Fellow Calix Stockholders:
We are very pleased that 2017 was our fifth consecutive year of revenue growth. In 2017 revenues increased 11%,
surpassing $500 million for the first time in our history. This also marks our second consecutive year of double-digit
growth. In addition to growing revenues, we continued to diversify and expand our client base, ending 2017 with well
over 1,400 customers. We also ended 2017 with a record low cash conversion cycle of 59 days compared to 81 days
at the end of last year despite delayed payment in the fourth quarter from one of our largest customers.
While 2017 was a challenging year, we ended the year with improved performance and profitability and completed
several large services programs for key customers. In addition to improvements on the profitability of ongoing
programs, our services leadership launched new innovative services offerings built on our platforms and tailored to
enable our customers to deliver an unrivaled subscriber experience. We believe these services will deliver high
differentiable value to our customers and serve as an important cornerstone of our services business in 2018.
The most important milestone that we achieved in 2017 was the culmination of our multi-year transformation from a
wireline access systems provider to a software platform, cloud analytics, services and solutions provider. Our
platforms empower our customers to build new business models, rapidly deploy new services and dramatically
improve the subscriber experience. Our platforms make it easy for communications service providers to master and
monetize the complex infrastructure between their subscribers and the cloud. Combined with our services and cloud
offerings, our platforms make the promise of the smart home and business a reality. And, our platforms are purpose-
built to address the needs of any service provider, from traditional wireline providers and cable MSOs to hospitality
providers, fiber over builders, co-ops and municipalities. In 2017, we acquired new customers in each of these
segments and expanded our addressable market. In recognition of this transition, we started 2018 with an updated
mission statement and purpose. Our mission is to connect everyone and everything by building platforms that connect
the world.
While we will continue to support our non-AXOS and non-EXOS systems as well as our traditional cloud and software
products, we are focused on driving the evolution and market penetration of our strategic platforms and services. This
past year was an important year for all our strategic platforms:
• Calix Cloud - a cloud analytics platform that leverages network data and subscriber behavioral data to deliver
analytics and intelligence to marketing and customer support professionals via role specific dashboards. We
launched Calix Cloud in early 2017, delivering Calix Marketing Cloud and Calix Support Cloud to dozens
of customers. Customer reception to our Calix Cloud platform has been strong as we saw an increase in not
only the number of deals, but also an increase in deal size as the year progressed. Thanks to Calix Cloud,
many of our customers are realizing increases in ARPU, reductions in churn, significant reductions in
customer support costs and greater marketing campaign ROI. Importantly, these benefits were realized
without customers having to make significant capital investments to deploy Calix Cloud.
• EXOS - a carrier class premises software platform that supports residential, business and mobile subscribers.
EXOS, when coupled with our market leading GigaFamily premises systems, will provide a unique
foundation for mastering and monetizing the complexity of the smart home and business. In 2017, we
announced our EXOS strategy and roadmap. We also made significant enhancements to our existing
GigaFamily premises portfolio by introducing Mesh enhancements that provide unsurpassed whole-home
Wi-Fi coverage. We benefited from record adoption of these new capabilities in 2017 with over 200
customers purchasing 804 Mesh Satellites in the first quarter of availability.
• AXOS - a software platform for access networks that allows a service provider to deliver all services on a
single, elastic, converged access network that is always on. Our AXOS platform continues to drive business
model transformation across our industry. Through the fourth quarter of 2017, nearly 300 customers have
deployed AXOS to build next generation access networks. In addition, our AXOS platform was recognized
in 2017 with a number of awards for innovation including the BRG Diamond Technologies Reviews for Best
FTTH/Optical Access Platform, Light Reading Leading Lights Award for Most Innovative New Cable
Product and the top score in the Lightwave Innovation Reviews.
Business with our largest customers continued to grow and expand in 2017. Sales to our largest customer,
CenturyLink, increased by more than 60% compared to 2016. In the fourth quarter of 2017 we began shipments of
AXOS on our E9-2 Intelligent Edge System for a significant NG-PON2 deployment by a Tier 1 communications
service provider. This deployment, starting in early 2018, signifies a major industry milestone as the beginning of the
first large-scale deployment of NG-PON2 technology. It also marks the culmination of our nearly decade-long effort
to create a platform that can deliver the universal, unified access network. We also made progress in expanding our
customer base and addressable markets in 2017. For instance, we launched the AXOS E3-2 Intelligent PON Node
along with AXOS DPx in 2017. Armed with this solution, our team was able to expand our presence in the cable
MSO space, closing deals with new customers such as SkyCable in the Philippines and ImOn Communications in the
United States.
We also added dynamic new talent to our executive team and our Board of Directors. On the executive front, we
welcomed two new members to our leadership team in 2017 – Matt Collins, our first ever Chief Marketing Officer,
previously with Dun & Bradstreet, IBM and McKinsey and Cory Sindelar, our new Chief Financial Officer, previously
with Violin Memory, Ikanos Communications, and Legato Systems. We announced three new members to our Board
of Directors with the addition of Kira Makagon, Kathy Crusco and J. Daniel Plants. Kira brings a wealth of experience
in software, technology and innovation. Kathy brings decades of finance and operational experience from the
technology industry. Dan brings nearly two decades of experience as an investor and advisor to public and private
companies. We also want to take this time to send a heartfelt note of thanks to one of our longest serving Board
members, Mike Flynn. Mike announced that he will retire at the expiration of his term following our 2018 Annual
Stockholders Meeting. Mike helped shape and guide Calix for over a decade and his leadership will be missed.
As always, I want to thank you – my fellow Calix stockholders, customers, suppliers and employees – for your
continued support. As we transformed Calix over the last several years, we made significant investments in people,
systems and platforms. We remain focused on helping our existing customers transform their business models while
striving to win new customers. As a broader base of customers across different markets and geographies embrace our
unique platforms, we are confident that we are laying the groundwork for sustained growth and improved profitability.
Sincerely,
Carl Russo
President and CEO
Calix, Inc.
CALIX, INC.
1035 N. McDowell Boulevard
Petaluma, California 94954
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 16, 2018
To the Stockholders of Calix, Inc.:
The Annual Meeting of Stockholders (“Annual Meeting”) of Calix, Inc. (“Calix”), will be held virtually, via live webcast
at www.virtualshareholdermeeting.com/CALX18, on Wednesday, May 16, 2018 at 9:00 a.m. Pacific Daylight Time. The meeting will
be online only, and will be held for the following purposes:
1.
2.
3.
4.
5.
To elect four directors to the Calix Board of Directors (“Board”);
To approve the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (“Nonqualified ESPP”) to
amend certain terms and increase the number of shares of common stock issuable under the Nonqualified ESPP by
2,500,000;
To approve, on a non-binding, advisory basis, the compensation of our named executive officers;
To ratify the selection of KPMG LLP as Calix’s independent registered public accounting firm for the fiscal year ending
December 31, 2018; and
To transact such other business as may properly come before the Annual Meeting or any adjournment or postponement
thereof.
