Calix (CALX) 10-Q2023 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Address of Principal Executive Offices) (Zip Code)

(408) 514-3000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

As of July 17, 2023, there were 66,320,013 shares of the Registrant’s common stock, par value $0.025, outstanding.

FORM 10-Q

TABLE OF CONTENTS

 

 

CALIX, INC.

See accompanying notes to condensed consolidated financial statements.

1. Company and Basis of Presentation

Company

Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999 and is a Delaware corporation. The Company is the leading global provider of a platform (cloud, software and systems) and managed services that focus on the subscriber-facing network, the portion of the network that governs available bandwidth and determines the range and quality of services that can be offered to subscribers. This platform and managed services enable broadband service providers (“BSPs”) of all sizes to innovate and transform their businesses. The Company’s BSP customers are empowered to utilize real-time data and insights from the Calix platform to simplify their businesses and deliver experiences that excite their subscribers. These insights enable BSPs to grow their businesses through increased subscriber acquisition, loyalty and revenue, thereby increasing the value of their businesses and contributions to their communities.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, including the accounts of Calix, Inc. and its wholly-owned subsidiaries, have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) can be condensed or omitted. In the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. All intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet as of December 31, 2022 has been derived from the audited financial statements at that date.

The results of the Company’s operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year or any future periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

2. Significant Accounting Policies

The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022. The Company’s significant accounting policies did not change during the six months ended July 1, 2023.

Newly Adopted Accounting Standard

The Company did not adopt any new accounting standards during the six months ended July 1, 2023 that were significant to the Company.

Recent Accounting Pronouncements Not Yet Adopted

There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months ended July 1, 2023 as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, that are significant or expected to be significant to the Company.

3. Cash, Cash Equivalents and Marketable Securities

The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as commercial paper, corporate debt securities, municipal securities and U.S. government securities. The Company considers all investments with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent commercial paper, U.S. government agency securities, corporate debt securities, municipal securities and U.S. government securities with maturities greater than 90 days at date of purchase. Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values.

Marketable securities with maturities greater than one year are classified as current because management considers all marketable securities to be available for current operations.

The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive loss in the stockholders’ equity until realized. Realized gains and losses on sales of marketable securities, if any, are determined on the specific identification method and are reclassified from accumulated other comprehensive loss to results of operations as other expense, net. There were no realized gains and losses for the three and six months ended July 1, 2023 and July 2, 2022, respectively.

Cash, cash equivalents and marketable securities consisted of the following (in thousands):

The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and short maturities.

4. Fair Value Measurements

The following tables sets forth the Company’s financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):

5. Balance Sheet Details

Accounts receivable, net consisted of the following (in thousands):

Inventory consisted of the following (in thousands):

Prepaid expenses and other current assets consisted of the following (in thousands):

Property and equipment, net consisted of the following (in thousands):

In March 2018, and as amended in December 2020, the Company entered into an agreement with a vendor to develop a certain software product and related enhancements pursuant to which the Company is obligated to make revenue-share payments under the program, subject to aggregate fixed revenue-share payments of $15.8 million. The payments are based on a revenue-share rate applied to revenue from the developed-product and the corresponding hardware sales through March 2024. If the minimum revenue-share payments are not achieved by the end of that period, a true-up payment will be due. As of July 1, 2023, the liability, including accrued interest, was $7.6 million, which is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheet. As of December 31, 2022, the liability, including accrued interest, was $11.4 million, of which $7.2 million was included in “Accrued liabilities” and $4.2 million in “Other long-term liabilities.”

Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands):

6. Commitments and Contingencies

Lease Commitments

The Company leases office space under non-cancelable operating leases. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. Future minimum payments under the non-cancelable operating leases consisted of the following as of July 1, 2023 (in thousands):

The Company leases its headquarters office space in San Jose, California under a lease agreement that expires in December 2025. The future minimum lease payments under the lease are $6.1 million and are included in the table above.

The weighted average discount rate for the Company’s operating leases as of July 1, 2023 was 5.4%. The weighted average remaining lease term as of July 1, 2023 was 3.5 years.

