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Calix, Inc. (NYSE:CALX)

Q1 2014 Earnings Conference Call

April 29, 2014 16:30 ET

Executives

David Allen - Director, Investor Relations & Treasurer

Carl Russo - President and Chief Executive Officer

William Atkins - Executive Vice President and Chief Financial Officer

Analysts

Victor Chiu - Raymond James

Mark McKechnie - Evercore

Christian Schwab - Craig-Hallum

Tim Quillin - Stephens

Simona Jankowski - Goldman Sachs

Amitabh Passi - UBS

George Notter - Jefferies

Mike Lin – Stifel Nicolas

Operator

Greetings, and welcome to the Calix First Quarter 2014 Earnings Conference. At this time, all participants are in a listen-only-mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. David H. Allen, Director of Investor Relations. Thank you. You may begin.

David Allen

Thank you, operator, and good afternoon everyone. Before we begin the call, I would like to remind you that on this call, we will be making forward-looking statements regarding future events, including, but not limited to the size of the funnel of our sales opportunities, the long-term growth prospects for Calix, our expectations for the next quarter, our development of new products that will continue to help our customers transform their networks, the future business and financial performance of the company and our expectations of revenue, gross margins, earnings per share, stock-based compensation and amortization of intangibles. These forward-looking statements are based on estimates, judgments, current trends in market conditions and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements.

I would encourage you to review our various SEC reports, including our Annual Report on Form 10-K for the period ending December 31, 2013 available at www.sec.gov, in which we discuss these risk factors. All forward-looking statements are made as of the date of this conference call and except as required by law, we do not intend to update this information.

Also on this conference call, we will be discussing GAAP and non-GAAP results. We are providing the non-GAAP estimates to enable interested parties to evaluate our performance in the same manner in which we evaluate our own operations. These non-GAAP measures exclude certain charges and benefits, which we do not consider to be a part of our ongoing activities or meaningful in evaluating our financial performance, including stock-based compensation expense, acquisition-related expenses if any, and amortization of acquisition-related intangible assets. To help you better understand those results, we have included a reconciliation of our GAAP and non-GAAP results in our earnings press release. All numbers that are discussed in today’s conference call are non-GAAP unless otherwise noted. This conference call will be available for audio replay in the Investor Relations section of the Calix website at www.calix.com. In addition our earnings press release, along with supplemental financial data has been posted in the Investor Relations section of the Calix website, which you may want to review in conjunction with our press release in conference call remarks today.

I would now like to turn the call over to Calix President and CEO, Carl Russo. Carl?

Carl Russo

Thank you, Dave and good afternoon everyone. Joining me on today’s call is William Atkins, our Executive Vice President and Chief Financial Officer.

The Calix team performed well in the first quarter. Revenue exceeded our expectations on a backdrop of increasing activity and our customer base. We made good progress with our E series family, especially in our international markets. Furthermore, William has come up to speed rapidly.

And without further ado, I will turn the call over to him to review Q1 in detail and share our guidance for Q2. William?

William Atkins

Thank you, Carl. As a reminder, the guidance will be provided on February 11 for the fourth quarter called for revenues of between $78 million and $84 million, gross margins of between 45% and 45.5%, and operating expenses in the range of $41 million to $41.7 million with the resulting EPS being a loss of between $0.07 and $0.12 per share. Actual revenue for the quarter was $85.8 million and EPS was a negative $0.03 per share, both better than our guidance. Gross margin was 45.9% and operating expenses came in at $40.7 million, both metrics slightly ahead of our guidance.

As we anticipated, we saw decline in cash this quarter and Calix ended the quarter with total cash of $75.5 million, down from $83 million. Revenue for the quarter was down $4.7 million from $90.5 million in the same period last year and down seasonally from the prior quarter of $94 million. International revenue was $10.6 million in Q1, down from $12.7 million in Q1 a year ago and from $13.6 million in Q4. We had one 10% customer again this quarter.

At 45.9%, gross margin was a little higher than had been expected and reflected customer and product mix, deferred and recognized or shipped revenues and movements in inventory reserves. The gross margin in Q1 was down from the 48.1% level of 2013’s Q1, but up from Q4’s 45.2% level.

Q1 operating expenses at $40.7 million were slightly lower than anticipated and down from the prior quarter by $300,000. This favorable outcome reflected good control over operating expenses and timing differences related to consulting activities that will impact Q2. OpEx was up $1 million from the same quarter a year ago primarily due to expenses associated with our international expansion activities.

