Q1 2024 Calix Inc Earnings Call

Participants

Jim Fanucchi; VP, IR; Calix, Inc.

Michael Weening; President, Chief Executive Officer, Director; Calix Inc

Cory Sindelar; Chief Financial Officer, Principal Accounting Officer; Calix Inc

Ryan Koontz; Senior Analyst; Needham & Company LLC

George Notter; Analyst; Jefferies

Samik Chatterjee; Analyst; JPMorgan

Scott Searle; Analyst; ROTH MKM

Michael Genovese; Analyst; Rosenblatt Securities

Tim Savageaux; Analyst; Northland Securities, Inc.

Christian Schwab; Analyst; Craig-Hallum Capital Group LLC

Presentation

Operator

Greetings, everyone, and welcome to the Calix first-quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Fanucchi, Vice President of Investor Relations. Sir, please go ahead.

Jim Fanucchi

Thank you, Melissa, and good morning, everyone. Thank you for joining our first-quarter 2024 earnings call. Today on the call, we have President and CEO, Michael Weening; and Chief Financial Officer, Cory Sindelar. As a reminder, yesterday, after the market closed, Calix issued a news release, which was furnished on a Form 8-K, along with our stockholder letter and it was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of our website.
Before I turn the call over to Michael for his opening remarks, I want to remind everyone on this call we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy and market outlook, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause the actual results and trends to differ materially are set forth in the first-quarter 2024 letter to stockholders and in the annual and quarterly reports filed with the SEC.
Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. Also in this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the first quarter of 2024 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP.
With that, it is my pleasure to turn the call over to Michael. Michael. Please go ahead.

Michael Weening

Thank you, Jim. Our results in the first quarter demonstrated the continued execution and strength of our strategy. Our platform, cloud and managed services are enabling our broadband customers to succeed against their competitors every day. Their success delivers value to their stakeholders and in turn, to Calix. Our unique broadband business model delivered record gross margins as BSPs deployment of the Calix platform, cloud and managed services continued unabated.
However, our appliance business remains challenged in the same way, the market is, with larger customers reevaluating their CapEx plans. This trend continued into the second quarter, which we did not forecast. Now that we understand this larger customer dynamic, we have adjusted our expectations accordingly.
At the same time, however, it highlighted the ongoing strength of our smaller BSP customers. While growth in this set of customers is muted by a new build indecision around BEAD, the business, as usual, part of their operations, completing existing network builds and filling those networks by winning new subscribers remains robust.
Leading indicators from infrastructure vendors that deploy fiber combined with green shoots in our customer base lead us to forecast that the second quarter will be the bulk of our appliance revenue. Regarding BEAD, and as we have said, we believe revenue will begin in early '25 and we will lead working with customers to help them to government funds is something that we have done for 15 years.
Recently, you saw us create a partnership with industry-leading funding solution provider, Ready.net. This partnership enables us to leverage Ready.net's tools as part of our existing funding consult program, connecting our more than 1,600 customers with a streamlined portal to apply for and win grant funds, secured capital and adhere to public funding requirements.
Earlier this month, we announced that 74% of federally funded BSPs used Calix for their broadband speed test. This is a significant indicator of future success as any BSP who received government stimulus much routinely report back on the speed they are delivering to their customers. This is a complicated undertaking that we've made simple via our platform cloud and managed solutions. We expect that 74% figure to grow.
While the largest government stimulus program is soon to be here, we've been actively landing new footprint as our consolidated network delivers the lowest cost per bit per mile infrastructure and up to 80% months reduction in operating expense as demonstrated at Verizon.
Unlike in times past, when many new accounts were startups, the 10 new accounts recorded in the first quarter all came from existing service providers. We intend to maintain our aggressive stance in the market at this critical time.
Finally, and most importantly, the wave of disruption is speeding up. Larger service providers are engaging in conversations with Calix to help them build a more valuable business by avoiding commoditization. Two examples from the first weeks of Q2 include signing the largest cloud deal in our history and a larger service provider, selecting SmartBiz. Both are indicators that we are crossing the chasm in this disruption.
With that, I'd like to turn it over to Cory to review our financial results for the quarter.