The above items of business are more fully described in the Proxy Statement. Only stockholders who owned Calix common
stock at the close of business on March 19, 2018 can vote at this meeting or any adjournments that take place.
We have elected to use the Internet as our primary means of providing our proxy materials to stockholders. Consequently,
stockholders will not receive paper copies of our proxy materials unless they specifically request them. We will send a Notice of
Internet Availability of Proxy Materials (“Notice”) on or about April 3, 2018 to our stockholders of record as of the close of business
on March 19, 2018. We are also providing access to our proxy materials over the Internet beginning on or about April 3, 2018.
Electronic delivery of our proxy materials will significantly reduce our printing and mailing costs, and will reduce the environmental
impact of the proxy materials.
The Notice contains instructions for accessing the proxy materials, including the Proxy Statement and our annual report, and
provides information on how stockholders may obtain paper copies free of charge. The Notice also provides: the date and time of the
virtual Annual Meeting; the matters to be acted upon at the meeting and the Board’s recommendation with regard to each matter; and
information on how to attend the virtual Annual Meeting and vote online.
You are cordially invited to attend the virtual Annual Meeting, but whether or not you expect to attend, to ensure that your vote
is recorded, you should vote and submit your proxy over the Internet following the voting procedures described in the Notice. In
addition, you can vote and submit your proxy online, or if you have requested and received paper copies of proxy materials, over the
phone or by signing, dating and returning by mail the proxy card sent to you.
By Order of the Board of Directors
Suzanne Tom
Corporate Secretary
Petaluma, California
April 3, 2018
The Notice of Annual Meeting, Proxy Statement and Form of Proxy are being distributed and made available on or about April 3, 2018.
Table of Contents PROXY STATEMENT
FOR 2018 ANNUAL MEETING OF STOCKHOLDERS
TABLE OF CONTENTS
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER
MEETING TO BE HELD ON MAY 16, 2018
QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING
CORPORATE GOVERNANCE
Leadership Structure of the Board
Board Independence
Board Composition and Qualifications
Board Meetings and Committees
Annual Self-Assessment and Board Education
Board Oversight Over Risks
Communications with the Board
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
PROPOSAL NO. 1—ELECTION OF DIRECTORS
Nominees for Election to a Three-Year Term Expiring at the 2021 Annual Meeting of Stockholders
Current Directors Continuing in Office After the Annual Meeting
Director Class Changes
Executive Officers
Independence of the Board
PROPOSAL NO. 2—APPROVAL OF THE AMENDED AND RESTATED 2017 NONQUALIFIED EMPLOYEE STOCK
PURCHASE PLAN
PROPOSAL NO. 3—APPROVAL ON A NON-BINDING, ADVISORY BASIS OF THE COMPENSATION OF OUR
NAMED EXECUTIVE OFFICERS (“SAY-ON-PAY”)
PROPOSAL NO. 4—RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Principal Accountant Fees and Services
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Summary Compensation Table
Grants of Plan-Based Awards in 2017
Outstanding Equity Awards at December 31, 2017
Option Exercises and Stock Vested in 2017
Potential Payments upon Termination or Change of Control
CEO PAY RATIO
DIRECTOR COMPENSATION
EQUITY COMPENSATION PLAN INFORMATION
COMPENSATION COMMITTEE REPORT
AUDIT COMMITTEE REPORT
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HOUSEHOLDING OF PROXY MATERIALS
OTHER MATTERS
ANNUAL REPORTS
APPENDIX A: AMENDED AND RESTATED 2017 NONQUALIFIED EMPLOYEE STOCK PURCHASE PLAN
APPENDIX B: RECONCILIATION OF GAAP TO NON-GAAP MEASURES
1
2
6
6
6
7
8
11
11
12
12
14
15
16
18
21
22
22
23
28
29
29
30
30
41
42
43
44
44
47
48
50
51
52
53
53
53
54
A-1
B-1
Table of Contents
CALIX, INC.
1035 N. McDowell Boulevard
Petaluma, California 94954
PROXY STATEMENT
FOR THE 2018 ANNUAL MEETING OF STOCKHOLDERS
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER
MEETING TO BE HELD ON MAY 16, 2018
The Board of Directors of Calix, Inc. is soliciting your proxy to vote at the virtual Annual Meeting of Stockholders to be held on
May 16, 2018, at 9:00 a.m. Pacific Daylight Time, and any adjournment or postponement of that meeting (“Annual Meeting”). The
Annual Meeting will be held via live webcast only at www.virtualshareholdermeeting.com/CALX18.
We have elected to provide access to our proxy materials on the Internet. Accordingly, we are sending a Notice of Internet
Availability of Proxy Materials (“Notice”) to our stockholders of record as of March 19, 2018 (“Record Date”), while brokers and
other nominees who hold shares on behalf of beneficial owners will be sending their own similar notice. All stockholders will have the
ability to access the proxy materials on the website referred to in the Notice, or to request a printed set of the proxy materials.
Instructions on how to request a printed copy by mail or email may be found in the Notice and on the website referred to in the Notice,
including an option to request paper copies on an ongoing basis. On or about April 3, 2018, we are making this Proxy Statement
available on the Internet and are mailing the Notice to all stockholders entitled to vote at the Annual Meeting. We intend to mail or
email this Proxy Statement, together with a proxy card, to those stockholders entitled to vote at the Annual Meeting who have
properly requested paper copies of such materials within three business days of request.
The only voting securities of Calix, Inc. are shares of common stock, $0.025 par value per share (“common stock”), of which
there were 51,718,928 shares outstanding as of the Record Date (excluding treasury shares). We need the holders of a majority of the
outstanding shares of common stock, present or represented by proxy, to hold the Annual Meeting.
In this Proxy Statement, we refer to Calix, Inc. as the “Company,” “Calix,” “we” or “us” and the Board of Directors as the
“Board.” When we refer to Calix’s fiscal year, we mean the twelve-month period ending December 31 of the stated year.
Our Annual Report to Stockholders, which contains consolidated financial statements for fiscal year 2017, accompanies this
Proxy Statement if you have requested and received a copy of the proxy materials in the mail. Stockholders who received the Notice
can access this Proxy Statement and the Annual Report to Stockholders at the website referred to in the Notice. You also may obtain a
copy of our Annual Report on Form 10-K for fiscal year 2017, which was filed with the Securities and Exchange Commission
(“SEC”), without charge, by writing to our Investor Relations department at the above address. Our Annual Report on Form 10-K and
Proxy Statement are also available under “SEC Filings” in the Investor Relations section of our website at investor-relations.calix.com
and at the SEC’s web site at www.sec.gov.
1
Table of Contents THE PROXY PROCESS AND STOCKHOLDER VOTING
QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING
Who can vote at the Annual Meeting?
Only stockholders of record at the close of business on March 19, 2018 will be entitled to vote online at the Annual Meeting. At
the close of business on March 19, 2018, there were 51,718,928 shares of common stock issued and outstanding and entitled to vote.