Turning now to the balance sheet, we ended the quarter with total cash of $75.5 million, a decrease of $7.5 million in the quarter. Receivables DSOs were 43 days compared to 41 days in the previous quarter. Inventory levels decreased as expected to $45.1 million from $51.1 million in Q4, while inventory turns decreased to 3.4 turns from 4.1 turns reflecting that higher starting balance in Q1. Deferred revenues were $47.5 million, down from $53.3 million in the prior quarter and reflecting the completion of a number of BBS projects that were recognized as revenues during the first quarter.

Let me now discuss our guidance for the second quarter of 2014. Historically, Q2 has tended to be a higher performing quarter than Q1 and we expect this trend to continue. Very importantly, we expect to return to profitability and to being cash flow positive in Q2 and for the rest of 2014.

Our guidance for Q2 is as follows, the revenue range for the second quarter is expected to increase and to be in a range of between $94 million and $97 million. Gross margins are expected to be down slightly this quarter primarily due to two factors. One, product and customer mix considerations. And two, the recognition of additional BBS revenues, which have lower margin outsourced professional services related to contract close outs. Consequently, we anticipate gross margin to come in between 45% and 45.5% in Q2.

Operating expenses will increase at a rate slower than revenues in Q2. OpEx is expected to be in the range of $42.3 million to $42.9 million with a sequential increase primarily due to compensation expenses derived from increases in headcount and from annual salary adjustments. Given our revenue and margin expectations, we expect to return to non-GAAP profitability in Q2 and to generate a range of zero to $0.02 per share. Inventories are expected to decline slightly from Q1. Finally, we expect to be cash flow positive in each of the remaining quarters of 2014.

At this point, I would like to turn the call back over to Carl. Carl?

Carl Russo

Thank you, William. In this quarter alone there have been numerous examples of an acceleration in the demand for broadband services. While gigabit is the buzz word, it is really about providing high performance broadband services to a variety of subscribers. In residential offerings it is driven by entertainment, video and gamming along with an increasingly mobile workforce. In enterprise offerings, it is driven by an acceleration of the content and applications moving to the cloud along with an explosion of connected devices. These changes point to a future access infrastructure quite different from that which exists today. And with our focus set of software, system and service offerings, we believe Calix is well positioned to succeed in this market.

With that I would like to turn the call over for questions. Operator?

Question-and-Answer Session

Operator

Thank you. At this we are conducting our question-and-answer session. (Operator Instructions) Our first question is coming from the line of Simon Leopold with Raymond James. Your line is now open. You may proceed with your question.

Victor Chiu - Raymond James

Hi, this is Victor Chiu in for Simon Leopold. I wanted to ask about the status of your Tier 2 and Tier 3 customer base and how that’s trending since that’s been upgraded and impact on your results previously. And yes I just kind of wanted to see if you could give us an update a little bit on that first?

Carl Russo

Victor thanks. And please say hello to Simon. Let me break that up for you this is Carl. And I would like to actually separate it because I think Tier 2 and Tier 3 is often discussed as if they were one tier or one behavior. And we see very different behaviors between what are traditionally Tier 2 carriers and the smaller carriers that makeup Tier 3.

In the Tier 2 we are seeing mostly a sideways movement in their business and have seen over the last few quarters. While we think we are doing well inside of those customers, there is no notice of uptick or downtick in that segment of the market.

We have, however, historically commented on the uncertainties affecting the smaller carriers in the space and that causing them to at times delay or standstill on otherwise CapEx investments that they would have made. What we are seeing in the last quarter is an acceleration of opportunities in the smaller carrier space. So what we refer to as Tier 3 has actually been accelerating in a very meaningful way, not only in breadth, but also in the number of deals that we see showing up in the funnel. So, we have actually seen an uptick in that business in Q1 and it continues to accelerate into Q2.

Victor Chiu - Raymond James

Is this divergent from what happened in Q4, because it seems like Tier 2 and Tier 3 are both a bit soft and yes that seemed like what that kind of what it was?

Carl Russo

So to be clear, in Q4, you may remember our comments of saying a chilly wind blew through the space and most affecting larger customers down to smaller customers. So, to speak directly to the Tier 3, the smaller service providers of all types, we have seen that actually continue to build since late in the fourth quarter start to get active and it’s really started to step up in the first quarter.

Victor Chiu - Raymond James

Okay. I think that seems contradictory to your largest competitor, Adtran, who mentioned specifically that Tier 2 and Tier 3 had started to become weak for them, a bit delayed from you guys. So, are they just kind of trailing you? Is that kind of how we should think about that or is there kind of a diverging pattern between your customer base? And is there a share gain, I guess, is that a component of it as well?

