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Calix, Inc. (NYSE:CALX)

Goldman Sachs Technology and Internet Conference

February 13, 2013 12:40 PM ET

Executives

Geoff Burke – Senior Director of Corporate Marketing

Michael Ashby – Executive Vice President and Chief Financial Officer

Analysts

Simona Jankowski – Goldman Sachs

[No presentation session for this event]

Question-and-Answer Session

Simona Jankowski - Goldman Sachs

Simona Jankowski, the telecom equipment analyst here at Goldman Sachs and it’s my pleasure this morning to welcome Michael Ashby to my right, the CFO of Calix, and also Geoff Burke who is the Senior Director of Corporate Marketing at Calix. So thanks for joining us. Appreciate it.

Michael Ashby

Glad to be here, Simona, very glad.

Geoff Burke

Yes.

Simona Jankowski - Goldman Sachs

I would like to dive straight in and as we look into this year 2013, you guys have commented on that on your earnings call and certainly seem like the tenure of the discussion was quite a bit more positive relative to last year when obviously there were quite a few challenges in the industry broadly as well as some in the markets you serve specifically. So can you just give us first kind of a high level overview into why you feel better about 2013 and what are some of the top couple of drivers that you think that will help you benefit.

Michael Ashby

Sure, indeed. 2012 wasn’t a good year, so make 2013 look much more positive.

Simona Jankowski - Goldman Sachs

Easy comp, sure.

Michael Ashby

But generally speaking, we have a number of different growth engines ahead of us that we have been working on for some time, some of which were delayed and some of which were delayed on our own reasons, for reasons out of our control and those have slowly come together. So we are at a point now where we think things are beginning to align in the right direction and we have the opportunity to grow the business finally in 2013 possibly by the year later than we had originally expected it.

And I think there are that five of them specifically for 2013, the legacy Qwest part of CenturyLink being one of them, the Verizon states of Frontier being another one, the Regional Tier 3 accounts that are beginning to come back and we expect that to continue, and then the growth of our international Tier 2 and Tier 3 infrastructure that we will be putting in place about 18 months now and is beginning to take shape and beginning to ramp up. And then finally, the Ericsson Tier 1 international agreement which is also in place and which we expect slowly to ramp up.

So as we look forward, we are looking fairly optimistic towards 2013 and towards some growth finally this year.

Simona Jankowski - Goldman Sachs

Okay. So may be to take it a little bit more near term, when we look at your guidance for Q1, you basically guided revenues to be up about 16% year-over-year which implied a relatively modest 1% to 2% sequential decline and relative to normal seasonality for you guys when you typically had down 20% in Q1, that’s obviously a lot better. So which of these five factors or what specifically can you point to that is hoping you get better than typical visibility?

Michael Ashby

Sure. Those five factors plus the fact that Q4 wasn’t as strong as traditionally it has been, so that was the decline one wouldn’t expect to be quite as strong. So our seasonality has changed just a little bit, but specifically the legacy Qwest opportunity, we received certification in November for the first suite of products able to get on to the Qwest and Qwest is about two-thirds of the size bigger than CenturyLink itself. So it’s a huge opportunity and we started shipping in December.

So in the first quarter, we will be shipping for the full quarter and what is happening there is that CenturyLink is beginning to look at different projects and look more seriously growing out fiber products, either fiber every deep into the node of fiber-to-the-home and that is why we stand a better chance of competing being a fiber forward company. So that’s probably the biggest single one, and Frontier, again, we will be competing for the full quarter, so we expect to see some good growth in that business.

The regionals have been slowly come back each quarter slightly better than the previous quarter and we think about the middle of this year they will be back to more or less normal, but within the sales of Q1 we are going to see some increase over Q4 while traditionally that would be down, and those are sort of things that can help us get to a decent Q1 result.

Simona Jankowski - Goldman Sachs

Okay. So may be just on the central opportunity with Qwest, can you just parse it out just a little bit; so what specifically is the initial project that you got qualified for that you are shipping into this first quarter? And then you mentioned some additional which I kind of understood to be incremental potential further opportunities on the fiber to the node or fiber to the home side, what will be the timeline for those potentially getting rewarded and deployed.