Stockholder of Record: Shares Registered in Your Name
If, on March 19, 2018, your shares were registered directly in your name with Calix’s transfer agent, Computershare, Inc., then
you are a stockholder of record. As a stockholder of record, you may vote online at the Annual Meeting or vote by proxy. Whether or
not you plan to attend the Annual Meeting, to ensure your vote is counted we urge you to vote by proxy on the Internet as instructed
below, or if you request and receive a proxy card by mail or email, over the phone or by signing, dating and returning by mail the
proxy card sent to you.
Beneficial Owner: Shares Registered in the Name of a Broker, Bank or Other Agent
If, on March 19, 2018, your shares were held in an account at a brokerage firm, bank, dealer or other similar organization, then
you are the beneficial owner of shares held in a “street name” and these proxy materials are being forwarded to you by that
organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual
Meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You
are also welcome to attend the Annual Meeting and to vote online.
What do I need in order to be able to attend the Annual Meeting online?
Calix will be hosting the Annual Meeting via live webcast only. Any stockholder can attend the Annual Meeting live online at
www.virtualshareholdermeeting.com/CALX18. The webcast will start at 9:00 a.m. Pacific Daylight Time. Stockholders may vote and
submit questions while attending the Annual Meeting online. In order to be able to participate in the online Annual Meeting, you will
need the control number included on your Notice or, if you received a printed copy of the proxy materials, your proxy card if you are a
stockholder of record, or included with your voting instruction card and voting instructions you received from your broker, bank or
other agent if you hold your shares in a “street name.” Instructions on how to participate online are also posted online at
www.virtualshareholdermeeting.com/CALX18.
What am I being asked to vote on?
You are being asked to vote on:
•
•
•
•
election of four Class II directors to hold office until our 2021 Annual Meeting of Stockholders (Proposal No. 1);
approval of the Amended and Restated 2017 Nonqualified Employee Stock Purchase Plan (“Nonqualified ESPP”) to
amend certain terms and increase the number of shares of common stock issuable under the Nonqualified ESPP by
2,500,000 (Proposal No. 2);
approval on a non-binding, advisory basis of the compensation of our named executive officers, or NEOs, as disclosed in
this Proxy Statement (Proposal No. 3); and
ratification of the selection of KPMG LLP as our independent registered public accounting firm for the fiscal year ending
December 31, 2018 (Proposal No. 4).
In addition, you are entitled to vote on any other matters that are properly brought before the Annual Meeting.
How does the Board recommend I vote on the Proposals?
The Board recommends that you vote:
•
•
FOR each of the Class II director nominees;
FOR approval of our Nonqualified ESPP;
2
Table of Contents
•
•
FOR approval, on a non-binding, advisory basis, of the compensation of our NEOs; and
FOR ratification of KPMG LLP as our independent registered public accounting firm.
How do I vote?
For election of directors, you may either vote “For” the four nominees or you may “Withhold” your vote for all or for any
nominee you specify. For any other matter to be voted on, you may vote “For” or “Against” or abstain from voting. The procedures
for voting are as follows:
Stockholder of Record: Shares Registered in Your Name
If you are a stockholder of record, you may vote in any of the following manners:
•
•
•
•
To vote during the Annual Meeting, follow the online instructions provided on the Notice of Internet Availability of Proxy
Materials to login to www.virtualshareholdermeeting.com/CALX18 to cast your vote.
To vote over the Internet prior to the Annual Meeting, follow the instructions provided on the Notice of Internet
Availability of Proxy Materials.
To vote by phone, call the toll free number found on the proxy card, which you can request by following the instructions
provided on the Notice of Internet Availability of Proxy Materials.
To vote by mail, complete, sign and date the proxy card, which you can request by following the instructions provided on
the Notice of Internet Availability of Proxy Materials, and return it promptly by mail. As long as we receive your signed
proxy card, or your vote by Internet or phone, by 11:59 p.m. Eastern Daylight Time on May 15, 2018, we will vote your
shares as you direct.
• Whether or not you plan to attend the Annual Meeting, we urge you to vote by proxy, phone or the Internet to ensure that
your vote is counted. Even if you have submitted a proxy or voted by phone or the Internet before the Annual Meeting,
you may still attend the Annual Meeting and vote online. In such case, your previously submitted proxy or vote will be
disregarded.
Beneficial Owner: Shares Registered in the Name of Broker, Bank or Other Agent
If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a
voting instruction card and voting instructions with these proxy materials from that organization rather than from us. You should
complete and mail the voting instruction card to ensure that your vote is counted. You should follow the instructions from your broker,
bank or other agent included with these proxy materials, or contact your broker, bank or other agent to request a proxy form. You may
also vote online at the Annual Meeting.
Who counts the votes?
Broadridge Financial Solutions, Inc., or Broadridge, has been engaged as our independent agent to tabulate stockholder votes. If
you are a stockholder of record, and you choose to vote over the Internet (either prior to or during the Annual Meeting) or by phone,
Broadridge will access and tabulate your vote electronically, and if you have requested and received proxy materials via mail or email
and choose to sign and mail your proxy card, your executed proxy card is returned directly to Broadridge for tabulation. As noted
above, if you hold your shares through a broker, your broker (or its agent for tabulating votes of shares held in a “street name”) returns
one proxy card to Broadridge on behalf of all its clients.
What is the required vote and how are votes counted?
A majority of the outstanding shares of common stock must be present or represented by proxy at the Annual Meeting in order
to have a quorum. Abstentions and broker non-votes will be treated as shares present for the purpose of determining the presence of a
quorum.
With respect to Proposal No. 1, the election of directors, directors will be elected by a plurality of the votes cast, which means
that the four nominees receiving the highest number of “For” votes will be elected. Abstentions and broker non-votes will have no
effect with regard to this proposal, because approval of a percentage of shares present or outstanding is not required for this proposal.
3
Table of Contents
With respect to Proposals No. 2, 3 and 4, the affirmative vote of the holders of a majority in voting power of the shares of
common stock present or by proxy and entitled to vote on the proposal is required for approval. Abstentions have the same effect as a
vote against these proposals.
Because your vote on Proposal No. 3 is advisory, it will not be binding on us, our Board or our Compensation Committee.
However, we value our stockholders’ views on the effectiveness of our executive compensation program and our Board and
Compensation Committee will consider the advisory vote of our stockholders when making future decisions about executive
compensation.
Under the New York Stock Exchange (“NYSE”) rules, brokers are permitted to vote their clients’ proxies in their own discretion
as to certain “routine” proposals. However, where a proposal is considered “non-routine,” a broker who has received no instructions
from its client generally does not have discretion to vote its clients’ uninstructed shares on that proposal. When a broker indicates on a
proxy that it does not have discretionary authority to vote certain shares on a particular proposal, the missing votes are referred to as
“broker non-votes.” Those shares would be considered present for purposes of determining whether a quorum is present, but would
not be counted in determining the number of votes present for the proposal. Those shares would not be taken into account in
determining the outcome of the non-routine proposal.