For the three and six months ended July 1, 2023, total rent expense of the Company was $1.2 million and $2.4 million, respectively. For the three and six months ended July 2, 2022, total rent expense of the Company was $1.1 million and $2.2 million, respectively. Cash paid within operating cash flows for operating leases was $2.3 million for the six months ended July 1, 2023 and July 2, 2022 for each respective period.

Purchase Commitments

The Company’s suppliers, including contract manufacturers (“CMs”) and original design manufacturers (“ODMs”), place orders for certain component inventory in advance based upon the Company’s build forecasts in order to reduce manufacturing lead times and ensure adequate component supply. The components are used by the CMs and ODMs to build the products included in the build forecasts. The Company generally does not take ownership of the components held by CMs and ODMs. The Company places purchase orders with its CMs and ODMs in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when the CMs and ODMs convert the component inventory to a finished product and takes ownership of the finished goods inventory. In the event of termination of services with a manufacturing partner, the Company has purchased, and may be required to purchase in the future, certain of the remaining components inventory held by the CM or ODM as well as any outstanding orders pursuant to the contractual provisions with such CM or ODM. As of July 1, 2023 and December 31, 2022, the Company had approximately $253.9 million and $340.6 million, respectively, of outstanding purchase commitments for inventories to be delivered by its suppliers, including CMs and ODMs, within two years.

The Company has from time to time, and subject to certain conditions, reimbursed certain suppliers for component inventory purchases when this inventory has been rendered excess or obsolete, for example due to manufacturing and engineering change orders resulting from design changes, manufacturing discontinuation of products by its suppliers, or in cases where the Company has committed inventory levels that greatly exceed projected demand. The estimated excess and obsolete inventory liabilities related to such manufacturing and engineering change orders and other factors, which are included in accrued liabilities in the accompanying balance sheets, were $11.5 million and $10.3 million as of July 1, 2023 and December 31, 2022, respectively. The Company records the related charges in cost of revenue in its Condensed Consolidated Statements of Comprehensive Income.

Litigation

From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities. The Company is not currently a party to any legal proceeding that, if determined adversely to the Company, in management’s opinion, is currently expected to individually or in the aggregate have a material adverse effect on the Company’s business, operating results or financial condition taken as a whole.

7. Stockholders’ Equity

2019 Equity Incentive Award Plan

Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of the Company’s Board of Directors, are eligible to receive awards under the 2019 Equity Incentive Award Plan (“the 2019 Plan”). The 2019 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards and dividend equivalents to eligible individuals. At the Company’s 2023 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the 2019 Plan by 1.5 million shares. As of July 1, 2023, there were 5.7 million shares available for issuance under the 2019 Plan.

During the three months ended July 1, 2023, stock option awards exercisable for up to an aggregate of 0.2 million shares of common stock were granted with a grant date weighted-average exercise price of $42.79 per share. During the six months ended July 1, 2023, stock option awards exercisable for up to an aggregate of 0.6 million shares of common stock were granted with a grant date weighted-average exercise price of $48.75 per share. These stock option awards vest 25% on the first anniversary of the vesting commencement date and on a quarterly basis thereafter over an additional three years.

In February 2023, performance-based stock option awards exercisable for up to an aggregate of 1.2 million shares of common stock were granted to certain Company executives with a grant date exercise price of $51.57 per share. The actual number of shares earned is contingent upon achievement of annual corporate financial targets for bookings and non-GAAP net operating income for 2023 (collectively, the “2023 Performance Targets”) during the one-year performance period. These performance-based stock option awards will vest, subject to certification by the Compensation Committee of the Company’s Board of Directors upon the achievement of the 2023 Performance Targets, as to 25% of the shares of common stock earned on the one year anniversary of the date of grant, and as to the remaining 75% of the shares of common stock earned, in substantially equal quarterly installments over the subsequent 36 months, subject to the executive’s continuous service with the Company through the respective vesting dates. If the non-GAAP net operating income target and the bookings target are each achieved below 80% of target, no shares would be awarded, and the performance-based stock option awards would be forfeited in full. If either target is achieved at the minimum threshold of 80% of target, then the shares are awarded at 50% of the granted shares, with an increasing percentage of shares awarded above the minimum thresholds up to 125% of the granted shares for each target. Each target result is then weighted by 50% and the combined total determines the percent of target shares. The maximum combined award is 100%. The probability of meeting the performance conditions related to these performance-based stock option awards was assessed to be probable as of July 1, 2023 based on adjusted targets, and stock-based compensation expense of $4.5 million was recognized for the three months ended July 1, 2023. For the six months ended July 1, 2023, stock-based compensation expense of $6.9 million was recognized.