Michael Ashby

The timelines is a little difficult to say because what Qwest was doing previously was upgrading their network and using ADSL or VDSL2 technology to meet minimum PUC requirements. Now that they have been absorbed by CenturyLink, CenturyLink is trying to upgrade the network in a different way, they go about it project-by-project, they go about it by state-by-state. And they look at specific regions that they want to upgrade, and then look at the best way to do that. So CenturyLink has a very successful video offer they call Prism TV, which is now trying to roll out into the Qwest. So slightly we began see those project come up and in each case now able to compete in those and to say when it becomes more fiber and we stand a better chance to compete it, so Geoff if you want to add…

Geoff Burke

No, I think the other way to think about this two is, historically we have been involved with majority of the deployment, so as Michael pointed out, as those go in to new regions and new areas, it's very natural those actually fall into our camp versus what has historically been doing was keeping up with just basic PC upgrade, I think the other thing just probably to notice as of today we’ve actually now sold into every region that was formally Qwest. So that pump has now primed in the all the areas what we would be looking to compete head-to-head was really now nearly 11 million lines of new business that here to for and not been available to us.

Simona Jankowski - Goldman Sachs

So in the past just you try to help us understand the opportunity for you at Qwest has basically said looking there is an incumbent there, which one of your competitors and there is nothing that we shouldn't be able to get maybe 20% of 30% even more of that business. In terms of what you have the one date how far are longer we in that aspiration?

Michael Ashby

It's difficult to say, because what they are telling to you now is, we will like looking project-by-project, so we continue to compete them in every week, every month on new projects for the big rolled out. So that's another question, I think CenturyLink we can say, we are awarding vendor number two, 20% or 30% of our business that is really being looked at very different thing, looking at as they run our individual projects, and it's the competitive situation in each case. And so there is a chance that we could do very well in most of them.

So could ramp up fairly quickly, the opportunity is clearly that what we required was been able to have the product certified. Most of the products that we require to compete on have been certified, but there are still some have to get certification. We have other products through go through in April and November I think, we believe it's probably 70% of the products that we required today already certified, so the reminder – during the remainder of 2013. So we feel very good about a competitive situation there, I think it difficult to put a number on it, but we're very confident in our ability to succeed in those legacy Qwest territories.

Simona Jankowski - Goldman Sachs

Okay, let me shift gears than a bit to the Tier 2 and Tier 3 segment were there was some overhangs in the course of last year kind of related to the regulatory environment, because Connect America Fund and some of the kind of uncertainty that cost in terms of spending plan. And you indicated that seems to be now getting better although slowly. We've spoke to one of your key competitors in that area yesterday and that was more that – it was still said distressed level perhaps for couple of years. And so not trade that just finance, but I would love to kind of hear more specifically.

Michael Ashby

I'd be happy to talk about that, and I'll ask Geoff to come in, in a second, because he's recently been at the shows and can give you some of the latest information. But, no, we see that -- you know, we had a precipitous drop in Q2 of 2012, about 20% in one quarter, and we said at the time we didn't think it was going to drop any lower, and in fact that proved to be the case. It stabilized. We have seen that business slowly start to come back. We expect that to continue through the middle of next year, of this year 2013, and after that to be back to normal.

The reason for that is that the regulatory environment is becoming clearer and clearer, and we're beginning to see those regional telephone providers begin to invest again. So, Geoff was recently at the NTCA conference in Orlando.

Geoff Burke

Yes, I was, and they actually have just recently changed the name. It's the RTIME show now, and the reason is because the NTCA, which is the association of cooperatives, and OPASTCO which was the association of literally companies or family-owned operators, joined actually at this conference. So, there actually is one lobbying entity for virtually the entire rural telephony market in the US now. And this show has really always been a bit of a benchmark year after year as to what their mentality is, what their agenda is going into the next year, and you know, it was much more positive, there's no question than it was even last year at the same time.