Under NYSE rules, Proposals No. 1 through No. 3 are non-routine matters while Proposal No. 4 is a routine matter. Because
brokers cannot vote uninstructed shares on behalf of their customers for non-routine matters, it is important that stockholders vote
their shares.
Broadridge will separately count “For” and “Withhold” votes with respect to Proposal No. 1, “For” and “Against” votes and
abstentions, with respect to Proposal Nos. 2 and 3, and “For” and “Against” votes, abstentions and broker non-votes with respect to
Proposal No. 4.
How many votes do I have?
On each matter to be voted upon, you have one vote for each share of common stock you own as of March 19, 2018.
What if I return a proxy card but do not make specific choices?
If you have properly requested and received a proxy card by mail or email, and we receive a signed and dated proxy card that
does not specify how your shares are to be voted, your shares will be voted “For” the election of each of the four nominees for director
and “For” Proposals No. 2, 3 and 4. If any other matter is properly presented at the Annual Meeting, the individuals named as proxy
holders on your proxy card will vote your shares in the manner recommended by the Board on all proposals presented in this Proxy
Statement and as they may determine in their best judgment as to any other matters properly presented for vote at the Annual Meeting.
Who is paying for this proxy solicitation?
We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors, officers and
employees may also solicit proxies in person, by phone or by other means of communication. Directors, officers and employees will
not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the
cost of forwarding proxy materials to beneficial owners.
In addition, we have engaged MacKenzie Partners, Inc., a proxy solicitation firm, to assist in the solicitation of proxies for a fee
of approximately $12,500, inclusive of expenses.
What does it mean if I receive more than one Notice of Internet Availability of Materials or set of materials?
If you receive more than one Notice of Internet Availability of Materials or more than one set of materials, your shares are
registered in more than one name or are registered in different accounts. In order to vote all the shares you own, you must follow the
instructions for voting on the Internet on all of the Notices of Internet Availability of Proxy Materials or proxy cards you receive via
mail or email upon your request, which includes voting over the Internet, phone or by signing and returning all of the proxy cards you
request and receive.
4
Table of Contents
Can I change my vote after submitting my proxy or voting on the Internet or by phone?
Yes. You can revoke your proxy or prior vote at any time before the final vote at the Annual Meeting. If you are the record
holder of your shares, you may revoke your proxy or prior vote in any one of three ways:
• You may submit another properly completed proxy with a later date or submit a new vote on the Internet or by phone
using the same instructions followed when you submitted your prior vote.
• You may send a written notice that you are revoking your proxy to Calix’s Corporate Secretary at Calix, Inc., 1035 N.
McDowell Boulevard, Petaluma, California 94954.
• You may attend the Annual Meeting and vote online. Simply logging into the Annual Meeting will not, by itself, revoke
your proxy or prior vote.
If your shares are held by your broker, bank or other agent, you should follow the instructions provided by them.
How will voting on any business not described in this Proxy Statement be conducted?
We are not aware of any business to be considered at the Annual Meeting other than the items described in this Proxy
Statement. If any other matter is properly presented for vote at the Annual Meeting and you are not attending the meeting in person
but have voted by proxy, the individuals named as proxy holder on your proxy card will vote your shares as they may determine in
their best judgment.
When are stockholder proposals due for next year’s Annual Meeting?
To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing by December 4, 2018,
to Calix’s Corporate Secretary at 1035 N. McDowell Boulevard, Petaluma, California 94954. If you wish to submit a proposal that is
not to be included in next year’s proxy materials under the SEC’s shareholder proposal procedures or nominate a director, you must do
so between January 16, 2019 and February 15, 2019; provided that if the date of the annual meeting is earlier than April 16, 2019 or
later than July 15, 2019, you must give notice not later than the 90th day prior to the annual meeting date or, if later, the 10th day
following the date on which public disclosure of the annual meeting date is first made. You are also advised to review our bylaws,
which contain additional requirements about advance notice of stockholder proposals and director nominations.
What is the quorum requirement?
A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if the holders of a majority in voting
power of the shares of common stock issued and outstanding and entitled to vote are present or represented by proxy at the Annual
Meeting. On the Record Date, there were 51,718,928 shares outstanding and entitled to vote. Accordingly, 25,859,465 shares must be
represented by stockholders present at the Annual Meeting or by proxy to have a quorum.
Your shares will be counted towards the quorum if you submit a valid proxy vote or vote online at the Annual Meeting.
Abstentions and broker non-votes also will be counted towards the quorum requirement. If there is no quorum, either the chairperson
of the Annual Meeting or a majority in voting power of the stockholders entitled to vote at the Annual Meeting, present or represented
by proxy, may adjourn the Annual Meeting to another time or place.
How can I find out the results of the voting at the Annual Meeting?
Voting results will be announced by the filing of a Current Report on Form 8-K within four business days after the Annual
Meeting. If final voting results are unavailable at that time, we will file an amended Current Report on Form 8-K within four business
days of the day the final results are available.
5
Table of Contents
CORPORATE GOVERNANCE
Overview
Our Board is responsible for providing oversight over the Company’s business and affairs, including the Company’s strategic
direction, as well as the management and financial and operational execution that can best perpetuate the success of the business and
support the long-term interest of our stockholders. To effectively support its responsibilities, the Board has four board committees: an
Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee and a Cybersecurity Committee.
These Board committees carry out responsibilities set out in specific committee charters approved by the Board and consistent with
applicable requirements of the NYSE and the SEC. The Board may at its discretion retain outside advisors at the Company’s expense
in carrying out its responsibilities.
Our Board is committed to good corporate governance practices and seeks to represent stockholder interests through the
exercise of sound judgment. To this end, the Board has adopted Corporate Governance Guidelines (“Guidelines”) that provide specific
provisions for the governance of the Board and Company. We have a Code of Business Conduct and Ethics (“Code of Conduct”)
applicable to all directors, officers and employees that is approved and adopted by our Board representing our commitment to the
highest standards of ethics and integrity in the conduct of our business. Our bylaws, together with the Guidelines, the Board
committee charters and our Code of Conduct serve as the governance and compliance framework of the Company.
On an annual basis, the Board and its committees review the Guidelines, Board committee charters and our Code of Conduct.
The Guidelines, the written charter for each of the Audit Committee, Compensation Committee, Nominating and Corporate
Governance Committee and Cybersecurity Committee and the Code of Conduct, as well as any amendments from time to time, may
be found under “Leadership & Governance” in the Investor Relations section of our website at investor-relations.calix.com. The
referenced information on the Investor Relations section of our website is not a part of this Proxy Statement.