Cory Sindelar

Thank you, Michael. The first quarter represented another quarter of deliberate and disciplined execution. We delivered revenue of $226.3 million, which was within the guidance range we provided in January, against the crosswinds prevalent in our industry for continued growth in our platform cloud and managed services drove record non-GAAP gross margin of 54.9%.
In the first quarter, we saw a platform adoption with 18 customers beginning their platform journey with us and 27 customers deploying a managed service for the first time. In the first quarter of 2024, non-GAAP operating expenses were $108.4 million, down $1.6 million from the prior quarter. The decrease is attributed to our connections event, which occurs each year in the fourth quarter.
As we talked about in our last call. Our plan is to keep 2024 operating expense investments relatively consistent with 2023 as we continue to believe that this level of investment represents a great opportunity for us to grow our footprint ahead of the US government broadband investment.
Our debt-free balance sheet remains strong. At the end of the first quarter, cash and investments were nearly $240 million, representing a sequential increase of $19 million. This was our fourth consecutive quarter of double-digit free cash flow. During the first quarter, our supply chain continued to normalize. We exited Q1 with purchase commitments falling another $29 million from year end to $147 million.
Inventory deposits declined by $2 million and our inventory turns were 3.1, down from 3.3 last quarter as our component inventory increased. Excluding component inventory, our inventory turns would have been greater than 4. Furthermore, we expect these reductions in working capital requirements, combined with continued profitability, will result in consistent and quarterly double-digit operating and free cash flow.
During the first quarter, we repurchased $4 million of our common stock, bringing our total common stock repurchases over the last year to $89 million. Our repurchase program remains in place with approximately $110 million available at the end of the first quarter.
Now let's discuss our revenue guidance for the second quarter. As Michael has discussed, there currently are several crosswinds in our industry. As a result of these factors, our second quarter of 2024 outlook is for revenue to be between $197 million and $203 million. The forecasted decline in revenue from the first quarter is mostly due to the continued delay of purchasing decisions at a few of our medium and large customers.
Looking out a bit further, we believe the June quarter will set the bottom for revenue as revenue from a few significant customers will have diminished to a point where there is limited downside risk. When you combine the green shoots from our smaller customer base with footprint expansion, we believe we will return to revenue growth.
In summary, while crosswinds affect our top line in the near term, our platform, cloud and managed services will continue to grow unabated and drive gross margin expansion. And with the industry's strongest balance sheet, we have the financial resources to invest in our operations and grow our footprint in advance of the US government broadband investments.
Michael, back to you.

Michael Weening

Thank you, Cory. As I have shared, I meet with broadband customers and their investors constantly. It is clear they are understanding the disruption that faces legacy network operators, which is critical to our crossing the chasm from early adopters to winning an early majority. With more than 1,000 customers deploying our platform, it is no surprise that we are engaging with ever larger prospects who are interested in how our BSP customers are achieving their incredible revenue, margin, cash flow and customer satisfaction results.
The entire Calix team remains energized by the opportunity to expand our platform, cloud and managed services business. At the same time, with more than 60 million new fiber connections forecasted in the next five years, we have a once-in-a-generation opportunity to land new network footprint and enable our BSP customers to win new subscribers, thereby filling those networks with an expanding portfolio folio of managed services.
This will be supercharged by the BEAD funds that began in '25. While only one state has completed all 10 steps in the BEAD process, 42 other states have completed 9 of the 10 steps to begin funding. In closing, I want to reiterate that we are confident in our long-term outlook.
We have a talented and motivated team executing our strategy every day. We have unique technology that positions us to surf this wave and take advantage of new network builds. We have the financial strength and balance sheet that allows us to avoid any distractions. Therefore, we intend to keep a steady and disciplined hand on our operating expense investments as we maximize this opportunity and help our customers win.
Jim, let's open the call for questions.

Jim Fanucchi

Thank you, Michael. Melissa, please open the call for questions at this time.

Question and Answer Session

Operator

(Operator Instructions)
Ryan Koontz, Needham & Co.

Ryan Koontz

Great. Thanks for the question. Just unpacking your customer segments there a bit, looks like your Tier 3s or the smaller customers relatively stable here, but the medium and large really hurting your -- how should we think about the trajectory of those segments going forward here into 2Q? And then, how do you think about them in the second half at this kind of early stage from a from a high level? Thanks.