It's for some very clear reasons. One is that whereas last year you still had a lot of lobbying going on, talk about court cases which ultimately did happen, that were in place and how unfair the environment was and how positioning and posturing as to how to change it going forward -- we're actually here at this point. Jessica Rosenworcel, one of the FCC commissioners, actually spoke at the show and laid out the fact that they just recently had proved what they saw to be as the final order for the algorithm, the regression analysis that would drive the rate of return carriers. That's representative of about 2 billion of yearly dollars that flow into that area, and then outlined some of the specifics that they are going to do to address the concerns for that audience.

So that said, most of the folks we spoke with were actually very optimistic that they were addressing some very key aspects that they were – that had hindered their investment to date. Of course, they did maintain the proof was to be in the putting, oddly enough even after they announcement they actually haven’t released the real order yet. We expect it at literally any day now, just hasn’t necessarily been released yet.

But that said the clarity is literally on the horizon. It’s beyond us. It’s right in front of us. And certainly also many of these companies have gotten that level of comfort and have digested what these changes mean to them to the point that they now know that they need to change what their investment strategies may be. And may be, for example that instead of investing in their ILEC, they will invest in adjacent communities to those ILECs. And they’re boasting the business up that way by utilizing that to increase scale.

Others are looking at it in terms of, if indeed we are going to combine either through acquisition or even sell the company outright, we basically need to be in a position of strength. So we need to invest in those networks. So we’ve actually stepped away from the show with a much different opinion that things were actually getting a lot more stable and certainly that we’ve expected investment come back in 2013 versus what we saw in 2012.

Simona Jankowski - Goldman Sachs

Got it. So, just to be clear, it sounds like your relative optimism stems from the clearing up of the regulatory environment, but we're not yet at a point where you're seeing that in terms of the discussions that your sales team or your partners are having order activity that is coming for your actual customers, is that fair, do you expect that to follow?

Geoff Burke

Well we actually saw some in our recent quarter. We actually saw some good returning strength in that area.

Simona Jankowski - Goldman Sachs

Okay.

Michael Ashby

No, we’ve definitely seen increased activity, increased growth in the base.

Simona Jankowski - Goldman Sachs

Okay and that’s encouraging.

Geoff Burke

Consider from an RFP perspective as well, when you talk to consulting engineers, they’re seeing a lot more activity than they actually saw in 2012.

Simona Jankowski - Goldman Sachs

Okay, so that is encouraging. Let me make sure I also understand kind of the relative magnitude of what the connect the Connect America Fund could mean for you versus the BBS level of revenue which it seems like at this point has stabilized in the high-single digits and you kind of see that flattish for the next couple of years.

Geoff Burke

Correct.

Simona Jankowski - Goldman Sachs

On the Connect America Fund, can you just help quantify that for us and also in particular how that starts flowing in, sort of understand phase 1 which was happening last year out of a $300 million – I think it was a $115 million that was expected by the carriers leaving a little over $180 million sort of unclaimed. Does that go away, does that come back in and happens then to the amount this year, if you can just help me understand?

Geoff Burke

Let me address that because I want to make sure that there is some parsing here that needs to take place. They are actually two segments to the Connect America Fund, and just to be clear to everybody in this audience as well, the dollar values never changed. The dollar values basically were $4 billion from 2011 levels going into these changes. And there are $4 billion coming out. What ultimately changed was how they are going to use algorithms to distribute those dollars in the meantime.

So basically what – you have to segment in two activities. One is what we were just talking about, the rate of return carriers. They basically have $2 billion available to them. And how this transition going on from a, really an OpEx subsidy to a CapEx incentive. Those rules, the final orders I mentioned, we expect to come out within days. Okay. And once that is out there, these folks will have really their road map for where these dollars are going to come in for the next five years or so.

There’s a second segment which is that $300 million we were talking about, was a part of and that was the Price-Cap carriers, okay. And the Price-Cap carriers were literally those folks that are going from AT&T, Verizon all the way down to – there are some smaller ones, but basically about half a million lines or more are what those companies are. And those funds will be high cost loops that happen to fall into the footprints of large carriers. They actually had a bit of a shift that happened. When the FCC did their national broadband plan and worked through the math on that, they determine that the vast majority of the areas that were lacking adequate broadband stay into that footprint.