Carl Russo

So, I can’t speak to what someone else said. I mean, the only thing I can tell you is look we have direct relationships with all of our customers. And obviously, you see this trend of discussions around gigabit communities, but frankly more enhanced broadband services that we think are contractually were very well-positioned for. So, I recall can’t address what somebody else would say. I can only help you understand what we are seeing. So, I mean, I am sorry for that, but that’s what we are seeing.

Victor Chiu - Raymond James

So you are not seeing share gain as a component of the accelerating Tier 3 revenue I guess?

Carl Russo

So, we don’t make comments really on market share gains or specific customers’ expectations. I can just tell you what we are seeing from an interest level and it is quite marked in what we are seeing in the smaller carrier space.

Victor Chiu - Raymond James

That’s fair. And just one last thing on the gross margin, can you give us a little bit of color on what exactly the product mix was that led to the upside this quarter and what the contribution will be next quarter?

Carl Russo

Yes. I will excuse William from answering that question, because as you know, we don’t answer the next questions again, because we view access as a space, but William you may want to make comment on next quarter’s guidance?

William Atkins

Yes. On next quarter, it is exclusively I think noted that we are going to see some tightness a little bit in that gross margin levels and downward pressure on that. And that’s because we are seeing our BBS programs running through as I noted in the call. We are basically moving to close out those contracts and that involves an externally contracted services element, which is lower margin than our average corporate margin. So that affects our margins over the next few quarters.

Victor Chiu - Raymond James

Okay, great. Thank you.

Carl Russo

Thank you very much for the questions.

Operator

Ladies and gentlemen, our next question is coming from the line of Mark McKechnie with Evercore. Sir, your line is now open. You may proceed with your question.

Mark McKechnie - Evercore

Okay, great. Thanks for taking the question. Hey, guys. Let me ask you three questions really or subjects. First is the standard update on your project with Ericsson, Carl, could you give an update on the program? Did we see any revenues this quarter? What type of engagements are happening here with carriers? Are we still looking at a ramp in the second half of the year? And any thoughts on the margin profile when that ramps up? And I have got a couple after that.

Carl Russo

So I will take that one, Mark. Good afternoon. On the Ericsson piece, as you know, there is always revenues in the quarter from Ericsson as we have continued with the program from day 1. I think your question is what are we seeing from a growth perspective and are we on plan? The bad news there is if you look at our international revenues year-over-year, you will notice that they look to be relatively flat. The good news is there is a reason for that. The reason for that is we started to operationalize the E7 and the E series product family into the BLM footprint with the management system integration that we have been speaking about. And the good news is we are now in labs and in situations that caused the customer to want to test it, which inexorably has slope effect on their willingness to order. We expect that effect to basically work its way through over this quarter and next. So pardon me, first quarter and second quarter, but I am very encouraged with the progress that we are making across the footprint now.

Mark McKechnie - Evercore

Carl, that – so it’s for this Ericsson it sounds like that’s some of your existing customers, right, if they are pausing I am more curious as to how the new customer activities are going there?

Carl Russo

Well, did I stun you with that answer, Mark? The new customer activities are going well. There are many situations that we work together on and are working together on right now. So the short answer is well.

Mark McKechnie - Evercore

Got it. Okay, I appreciate that. And then maybe for William on the OpEx guidance this quarter for June it looks like little higher than I had thought, not crazy out of the range or anything, but I wanted to ask do you – one was there – it sounded like you alluded to some sort of a one-time pause in Q1 that might have gotten pushed into Q2, so do you think looking out to a year are we going to be seeing OpEx go up every quarter in line with revenue or do you think you can hold it a little flatter there relative to your revenue growth?

William Atkins

Well, we don’t provide guidance out beyond a single quarter, so the short answer is that there were some timing aspects to push some of those operating expense up to Q2, but I can’t really talk further than that.

Mark McKechnie - Evercore

Okay, got it. And then probably the last one here for me is on the new products and maybe Carl you chime in on this, I think I guess about a quarter ago you announced that the business services products for the cable operators, and I wanted to get a sense for how that launch is going?

Carl Russo

And by the way, thanks for asking. And for that I hope I didn’t confuse you in that sense. Those products are available for all service providers as an update we had now just begun our first lab trials and so far so good. We will knock on wood, but stay tuned. But it’s progressing down the path that we want it to go down.

Mark McKechnie - Evercore

Okay, great, very good. Thanks. I will turn over. Bye guys.

Carl Russo

Mark, thank you.

Operator

Thank you. Our next question is coming from the line of Christian Schwab with Craig-Hallum. Your line is now open. You may proceed with your question.

