour ago in this room. All right. So we've somewhat alluded to this. But just can you help us understand kind of how the appliance-based platform, cloud, and managed services business works? And just who is that ideal customer? I think you said more of a forward-thinking service provider but just kind of expanding. Well, since you got funding as a Greenfield, you would be an ideal customer. Why? Because literally, what you're looking for is a shake-and-bake solution to becoming a BSP outside of the routes, the rights-of-way, the permits, et cetera, the buildings, the trucks, everything you would need to be that broadband service provider facing the subscriber we provide. What might be a company that has all of those things but isn't a broadband service provider? An electric co-op. And if you're following the space, it's amazing. But electric co-ops, which are very poorly understood, serve many tens of millions of customers. And the reason those electric co-ops exist is they couldn't get power. Guess what they're underserved with today? And they literally have buildings, trucks, rights-of-way, subscribers, underserved, et cetera. So they are a space that has been and will remain a space that is just purpose-built for the entire opportunity. However, I want to also address the point that we were talking about earlier. Where are we in this process? So in Crossing the Chasm, part of that starts at 1 level, at the network level. So a customer that we've had for now 6 years in deployments is Verizon. Verizon is deploying just our products for the network, so the appliance and the software, not the clouds, not the managed services. They're not trying to be a BSP. All they were looking at doing was building the highest capacity. By the way, it's a 4 by 10 gig PON. So it's a 40 gig PON. There was nothing like it in the world at scale to deliver the lowest cost per bit per mile. That network is built on E9s and AXOS. There is no second vendor because to do what they're trying to do, no one can do it because you can't consolidate the functions in the way they wanted to consolidate them. So they literally have and I won't bore you with the details. They have one workflow, a single unified workflow that drives their entire network. And you just rip costs out of operating the network. People often get focused on what's the cost of this box or the cost of that box. And they forget that that network has to operate for 7-10 years. And you can save yourself 5% over here and spend that 5% every month thereafter because of the way the network functions. So, not only you got a startup, there's all sorts of conversations to have with all sorts of service providers, which is why on this side of the chasm about to go over here, it's go time. Yeah. Cisco was here yesterday. They were kind of talking about how people underestimate that the cost of the network, the cost of a network outage versus the cost of the equipment, is a very small fraction of the cost of an outage. I think you're, in some ways, making that point here. But just in terms of kind of contextualizing how you see the competitive landscape today, given that we are kind of crossing this chasm, there's a lot of maybe more distressed kind of equipment providers than the past. Just how are you guys seeing the space and your positioning with this? Very simple. There's a disruption. You're either on one side of it or the other. Calix 1.0 is on the backside of that wave. What we've built today is on that wave. And we're very focused on paddling as fast as we can to stay on the wave. But in the subscriber-facing network, there's no one doing what we're doing. If you think about the disruption that we talked about earlier, those three horizontal being replaced by a device that can get all services, a consolidated network talking to the cloud, well, then there's device structures, by the way, the flip phone versus the iPhone. There's the network and what we're doing. Who's riding the wave of disruption in the cloud? Arista. And so as I look at the disruption, those are analogous models. Now, what are the differences? I'll give you two big differences. And also, Jayshree, used to report to me for a small period of time when I was trying to leave Cisco. And she's done a phenomenal job there. They have a space. Think about that infrastructure. As hard as it is to build a data center, a whole lot harder to go build subscriber-facing network out into the hinterlands. And so their ability to ramp is much faster than ours. The difference? How many web-scale players are there versus how many service providers? So you have big customer concentration. They've done a remarkable job of managing it. We have diversity, stochastic, interpolatable business, et cetera. It's just two different businesses. But that's what's going on. And to your point, a legacy service provider is selling pipes at a commodity price. It continues to go down. They immediately put pressure on their vendors to drive what? Purchasing agents come out and try and drive more first cost out. It puts the legacy vendors under tremendous price pressure. So you see consolidative acquisitions, which in your history have worked how many times in our business? Not many, not many. How about none? But we keep doing them without understanding why they don't work because they're complex systems. And the customers won't let you shed their installed base. So the inevitable revenue synergies turn out to be less than what you think. The OpEx synergies never turn out because the customer won't let you out of the R&D streams behind it. So that's what you see. And it's not whether somebody's doing a good job or a bad job. If you miss a disruption, it's brutal. And I've had the privilege of being on both sides of them. OK. So you just mentioned kind of lack of customer concentration. It seems to have helped you do a better job of kind of navigating the inventory challenges that some of the others have discussed. Just how would you outline kind of where the differences are relative to inventory headwinds faced by kind of other equipment providers? And this is as simple as