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Executives

David Allen - IR

Carl Russo - President & CEO

Michael Ashby - EVP & CFO

Analysts

Blair King - Avondale Partners

Mark McKechnie - Evercore Partners

Amitabh Passi - UBS

Calix, Inc. (CALX) Acquisition of Fiber Access Assets from Ericsson & Companies Sign Global Reseller Agreement Conference Call August 22, 2012 5:00 PM ET

Operator

Greetings and welcome to the Calix Conference Call Announcing the Signing of a Definitive Agreement under which Calix will acquire the Fiber Access Assets from Ericsson and the signing of the Global Reseller Agreement between the two companies. 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.

It is now my pleasure to introduce your host, David Allen, Director of Investor Relations and Treasurer of Calix. Thank you Mr. Allen, you may begin.

David Allen

Good afternoon everyone and thank you for joining us on short notice for today's call. Before we begin the call, I want to remind you that this conference call contains forward-looking statements regarding future events, including but not limited to our pending acquisition of the Fiber Access Assets from Ericsson and the signing of a Global Reseller Agreement between the two companies and the growth opportunities and potential benefit of this transaction.

These statements involve risks and uncertainties including the risk that the parties will not proceed with the transaction for any reason that the ultimate terms of the transactions will differ materially from those currently contemplated that Calix will not successfully develop and sell the new products and services; that the degree of competition in the markets for such products and services will be greater than anticipated that Calix will be unable to successfully integrate the acquired assets and new employees into our business and other risks detailed in our press release today and our annual report on Form 10-K for the year ended December 31, 2011 and our Form 10-Q for the quarter ended June 30, 2012.

These risk and uncertainties could cause actual results to differ materially from those outlined in the forward-looking statements which maybe made during the call. All forward-looking statements made as of the date of this conference call and except as required by law, we do not intend to update this information. This conference will be available for audio replay in the Investor Relations section of the Calix website at www.calix.com.

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

Carl Russo

Thank you, Dave. Good afternoon, everyone. Joining me on the call today is Michael Ashby, our Executive Vice President and Chief Financial Officer. Earlier today, we announced that Calix has entered into agreements with Ericsson that will add new products to our unified access portfolio and create a powerful channel for deployment of Calix systems and software in 180 countries world-wide.

Specifically, we signed two agreements. The first is a definitive agreement for Calix to acquire Ericsson’s Fiber Access portfolio and remaining assets. The second is a Global Reseller Agreement under which Calix will become Ericsson’s preferred global partner for broadband access applications allowing Calix to sell its unified access systems and software through Ericsson’s global sales force.

We view these announcements as important and positive developments for Calix, our customers and our investors for primarily two reasons. The first is that this partnership positively affects our growth trajectory, accelerate and derisk our international market expansion and immediately establishes Calix currently North America’s fiber access deployment leader and a truly global access systems and software vendor with a diversified customer base worldwide including many Tier 1 customers.

And second, this aligns Calix with Ericsson, the world’s leading wireless equipment and services vendor. As the world’s communications networks continue to transform into all IP services via Ethernet over fiber and wireless. The alignment of the best-in-class vendors of wireline and wireless technologies is both powerful and strategic for our customers.

I will come back and add some closing comments. And at this time, I would like to turn it over to Michael Ashby. Michael?

Michael Ashby

Thank you, Carl and good afternoon everyone. My prepared remarks will be very brief. The acquisition transaction is expected to close during the fourth quarter of 2012. Financial terms of the transaction are not being disclosed. After the close of the transaction, we expect the acquired assets will be accretive to non-GAAP diluted earnings per share. Since the transaction is not expected to close during the current quarter, there will be no impact on our Q3 results. We will give guidance that includes the impact of today’s announcement during our third quarter earnings call or when the transaction closes after our Q3 earnings call.

The essential elements of the transaction are as following: Calix acquired the EDA 1500 GPON platform and associated ONT’s from Ericsson and will take over the manufacturing and continued development of that platform. This platform and its ONT’s will become part of an expanded Calix unified access portfolio of systems and software. Calix will also bring on board up to 61 former Ericsson employees all of whom are based in Silicon Valley.

The Global Reseller Agreement builds on the acquisition agreement establishing Calix as Ericsson’s preferred global partner for broadband access applications. This allows Ericsson to sell Calix’s unified access systems and software now including the EDA 1500 and associated ONTs through Ericsson’s global sales channels in 180 countries around the world. The majority of Ericsson’s current customers are large international tier-one accounts so that new resell channel compliments very nicely our existing international expansion activities which continue to focus predominantly on tier-II and tier-III customers globally.