Christian Schwab - Craig-Hallum

Great. Thank you. Solid quarter, as we look at gross margins, would you expect gross margins to continue the trend to be up on a year-over-year basis when we exit ’14 versus ’13?

William Atkins

In terms of over the year – and the key element of that is going to be the movement of those last BBS contract as they move through our P&L. As we have indicated in the past, we expect those substantially to be off of our balance sheet by year end. And therefore the margin pressures associated with those close outs will ease by the end of the year. But let me turn it over Carl for some of the bigger picture outlook.

Carl Russo

Yes, I mean just real quickly as we discussed for a while now and Christian thanks for coming on board, we do appreciate it. We have been experiencing a trend of expanding gross margins since we went public. And we attribute that to the shifts in the access infrastructure and how they are – the networks are architected, the systems that we build. But we have also been clear to try and counsel folks on when we have opportunities to be footprint aggressors or expand market share that will sometimes have a downward effect on gross margins. Obviously we have stepped off in the last year into a pretty big push into international markets and those are markets where we don’t have any share. And as you move into new markets those deals are typically going to be lower than the deals that you would have in your existing markets. So the long-term trend we believe is going to continue to be up into the right. But having said that, in any given quarter you may see some attenuation either way and I think Williams articulated what’s going to go on in second quarter we believe.

Christian Schwab - Craig-Hallum

Great. As far as some of these government initiatives for increased spending targeting real broadband, is there any of the four that you guys have highlighted previously that you believe will have a more material impact in a timely manner than others or are we kind of in a wait and see in all of them?

Carl Russo

As they all have impacts I don’t know that I would jump forward and say that anyone them has a bigger impacts than the other. I mean to be blunt, last week’s news – I think it was last week’s news on Commissioner Wheeler’s announcement on net neutrality may ultimately have the biggest effect in driving the infrastructure investments forward. So – and that’s not in the set of things that you mentioned.

Christian Schwab - Craig-Hallum

Right, right, okay, great. And then my last question we would anticipate then or should we anticipate, I should say, that we will see year-over-year revenue growth this year in the international business?

Carl Russo

So, I will answer the broad question. I don’t think there is any question that we are going to see that growth. And there is something that you will see in our kit on the website is we added some 20 new customers this quarter, as you might imagine the vast majority of which were in the international markets. And the goal – the program that we follow and the goal that’s very clear for the teams is first and foremost gaining customer references, so if you will pins on the map, in our regions that can start to gain the Calix experience and speak positively about it in region. And we are making very good progress in our international markets on putting pins on the map.

Christian Schwab - Craig-Hallum

Excellent. No other questions. Thank you.

Carl Russo

Thanks Christian. Again, thanks for joining.

Operator

Thank you. Our next question is coming from the line of Tim Quillin with Stephens. Your line is now open. You may proceed with your question.

Tim Quillin - Stephens

Hey, good afternoon. In terms of the international outlook, does the completion of the interface with the Ericsson management system mainly impact in the near-term your installed base? So in other words, as you said, there is this pause to evaluate those products, but are your opportunity sets then greatest within that installed base that have been buying the BLM 1500 platform, but now are evaluating the E series for maybe broader initiatives?

Carl Russo

The short answer is time will tell. Having said that, we are actually very encouraged by the number of new prospects that have shown up in the funnel that were basically unleashed by having E series products available for our international markets, because they really weren’t until this most recent release, release 2.3 for the E series products. So, what’s happening now is it’s starting to go out into the channel with a viable product series that allows our customers internationally deploy the E series with our T series premises family and address in a meaningful way those opportunities that we haven’t been able to address before. In the existing customers, it clearly has a slowing effect, but I guess my – if I were to put a finger on the air and say which way does the wind blow, I suspect our larger opportunity in very quickly is going to be not in the install base, but actually in new prospects that are jumping into the funnel with Ericsson as the partner.

Tim Quillin - Stephens

Right. And then this is kind of going back a ways, but Ericsson was a GPON domain supplier to AT&T, does the completion of the interface with the management system give you a toehold into AT&T or what would be the steps that you might need to take to be a GPON supplier if AT&T starts building these GigaPower networks like they have suggested they would?

Carl Russo

So, Tim, I think yours is a very logical question to ask. And as you know from a competitor perspective, we cannot talk about individual customer situations and that would certainly be one that in recent times will be I think on everybody’s minds. Suffice it to say that as we look at the marketplace and individual customers moving towards higher capacity and deeper service offerings across the access infrastructure, we believe that, that expands our opportunities in the marketplace. But other than that, I would really prefer not to speak about any given customer.