So they actually took an extra $900 million from the traditional USF fund and threw into the Price-Cap category. So now there is about $1.8 billion, okay, that was actually dedicated to those companies. And that was actually taken away at the expense of mobility folks, of mobile carriers.

Now, the $300 million is called Phase I, it was a kick start program to basically get this program going as they work through the rules of the separate algorithm they will be using in those areas. The $300 million that was initially offered as you alluded to not all was taken, only about a $115 million was taken. The rule basically stated that if they didn’t have the rules identified and cleared by the end of 2012, they had to do another $300 million.

So as of this last week, the comment period for how they should change the rules specific to that $300 million actually just closed, okay, so we can look forward probably to the March timeframe where another set of rules will come out and another $300 million will be issued and potentially the left over from the previous $300 million would actually roll into that. So that’s part of the thing that we are actually working through right now.

The next stage of that end then are the basically the sharing of the official rules that we expect just before the summer timeframe for the price cap carriers to get at that $1.8 billion going forward. And that would – so that actually going to mature a little bit later throughout 2013 and we really are expecting that the reverse auctions that are part of that, and will actually take place probably in 2014, there is no impact.

Simona Jankowski - Goldman Sachs

Okay. So that’s a quite a lot…

Geoff Burke

(Inaudible). Yeah, so the best way, the lesson to take away from this is, there's definitely clarity on the immediate horizon in the Rate of Return areas. In the Price Cap areas, clearly, they've known where this is going for a while, but we actually have very clear regulatory rules coming out in the mid-part of the year. That has, since it's a drop in the bucket for those larger carriers, that doesn't really affect them as much, but it does present the opportunity for basically turning that spigot back on as it matures over the course of, over the course of the rest of the year, and you know, it could have a small impact but I wouldn't -- I really haven't seen a lot of changes in that area over the course of the last year.

Simona Jankowski - Goldman Sachs

I have two follow-up just kind of help us put all of this in context, the first one is can you just remind us what’s your exposure would become a percent of revenue perspective to both of those buckets, the rate of return type which are typically more to Tier 3 and then the price cap carriers which I kind of equate more with the Tier 2 perhaps but if that’s not?

And then secondly, how – is it fair to then interpret what you just said in that the clarity that now exist in the rate of return camp is what you think is causing that segment of your customers as far as pending, pretty immediately, so that’s the most positive development. On the second camp which is kind of the cap guys, for them – yeah, it’s very, very small relatively speaking so it’s not really something to get that excited about?

Michael Ashby

Well, I think the exposure is not the right way to think about it, because this is not an additional business or additional revenue for Calix or anybody else. What it is, the real way to think about it I think it’s a means of funding for those customers to be able to carry out the projects. So when these companies want to invest in something, they have different means that they can fund this from obviously their own cash flow or raising money in the markets or different forms of government financing, government loans which are U.S. traditionally won BBS is another one.

And just USF/ICC reform is another one. So it is in total $4 billion a year of funding that has to go towards broadband, so that’s an incentive to build that broadband and it allows them to roll out broadband project. So it’s not really a question of exposure, the issue that we have was simply the rate of return case, the regional case, didn’t know what the exact rules are going to be and how that will affect them. And so they halted investing until they found out what those are going to be and have been trying to get the rules changed in more favorable for them. So it was really that uncertainty over what was happening that could stop them investing.

Simona Jankowski - Goldman Sachs

Yeah, and I think the question was more – what I meant by exposure say, when you take the peak quarter for you as those kind of regional customers who are exposed to this source of funding, what percent of revenue did they comprise and kind of how far did they go down in the soft quarter. Just help us understand when this clears up and normalize as what is that delta…?

Michael Ashby

Sure, the regional accounts generally speaking for us represent between 55% and 60% of our revenue and have done traditionally for a number of years. In Q2 they caught by 20% in one quarter. It is slowly recovering and we expect it to get back to that 55% to 60% of revenue by the middle of this year.

