Calix - broadband access with growing market momentum
June 14, 2010		Email this page

Interview with Geoff Burke, Senior Director, Corporate Marketing

Overview

Calix, a public company founded in 1999 and based in Petaluma, California, offers a portfolio of broadband communications access systems and software for copper and fibre infrastructure.

The company provides multi-protocol and Ethernet service access platforms, a range of ONTs and a network management solution designed to enable service providers to address residential and business customers.

Calix markets and sells its products primarily in North America, plus the Caribbean and Latin America, via a direct sales force.

In March 2010, Calix raised over $83 million via an IPO of common stock priced at $13.00 per share.

The IPO

Calix launched as a public company March 24, 2010 and was one of the first technology firms to implement an IPO after the downturn. The company met all of its objectives for the offering and Mr. Burke believes the share price has now stabilised after initial fluctuations.

Calix has been operating for around 10 years and Geoff Burke said the company did not have any great desire to go public, partly due to the cost involved, the stringent reporting requirements and the increased financial transparency to competitors. However, the public listing offered advantages from a strategic perspective, for example if Calix wished in the future to acquire assets or technology.

In this context, in 2006 Calix acquired Optical Solutions, a supplier of GPON access systems, and that transaction highlighted the potential benefits of being public. Mr. Burke noted that as a private company there are likely to be arguments over valuation between the two parties, whereas a public company can point to a chart showing its exact value as defined by the market.

Regarding transparency, Mr. Burke said that on reaching $200 million in annual revenue as a private company, Calix began to publicly disclose some financial milestones, although it did not release details of margins or quarterly revenue data. The company did though issue numbers for port count on a regular basis, which would have provided some basis for estimating its revenue.

From the customers' perspective, the public status is not considered essential in North America as Calix already has major reference customers there, although potential customers may like to be able to look the company up on the NYSE. The status should certainly help as Calix moves into international markets.

Commenting on the fact that the IPO filings revealed that Calix was not profitable despite its substantial North American market share, Mr. Burke said that over the preceding 18 months the company had been profitable on a pro-forma basis numerous times, most recently in Q4 of 2009, and usually had been close to achieving profitability while it continued to increase market share. He emphasised that in Tier 2/3 North America and the Caribbean service provider sector, Calix is the dominant access solutions supplier.

It was noted that as a private company, Calix was focused on building up a successful, sustainable business to satisfy the demands of its backers, with profitability not an immediate priority.

Growing market momentum

The Calix product portfolio enables service providers to either gradually evolve from TDM, ATM and DOCSIS-based networks over copper or coaxial cable to Ethernet over fibre, or to simply transition directly to a fibre access network. With most service providers worldwide now aiming to offer IP services utilising Ethernet technology over fibre or wireless infrastructure, the company believes it is in a strong position.

A number of significant factors have combined to create what Calix regards as an inflection point that will enable it to apply a new degree of aggressiveness in the market and move to a higher level in terms of leveraging its costs.

The first factor is that Calix has reached the point where it has many existing customers that now wish to fill out installed chassis with linecards, which is often a very different proposition in terms of costs and margins from winning a contract and deploying equipment with a new customer.

A second factor is 'tailwinds' deriving from both the company's international expansion - specifically into Latin America, where Calix is beginning to win business - and broadband stimulus funding programs in the U.S. and in countries worldwide.

According to Geoff Burke, currently over 40% of Tier 3 service providers in the U.S. already rely on Calix systems, while around 90% of the non-Verizon optical ports deployed by communications service providers in the country run on Calix equipment.

Moreover, to date U.S. stimulus funding is generally being awarded to established IOCs for fibre-based projects.

Supporting this comment, Mr. Burke noted that of the first eight stimulus-funded projects that publicly announced the selection of access vendors, all have involved Calix,

"When a service provider is awarded $20 or $30 million, and perhaps much more, to build out a broadband network, it looks very carefully at what technology is available. I believe Calix's access portfolio provides an extremely compelling solution for such projects, in particular offering a broader range of products and a more flexible system than rival solutions".

The third factor relates to addressing what is termed 'new species'. Mr. Burke said that Calix is now gaining traction in sectors adjacent to its traditional markets, notably the MSO space where companies are moving to fibre access, especially to serve SMB customers.

In such deployments the operators can utilise products such as Calix' RF over Glass (RFoG) solution to enter the business services space.

Finally, it was noted that over the past year, around 16 million U.S. access lines have basically "fallen into Calix's lap" and are in the process of being transferred to established customers. This total includes the more than 4 million lines Verizon has sold to Frontier and a further 11 million access lines that CenturyLink will gain as a result of its merger with Qwest.