Tim Quillin - Stephens

Okay. And then I will ask you another specific question about a customer, but with CenturyLink, I wouldn’t ask you to try and preview any additional projects they might announce, but they have already announced a couple projects that you are supporting, one of which is in Las Vegas. And I was wondering if you just, within Las Vegas, if you could tell us how far along you are in that process in terms of maybe the number of neighborhoods versus the number of planned neighborhoods or however you want to try and capture that opportunity?

Carl Russo

Is there a fifths amendment I can appeal to, so unfortunately Tim I would go back as you might imagine to the answer on the previous question. That’s by the way, you are asking again these are all the right questions I understand that, but we are really very cautious about sharing information with any customers or prospects. If they want to share it they can that would not be something that would be appropriate for us to share, I hope you can understand that.

Tim Quillin - Stephens

Yes. And maybe I can ask a little bit more generic question in terms of the Google Fiber impact or the impact of AT&T, but you can’t pick up a newspaper or read the web without hearing about planned fiber rollout and I have to think that impacting your customers decisions right now, you kind of suggested that within Tier 2 that they are kind of moving sideways they have and I think you expect them to continue to move sideways, but are the level of discussions changing at all with that customer set because of what Google and AT&T are doing?

Carl Russo

Well, I don’t think there is any question that it’s not just the Google and AT&T effect or the gigabit networks I mentioned in my comments that the buzz word is gigabit, but you have so many other things I just mentioned for example the FCC commissioner’s plan on net neutrality, the fact that frankly you can’t open a newspaper on any given day without seeing an article and if that directly relates to the access infrastructure. So there are a bunch of things that are influencing all of our customers of all sizes. The Tier 2 is in particular I believe view cast as an opportunity to expand their footprint and as potentially a source of funding to build some of their networks. So if I were to put – do you think that I see first and foremost from the Tier 2s it would be that. But they too are looking at the effects and impacts of these higher speed offerings. And we are seeing some movement there in the Tier 2s as well with either offerings or contemplated offerings.

Tim Quillin - Stephens

Okay. And then lastly and maybe this question is for William. But what is the level of visibility that you have on the second quarter guidance and it would be great if you could quantify that level of visibility but maybe it’s not just qualitatively the implication is kind of low-double digit quarter-over-quarter increase which is good but kind of given the momentum you saw at the end of the quarter, is it something that’s relatively conservative number or is it a number that is kind of a full solid number that you would have to stretch to get?

William Atkins

Well, as you can imagine one of my top priorities in the past quarter, I have been getting my feet firmly under the desk and have been zeroing in on guidance and on forecasting, so these are numbers that I am highly confident of. So I am not going to couch those being too conservative or too much of a stretch basically how I will see it being played out in Q2 just that simple. So basically these are guardrails that we plan having the company moved on in Q2.

Carl Russo

And I would echo that sentiment Tim our goal is to try and setup these ranges for where we believe the business will land. We are fortunate in Q1 to have some things occur earlier than we actually thought they would and they came in at the end of the quarter. And so thus we overachieved. But our goal is always going to be to set these guardrails as reasonably as we can to give you our best view of where we believe we will end up.

Tim Quillin - Stephens

Okay, thank you.

Operator

Thank you. Our next question is coming from the line of Simona Jankowski with Goldman Sachs. Your line is now open. You may proceed with your question.

Simona Jankowski - Goldman Sachs

Hi, thanks very much. I wanted to follow-up a little bit on the gross margin expectations. I think you mentioned as one of the drivers some of the professional services related to BBS build out here can you just remind us what that revenue run rate is right now quarterly, is it in the high single digits. And also how much of that is left, is that really most of what’s in deferred on the balance sheet?

Carl Russo

Sure. In terms of deferreds, so as we go back and look at like Ks and Qs obviously we break those out and we show you the extended warranty component of deferreds. And so you can pretty easily back the extended warranty component out and what is left at least historically is a very good proxy for how those BBS revenues run through our balance sheet and through our P&L. So if you look out to the end of the year, we will substantially run down the BBS contract revenues that are currently sitting on our balance sheet.

Simona Jankowski - Goldman Sachs

Okay, terrific. And then how should we think about that transition then into next year? Is that – should we think about that as kind of chunk of revenue that goes away that you need to replace with something else like perhaps your international efforts or do you just think that those Tier 3s who are benefiting from that funding will just increase their own CapEx?