Cory Sindelar

Yeah. Thanks, Ryan, and thanks for the question. As we outlined in our letter, we're continuing to see green shoots coming out of the smaller customer base and the decline from Q1 to Q2 is really focused on those medium and large customers. To put a point on it, that segment -- those segments in the fourth quarter were $77 million of revenue and in the first quarter, they turned out to be about $43 million.
We didn't expect continued deterioration a quarter ago, but clearly they're still stuck in their capital planning processes. And we're not forecasting them to be -- to have to get from that $43 million level. So those segments really have not much more pressure to go. And so we think at this point, why Q2 has bottomed and we're confident that from here on out, we ought to be able to grow.

Ryan Koontz

Got it. Thanks, Cory. And quick follow-up, if I could, please, on your product mix here in terms of Revenue EDGE Intelligence Access EDGE, should we think that Intelligent Access EDGE as the trajectory for your new footprint gain? I actually thought it might be a little worse than that and might see a kind of more of a mix toward selling and revenue EDGE, but how should we interpret those two product segments?

Michael Weening

Well, so the -- on the Intelligent Access EDGE, that's a mix of new network gains, but also our existing customers filling out the network builds that they currently have. And so we said we saw some rails. You see the continued strength in our rural customers who are in a smaller segment, who continue to build out both networks successfully. And that's why you see that under underpinned strength.
And I would say that as we go forward and you start to see those 60 million fiber line start to get build out, that you're definitely going to see the Intelligent Access EDGE surge. On the Revenue EDGE side, that is the business as usual part of our business where that's what they use to acquire our new subscribers.
And so you're going to see that continue. And in fact, as we we took 10 customers last year -- last quarter from -- and therefore, those when they're generally caps and grows where they're saying, I have an existing fiber network. I'm worried about commoditization. I need to differentiate my business in my markets, and Calix is best positioned to do that, so.

Ryan Koontz

Got it, Michael. So it's fair to say that the Intelligence Access EDGE number includes a healthy component of sell-in, fill-in, EDGE-out from existing networks, but entirely new footprint is down much more than that?

Michael Weening

For sure. And that's back to the indecision with regards to decision making as they work through try invest my [drive pattern] and the capital that I have and a new network build or do I use the funding that's now almost six months -- seven, eight months out and the BEAD funding can go after that instead of using my existing capital. So in the future, you will definitely see it swing up on the network side as they begin to deploy those BEAD funds and we take footprint.

Ryan Koontz

Got it. Great. I'll pass it on from here. Thank you.

Michael Weening

Thanks, Ryan.

Operator

George Notter, Jefferies.

George Notter

Hi, guys. Thanks a bunch. I wanted to ask the BEAD question. I think you said the six to eight months out. Look, I know the BEAD program is a little bit controversial in terms of the process and the potential for delays, is there -- can you handicap the BEAD process? Do you really think that the monies are flowing by year end than the six to eight months out? Or do you think it's a program that has the potential to slip?

Cory Sindelar

Good question. We have in -- everybody's asking that question. And so over the last three years, others have been asserting that it would be coming earlier. We've been very consistent with regards to our views that which takes significantly longer to arrive. And then when it does arrive, it's going to be a lot larger than people anticipate. So what's our view on it? As we it in 2025 -- in early 2025, we think that you'll start to see some trickles and then it will go from there. 2025 is the year.

Michael Weening

Yeah, Ryan. You could see from the NTIA's website that they made some good progress in terms of getting states approved through the volume one or the challenge process. If you include territories, they went from 29 last quarter to 47. I would expect that the NTIA will start working more on the volume two in getting more states approved. But you're right. So you start seeing those states get approved and this (inaudible) in turn continue to slip. So like any government funds. And that's where I'm continuing to watch that. I'm encouraged by what I saw what happened in the last 90 days, and we'll see what the next 91 days brings.

George Notter

Got it. And then just as a follow up, I think you guys were talking about the overhang associated with BEAD. How many -- we talked about kind of network planners kind of going offline is a result of the weight for effect associated with BEAD. Is that -- you talked about the strength in your smaller customers. Is that something that you're seeing right now in the smaller customer base? Or is that something you're looking at more prospectively as the year goes on? Or how do you think about that effect and how it layers in your business timing wise? Thanks.