With that I'll turn the call back to Carl.

Carl Russo

Thank you, Michael. We’re excited to be working closely with Ericsson and confident that this global partnership will provide significant value to all of our customers. Members of the Calix management team and I will be meeting later this afternoon with the Ericsson employees expected to join us as a result of today’s announcements, and we’re looking forward to their becoming part of the Calix family and serving the global access market with the industry’s premier broadband access solutions portfolio across the fiber and copper.

Clearly, today’s announcements are important leap forward as we seek to bring our unified access systems and software to the world.

Over the past year or so, we have looked at a number of options to accelerate our expansion and believe this course represents the best possible outcome. Frequently for this type of carve-out transaction includes legacy products with declining revenue streams.

In this case, we are not taking over any legacy products and we’re providing Ericsson with the opportunity to resell Calix Unified Access systems and software which we believe to be the most advanced access products in the industry. We also believe that this partnership with Ericsson is unique in the industry providing an ideal vehicle for Calix to further our strategic objectives.

To-date, the geographies that we have addressed represent less than 15% of the global access market. Now as the preferred partners to Ericsson, this addressable market expands to include over 180 countries and a boarder set of relationships including Tier 1 vendors worldwide. This enormous expansion of the addressable market for Calix Unified Access systems and software is achieved through alignment with the world's leading provider of telecommunication technology and services and its sales channel including domain supplier relationships.

Additionally, the targeted acquisition of Ericsson fiber access portfolio and assets inline with our vision of the future where communication service providers deliver all IT services via internet over fiber and wireless. The acquired technology is strong and the expertise of the US based team joining us is deep, providing ample opportunity for immediate cross-fertilization across our development organization that is 100% focused on access innovation. We believe that the pressure of communication service providers to upgrade their networks to meet the ever increasing need for advanced broadband services is a global phenomenon.

The combination of Calix expertise and unified access with Ericsson's focused on wireless and end-to-end solutions allows both companies to focus on our respective strengths and provide the best solutions to address this extraordinary opportunity.

At this point, I would like to turn the call over for questions. Doug?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Blair King from Avondale Partners. Please proceed with your questions.

Blair King - Avondale Partners

First, perhaps Carl you can talk a little bit about the domain supplier relationship that Ericsson has with AT&T and how that might impact your ability to penetrate that account overtime and what and if it does what do you see as kind of the milestones in achieving some traction within that piece of the business?

Carl Russo

Well, so let’s take it up to the attention of the agreement. Obviously, this is a global agreement that has many tier 1s. I can certainly understand the desire to understand this particular tier 1 and obviously at this point in time until the close where as you might imagine not much we can talk about. As you are aware from our conference calls we have begun calling on the tier 1s in North America and we certainly see opportunities for us to bring our products and services to those tier 1s to help them being more competitive, so obviously we would hope that that would make things more positive, but any more detail beyond that I simply would not give at this time.

Blair King - Avondale Partners

May be a broader question just around the general entry point into some of these tier 1s, there is obviously a lot of integration work that happen for each individual tier 1 account; can you give some sense as to how much of that integration work has already been done in previous quarters and previous years of Ericsson?

Carl Russo

That’s a great question; Ericsson as you were probably aware has deployed their EDA 1500 platform inside of AT&T and is fully integrated into AT&T’s OSSs top to bottom.

Blair King - Avondale Partners

Alright and then in terms of some of your other products, the E7 [series] and perhaps other products that Calix has, have you been through some sort of testing, lab testing with Ericsson to get that speed with some of these other tier-ones?

Carl Russo

Let me put it this way. There have certainly been discussions going on for a little bit of time. So I will leave that one to you and stop there. Is that fair?

Blair King - Avondale Partners

Yeah, that’s fair. And the last one is Mike. Can you just give some sort of explanation as to why Calix would not want to disclose other terms of the agreement?

Michael Ashby

For the time being, this is private transaction between Ericsson and ourselves and neither party want to disclose the terms of it.

Blair King - Avondale Partners

And can we assume it's not a material sum of cash then?

Michael Ashby

Yes.

Operator

Our next question comes from the line Mark McKechnie from Evercore Partners. Please proceed with your question.

Mark McKechnie - Evercore Partners

I wanted to ask a little bit about Ericsson's access division. We follow Ericsson but I am not closely aligned with the overall division. So you are just saying the EDA 1500 line, you know, how big of a player can you tell or what you can share with us about and what you are doing to the organization? It sounds like you are not eyeing any legacy gear. Is that going to leave the copper business with Ericsson? and then you know the 61 US employees are getting you know, are there other employees from that group development folks or what have you on this EDA product that you are going to lay off or that Ericsson will move to different divisions? How does that work?