William Atkins

Well, it’s William here. As Carl has indicated, we are very confident of the strength in the funnel. And so again as you can imagine, another area that I was really drilling down over the past quarter, and in fact, even before joining the company was this whole pressure of the deferred revenue runoff and its interplay that’s projected revenues going forward. And I am glad to say that, that strong funnel basically underpins my confidence. So we are going to continue to have revenue growth going forward.

Simona Jankowski - Goldman Sachs

Okay.

Carl Russo

And Simona, let me add one other color please if I may, because you have been with us since the IPO and you have rode this. So, we – initially, we all looked at BBS as an incremental source of funding, remember that.

Simona Jankowski - Goldman Sachs

Yes.

Carl Russo

And then we thought it was going to be any day now and it became any year now.

Simona Jankowski - Goldman Sachs

Right.

Carl Russo

And then in retrospect, we finally realized that in fact what it is and by the way we have projected this forward as we think about cap is not an incremental funding source, but in fact a substitutable funding source. So, I think part of what if you read between the lines of what William just said is we expect the inverse to happen, but as that funding source goes away. And we are seeing this by the way in space in our small service provider customers, which is then bringing on their own out of operating income funding sources that go and build additional network. That’s a very healthy process in our opinion.

Simona Jankowski - Goldman Sachs

Yes – no, that makes a lot of sense. I also wanted to come back to the margins again. I think you made the comment that since you have these BBS remaining projects for a few quarters and it sounds to me like you have the international pricing issue with you for a few quarters as well as you go out and expand, that this impact might be with us for a few quarters. Was that the right interpretation, in other words, that we might see gross margins here in the mid-40s perhaps for the remaining quarters of the year?

Carl Russo

By the way, it may be. I suspect it will generally drift back up. I just wanted to make sure that in the earlier question, I made it clear that as you know as you chart – and you specifically have charted our gross margin expansion over time, while it’s pretty prone to where least squares fit, it’s not exactly linear. And some of the things that can push it out to the right and slow it down a bit is one we are going after footprint expansion and moving into new markets. As that is a percentage of revenue, so let’s just say, international revenues grew faster than we thought. Likely that would come with more pressure on gross margin. Gross profit would go up, but if revenues expand dramatically in markets that we are new to, then you are going to see that push out to the right. I think in general, we are going to see a drift up over the course of the year as drift is the word I would use.

Simona Jankowski - Goldman Sachs

Yes. I mean, one of the things that we historically look to for providing margin expansion was this mix shift from the C series to the E series. Now, if I think about an E series deployment internationally, is that now a lower margin than the C series was domestically or is it just lower than the E series domestically, but still higher than what the C series was?

Carl Russo

Yes. It really depends on – I appreciate you are trying to parse it that way, but it’s even more granular than that. It’s on an individual customer by customer, situation by situation, second order, first order, it’s very complicated. So in general, the easiest way I would ask you think about it is when we are putting pins on the map and they are in new regions, so the first pin that goes into that region is likely going to be at a lower margin that it will be later on.

Simona Jankowski - Goldman Sachs

Okay, terrific. Well, thank you very much. Appreciate it.

Carl Russo

Thanks, Simona.

Operator

Thank you. Our next question is coming from the line of Amitabh Passi with UBS. Your line is now open. You may proceed with your question.

Amitabh Passi - UBS

Thank you. I just had a couple on my end. Carl, of the 20 new customers you added in the quarter were there any Tier 1s?

Carl Russo

I hope you will respect me for saying I am not going to answer that question.

Amitabh Passi - UBS

Okay, maybe I will…

Carl Russo

Amitabh, just to finish, if there were they would have been international.

Amitabh Passi - UBS

Okay. Maybe and I don’t know Carl if you can help us here, you have talked multiple times about a developing expanding funnel of opportunities in international markets, are there any metrics you can give us in terms of just getting the feel for how that funnel is developing particularly over the last couple of quarters?

Carl Russo

There is no metric simply that is getting larger and it’s getting larger as funnels do. When funnels start to expand they obviously expand at the top first and we see lot more deal flow coming in and that eventually starts to work its way through the funnel. We are just seeing – I mean we are seeing expansion at the top of the funnel and it’s pretty consistent. And then it just works its way through the funnel. So there is no metrics that I would give you to try and help you on that I am just trying to give you a sense for the directionality of the business.

Amitabh Passi - UBS

Okay. And then maybe just one final one for William accounts payable can you help us understand what happened this quarter and how do we think about that going forward?

William Atkins

Yes, we just basically took on some inventory at the end of the Q4 and so therefore we just paid that down this quarter, that’s substantially what happened.

Amitabh Passi - UBS

So you are back at a more normal level now?