Michael Weening

Well, we identified that in January this year. We stated that it would be -- this is going to be any impact through first half, right? And so we saw that in Q1, and we see that in Q2. You see a profound impact on some of the larger customers as they're working through this. With our existing customer base, they still are going through that decision-making process. So a portion of them are -- have made a decision to not apply for BEAD, but there are a portion of them that are continuing on, Therefore, are pursuing BEAD. Therefore, that indecision continues and you see it lesser in the smaller customers and more profound in the medium and large.

George Notter

Great. Thank you.

Operator

Samik Chatterjee, JPMorgan.

Samik Chatterjee

Hi, good morning and thanks for taking my questions. I did jump on a bit late, so if I -- if you've answered this, please excuse me. But you did call out in 1Q as well, certain significant customers that were pausing spend. You are calling that out as a headwind in this release as well.
I'm just wondering when you look at the breadth of the customers, sort of that are pausing, is that just expanding in terms of the breadth as you go into sort of the back end of the year? Is that really becoming sort of a more evident trend or it is typically sort of remaining constrained to a few? I think you had called out three significant customers last quarter that had paused. Is it remaining constraint to those? And I have a follow-up. Thank you.

Michael Weening

Well, it's a great question for you to answer and identify that the shift from Q4 to Q2 and how we did not anticipate it continuing in the second quarter.

Cory Sindelar

Yeah, it is largely two customers that have continued to have delays in their capital decision. And so it's not a broadening, it's really more focused on those couple. And when you take a look at what they did, we were at $77 million in Q4 of last year. It's $43 million in the current and anticipated to be about half that in Q2. So no, I don't -- it's not broadening out. It's still tied to largely predominantly, those two customers in particular.

Michael Weening

And that's why we feel confident in calling the bottom. The small space segment remains very robust. We've demonstrated that. And while they may have some pause in their decision making, they continue to expand out with their initial or with their existing network builds and winning new subscribers. We've seen green shoots in everything that we're doing. If you actually look at last year, as inventory turns decline, we saw obviously, our funnel decline in the same way, and we've also seen that turnaround.
Our funnel is now expanding. And you also the lead indicators from fiber builder like Dycom, who called out that they're starting to see those green shoots and they are are also expanding. So that's why we feel comfortable calling the bottom. And then in the second half, we'll start seeing the expansion.

Samik Chatterjee

Got it, got it. And for my follow-up, one of the interesting things you highlighted in the shareholder letter is even as customers are pausing some of the new network builds, they're focusing more on subscriber trends and monetization of those subscribers, I assume, which leads we think this should be more interest for your for cloud platforms overall, but I know you outlined that in Q2 you will continue to grow them.
But what are you seeing in terms of trends? Are you seeing any accelerating trends just on account of 10 customers relying more on you for those services in the meantime as the network builds that pause? I mean, any insights on that because I would think you'd have a counterbalancing effect of the cloud platforms there. Thank you.

Michael Weening

That's a great question, Samik, and a good insight. And in fact, it's exactly like that. I actually had a prospect, you've never done business with us last week, use the following term, you stated that we did not have the time over the last three years through the pandemic to pour a cup of cofee, let alone consider a different business strategy. But through this pause and some of the challenges that are going on the industry, we actually took a step back.
We started to look at you as an alternative. And through our conversation, we realized that you're not an alternative, that you're the choice that we should be making because you're not coming to us talking about [doubling] in dumb fiber network. Where you're actually talking about is building out a diversified business strategy that is very comprehensive for the consumer, expands into small business and then the vision to go into medium. And then at the same time, differentiates the local brand with the community through assets like SmartTown.
And so in this type of scenario where they did not have that breathing room to even consider it, they now do. And this represents what we've been stating in Q2, Q4 and now in Q2 again, that this represents a massive opportunity to search through that demonstrate the value that we can have to their business and set ourselves up for a decade to come.
And so that's why we're so enthusiastic about the pause that's happening in the market right now. It creates an opportunity with those customers to actually take the time to think and recognize that there is a big shift happening and they have an opportunity to partner with Calix.

Samik Chatterjee

Thank you. Thanks for taking my questions.

Operator

Scott Wallace Searle, ROTH MKM.