During the three months ended July 1, 2023, 31,000 shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $16.30 per share. During the six months ended July 1, 2023, 0.3 million shares of common stock were issued pursuant to the exercise of stock options at a weighted-average exercise price of $12.56 per share. As of July 1, 2023, unrecognized stock-based compensation expense of $95.0 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.2 years.

Employee Stock Purchase Plans

The Company maintains two employee stock purchase plans - the Amended and Restated Employee Stock Purchase Plan (the “ESPP”) and the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (the “NQ ESPP”).

The ESPP allows eligible employees to purchase shares of the Company’s common stock through payroll deductions of up to 15% of their eligible compensation subject to certain Internal Revenue Code limitations.

At the Company’s 2023 annual meeting of stockholders, the stockholders approved an increase in the number of shares of common stock issuable under the NQ ESPP by 1.2 million shares. The maximum number of shares of common stock currently authorized for issuance under the NQ ESPP is 7.5 million shares. As of July 1, 2023, there were 3.8 million shares available for issuance under the NQ ESPP. During the six months ended July 1, 2023, 0.4 million shares were purchased and issued. As of July 1, 2023, unrecognized stock-based compensation expense of $10.9 million related to the NQ ESPP is expected to be recognized over a remaining weighted-average service period of 0.8 years.

Stock-Based Compensation

Stock Repurchase Program

In July 2022, the Company’s Board of Directors authorized a one-year stock repurchase program for up to $100 million of the Company’s common stock. Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or otherwise, all in accordance with the rules of the SEC and other applicable legal requirements. The specific timing, price and size of the purchases depends on prevailing stock prices, general economic and market conditions, and other considerations consistent with the Company’s capital allocation strategy. The repurchase program does not obligate the Company to acquire a particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. In May 2023, the Company’s Board of Directors amended the repurchase program to remove the one-year end date. As of July 1, 2023, the remaining authorized amount for stock repurchases under this program was $90.0 million. For the six months ended July 1, 2023, the Company purchased 0.2 million shares of common stock for $10.0 million at an average price per share of $44.53.

8. Revenue from Contracts with Customers

The Company develops, markets and sells a broadband platform and managed services, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the Company unit level. Accordingly, the Company is a single reporting segment and operating unit structure. The Company’s chief operating decision maker is the Company’s Chief Executive Officer, who reviews financial information presented on a Company-wide basis, for purposes of allocating resources and evaluating financial performance.

The following is a summary of revenue disaggregated by geographic region based upon the location of the customers (in thousands):

Contract assets include amounts recognized as revenue prior to the Company’s contractual right to bill the customer. Amounts are billed in accordance with the agreed-upon contractual terms. The closing balance as of July 1, 2023 was $4.3 million of which the Company expects to bill 54% of the balance during the remainder of 2023. The contract asset balance may fluctuate depending on the timing of fulfilling the related performance obligations with the Company's customers.

Contract Liability

Deferred revenue was $67.2 million, $69.6 million and $58.6 million as of July 1, 2023, April 1, 2023 and December 31, 2022, respectively. The decrease in the deferred revenue balance for the three months ended July 1, 2023 was the result of revenue recognized of $11.3 million that was included in the deferred revenue balance at the beginning the period offset by cash payments received or due in advance of satisfying the Company’s performance obligations. The increase in the deferred revenue balance for the six months ended July 1, 2023 was driven by cash payments received or due in advance of satisfying

the Company’s performance obligations and balances reclassified to contract assets during the period offset by $20.0 million of revenue recognized that was included in the deferred revenue balance at the beginning of the period.