William Atkins

Yes, I would agree.

Amitabh Passi - UBS

Okay, alright. Thanks.

Carl Russo

Thanks Amitabh.

Amitabh Passi - UBS

Thank you.

Operator

Thank you. Our next question is coming from the line of Sanjiv Wadhwani with Stifel Nicolaus. Your line is now open. You may proceed with your question.

Mike Lin – Stifel Nicolas

Hi, this is Mike speaking in for Sanjiv. First question I had was about the revenue forecast for the rest of the year. I think in the last quarter’s call you mentioned that Q2 and Q3 looks strong but it looks like you have pushed in those orders and got them earlier into Q1, so for the rest of the year what was sort of the outlook looking like and did you still expect the annual forecast to be below 10% for the year in terms of growth?

Carl Russo

So right now I would say that there is nothing that would cause us to change how we are viewing the year and obviously as William has mentioned we focus on guidance one quarter at a time. So our guidance for the quarter is 94 to 97 and that’s where we are focused on. Beyond that even though we are ahead of planning Q1 there is nothing I am going to tell you that should take raise models for the year.

Mike Lin – Stifel Nicolas

Understood. And going back to your comments earlier, you were saying that the net neutrality legislation that has been coming up could probably have more of an impact than the CAF 2 funding legislation, could you maybe expand on that a little bit was that a comment that affected your space in particular or more so in some of the network monitoring equipment company space?

Carl Russo

No, no, no, very specifically in the access space. So, let me see if I can give you an example. And there is going to be a lot of gnashing of teeth as there is information heard on the whole ruling coming up, but here is a simple one for you. If I am a Web 2.0 company and I have a remarkable market cap to revenue multiple, part of the reason I have that market cap to revenue multiple as an assumption but the access infrastructure is going to continued to be opened up made more robust enhanced because if it isn’t that my business model is pinched, does that make sense Mike?

Mike Lin – Stifel Nicolas

Yes.

Carl Russo

Okay, so now if I am one of those companies and the rate of infrastructure investment is too slow, I might go out and say what I need to start rattling sabers and build some infrastructure to get people move in.

Mike Lin – Stifel Nicolas

Got it.

Carl Russo

And if I were the CFO of one of those companies I might actually say accomplished because it’s got everybody moving. Now you come along net neutrality and here is one man’s view. This being my view, if I am one of those companies I would have had a choice to either between building my own infrastructure or renting someone else’s, which is what commissioner Wheeler’s net neutrality proposal allows me to do. I am all for renting so I can focus on my business. As that renting happens those are dollars that are kind of go directly into the infrastructure. So that ruling has the potential to significantly expand the rate at which infrastructure is invested in and also the technologies that are potentially chosen to do it. I think that’s positive.

Mike Lin – Stifel Nicolas

Okay, it’s very interesting. Well, thank you. Appreciate it.

Carl Russo

You are welcome.

Operator

Thank you. (Operator Instructions) Our next question is coming from the line of George Notter with Jefferies. Your line is now open. You may proceed with your question.

George Notter - Jefferies

Hey, thank you. I wanted to ask about – get more color on the experience with Ericsson, I guess I was a little bit confused, Carl about your comments on Release 2.3 and at the same time, you said that new customer opportunities perhaps are bigger than even selling through the existing Ericsson customer set. You guys have owned this Ericsson access business for a year and a half now, I guess I am trying to understand why you haven’t seen some of these new opportunities I guess percolate up earlier than just now? And why is Release 2.3 kind of a catalyst for you to again go address those new opportunities? Thanks.

Carl Russo

That’s great question. I mean, basically we didn’t have an internationalized family of Premises products to go along with the E7 systems to sell the complete network. I am sorry if I didn’t make that clear in an earlier conference call. So Release 2.3 is of seminal importance to us expanding our international business in two dimensions, one is being able to sell the E series with the appropriate other end of the network on it. And so that opens us up to new opportunities and the reason you haven’t seen the new opportunities before is because until you have the product fit, it’s hard to go bid them.

George Notter - Jefferies

Sorry, when did Release 2.3 precisely start to ship?

Carl Russo

Let’s just say within the first quarter.

George Notter - Jefferies

Okay, got it. I am sorry I interrupted you. You had another piece of the response.

Carl Russo

George, you are welcome to interrupt me anytime. The other piece of that is now going to the installed base, where we are looking to bring the E7 into that installed base via the software integration etcetera and that has to be tested. So, you sort of have this slow effect going on until two things happen, you add the new opportunities into the funnel, because now they can go sell them. And you get through the hand off, if you will, of having – formerly have these units. Now, I can go sell this new thing and potentially deploy it as well.