Leadership Structure of the Board
Under our bylaws, our Board appoints our corporate officers, including the chief executive officer. We separate the roles of
chief executive officer and chairman of the Board in recognition of the differences between the two roles. Mr. Russo serves as
president and chief executive officer and is responsible for setting the strategic direction for and the day-to-day leadership and
performance of Calix, while Mr. Listwin serves as chairman and provides guidance to the chief executive officer and management,
sets the agenda for Board meetings and presides over meetings of the full Board. The Board does not have a policy on whether the role
of the chairman and chief executive officer should be separate and, if it is to be separate, whether the chairman should be selected
from the non-employee directors or be an employee and if it is to be combined, whether a lead independent director should be
selected. As president and chief executive officer, Mr. Russo is not “independent” under the rules of the NYSE. Mr. Listwin, Calix’s
chairman, is an independent director, as defined under the rules of the NYSE. The Board believes that the current board leadership
structure is best for Calix and its stockholders at this time. Our Nominating and Corporate Governance Committee periodically
reviews and recommends to the Board the leadership structure of the Board.
Board Independence
Among other considerations, the Board strongly values independent board oversight as an essential component of strong
corporate performance. On at least an annual basis, the Board undertakes a review of the independence of each director and considers
whether any director has a material relationship with Calix. The Board evaluates each director under the independence rules of the
NYSE and the non-employee director and audit committee independence requirements of the SEC.
The NYSE rules require listed company boards have at least a majority of independent directors. Based on its evaluation, our
Board determined that each of Messrs. Bowick, DeNuccio, Everett, Flynn, Listwin, Matthews, Peters and Plants, and each of Mses.
Crusco and Makagon, representing ten of Calix’s eleven current directors, are independent directors as defined under the NYSE rules.
Mr. Russo, who has served as our president and chief executive office since 2002, is the only member of the Board who is not
independent.
6
Table of Contents
Ten of the total eleven directors of our Board are independent under NYSE rules:
Director
Christopher Bowick
Kathy Crusco
Kevin DeNuccio
Mike Everett
Michael Flynn
Don Listwin
Kira Makagon
Michael Matthews
Kevin Peters
J. Daniel Plants
Carl Russo
Independent
Independent
Independent
Independent
Independent
Independent
Independent
Independent
Independent
Independent
Independent
Not Independent
Director Since
2014
2017
2012
2007
2004
2007
2017
2010
2014
2018
1999
Board Composition and Qualifications
The Board assesses Board composition and qualifications at least annually. In assessing Board composition and qualifications,
as well as in evaluating candidates for nomination or to fill vacancies on the Board, the Board seeks to maximize effectiveness of the
Board and its committees to perpetuate the success of the Company, to best represent stockholder interests through the exercise of
sound judgment and to assure continuity in the Board’s oversight over the Company and management. The Board places significant
emphasis on ensuring an appropriate mix of characteristics, skills and experience for the Board as a whole and as to each individual
director. The Board, through its Nominating and Corporate Governance Committee, evaluates the skills and attributes of the Board as
a whole and each individual director against the Company’s needs and strategic direction. Among other considerations, the Board
seeks to ensure an appropriate mix of expertise in executive and corporate leadership, diversity of background, perspective and
experience (including diversity of gender, age and ethnicity), personal and professional integrity, ethics and values, financial and
operational experience, as well as expertise and insights in technologies, industries and markets relevant to the Company’s strategic
plans.
Our Board believes the current mix of skills, backgrounds and attributes of our Board maximizes the effectiveness of our Board
in its oversight responsibilities. In 2017, we added two new directors to our Board, with Ms. Makagon bringing substantial expertise in
global platform strategy, technology, cybersecurity, operations and high technology executive leadership to our Board and Ms. Crusco
adding deep financial and operational expertise, executive leadership operations, public company leadership and governance
experience to our Board. In 2018, we added Mr. Plants as a new director, bringing his expertise in corporate governance and
leadership, as well as adding stockholder insight, to our Board. The Board values the increase in board gender diversity, experience
and perspective from the additions of Mses. Crusco and Makagon and Mr. Plants to the Board. A summary of the mix of key skills
and attributes representative of our current Board is as follows:
7
Table of Contents
Our Board also considers board tenure in its review of Board composition. Our Board consists of a mix of board tenure. Of our
independent directors, we have three directors at tenures of less than one year, two directors at tenures of one to five years, two
directors at five to seven years and three directors at ten or more years. In May 2017, Mr. Pardun retired from our Board, and
Mr. Flynn will retire from our Board effective as of the end of his current term at the 2018 Annual Meeting.
Director
Christopher Bowick
Kathy Crusco
Kevin DeNuccio
Mike Everett
Michael Flynn
Don Listwin
Kira Makagon
Michael Matthews
Kevin Peters
J. Daniel Plants
Carl Russo
Date Joined
July 2014
September 2017
September 2012
August 2007
July 2004
January 2007
July 2017
December 2010
October 2014
March 2018
December 1999
Board Meetings and Committees
Our Board met seven times during fiscal year 2017. During 2017, each Board member attended 75% or more of the aggregate of
the meetings of the Board and of the committees on which he or she served. In addition, our Board met in executive session without
management present during its four regularly scheduled in-person meetings in 2017. Our chairman of the Board presides over the
executive sessions of the Board.
We encourage our directors to attend our annual meetings of stockholders and each director serving at the time of our 2017
annual meeting of stockholders was in attendance.
The Board has established three principal Board committees: the Audit Committee, the Compensation Committee and the
Nominating and Corporate Governance Committee. In June 2017, the Board established a fourth Board committee, the Cybersecurity
Committee. The membership for all four Board committees are composed of independent directors.
Audit Committee
Our Audit Committee is established in accordance with Section 3(a)(58)(A) of the Exchange Act and is responsible for
overseeing management of Calix’s risks relating to accounting matters, financial reporting and legal and regulatory compliance. Each
director serving on our Audit Committee is independent within the meaning of the NYSE listing standards and applicable rules and
regulations of the SEC. Ms. Crusco joined our Audit Committee on December 6, 2017. Previously, Mr. Bowick served on our Audit
Committee from May 17, 2017 to December 6, 2017 and former director Mr. Tom Pardun served on the Audit Committee until his
retirement from our Board on May 17, 2017. Messrs. Bowick and Pardun were independent within the meaning of the NYSE listing
standards and applicable rules and regulations of the SEC during their service on the Audit Committee.
8
Table of Contents
The current members of our Audit Committee are Mr. Everett, Ms. Crusco and Mr. Matthews, with Mr. Everett serving as the
Audit Committee chair. Our Board has determined that Mr. Everett and Ms. Crusco are each an “audit committee financial expert” as
defined under the SEC rules. During 2017, the Audit Committee met ten times, and conducted private sessions with our independent
registered public accounting firm, with individual members of management and with the committee members at each of its four in-
person meetings.
Our Audit Committee oversees our corporate accounting and financial reporting process. Among other matters, the Audit
Committee evaluates the independent registered public accounting firm’s qualifications, independence and performance; determines
the engagement of the independent registered public accounting firm; reviews and approves the scope of the annual audit and the audit
fee; discusses with management and the independent registered public accounting firm the results of the annual audit and the review of
Calix’s quarterly consolidated financial statements; approves the retention of the independent registered public accounting firm to
perform any proposed permissible non-audit services; monitors the rotation of partners of the independent registered public accounting
firm on Calix’s engagement team as required by law; reviews Calix’s critical accounting policies and estimates; oversees the internal
audit function and annually reviews the Audit Committee charter and the committee’s performance. The Audit Committee operates
under a written charter pursuant to applicable standards and rules of the SEC and the NYSE. The Audit Committee’s written charter is
available under “Leadership & Governance” in the Investor Relations section of our website at investor-relations.calix.com.