Simona Jankowski - Goldman Sachs

Got it, okay. So that’s very helpful. That could be a fair 10% to 12% delta than to normal.

Michael Ashby

Correct.

Simona Jankowski - Goldman Sachs

Okay. That’s helpful. Let me shift gears and turn a little bit to your international business where you actually had a fairly strong fourth quarter. Even though I understand the Ericsson piece that you talked about came in below expectations, but your organic international business look to be up about 40% sequentially, so it seems like that’s starting to gain traction on its own. Can you just outline a little bit, what is happening there? Where is some of that initial traction coming from? And then I’ll shift gears to Ericsson in a bit.

Michael Ashby

Sure. We have been building the infrastructure in International to go off to Tier 2 and Tier 3 accounts for the last 18 months and is beginning to ramp up. We’re having a number of wins, small wins and – but they are beginning to increase in frequency and size. So it’s starting from the small base and beginning to grow.

We have also had quite a lot of success in Canada and the Caribbean and that continues. And I think we’ve been extremely successful in the Caribbean. And so that’s large part of the growth that we saw in Q4 from this two areas. So it’s an overall growth. We expect it to be somewhat lumpy as we go forward, but over any 12 month period to continue to increase as a present of total revenues.

And for example, we have been – we have people in the number of different parts of the world. We will cover all different parts of the world. We have value-added resale agreements that we’ve signed over the last year with resellers in different countries. That’s beginning to produce the funnel and that funnel is beginning to increase every quarter as we – over the last year and we expect that to continue through 2013. So it’s just becoming a more solid base and its slightly growing from that.

Simona Jankowski - Goldman Sachs

Okay. I think at some point late last year, you talked about having 20 international customers. When I look at the pictures you saw in Q4, was that – how narrow was that? Was that led by a couple of big deployments or was it really fairly widely spread?

Michael Ashby

There were some large deployments, and there was also an increase in smaller range.

Simona Jankowski - Goldman Sachs

Okay. And in the international market, your approach is a bit different than domestic. Domestically you’re pretty much on the wreck.

Michael Ashby

Correct.

Simona Jankowski - Goldman Sachs

Internationally you are going for VARs. How did they impact the margin structure as you blend in more international business and then the other distinction of course is you’ve got competitors like Huawei there that you don’t have as much here? So the do the VARs tend to pressure margins as that percent of the mix increases?

Michael Ashby

We expect to be able to achieve similar to corporate margins in international business over time. There are situations when you are breaking into an area where you are going to discount in order to get certain deals to begin with. So there are individual situations, which might have an impact on margin. But overall, we don’t expect the international business to be any significant pressure on margins.

Simona Jankowski - Goldman Sachs

And is that because your international businesses overweighed to your E-Series products, which higher margins?

Michael Ashby

International business is only E-Series products. Yeah, which is higher margins, so.

Simona Jankowski - Goldman Sachs

Okay.

Simona Jankowski - Goldman Sachs

Okay, so that’s really the offset?

Michael Ashby

That is correct.

Simona Jankowski - Goldman Sachs

And then I wanted to come back to the Ericsson situation, I think it initially thought you might have about $4 million in the fourth quarter ended up being about $1 million. You can quickly touch again on kind of the major delta there not to draw on it, but just to make sure we have a common foundation. And then more importantly, as we look forward and you have talked about $10 million to $15 million run rate target for that business, if you can just give us some idea, so when you think you might get into that ballpark and also how much of that would be your products versus the Ericsson BLM product?

Michael Ashby

Okay, the Ericsson, we’re very excited about the Ericsson deal and about the long-term prospects for that, and we had expected and thought that once that deal was closed that we would immediately start reselling the BLM 1500 back to Ericsson and that we miscalculated, because we didn’t realize number one that – the things like Ericsson has already shipped as much as they could to the customer base before the deal closed. That’s not surprising, but nevertheless and so we cover the best. And number two, lot of problems in just understanding Ericsson, their understanding us and just trying figure out exactly where to go and what to do within Ericsson. It’s a very large, very disorganized company in many respects.