Revenue allocated to remaining performance obligations (“RPOs”) represents contract revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods but excludes variable consideration where the monthly invoicing is based on usage or where actual usage exceeds the minimum commitment. RPOs were $213.0 million as of July 1, 2023, and the Company expects to recognize as revenue 38% of this amount over the next 12 months and the remainder thereafter.

Contract Costs

The Company capitalizes certain sales commissions related primarily to multi-year subscriptions and extended warranty support for which the expected amortization period is greater than one year. As of July 1, 2023 and December 31, 2022, the unamortized balance of deferred commissions was $10.4 million and $11.2 million, respectively. For the three and six months ended July 1, 2023, the amount of amortization was $1.5 million and $2.9 million, respectively, compared to $0.9 million and $1.6 million for the three and six months ended July 2, 2022, respectively. There was no impairment loss in relation to the costs capitalized for either period.

Concentration of Customer Risk

No customer accounted for more than 10% of the Company’s revenue for the three or six months ended July 1, 2023 and July 2, 2022.

One customer represented 14% of the Company’s accounts receivable as of July 1, 2023. One customer represented 11% of the Company’s accounts receivable as of December 31, 2022.

9. Income Taxes

The following table presents income taxes and the effective tax rates for the periods indicated (in thousands, except percentages):

The Company’s income taxes for the three and six months ended July 1, 2023 and July 2, 2022 were determined using an estimated effective tax rate adjusted for discrete items that occurred during the respective periods. The Company’s effective tax rate for the three and six months ended July 1, 2023 and July 2, 2022 differed from the statutory federal corporate tax rate of 21% primarily due to state taxes, the inclusion of income from certain foreign operations and the effect of non-deductible stock-based compensation for executive officers offset by U.S. federal research tax credits and excess tax benefits from stock-based compensation.

The Company has net deferred tax assets that have arisen primarily as a result of temporary differences, net operating loss carryforwards, capitalized research and development costs and tax credits. The Company’s ability to realize a deferred tax asset is based on its ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. Management believes that it is more likely than not that the Company will utilize a significant portion of its deferred tax assets.

The Company maintained a valuation allowance for the three and six months ended July 1, 2023 and July 2, 2022 of $29.9 million on certain U.S. federal and state deferred tax assets that the Company believes are not more likely than not to be realized in future periods.

The Company considered scheduled reversals of deferred tax liabilities, historic profitability, projected future taxable income, ongoing tax planning strategies and other matters, including the period over which its deferred tax assets will be recoverable, in assessing the need for and the amount of the valuation allowance. In the event that actual results differ from these estimates, or if the Company decides to adjust these estimates in the future periods, further adjustments to its valuation allowance may be recorded, which could materially impact the Company’s financial position and net income in the period of the adjustment.

10. Net Income Per Common Share

The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):

Potentially dilutive shares have been excluded from the computation of diluted net income per common share when their effect is antidilutive. These antidilutive shares were from stock options.

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue or other financial items, any statement of or concerning the following: the plans and objectives of management for future operations, proposed new products or licensing, product development, anticipated customer demand or capital expenditures, anticipated growth and trends in our business and industry, future economic and/or market conditions or performance and assumptions underlying any of the above. In some cases, forward-looking statements can be identified by the use of terminology such as “could,” “may,” “will,” “would,” “expects,” “believes,” “intends,” “plans,” “anticipates,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative thereof or other comparable terminology. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including those identified in the Risk Factors discussed in Part II, Item 1A, of this report on Form 10-Q, as well as in other sections of this report and in our Annual Report on Form 10-K for the year ended December 31, 2022. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

Overview

We are the leading global provider of a broadband delivery platform (cloud, software and systems) and managed services that enable service providers of all types and sizes to innovate and transform their businesses. For our customers to successfully transform their businesses into the innovative BSPs of the future, they require actionable data for critical business functions such as network operations, customer support and marketing. However, this data is often trapped in disparate systems or departmental silos. Our Calix platform, which includes Calix Cloud, Revenue EDGE and Intelligent Access EDGE, gathers, analyzes and applies machine learning to deliver real-time insights seamlessly to each key business function. Our customers utilize these insights and data to simplify network operations, marketing and customer support and deliver experiences that excite their subscribers. This enables BSPs to grow their brand through increased subscriber acquisition, loyalty and revenue and to reduce their operating costs, creating value for their businesses and the communities they serve.