Product differentiation

Calix believes its product offering is highly differentiated from those of its competitors and that the company is amongst the market leaders as regards technology. For example, Calix claims to offer the broadest range of ONT products available from any supplier.

The products incorporate advanced technology such as the facility to remotely activate ONTs and turn up RFoG service, plus standards-based extended reach capability for its GPON solution that enables service delivery over 40 km range. Calix's ONTs are also able to automatically detect GPON and Active Ethernet traffic 'on the fly'.

More specifically, Mr. Burke cited the high density E7 access platform, a modular two-slot, 1RU chassis with a 100 Gbit/s non-blocking backplane, within which each blade can support both GPON and Active Ethernet. This chassis can be stacked to support a single IP address across up to 10 units.

Concerning the possibility that Calix might be driven to sell its products at unrealistic prices due to the competition, Mr. Burke said this was a highly unlikely scenario for a number of reasons.

Firstly, Calix offers a portfolio comprising seven products under its Unified Access infrastructure solution that it believes provides the most flexible access solution available, as well as delivering benefits as regards operational efficiency.

More broadly, Mr. Burke believes the carrier market is now very different from markets of the past due to the environment in which service providers have to operate. Elements that have changed over the past 5-10 years include the shift to IP-based services and the regulatory and competitive environment relating to broadband services.

Carriers now have to react quickly to consumer demand or risk losing subscribers, whereas in the past they could virtually afford to offer whatever services they chose.

In this environment, Calix solutions are designed to support current and future capacity requirements and operate efficiently in the network. Notably, the Calix product range is based on a common Ethernet core, meaning that all systems auto-recognise each other in the network and can often auto-provision according to the customer's requirements, so enabling rapid delivery of new services and reduced opex.

Supporting carrier revenue models

The top question on customers' minds, Mr. Burke said, is the carrier's revenue model and ability to deliver profitable services.

From the Calix perspective, the service provider revenue generating model relies on several elements, one being the implementation of media applications over platforms such as Microsoft Mediaroom.

Where service providers are using, for example, Microsoft's Xbox as the console for media implementations, they can offer a range of IPTV services and features, such as broadcast and on-demand TV and gaming, as well as support over-the-top (OTT) video via Microsoft Marketplace and Netflix. Moreover, the Xbox offers a highly adaptable platform that can support services tailored to individual consumer's needs.

Calix believes service providers can employ this approach to deliver revenue-generating services, and even though some services may be free to the customer, they are also effectively free to deliver for the carrier as they have no significant impact on the network.

In this environment, Calix sees its role as providing the service provider with the bandwidth to support current and future services based on products that are cost-effective to purchase and operate.

Service providers can further increase their value to the end customer by offering 'geek squad' services - for example, setting up a home network.

Mr. Burke explained that Calix enables carriers to monitor behaviour on the network, including within the home, which they can then use to identify abnormal traffic patterns that may indicate the presence of a virus. The service provider could then offer to investigate and resolve the issue for the customer and thereby perhaps also remove phantom traffic from its network.

Ultimately, consumers will change service providers if the broadband service they receive is unacceptable or if they can gain useful features by changing to another provider, and Calix sees this factor driving carrier demand for capacity and features.

Mr. Burke also noted that cable operators are finding it necessary to increase upstream capacity with the growth of interactive services and new customer behaviours, thus creating demand for symmetrical broadband links and as a result new or additional access network equipment.

International expansion

Calix is now ready to expand beyond North America to overseas markets, based in part on its recently acquired public listing. Its products are already compliant with international standards and therefore suitable for deployment in markets worldwide.

Having become market leader in North America, where its systems are now deployed with over 500 service providers, Mr. Burke remarked that Calix - which does not address the market through distributors or resellers - has taken a very disciplined approach to international growth, to date only entering markets where it believes it can establish a dominant position reasonably quickly.

Europe is seen as a developing market for Calix, although one presenting significant differences to North America. In Europe there is a notable focus on open access networks that is not generally found in North America.

Other aspects of the European market are more consolidation in terms of service providers than in the U.S. and typically, a higher population density in the region. This means shorter local loops and as a result copper links can be still be used to deliver broadband, whereas fibre is generally required in North America. However, Mr. Burke stated that Calix sees the European market as being on the cusp of adopting fibre in the access network on a wide scale.

An example of the focused approach to expansion is the company's move into the Caribbean region, where Calix has established a major presence. From this position the obvious next move, and one Calix is now engaged in, is Latin America.

Mr. Burke added that the company has already announced a contract win in Mexico and will be announcing further wins in the region shortly.

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