customer concentration is a little less. Well, let me let Cory tell you what he has available to him as he looks at running a capital-efficient business. And I won't say a word. So throughout the pandemic, supply chain-induced challenges, Calix was advantaged because of the data that we have from our customers, not only the data from the firsthand relationship that we have with the customers but all the information that's up in the cloud. When the system gets turned on, it connects to the cloud. We know what the actual demand curve looks like. We know what the deployment curve looked like. And so as we've worked through the supply chains, we put customers on allocation. So we did a very good job managing it through the supply chain. And we're doing it now that it unravels. So we know what our customers have in inventory. And what you're seeing today is a collapse of lead times. So today, if you had a lead time of, let's say, 36 weeks, and now it's going to 18 weeks, that feels like less inventory in the channel. They just don't have to buy as much. But they never got way out of whack to begin with. And so you're seeing a little bit of that in our business as lead times normalize. But we never let our customers get out of whack in the first place on accumulating too much inventory. Let me give you the analogy. If you were in a two-tier distribution model many years ago, there was sell-in and sell-through. There was a revolution back in 1995 when I was at Xircom where we got to sell-through. We have sell-through data millisecond by millisecond. So if you know what you shipped them and you have the sell-through, then you know what's in inventory. The inventory happens to be your customer's inventory. By the way, you know their deployment rates. You can help them try and raise their deployment rates. You have all this information. What do you hear on conference calls from other legacy vendors? There's inventory out there. We don't know where it is. Or we don't know how much it is. Or we were surprised by this. None of that exists here. It does exist in our Calix 1.0 SKUs. But it's a single-digit%. OK. Got it. OK. You've mentioned the managed services business, BARC, RLO, and others. They've each been growing each quarter. Can you just talk about how you monetize these partnerships and just the impact on margins as that business grows? Sure. When we talk about managed services, there's two flavors. There's the ones that we develop. There's the ones that we partner with third parties. For the ones that we develop, the margin profile is 9,500, around that range. So as we continue to see the attach rate there, the margins continue to go up. It relates to the partner folks. We orchestrated and built it all together, built all the connectivity so that our BSPs can go out and sell these services and turn them up in weeks as opposed to months or years. In that case, we treat it as an agent fee. So we're going to take that portion of the transaction. And so the margin's at 100 points. And so that's how those two things are structured now. They affect our P&L. Got it. And you don't break out specific software revenue. But just how can investors get comfort with just the level of recurring revenue? Algebra. It's very simple. Most of our—well, look. Our long-term investors that understand the long-term value proposition that we can build, they have all built their own models. It's a two-variable model. What do they think the margins are in the appliance side? What do they think the margins are on the software side? You go from there. So everybody can sort of suss that out a little bit. But what we're not going to do is foot the model because in a disruption, typically, your competition comes from Sand Hill Road. As soon as you foot the model, then Meta can go, "Hey, I can go down Sand Hill Road and say, I can do one better than that or whatever." So look. In the short term, it makes it a little more frustrating for public investors. Maybe we trade at a discount. I will tell you, in my experience, that discount is less than what you will trade at if you invoke a competitor. It's been a great entrepreneurial session for me. I got multiple businesses going at the end of this. All right. I'm giving you all the opportunities to start businesses. I know. know. Exactly. So let's talk about 2025 and beyond. I believe you mentioned returning to kind of a revenue growth rate in the 10%-15% range. What are some of the underlying drivers that will get you back to this level of growth and the growth margin improvement as we see that trajectory? Simply stated in my mind, it's the continuation of what we've already been doing and seeing. Again, last quarter is the robust growth in the platform-managed, cloud-managed services, which is very much an expand model. And the footprint expansion that we have the opportunity right now as we cross the chasm and BEAD and all the other funding. I mean, you know what's coming in 2025. The focus for us is making sure that we maximize our opportunity between here, frankly, and the first quarter of 2025. Cory, feel free to. Or Or you can just say he's right. He's right. I think we should end on that note. Any questions from the audience before I continue on? OK. Perfect. That's totally fine. Can we just take a moment to discuss balance sheet, just cash generation and uses of funds maybe as closing items? Sure. We are a cash-generative business. We've been free cash flow positive now going on, I think, three years. We anticipate that to continue. So the way we're looking at using our cash we're very much, if you look at our balance sheet metrics, DSO of like 40 days, no debt. And so we'll continue to look at an efficient capital allocation strategy. You can see that we recently added another $100 million to our corporate buyback. It's a program that we have instituted. It'll be the way we distribute cash back to shareholders. It's here for the long term. And we'll continue to be efficient buyers of Calix stock over time. Cory Sindelar, it's a delight to have you here today. Thank you. Thanks for inviting me. Thank you, Meta. Thanks, folks.