Scott Searle

Hey, good morning. Thanks for taking my questions. Hey, Mike, maybe just to quickly clarify a couple of items. Looking at the down quarter them into June and the weakness in the medium and large customers, are they entirely the cause of the downward sequential move from the first quarter and second quarter would imply another 40%, 50% sequential decline similar to what we saw in the current March quarter? Are you seeing some softening as well on the small business front?
And as we look into the second half of this year, wanted to clarify that recovery, is it all small business driven? And when you see BEAD in early '25, I'm assuming that's the initial spending that you're talking about as opposed to awards. Just want to clarify that. And then I had a follow-up.

Michael Weening

So Cory clearly stated that when revenue is declined from $77 million to $43 million in the medium large. And then we're anticipating it having again in second quarter, that we've fully attribute what's happening to that segment. And so -- and then as we stated in the investor letter, our small segment continues to be strong.
And then we look, at as they're going through this decision-making process, as I just stated, as a significant opportunity for us to actually surge in where they have the mind share and the time to think, where they can consider us as an alternative and our business model, which in the end is crafting the cause of chasm from us, moving from the really innovative, both, like allo and others, to really get it and have already deployed and recognize that they want to build a different business to differentiate in their markets to the network operators who are now starting to see the challenges and looking to fill our network.
So yes, it's attributed to medium and large. No, we do not see a shortfall in the small. In fact, we see them continuing to invest and grow. And that will lead to strength in the second half. I think I answered his question.

Cory Sindelar

And then the last question, Scott, you asked about was from BEAD. And yes, we're talking about not just awards, but revenue beginning in '25.

Scott Searle

Okay, great. And if I could, just on the BEAD's front. Look, you're working with multiple customers right now in terms of facilitating their process and obviously engaging with them. Is there a number in terms of the amount of requests that your customers have put in or some sort of magnitude help us understand what that dollar amount could actually look like? And I was wondering if you could clarify trickle in '25 and where you think this could peak out in terms of annual contribution from BEAD funding as we get into '26, '27 and beyond? Thanks.

Michael Weening

No, we don't have a number affiliated with that. The only number that we will provide is that we've had well over 500 consults that we've engage with customers and helping them understand where the different funds are. That's not only BEAD, but it's also state level, that's Tribal. All those different groups that we've been working with. I was at the Tribal Summit two weeks ago, and there were hundreds and hundreds of tribes there who are contemplating that government funding, which is directed at their markets.
So I would just say that we are incredibly active as I put -- or we put in the shareholder letter. We also have partnered with Ready.net, who is very active with our customers and helping them understand where the BEAD funding is, how to pursue it, what maps are. And where we see incremental value in that is, as we've done with previous programs over the last 15 years, we see those expanding beyond just the funding part of it, which is a great opportunity for us to partner with our customers into how do they stay compliant over the long term through the testing.
Currently, as I stated earlier in my remarks, 74% of federally funded customers in the US today use us for speed test. That should be a very good indicator with regards to the capabilities that we provide of broadband service provider to pursue government funding on how to make it simple and successful.

Scott Searle

Great. Thanks.

Operator

Michael Genovese, Rosenblatt Securities.

Michael Genovese

Great. Thanks. Thanks for the call. Thanks for all the points you're making, which are good. I just wanted to check first on a couple of more bare thesis points, just get your view on them. First of all, at OFC, Cisco was talking about basically going after the medium customer market, with Pond technology, with a Pond card hanging off a router, similar to the [CNO] solution. So just wanted to check if there's anything market share wise going on in Tier 2 market or if this is all just customer evaluation delays as you spoke about?

Michael Weening

There is a competitive thing going on. We're taking footprint. So that's what's going on. And so that being said, our acquisition of that footprint, like the 10 customers that we won in Q1, it takes time for them to actually burn through their previous inventory and make the transition of all those different elements. And so those are the green shoots that we've been referring to. With regards to other people coming into our market, bring it on.

Michael Genovese

Great. Okay. And then on the kind of Tier -- large, medium small customer question, having to do with BEAD there's been some people talking about how -- and I don't know how they can predict this. But they are predicting that at the end of the day, and I don't know if this is correct, but people are saying BEAD might go more towards the large and the medium customers and less towards the small customer base at the end of the day. So I don't know where that call is coming from or how people can say that.
You're working with all these customers. What's your confidence that your small customers who make up 80% of your revenues are going to be winners in the BEAD process? Like, where does that -- just sort of detail where that confidence comes from? And any data points you can give us there? Thanks.