In carrying out its responsibilities, the Audit Committee may at its discretion retain outside advisors at the Company’s expense.
Compensation Committee
Our Compensation Committee is responsible for overseeing the management of risks relating to Calix’s executive compensation
plans and arrangements. Each director serving on our Compensation Committee is independent within the meaning of the NYSE
listing standards, applicable rules and regulations of the SEC and Section 162(m) of the Internal Revenue Code. Mr. DeNuccio joined
the Compensation Committee on July 18, 2017. Previously, Mr. Listwin served on our Compensation Committee until July 18, 2017,
during which time he was independent within the meaning of the applicable rules and regulations of the NYSE and SEC.
The current members of our Compensation Committee are Messrs. Flynn, Bowick and DeNuccio, with Mr. Flynn serving as the
Compensation Committee chair. During 2017, the Compensation Committee met eight times.
Our Compensation Committee reviews and recommends policies relating to compensation and benefits of Calix executive
officers and employees. The Compensation Committee reviews and approves corporate goals and objectives relevant to compensation
of the chief executive officer and other executive officers, evaluates the performance of these executives in light of those goals and
objectives, and sets the compensation of these executives based on such evaluations. The Compensation Committee also administers
the issuance of stock options and other awards under Calix stock plans. The Compensation Committee reviews and evaluates, at least
annually, the performance of the Compensation Committee and its members, including compliance of the Compensation Committee
with its charter. In fulfilling its responsibilities, the Compensation Committee may delegate any or all of its responsibilities to a
subcommittee of the Compensation Committee, but only to the extent consistent with Calix’s certificate of incorporation and bylaws,
Section 162(m) of the Internal Revenue Code of 1986 (to the extent applicable), NYSE rules and other applicable law. The
Compensation Committee operates under a written charter pursuant to applicable standards and rules of the SEC and the NYSE. The
Compensation Committee’s written charter is available under “Leadership & Governance” in the Investor Relations section of our
website at investor-relations.calix.com.
In carrying out its responsibilities, the Compensation Committee may at its discretion retain outside advisors at the Company’s
expense.
Compensation Committee Interlocks and Insider Participation
Messrs. Bowick and Flynn served on Calix’s Compensation Committee for the entirety of 2017. Mr. Listwin served on the
Compensation Committee until July 18, 2017. Mr. DeNuccio has served on the Compensation Committee since July 18, 2017. None
of the members of Calix’s Compensation Committee is or was at any time during 2017 an officer or employee of Calix, was formerly
an officer of Calix or has engaged in certain related transactions with Calix, as required to be disclosed by SEC regulations. None of
Calix’s executive officers currently serves or in the past year has served as a member of the board of directors or compensation
committee of any other entity that has one or more executive officers serving on Calix’s Board or Compensation Committee.
9
Table of Contents
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is responsible for overseeing management of Calix’s risks associated
with the independence of the Board and potential conflicts of interest. Each director serving on our Nominating and Corporate
Governance Committee is independent within the meaning of the NYSE listing standards.
Our Nominating and Corporate Governance Committee currently consists of Messrs. Listwin, Peters and Flynn, with
Mr. Listwin serving as the Nominating and Corporate Governance Committee chair. During 2017, the Nominating and Corporate
Governance Committee met five times.
The Nominating and Corporate Governance Committee is responsible for making recommendations regarding candidates for
directorships and the size and composition of the Board. In addition, the Nominating and Corporate Governance Committee is
responsible for overseeing Calix’s Corporate Governance Guidelines and reporting and making recommendations concerning
governance matters. The Nominating and Corporate Governance Committee operates under a written charter that satisfies the
applicable standards of the SEC and the NYSE. The Nominating and Corporate Governance Committee’s written charter is available
under “Leadership & Governance” in the Investor Relations section of our website at investor-relations.calix.com.
In carrying out its responsibilities, the Nominating and Corporate Governance Committee may at its discretion retain outside
advisors at the Company’s expense.
Director Nominations
The Nominating and Corporate Governance Committee considers director candidate recommendations from a variety of
sources, including nominees recommended by stockholders. The Nominating and Corporate Governance Committee may also retain
an executive search firm to assist in identifying, screening and facilitating the interview process of director candidates. The
Nominating and Corporate Governance Committee may take into account minimum qualifications including, among other factors the
Committee may deem appropriate: diversity of personal and professional background, perspective and experience, including diversity
of gender, age and ethnicity; personal and professional integrity, ethics and values; experience in corporate management, operations or
finance; experience relevant to the Company’s industry and with relevant social policy concerns; experience as a board member or
executive officer of another publicly held company; relevant academic expertise; practical and mature business judgment; promotion
of a diversity of business or career experience relevant to the success of the Company; and any other relevant qualifications, attributes
or skills, which will be evaluated in the context of the Board as a whole, with the objective of assembling a board that can best
perpetuate the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of
experience in these various areas. In addition, the Nominating and Corporate Governance Committee expects any candidate for the
Board to be able to represent the interests of the Company’s stockholders as a whole rather than any special interest or constituency.
Each of our nominees standing for election at this 2018 Annual Meeting was recommended to the Board by the Nominating and
Corporate Governance Committee based on the Committee’s evaluation as set forth above.
The policy of the Nominating and Corporate Governance Committee is to consider properly submitted director candidates
recommended by stockholders. For a stockholder to make any nomination for election to the Board at an annual meeting, the
stockholder must provide notice to Calix, which must be received at Calix’s principal executive offices not less than 90 days and not
more than 120 days prior to the one-year anniversary of the preceding year’s annual meeting; provided, that if the date of the annual
meeting is more than 30 days before or more than 60 days after such anniversary date, the stockholder’s notice must be delivered not
later than 90 days prior to the date of the annual meeting or, if later, the 10th day following the date on which public disclosure of the
annual meeting date is first made. Further updates and supplements to such notice may be required at the times and in the forms
required under our bylaws. As set forth in our bylaws, submissions must include the name and address of the proposed nominee,
information regarding the proposed nominee that is required to be disclosed in a proxy statement or other filings in a contested
election under Section 14(a) of the Exchange Act, information regarding the proposed nominee’s indirect and direct interests in shares
of Calix’s common stock, and a completed and signed questionnaire, representation and agreement of the proposed nominee. Our
bylaws also specify further requirements as to the form and content of a stockholder’s notice. We recommend that any stockholder
wishing to make a nomination for director review a copy of our bylaws, as amended and restated to date, which is available, without
charge, from our Corporate Secretary, at 1035 North McDowell Boulevard, Petaluma, California 94954. The presiding officer at the
applicable annual meeting may, if the facts warrant, determine that a nomination was not properly made in accordance with the
foregoing, in which case the defective nomination may be disregarded.