We market our Calix platform and managed services to communication service providers globally through our direct sales force as well as select resellers. Our customers range from smaller, regional service providers to some of the world’s largest service providers. Customers are defined into small (less than 250,000 subscribers), medium (250,000 to 2.5 million subscribers) or large (greater than 2.5 million subscribers). We have enabled approximately 1,900 customers purchasing directly and through partners to deploy passive optical, Active Ethernet and point-to-point Ethernet fiber access networks.

Our revenue and potential revenue growth will depend on our ability to develop, market and sell our platform and managed services to strategically aligned customers of all types such as WISPs, fiber overbuilders, cable MSOs, municipalities and electric cooperatives in the United States and internationally. Our growth is also highly dependent on the speed and willingness of customers to adopt the Calix platform and managed services.

Revenue fluctuations result from many factors, including, but not limited to: increases or decreases in customer orders for our products and services, market, financial or other factors that may delay or materially impact customer purchasing decisions, non-availability of products due to supply chain challenges, including component and labor shortages and increasing lead times as well as disruptions as a result of pandemics or natural disasters, contractual terms with customers that result in delayed revenue recognition and varying budget cycles and seasonal buying patterns of our customers. More specifically, our customers have in the past spent less in the first quarter as they are finalizing their annual budgets, and in certain regions, customers are challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure. Our revenue is also dependent upon our customers’ timing of purchases, capital expenditure plans and decisions to upgrade their networks or adopt new technologies, including adoption of our software and cloud platform solutions, as well as our ability to grow our customer base.

Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that may cause revenue fluctuations. Factors that have impacted our cost of revenue for the three and six months ended July 1, 2023, or that we expect will impact cost of revenue in future periods, also include: changes in the mix of products delivered, customer location and regional mix, changes in the cost of our inventory, including higher costs due to materials shortages including components, supply constraints, investments to support expansion of cloud and customer support offerings as well as our customer success organization, changes in product warranty, incurrence of retrofit costs, amortization of intangibles, support fees for silicon-related development work for our products, changes in trade policies, allowances for obligations to our suppliers and inventory

write-downs. In addition, we periodically elect to ship by air versus by ocean in order to meet delivery commitments to our customers, which is more costly. Cost of revenue also includes fixed expenses related to our internal operations, which could increase our cost of revenue as a percentage of revenue if our revenue declines.

Our gross profit and gross margin fluctuate based on timing of factors such as changes in customer mix and changes in the mix of products demanded and sold (and any related write-downs of existing inventory or accrual for supplier commitments) and have in the past been and may be negatively impacted by increases in mix of revenue from channel sales rather than direct sales or other unfavorable customer or product mix, shipment volumes and any related volume discounts, changes in our product and services costs, pricing decreases or discounts, new product introductions or upgrades to existing products, customer rebates and incentive programs due to competitive pressure or materials shortages, supply constraints, investments to support expansion of cloud and customer support offerings, tariffs or unfavorable changes in trade policies.

Our operating expenses fluctuate based on the following factors among others: changes in headcount and personnel costs, which comprise a significant portion of our operating expenses; variable compensation due to fluctuations in shipment volumes or level of achievement against performance targets; timing of research and development expenses, including investments in innovative solutions and new customer segments, prototype builds and outsourced development resources; investments in marketing programs; asset write-offs; investments in our business and information technology infrastructure; and fluctuations in stock-based compensation expenses due to timing of equity grants or other factors affecting vesting.

Further, as a result of factors contributing to the fluctuations described above among other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. To the extent there are material differences between these estimates and actual results, our financial statements may be affected. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

Our critical accounting policies and estimates, which are revenue recognition, inventory valuation and supplier purchase commitments and income taxes, are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022. For the six months ended July 1, 2023, there have been no significant changes in our critical accounting policies and estimates.

Recent Accounting Pronouncements

There have been no additional accounting pronouncements or changes in accounting pronouncements during the six months ended July 1, 2023 as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2022 that are significant or expected to be significant to us.