Michael Weening

Well, to be clear, though, BEAD -- we didn't BEAD is going to go to small customers. We said that actually BEAD is going to go to the market, small, medium and large. We called out that our medium and large segment is down as they go through their decision-making process. But that should be an indicator that that should then swing back as they acquire that funding.
With regards to who's going to win, all three segments are going to compete for that money aggressively. But to be clear, BEAD is focused on the really rural underserved customers. And in fact, when I've engaged with the NTIA around this, they are aggressively trying to ensure that the small service providers do participate and that it just doesn't go to large because if the small teams do not actually participate in BEAD, that's going to be for America.
Why? Because they're the ones who actually have invested in nowhere USA because they live there. They love their community and they've done those investments with or without government funding and the NTIA's reliant on them, continuing that community-centered mindset to make very rural situations successful.
So anyone who says it's just going to be one segment or another, that I don't agree. We don't agree. It's going to be all three segments participating at different levels. And in all three segments, we have good relationships and -- or we'll be able to support them all.

Michael Genovese

Okay, great. And then finally for me, just looking past this, as we get to 2025, I know it's early to give an outlook for beyond one quarter or one year, but do you think that we can get back to a 10% to 15% type of growth rate in '25? Or do you think we'll be ramping towards that in sort of the first half of '25 and maybe don't get there until 2026 on the full-year basis? Just -- the long-term kind of annual growth rate starting in 2025, how are you thinking about it?

Michael Weening

We did that consistently for four years and we expect that once we get through this peculiar indecision phase, that we will get back to that. And as I stated in my opening remarks, the first thing I stated is that the fundamental underlying -- underpinnings of this business is our platform cloud and managed services remained strong as best evidenced by the fact that we've got cash flow and margins continue to grow, customers understand.
And this indecision period, as I stated, is an opportunity for them, take a deep breath, consider their future and what do they want to do over the next 5 to 10 years as opposed to just what's in front of them. And this creates the opportunity to have a very different conversation around how do you build a higher value business for your stakeholders, which can be members if you're a cooperative or shareholders if you're for profit. And this represents an opportunity for us to take footprint, which will then yield in 2025.

Michael Genovese

Great. Thanks very much.

Operator

Tim Savageaux, Northland Capital Markets.

Tim Savageaux

Hi, good morning. A couple of questions. And Michael, you hit on this briefly, but I want to go back to your green shoot commentary and see whether you had any more color on that, it was really -- and I have another question about revisiting kind of the share gain efforts that were discussed on the last call. You seemed to conflate those two and or any other signs of positive that activity throughout the customer base, small, medium or large that you would refer to are the green shoots? Or is it really your efforts to gain share?

Michael Weening

Well, so -- as we -- when you go back during the pandemic, our lead times were as high as 18 months. During that situation, we had deep insight into what BSP was doing through because they actually had to give us their orders. And therefore, the pipeline affiliated with that. And over time, as we've gone through that over the last eight -- over the last few years, you've seen basically lead times go down to from six quarters down to, in essence, a single quarter. And therefore, logically, you would also see the pipeline affiliated with that also shift.
And we're now at a place where things have stabilized and we have our VAR back to actually seeing, from a green shoots point of view, significant pipeline growth, which gives us confidence in what's going to happen in second half.
At the same time, we continue to take footprint, as evidenced by -- I talked about a larger customers selecting us Smart business. That's a significant win, that's a brand-new business. And us closing not in Q1, but in Q2, in the first few weeks of the quarter, we closed our biggest cloud deal in the company's history.
And so we -- I go through those points. The pipeline growing, the strong -- closing the largest cloud deal. And then a larger customers selecting us to actually go after their small business market, which is in essence brand new business for us. This represents a significant opportunity and gives us confidence in the second half.

Tim Savageaux

Great. And kind of following along from that, even, it's been maybe notable here in the last couple of quarters, is that even with the revenue side, you've seen gross margins continue to tick up. I imagine there's a mix aspect to that with the appliance business. And I guess a couple of -- as that perhaps recovers into the second half, what sort of impact do you expect it to have on the gross margin side? Which is -- could it blunt that sequential growth with hardware coming back? Or do you expect to see continued steady increases in gross margin throughout the year from greater software and service revenue?