10
Table of Contents
Cybersecurity Committee
The Cybersecurity Committee was constituted by the Board in June 2017 as a Board committee of independent directors
responsible for overseeing the management of enterprise security over cyber risks, overall data and security breach readiness and our
program for data and security breach response and management. Each director serving on our Cybersecurity Committee is
independent within the meaning of the NYSE listing standards.
Calix’s Cybersecurity Committee currently consists of Mr. Peters, Ms. Makagon and Mr. Matthews, with Mr. Peters serving as
the Cybersecurity Committee chair. During 2017, the Cybersecurity met two times since its June 2017 formation.
Our Cybersecurity Committee oversees Calix’s management of risks associated with cybersecurity threats and reviews with
management at each meeting the Company’s assessment of cybersecurity threats and risks, data security programs, and management
and mitigation of potential and any actual cybersecurity and information technology risks and breaches. Among other responsibilities,
the Cybersecurity Committee also reviews and provides oversight of: the effectiveness of Calix’s data breach incident response plan;
Calix’s cybersecurity risk systems against industry benchmarks and best practices; and Calix’s information security planning and
resources to manage changes in Calix’s cybersecurity threat landscape, including assessments of the potential impact of cybersecurity
risk on Calix’s business, operations and reputation. The Cybersecurity Committee’s written charter is available under “Leadership &
Governance” in the Investor Relations section of our website at investor-relations.calix.com.
In carrying out its responsibilities, the Cybersecurity Committee may at its discretion retain outside advisors at the Company’s
expense.
Annual Self-Assessment and Board Education
Annually, the Board and each Board committee conduct a self-assessment to assess the performance and effectiveness of the
Board and Board committees, as well as to provide feedback on individual directors. The chairman of the Board leads discussions and
actions related to the self-assessments. The Board is committed to the ongoing director education and advancement. To that end, the
Company has a written Board education policy and provides its directors with membership in the National Association of Corporate
Directors to assist them in remaining current with best practices and developments in board oversight and corporate governance.
Board Oversight Over Risks
The Board has an active role, as a whole and also at the committee level, in overseeing management of Calix’s risks, including
financial risks, cybersecurity risks, credit and liquidity risks, legal and regulatory risks and operational risks. The Board is responsible
for general oversight of risks and regularly reviews information from management who is responsible for the day-to-day processes and
operations to manage risks.
The Audit Committee has primary responsibility for oversight over management’s processes over financial, credit and liquidity,
legal and regulatory risks, including the Company’s compliance program; the Cybersecurity Committee oversees Calix’s management
of risks associated with cybersecurity threats; and the Compensation Committee is responsible for risk assessments over Calix’s
compensation practices and policies. While Board committees have responsibility for evaluating certain areas of risks and overseeing
the management of such risks, the entire Board retains overall responsibility and remains regularly informed through committee
reports about such risks.
Code of Conduct and Compliance
We are committed to the conduct of our business to the highest standards of ethics and integrity as reflected in our Code of
Conduct. All of our directors, officers and employees are expected to comply with our Code of Conduct, including our principal
executive officer, principal financial officer, principal accounting officer and persons performing similar functions. Under our Code of
Conduct, we have established a compliance hotline that is operated by an independent third party to receive complaints about any
accounting, internal control, or auditing matters, as well as compliance, ethical or other matters of concern (including on an
anonymous basis where permitted under applicable law). Annually, our Audit Committee reviews our Code of Conduct and related
policies and processes with management. Our Code of Conduct is available under “Leadership & Governance” in the Investor
Relations section of our website at investor-relations.calix.com.
11
Table of Contents
Risk Assessment of Compensation Practices and Policies
We have assessed, with input from outside consultants, and discussed with the Compensation Committee our compensation
policies and practices for our employees as they relate to risk management. Based upon this assessment, we believe that any risks
arising from such policies and practices are not reasonably likely to have a material adverse effect on the Company.
Our employees’ base salaries are fixed in amount and thus we do not believe that they encourage excessive risk-taking. While
performance-based cash incentives and sales-based incentives focus on achievement of short-term or annual goals, we believe that our
performance-based cash incentives and sales-based incentives appropriately balance risk and the desire to focus employees on specific
goals important to our long-term success. We believe these programs also do not encourage unnecessary or excessive risk taking as
the potential payout is limited, with payouts on performance-based cash incentives generally limited to 100% of target and payouts of
greater than target under sales-based incentives based on limited incremental achievement above 100% of target. Further, such
programs represent only one portion of the total compensation opportunities available to most employees and we believe that our
internal policies and controls help mitigate this risk.
A significant portion of the compensation provided to senior management is in the form of long-term equity-based incentives
that are important to help further align management’s interests with those of our stockholders. We do not believe that these equity-
based incentives encourage unnecessary or excessive risk taking because their ultimate value is tied to our stock price.
The statements regarding the risks arising from our compensation policies and practices contain forward-looking statements that
involve substantial risks and uncertainties. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial condition, results of operations, business
strategy and financial needs.
Communications with the Board
Stockholders and other interested parties may communicate with the Board or any specified individual directors. Such
correspondence should be sent to the attention of the Board or specific directors, c/o Corporate Secretary, 1035 N. McDowell
Boulevard, Petaluma, California 94954.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information as to the beneficial ownership of our common stock as of March 19, 2018 for:
•
•
•
•
each stockholder known by us to be the beneficial owner of more than 5% of our common stock;
each of our directors;
each NEO as set forth in the summary compensation table in this Proxy Statement; and
all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power
with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole
voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
Shares of our common stock subject to options that are currently exercisable or exercisable within 60 days of March 19, 2018 and
restricted stock units (“RSUs”) that vest within 60 days of March 19, 2018, are deemed to be outstanding and to be beneficially owned
by the person holding the options or RSUs for the purpose of computing the percentage ownership of that person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other person.
Percentage ownership of our common stock in the table is based on 51,718,928 shares of our common stock outstanding
(exclusive of treasury shares) on March 19, 2018. Unless otherwise indicated, the address of each of the individuals and entities
named below is c/o Calix, Inc., 1035 N. McDowell Boulevard, Petaluma, California 94954.
12
Table of Contents
Name of Beneficial Owner
5% Stockholder:
Nokomis Capital, L.L.C.
2305 Cedar Springs Rd., Suite 420
Dallas, TX 75201
Dimensional Fund Advisors LP
Dimensional Place
6300 Bee Cave Road, Building One
Austin, TX 78746
Lapides Asset Management, LLC.
500 West Putnam Avenue, 4th Floor
Greenwich, CT 06830
Divisar Partners QP, L.P.
275 Sacramento Street, 8th Floor
San Francisco, CA 94111
BlackRock, Inc.
55 East 52nd Street
New York, NY 10055
Ameriprise Financial, Inc.