Carl Russo

So Mark let me sit back and paint sort of a broad picture for you. And sort of go back a few months and I want to emphasize that throughout discussions, Ericsson has really been phenomenal in their strategic approach to this. And so here is sort of how the evolution worked. Ericsson had a global Access business, which includes both fiber and copper assets in different forms.

That global business had global employees. As the discussions continued, it became clear, in many of these carve outs as you know, you end up carving out a business, the business has revenues that might be flattish or slightly down and so you end up becoming a bigger company but then you have this downward pressure on revenues.

What we wanted to do was to basically move in to forward facing markets where we had significant opportunities for differentiable value. Ericsson saw that and agreed and so we started to align around the EDA 1500. They have two other systems products the EDA 1200 and the EDA 2500 which represent basically an IP DSLAM and a multi-service access platform, so much more copper based. That over the course of this year, they have put in to an end of life status.

They were also a very strategic and coming to an agreement with us to work with the San Jose based folks which we felt were well within our ability to do justice to if that makes sense, remembering our size and so we have an approach here that allows us to I think integrate very quickly with a very founded group of people and accelerate in essence on a fiber forward stance globally with not only the EDA 1500, but obviously with our E7 series et cetera without getting gummed up in the declining copper assets or other human resource challenges. So did that frame it for you?

Mark McKechnie - Evercore Partners

It does. No thanks, Carl and that it does help. And then this follow up from my second question here on the EDA 1500. How does that stack up versus your E series? I am guessing you are stepping to some bigger customers. So maybe there is a scale difference, but if you can tell me may be a little bit did you get any material new technologies or is this scale or how will you end up integrating the E and penetrating the E series versus the Ericsson product line going forward?

Carl Russo

So there is two different perspective. One is the product positioning and the other actually I want to come back and talk about people for a moment and hope that it will be clear why, Mark. So the product positioning is actually relatively straight forward. The E7 family is a broadly architected, highly versatile access infrastructure architecture. The EDA 1500 is a GPON OLT, a full blown, full fledged tier 1 GPON OLT.

So while the E7 is a much broader architecture with more headroom and can do more things ultimately the EDA 1500 is a really different purpose built GPON OLT that’s been installed in may tier 1s around the world and fully integrated into their back office systems that is highly valuable to us.

But that’s the product and technology. The people that did that are even more valuable because obviously those are the folks that can do it again and again and do other things as well. So it’s down that vein of both positioning from a product standpoint, but it also speaks directly to the expertise of those folks. Does that make sense?

Mark McKechnie - Evercore Partners

It does and a good deal of those I mean, those people on the R&D side. I am assuming the majority of them if not all of them work, you are getting the 61 here in Silicon Valley?

Carl Russo

Correct. The core of that group actually dates back to an acquisition that Ericsson did many years ago of a company called Entrisphere. And obviously that team has been added to and augmented et cetera, but yes it’s a very talented team and I am looking forward to being with them here in a few minutes. You know and again back to the tier one footprint, I mean as an example, the EDA 1500 is installed in accounts like Telefonica, Vodafone, Rostelecom in Russia. It’s a very valuable thing to us.

Operator

(Operator Instructions). Our next question comes from the line of Amitabh Passi from UBS. Please proceed with your question.

Amitabh Passi - UBS

Carl, I wanted to clarify. You said you are getting the GPON OLT, the EDA 1500. Just to maybe you can help me understand, will that then work with sort of your ONTs or is there also an ONT portion that you are acquiring from Ericsson?

Carl Russo

There is an ONT portion as well and I will not comment on the interoperability at this time. We will do so at the close.

Amitabh Passi - UBS

And then I don’t know if you guys can comment at this, but just looking at some third-party data, it looks like the ONT and OLT fees for Ericsson is running around $10 million to $12 million a quarter, is that kind of the right set of run rate we should be thinking about or is the business materially bigger?

Michael Ashby

Sure. We’re not going to comment at all on the numbers for the time being. We will wait until the close of the Q3 earnings call or when the deal closes to give some more detail at that time.

Operator

There are no further questions in the queue. I would like to hand the call back over to Mr. Allen for closing comments.

David Allen

Thank you, Doug and once again thank you all for joining us today on some short notice. We remain focused on executing against the growth opportunities ahead of us. And we look forward to updating you on our planned expansion activities and progress. Good bye for now.

Operator

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

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