Cory Sindelar

Yeah, it's a great question, Tim. As we said throughout our platform cloud and managed services business continuing to grow, as our customers continue to take share and add new subscribers. So you've seen that persist and we'll continue to do so.
As the network -- new network builds come back, what you'll ultimately see is a shift in product back to more access, which has higher gross margins. So you won't see necessarily a decline in gross margins. I think you'll see the progression continue. The rate at which it changes from quarter to quarter will vary depending on those mixes.
So for example, in the second quarter, the margin expansion is less than what it was in the first quarter. And it has to do with a lot of the product swinging back to the premises side in the second quarter. So inevitably, we think the margin will continue to progress. And I don't think you should think that'll pause because new network builds being decided.

Tim Savageaux

Okay. Thanks very much.

Operator

Christian Schwab, Craig-Hallum Capital Group.

Christian Schwab

Great. Hey, Cory, how long before the two large customers get back to $77 million from $20 million?

Cory Sindelar

That's a great question. I'm not going to call that one. Obviously, last quarter, I was surprised by -- thought they would get to where they would make some decisions. I wasn't anticipating the decline that we saw. So yeah, I'm not going to dare to go out on a limb and say when that will recover back. We know it will recover at some point, just don't know when.

Christian Schwab

Okay. So I mean, we havent been done $200 million in revenue over two years, right? And we're going to keep spending, almost [$110 million].

Cory Sindelar

Say that again.

Christian Schwab

You haven't done quarterly revenue approaching $200 million in two years.

Cory Sindelar

No, we did $265 million in the fourth quarter.

Michael Weening

We did $225 million -- $226 million in Q1.

Christian Schwab

Yeah, Q1 of '22, you had $202 million and this quarter you're guiding to $200 million at the midpoint.

Michael Weening

Yeah, we did (inaudible) we did $226 million.

Cory Sindelar

We haven't done to $200 million for about two years.

Christian Schwab

Yeah, okay --

Cory Sindelar

Sorry, we're playing along. We understand what you're saying. Go ahead, Christian.

Christian Schwab

You could look at it. The point is, is your OpEx is significantly higher, right? and I know we're going to invest for growth. But we talked about a trickle of BEAD starting in the beginning of '25, but we have no idea when the large customers are coming back. How long do you hold this heavy OpEx on a quarterly basis?

Michael Weening

We understand that there's 60 million new fiber in that line coming. We also recognized, as we've identified for you, that -- and you see at the fundamental business model is actually growing margin. And therefore, it is strong. Customers are delaying for the very first time, their decision-making. And they've got the time, as I stated, as it was so eloquently put to me last week, where I can actually -- I couldn't actually we actually have the time to pour coffee, and now I'm willing to entertain these conversations.
At this point in time, we will continue our OpEx investment because this is our opportunity to expand footprint as never before, ahead of one of the largest investments from the government in history. And to do anything but what we're doing would be wrong. And with our Board, our Chairman and our leadership team, we are confident in the opportunity to grow and that's going to yield significant returns. We are investing to win.

Christian Schwab

Understood. Thank you. My last question is with recent expectations for 2024 and a once-in-a-generation lifetime with BEAD, and large customers who are significantly under spending, shouldn't the target growth rate for fiscal year '25 be 20% or substantially higher than that from the top line?

Cory Sindelar

Possibly.

Michael Weening

Possibly That's why we're quite comfortable putting 20%. That's why we stated that we see this 2024 as this oddity. And to your point, over the last four years, we've delivered four years of 20% growth, and we see a return to growth in 2025. And we're working that right now. We see the green shoots and all those different elements. So we're not calling '25 at this point, but we were just asked in the previous question, do we see the return of 10% to 15%? Yes.

Christian Schwab

Okay, great. No other questions. Thank you.

Michael Weening

Thank you, Christian.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Fanucchi for any final comments.

Jim Fanucchi

Thank you, Melissa. We will participate in several investor events during the second quarter. And information about these events, including the dates and times and publicly available webcast will be posted on the Events and Presentations page of our Investor Relations section of calix.com.
Once again, we want to thank everyone on this call and webcast for your interest in Calix and for joining us. That concludes our conference call. Have a great day.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.