Calix Eyes A Broader Footprint In Broadband Access

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After struggling to find its financial footing during the latter half of 2011 and all of 2012, broadband communications companyCalix ( CALX ) has delivered robust growth this year amid an improvement in its end markets .

The company looks to continue the trend when it reports third-quarter results after the close on Tuesday.

Calix provides broadband communications access systems and software for fiber- and copper-based network architectures. The gear lets communications service providers, or CSPs, connect to residential and business subscribers in North America.

The company gets more than 80% of its revenue from the U.S. Its top customer, CenturyLink, accounted for about one-fifth of Calix's revenue last year.

Niche Player

Calix is one of the leaders in a fairly small and narrow niche that has been estimated at around $7 billion globally, according to data cited by Stephens Inc.

Other players in the field includeAlcatel-Lucent ( ALU ),Adtran ( ADTN ) andArris ( ARRS ). Of those companies, Calix is the smallest with $330 million in revenue last year. That compares to $18.8 billion forAlcatel-Lucent ( ALU ), the French telecom giant with a much more diverse revenue mix.

Arris, which also makes fiber-optic cables, routers, modems and other gear, had 2012 revenue of $1.35 billion. Adtran had 2012 revenue of $621 million.

In its niche market, however, Calix is a top player.

The company ranks as one of the three largest vendors of fiber access equipment in the world, according to comments made by Geoff Burke, Calix's senior director of corporate marketing, during a presentation last month at the Deutsche Bank dbAccess Technology Conference in Las Vegas.

In addition, Burke said, Calix is the "leader" in North American fiber access revenue as well as broadband access revenue.

"This equipment is specialized," he said. "It puts us in a very unique position in terms of the types of engineering we do and our alignment with our customers, who basically rely on us to ensure that their networks are up and constantly running."

Calix is in a quiet period and wouldn't provide direct comment.

The company's business has been good, at least lately. Calix's earnings during the first two quarters of 2013 more than tripled from the same period the prior year. Sales rose 18% during the first half of the year.

Analysts expect third-quarter profit to come in at 14 cents a share, up from 4 cents a year earlier. Revenue is seen rising 28% to $104.35 million, which would mark the biggest top-line gain in two years.

Calix's recent results represent a big turnaround from the previous year-and-a-half, when it logged six straight quarters of lower earnings and five quarters of flat or lower revenue.

It wasn't alone in seeing its financial returns decline. Adtran also had a period of six straight quarters of lower earnings and four straight quarters of lower or flat revenue.

One problem had to do with the transition from the Universal Service Fund (USF) to the Connect America Fund ( CAF ), both of which were established to help finance more telecom and broadband infrastructure in the U.S.

The USF was created by the Federal Communications Commission in 1997 to help fund programs that give more Americans access to phone service and Internet connections. The FCC got involved because it wasn't economical for private companies to build networks to certain areas, especially remote, rural parts of the country.

Money for the USF comes from fees paid by businesses and consumers on their long-distance bills. But that revenue base has been declining, leading the FCC to establish the CAF to support the expansion of broadband services to areas without broadband access.

During the initial stages of the transition, however, carriers in Tier 2 and Tier 3 markets cut back on their capital spending because of uncertainty over how the programs would proceed.

Those markets have begun to recover this year. Spending by U.S. Tier 2/3 carriers, Calix's core market, "could be in an upswing" amid increased clarity around U.S. government funding of initiatives to extend broadband access to rural communities, Stephens analyst Tim Quillin noted in a report initiating coverage on Calix.

"We believe carriers are getting better clarity on the impact of the transition from the Universal Service Fund to the Connect America Fund, and are now in a better position to plan and execute capital expenditures," Quillin said.

Calix's Burke has a similar view, saying that "we're actually seeing improvements in the overall spending in the Tier 3 markets in North America."

Growth Abroad

Calix should get an additional boost from more overseas business, thanks in part to its purchase last year of Ericsson's fiber access assets. As part of that deal, Calix also became Ericsson's preferred global partner for broadband access under a reseller agreement.

"In 2014, after Calix fully integrates its broad product offering into Ericsson's sales channels, we could start to see meaningful growth of its international business, which was 13% of second-quarter revenue," Quillin noted.

He also points out that Calix's revenue from Tier 2/3 carriers in Canada and the Caribbean continues to grow.

More international business should help Calix overcome challenges in other areas, says Goldman Sachs' Simona Jankowski.

"Longer term, Calix will need a stronger international ramp to offset expected Broadband Stimulus (BBS) revenue declines in 2015," Jankowski wrote in a September report downgrading Calix' stock to sell from neutral.

The downgrade was based on Calix's rapidly rising stock price, which touched a two-year high of 13.98 on Sept. 9 after starting 2013 out at less than 8. Shares currently trade near 12.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ADTN , ALU , ARRS , CAF , CALX

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