Results of Operations

Revenue

The following table sets forth our revenue (dollars in thousands):

No customer accounted for more than 10% of the Company’s revenue for the three and six months ended July 1, 2023 and July 2, 2022.

Gross Profit and Gross Margin

The following table sets forth our gross profit and gross margin (dollars in thousands):

Sales and Marketing Expenses

The following table sets forth our sales and marketing expenses (dollars in thousands):

Sales and marketing expenses for the three months ended July 1, 2023 increased by $13.5 million compared with the corresponding period in 2022 primarily due to increases in personnel expenses mainly related to sales headcount and higher sales incentive compensation of $9.4 million, stock-based compensation of $2.2 million and travel expenses of $0.9 million.

Sales and marketing expenses for the six months ended July 1, 2023 increased by $29.2 million compared with the corresponding period in 2022 primarily due to increases in personnel expenses mainly related to sales headcount and higher sales incentive compensation of $20.0 million, stock-based compensation of $4.2 million, travel expenses of $2.3 million and marketing expenses of $0.9 million.

We expect our investments in sales and marketing will increase in absolute dollars, but be relatively consistent as a percentage of revenue, as we extend our market reach and grow our business in support of our key strategic initiatives.

Research and Development Expenses

The following table sets forth our research and development expenses (dollars in thousands):

Research and development expenses for the three months ended July 1, 2023 increased by $14.9 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $9.0 million, stock-based compensation of $2.6 million, prototypes and test equipment expenses of $1.0 million, outside services of $0.8 million and depreciation and amortization of $0.8 million.

Research and development expenses for the six months ended July 1, 2023 increased by $28.3 million as compared with the corresponding period in 2022 mainly due to increases in personnel expenses of $17.2 million, stock-based compensation of $3.2 million, outside services of $2.6 million, prototypes and test equipment expenses of $2.3 million and depreciation and amortization of $1.6 million.

We expect our investments in research and development to increase in absolute dollars, but remain relatively consistent as a percentage of gross profit, as we seek to expand the functionality and capabilities of our platforms.

General and Administrative Expenses

The following table sets forth our general and administrative expenses (dollars in thousands):

General and administrative expenses for the three months ended July 1, 2023 increased by $5.8 million as compared with the corresponding period in 2022 mainly due to increases in stock-based compensation of $2.9 million and personnel expenses of $2.5 million. We plan to continue to invest in our information technology infrastructure and headcount due to the growth of our business.

General and administrative expenses for the six months ended July 1, 2023 increased by $12.9 million as compared with the corresponding period in 2022 mainly due to increases in stock-based compensation of $6.0 million, personnel expenses of $5.8 million and outside services of $1.1 million.

We expect our general and administrative investments to increase in absolute dollars but decline slightly as a percentage of revenue over time in relation to increased revenue.

Interest and Other Income (Expense), net

The following table sets forth our interest and other expense, net (dollars in thousands):

Interest and other income (expense), net increased by $2.5 million and $4.0 million as compared with the corresponding periods in 2022 mainly due to a higher rate of interest earned on our cash, cash equivalents and marketable securities as well as a growing cash balance.

Income Taxes

The following table sets forth our income taxes (dollars in thousands):

For the three and six months ended July 1, 2023, our income tax expense was $4.9 million and $6.7 million for an effective tax rate of 34.1% and 26.0%, respectively, which differed from the statutory rate of 21% primarily due to state taxes, the inclusion

of income from certain foreign operations and the effect of non-deductible stock-based compensation for executive officers offset by U.S. federal research tax credits and excess tax benefits from stock-based compensation. The effective tax rates for the three and six months ended July 1, 2023 are higher than the similar periods in 2022 primarily as a result of a lower excess tax benefits from stock-based compensation.

Our income taxes may be subject to fluctuation during the year and in future years as new information is obtained. This may affect the assumptions used to estimate the annual effective tax rate, including factors such as actual results differing from our estimates of pre-tax earnings in the various jurisdictions in which we operate, which could impact the recognition of our deferred tax assets, further benefits from stock option exercises, investments in our foreign operations, the recognition or de-recognition of tax benefits related to uncertain tax positions and changes in or the interpretation of tax laws in jurisdictions where we conduct business.