And to give you an example, they didn’t even know how to get orders to us. To pass through those orders, they’ve taken three months for us to get a processed in place to have all those transmitted through to us. And so we are starting to learn how Ericsson works, and we had to pick up the pace and move forward. We’re in the process of hiring a channel manager to manage that relationship and we’re looking for somebody who has some specific Ericsson experience, who has done it before. And we hope to get that position filled in the next few weeks and then have the channel manager to work with each of the regions in Ericsson.

So we have to work more closely with Ericsson to understand them. We have to get our products into their product portfolio, and how their regions trained and how their customers trained. So it’s all about the starting. So, all of that is starting, and so we rather naively thought that the business would just continue as it had in the past, and in fact there's a lot of work that we have to do to make it happen.

Again, we’re not concerned over time, but clearly it’s going to ramp up slowly overtime. So the $10 million to $15 million was a historic run rate. We expect that we will reach that before the end of this year. But it’s going to ramp up slowly from quarter-to-quarter. And then that is primarily going to be, you know, it's partially the reselling of the BLM 1500 and partially selling the E-series.

Now to sell our E-series products we have to interface with their operating systems; the Ericsson operating systems that are already operational in these accounts. That work is ongoing. It takes two to three quarters so by the middle of this year, the middle of 2013. We should start to be able to sell through an E-series product, and so that became a part of this revenue towards the end of the year, the second half of the year.

Geoff Burke

I think it's important also to reinforce the alignment, because now the reality is that – two things. One is that there are specific portions within Ericsson that are the lines in the business that we’re dependent up on broadband access to move forward. So for example, those lines in the business were they actually too large civil works projects for large broadband buildups with wireline and wireless.

As you removed that broadband access point from their portfolio, they actually were very incentive to be working with us to drive – to actively catalyst for that business – those lines of business from the company as well.

The other thing really is the convergence of wireless and wireline. As you look forward with their vision of wireless, you can’t do that without the complementary wireline infrastructure underlying it, right. And so I think that it’s important to understand there’s very clear alignment between the two companies and that long term as Michael pointed out, we’re very excited about where this ultimately can lead us.

Michael Ashby

So if you look over 2013, we had originally thought that would be $10 million to $15 million a quarter by reselling some back through Ericsson. And clearly this will take a while to ramp up to that number. Having said that, the analysts as you know, including your own estimate has virtually unchanged for the year with consensus at around $410 million, $409 million, $410 million. And we think that’s quite reasonable. So we’re not uncomfortable about that despite Ericsson not producing quite as much as before. Strength in other parts of our business we think is strong enough that we see those numbers as being fairly reasonable.

Simona Jankowski - Goldman Sachs

Sure. Maybe on the guidance fairly you gave on the call was double-digit growth. But it sounds like you’re comfortable with a street modeling closer to 20%, really.

Michael Ashby

I think the street modeling actually was 24%. That seems reasonable. The double digit issue was a little bit confusing. It wasn’t meant to be confusing. We weren’t actually trying to change the method. We were just trying to get to better terminology and not change the numbers. And not led to some confusion on the call. We actually started doing that a few months ago. But it seemed to cause some confusion on the particular – on this conference call.

Simona Jankowski - Goldman Sachs

Okay. Well, I appreciate clarifying it now. So to come back to Ericsson a little bit and actually broaden that discussion out, a bit more to just the environment in Europe. One of the things you’ve been hearing at this conference as well as through earnings season was that perhaps we’re starting to see earnings moved the environment in Europe. Most broadly in the economy at all, but also specific to the carrier space, and I think the one bright spot, there had been those telecoms announcements that you had Telecom Italia and others as well. How much are you part of these discussions now via Ericsson and what perspective can you give us on what the environment is there?

Michael Ashby

Well, let me give you just a quick – we announced we’re really not involved in the major PTT's in developed countries. And where we think our opportunities are is much more in the developing countries amongst with tail end carriers in developing countries and that's where Ericsson has been very successful.