George Notter - Jefferies

Got it. Okay, very good. That makes sense. And then the other question I had was just on – was there any potential or any weather impact on the business in Q1 that you guys noticed?

Carl Russo

No. And if we start – if I ever blame something on the weather, shoot me.

George Notter - Jefferies

Got it. Fair enough. Thanks very much, guys.

Operator

Thank you. Our next question is coming from the line of Mark McKechnie with Evercore. Your line is now open. You may proceed with your question.

Mark McKechnie - Evercore

Hi, guys. Yes, a follow-up question. So Carl, first I had to make this comment, but no offense in response to an earlier question, you talked about if you were a CFO, but I really don’t envision you as a CFO of a carrier customer. But the second question is on your second half outlook, I want to get a – or at least as I am looking out to the second half trying to get a better feel of from you from where we are on this architectural pause that we talked about, right, with the Tier 2s and Tier 4s shifting from copper to fiber in response to the Google spend and the video traffic and what have you. But Carl, I mean, do you get a sense – I mean, is this the entire industry, across your entire customer footprint? Is this a third of it? Is this the big guys, the small guys like any kind of metrics you can give as to where they might be in that cutover as we think about what to forecast for September and December?

Carl Russo

So, I want to go back to your comment about our comments on a pause, because I most definitely did say that in the past and that was a Q4 statement that we had seen a pause. And from our perspective it was clear that what caused the pause was everybody trying to orient around what’s all this stuff about gigabit, what’s going on here, the competitive circumstances, DOCSIS 3.0, 3.1, lots of information to assimilate. To be clear, we are not seeing that pause today. As a matter of fact, we are seeing the exact opposite, that it has lifted and people are now taking action. That action is not flowing smoothly across each segment or each customer grouping. In some areas it’s happening faster and in other areas it’s still a little bit sideways. That’s what I was commenting on when I was talking about Tier 2s looking a little more sideways and actually the smaller service providers of all types started to accelerate. So did that help to clarify that Mark.

Mark McKechnie - Evercore

Yes, it does, so I can kind of envision across your customer base all shapes and sizes some are testing it out probably, but from where you stand you think most all are evaluating it and are just at different phases of deployment?

Carl Russo

Certainly majority are evaluating these items, I can’t say everyone, but surely a majority. And I want to make sure I close that one other item because I think you are looking for sort of a view into the later on the year is that correct?

Mark McKechnie - Evercore

That’s exactly right.

Carl Russo

So let me tie that out with the question I was asked earlier. We definitely feel better about the business. We like what we are seeing in the funnel, but I don’t feel good enough yet to have anybody thinking any differently about the second half of the year. We are giving guidance for Q2 and I would strongly disregard any changes in the second half we will get there when we get there and our next quarter conference call we will be able to give you a better view on to what’s going on there.

Mark McKechnie - Evercore

Got it. And Carl maybe that’s helpful. One of the metric that could help again I am not sure how you will share with me but your relative mix of fiber versus copper if that’s – I know a lot of your systems can do both but are you at the point where you are seeing an acceleration in the shift from copper to fiber in the deployments and is it half of your deployments or where are we at there?

Carl Russo

So there is probably one milestone I might share with you, but let me make sure I set your expectations correctly. You heard this before but I want to reiterate it in a different way. We think about the access infrastructure as converging into a unified access infrastructure. We build systems that are very networking oriented and as such segmenting things by the subscriber phasing physical connection doesn’t make sense to us. So we don’t think of the business in that way. And as you know we shift lots of different physical interfaces across our product sets. What I can share is I believe we have eclipsed the 1000 customer mark on fiber deployments. So it is happening.

Mark McKechnie - Evercore

Got you, okay that’s great. Thank you, guys.

Carl Russo

And you are welcome Mark. Thank you.

Operator

Thank you. (Operator Instructions) It appears there are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

David Allen

Thank you, Operator.

Calix will be participating in three investor conferences this quarter. We hope you can join us at one of these events including the:

Jefferies 2014 Global Technology, Media and Telcom Conference in Miami on May 7; the Cowen and Company 42nd Annual Technology, Media and Telecom Conference in New York City on May 28 and the Stephens 2014 Spring Investment Conference in New York City on June 4. Live and archived audio webcast of these presentations will be available from the Investors section of calix.com.

We remain focused on executing against the opportunities ahead of us and we look forward to meeting with you at one of these upcoming events. Information about these events will be posted on the Events page in the calix.com Investor Relations section. Once again, thank you for joining us today and good-bye for now.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.

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