Liquidity and Capital Resources

Historically, we have funded our operations and investing activities primarily through sales of our common stock, cash flow generated from operations and various borrowing arrangements. For the past few years, we have generated cash flow from our operations as our business has grown. As of July 1, 2023, we had cash, cash equivalents and marketable securities of $264.1 million, which consisted of deposits held at banks and major financial institutions and highly liquid marketable securities such as U.S. government agency securities and commercial paper.

Operating Activities

Net cash provided by operating activities was $25.6 million for the six months ended July 1, 2023 and consisted of net income of $19.0 million and non-cash charges of $41.0 million offset by cash flow decreases of $34.4 million reflected in the net change in assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $34.1 million and depreciation and amortization of $7.9 million.

Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in prepaid expenses and other assets of $26.1 million mainly due to advanced payments to supply chain partners, the renewal of a software contract and reclassification of contract assets from deferred revenue; a decrease in accounts payable of $6.3 million due to the timing of inventory purchases; an increase in inventory of $4.2 million to improve our responsiveness to our BSPs’ subscriber demand; an increase in accounts receivable of $3.2 million in line with our revenue growth; and a decrease in accrued liabilities of $3.1 million due to the payout of incentive compensation and payments related to our Calix ConneXions 2022 Customer Success and Innovation conference. These changes were partially offset by an increase in deferred revenue of $8.6 million primarily due to our platform subscriptions and support contracts and reclassification of contract assets to prepaid expenses and other assets.

Net cash provided by operating activities was $14.4 million for the six months ended July 2, 2022 and consisted of net income of $15.6 million partially offset by non-cash charges of $29.2 million and cash flow decreases of $30.5 million reflected in the net change in assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of $20.5 million, depreciation and amortization of $7.7 million and deferred income taxes of $1.0 million. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of an increase in prepaid expenses and other assets of $23.3 million mainly due to advanced payments to supply chain partners, an increase in inventory of $9.4 million to improve our responsiveness to customer demand, a decrease in accounts payable of $6.1 million due to the timing of payments related to inventory purchases and an increase in accounts receivable of $0.9 million in line with our revenue growth. These changes were partially offset by an increase in deferred revenue of $8.7 million due to Calix Cloud and Revenue Edge subscriptions, and support contracts.

Investing Activity

For the six months ended July 1, 2023, cash used in investing activities of $18.8 million consisted of net purchases of marketable securities of $8.7 million and capital expenditures of $10.1 million, consisting primarily of purchases of test and computer equipment and software.

For the six months ended July 2, 2022, cash used in investing activities of $27.7 million consisted of net purchases of marketable securities of $21.8 million and capital expenditures of $5.9 million, consisting primarily of purchases of test equipment and computer equipment.

Financing Activities

Net cash provided by financing activities of $4.2 million for the six months ended July 1, 2023 primarily consisted of proceeds from the issuance of common stock related to our equity plans of $18.3 million. This was partially offset by repurchases of common stock of $10.0 million and payments related to a financing arrangement of $4.1 million.

Net cash provided by financing activities of $13.9 million for the six months ended July 2, 2022 primarily consisted of proceeds from the issuance of common stock related to our equity plans.

Working Capital and Capital Expenditure Needs

Our material cash commitments include non-cancelable firm purchase commitments, normal recurring trade payables, compensation-related and expense accruals, operating leases and revenue-share obligations. We believe that our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing our inventory. Furthermore, our Board of Directors has authorized a stock repurchase program for up to $100 million of our common stock of which $90.0 million remains available. During the six months ended July 1, 2023, repurchases of $10.0 million were made under the program. Our stock repurchase program does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time.

We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash needs for at least the next twelve months. If we are unable to generate sufficient cash flows or obtain other sources of liquidity, we will be forced to terminate our repurchase program, limit our development activities, reduce our investment in growth initiatives and institute cost-cutting measures, all of which may adversely impact our business and potential growth.

Contractual Obligations and Commitments

Our principal commitments as of July 1, 2023 consisted of our contractual obligations under non-cancelable outstanding purchase obligations, operating lease obligations for office space and a revenue share obligation. The following table summarizes our contractual obligations as of July 1, 2023 (in thousands):