And so through Ericsson, I think we’re going to see our revenue opportunities much more in countries like Eastern Europe, some of the smaller Asian countries, Middle East, Africa and South America. So we’re not really concentrating on the developed countries which are dominated by these larger PTT’s.

Geoff Burke

I think you summarized it well. I think that the reality as in those areas where we’re seeing the most opportunities for growth are in areas, especially because of our fiber expertise, where the existing infrastructure needs to leap frog for two reasons. One is to support more advanced wireless, okay. The other is basically because of the growing demand for all the proliferation broadband array devices and those are happening globally-.

And so when you aren't held down by that copper base, it basically allows you the opportunity to really look forward and invest. And sometimes, those are company initiatives, sometimes they’re social initiatives, by the governments and those sorts of things as well. The other of course is really been directly related to mobile. This is an underlying aspect of all the business for us and ultimately as advanced LTE gets out there and deployed, we should be coming in those areas, virtually everywhere and finding opportunity.

Simona Jankowski - Goldman Sachs

And then lastly, a question I had on Ericsson is that obviously there was some surprise around the revenue and kind of how that played and what we needed to do and since you’re hiring a channel manager and have to go through the qualification process, is the OPEX piece of that a little bit turning out differently as well, then your thought as far as how much OPEX you have to take on to support that expansion?

Michael Ashby

The OPEX is directly related to the fact that we took over 50 engineers in San Jose and building in San Jose and we’re actually consolidating another building in Fremont into the San Jose building, so that we have a larger presence now in Silicon Valley. And the 50 engineers, we were fortunate that we were able to pick the engineers that we wanted, to interview people at Ericsson and offer them jobs in Calix.

And so the 50 engineers have been, in many cases reassigned to work on Calix project, not on the Ericsson projects that they will be able to run the BLM 1500 projects or the other projects they were working before. So we managed to sort of bring in one fell swoop, get a lot of the expertise that we needed to help complement our own engineering efforts. So those have become part of our normal R&D development process now.

Simona Jankowski - Goldman Sachs

Okay, last question in the time we have is just on the – a bit on the competitive environment again and specifically Frontier was one of the opportunity you’ve highlighted for this year. This kind of – one of the situations where everyone is gaining share and so it's really difficult from our perspective to kind of figure out exactly how to reconcile comments that we hear from yourself and others in that account. So can you just give us as much granularity as you’re able as far as how many of those 13 former Verizon states in Frontier you’ve penetrated, last year, what is the set of advantages for you guys this year throughout that picture?

Michael Ashby

The simple answer to the share gain things is just let that numbers speak for themselves as we get through the year and I think we feel pretty good about our position there. In Frontier specifically, we're now selling into I believe, we've sold into, Dave should tell me. Nine, I think, is it nine, 13? Thirteen of the 14, of the 14 states, in total, and but Frontier is also doing the same thing that CenturyLink is doing, that instead of now buying just boxes in order to upgrade their network to meet PUC requirements, they're actually rolling out projects, most of which are fiber projects, and whenever it comes to a fiber project we stand a better chance of competing. So we are having success in new projects that they’re rolling out and we expect that to continue. So while, Frontier is going to cut their CapEx next year, we expect our revenue will grow within Frontier.

Geoff Burke

It seems the situations is CenturyLink and Qwest, when you're addressing PUC issues and you’re trying to hit the minimum, that’s one set of choices that you’re making. When you're actually now looking beyond that, looking to invest in the strategic areas of business going forward, we actually shine in that environment and certainly think our chances are very strong to complete head to head for business in there.

Simona Jankowski - Goldman Sachs

Great. Well, thank you so much. This was terrific. I appreciate it and we look forward to the discussion later in the day.

Geoff Burke

We head to break out here at Monterrey in a few minutes.

Unidentified Analyst

Yeah, the breakout is in the Monterrey room. Thank you.

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Source: Calix's Management Presents at Goldman Sachs Technology and Internet Conference (Transcript)
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