145 Ameriprise Financial Center
Minneapolis, MN 55474
Renaissance Technologies LLC
800 Third Avenue
New York, NY 10022
Named Executive Officers:
Carl Russo
Cory Sindelar
Michael Weening
Gregory Billings
William Atkins (9)
Non-Employee Directors:
Don Listwin
Christopher Bowick
Kathy Crusco
Kevin DeNuccio
Michael Everett
Michael Flynn
Kira Makagon
Michael Matthews
Kevin Peters
J. Daniel Plants
Shares of Common Stock Beneficially Owned (1)
Options
Exercisable
Within 60
Days
RSUs
Vesting
Within
60 Days
Total
Number of
Shares
Beneficially
Owned
Common
Stock
Percent
4,086,833 (1)
—
—
4,086,833
7.90%
2,994,490 (2)
—
—
2,994,490
5.79%
2,974,000 (3)
—
—
2,974,000
5.75%
2,938,305 (4)
2,938,305
5.68%
2,844,535 (5)
—
—
2,844,535
5.50%
2,751,704 (6)
—
—
2,751,704
5.32%
2,639,200 (7)
—
—
2,639,200
5.10%
6,127,855 (8)
20,000
2,414
—
—
819,590 (10)
57,551
—
149,925
107,851
108,027
—
78,030
56,173
1,013,794 (11)
420,000
—
166,250
109,375
—
7,500
—
—
—
10,000
12,500
—
12,500
—
—
—
—
—
—
—
17,910
17,910
26,936
17,910
17,910
17,910
24,330
17,910
17,910
—
6,547,855
20,000
168,664
109,375
—
845,000
75,461
26,936
167,835
135,761
138,437
24,330
108,440
74,083
1,013,794
12.66%
*
*
*
—
1.63%
*
*
*
*
*
*
*
*
1.96%
All Current Directors and Executive Officers as a
Group (14 persons)
8,541,210
738,125 176,636
9,455,971
18.28%
* Represents beneficial ownership of less than one percent of the outstanding shares of common stock.
(1) The information was based upon a Schedule 13G filed with the SEC on February 15, 2018 by Nokomis Capital, L.L.C. and
Brett Hendrickson as a group. Each of Nokomis Capital, L.L.C. and Mr. Hendrickson has shared voting with respect to
4,086,833 of these shares and shared dispositive power over 4,086,833 of these shares.
(2) The information was based upon a Schedule 13G filed with the SEC on February 9, 2018 by Dimensional Fund Advisors LP.
Dimensional Fund Advisors LP has sole voting power with respect to 2,812,306 of these shares and sole dispositive power with
respect to 2,994,490 of these shares. Dimensional Fund Advisors LP disclaims beneficial ownership of the shares.
13
Table of Contents
(3) The information was based upon a Schedule 13G/A filed with the SEC on February 8, 2018 by Lapides Asset Management,
LLC. Lapides Asset Management, LLC has sole voting power with respect to 2,438,300 of these shares and sole dispositive
power over 2,974,000 of these shares.
(4) The information was based upon a Schedule 13G filed with the SEC on January 8, 2018 by Divisar Partners QP, L.P., Divisar
Capital Management LLC, and Steven Baughman as a group. Divisar Partners QP, L.P. has shared voting power with respect to
2,690,649 shares and shared dispositive power with respect to 2,690,649 shares. Divisar Partners QP, L.P. disclaims beneficial
ownership of the shares. Each of Divisar Capital Management LLC and Mr. Baughman has shared voting power with respect to
2,938,305 shares and shared dispositive power with respect to 2,938,305 shares.
(5) The information was based upon a Schedule 13G/A filed with the SEC on January 29, 2018 by BlackRock, Inc. BlackRock, Inc.
has sole voting with respect to 2,784,788 of these shares and sole dispositive power over 2,844,535 of these shares. The shares
reported as being beneficially held by BlackRock, Inc. may be held by one or more of its subsidiaries: BlackRock Advisors,
LLC; BlackRock Asset Management Canada Limited; BlackRock Fund Advisors; BlackRock Institutional Trust Company,
N.A.; Blackrock Financial Management, Inc.; or BlackRock Investment Management, LLC.
(6) The information was based on upon a Schedule 13G/A filed with the SEC on February 14, 2018 by Ameriprise Financial, Inc.,
or AFI, Columbia Management Investment Advisers, LLC, or CMIA, as a group. Each of AFI and CMIA reports that it holds
shared voting power with respect to 2,751,704 shares and shared dispositive power with respect to 2,751,704 shares.
(7) The information was based upon a Schedule 13G filed with the SEC on February 14, 2018 by Renaissance Technologies LLC
(8)
and Renaissance Technologies Holdings Corporation as a group. Each of Renaissance Technologies LLC and Renaissance
Technologies Holdings Corporation has sole voting with respect to 2,639,200 of these shares and sole dispositive power over
2,639,200 of these shares.
Includes 2,239,188 shares held by The Crescentico Trust, Carl Russo, Trustee; 275,633 shares held by Equanimous Investments;
and 284,653 shares held by Calgrat Partners, L.P. The managing members of Equanimous Investments are Carl Russo and Tim
Pasquinelli. The managing partner of Calgrat Partners, L.P. is Tim Pasquinelli. Mr. Russo and Mr. Pasquinelli may be deemed
to have shared voting and investment power over the shares held by Equanimous Investments and Calgrat Partners, L.P., as
applicable. Mr. Russo and Mr. Pasquinelli each disclaim beneficial ownership of such shares, except to the extent of his
pecuniary interest therein. The address of each of The Crescentico Trust, Carl Russo, Trustee; Equanimous Investments; and
Calgrat Partners, L.P. is 1960 The Alameda #150, San Jose, California 95126.
(9) Mr. Atkins resigned as our executive vice president and chief financial officer effective May 19, 2017.
(10) Includes 200,000 shares held by No Mas Ninos, L.P. Mr. Listwin is a general partner of No Mas Ninos, L.P. and may be
deemed to have shared voting and investment power over the shares held by the partnership.
(11) Represents 1,013,794 shares held by Voce Capital Management, LLC. Mr. Plants is a managing member of Voce Capital
Management, LLC and disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our
common stock and other equity securities. Officers, directors and greater than 10% stockholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file. We believe that during the fiscal year 2017, our directors and Section 16
officers complied with all Section 16(a) filing requirements. In making the above statements, we have relied upon the written
representations of our directors and Section 16 officers.
14
Table of Contents PROPOSAL NO. 1
ELECTION OF DIRECTORS
Our Amended and Restated Certificate of Incorporation provides that our Board shall be divided into three classes, with the
directors in each class having a three-year term. Unless the Board determines that vacancies (including vacancies created by increases
in the number of directors) shall be filled by the stockholders, and except as otherwise provided by law, vacancies on the Board may
be filled only by the affirmative vote of a majority of the remaining directors. A director elected by the Board to fill a vacancy
(including a vacancy created by an increase in the number of directors) shall serve for the remainder of the full term of the class of
directors in which the vacancy occurred and until such director’s successor is elected and qualified.
As of April 3, 2018, the date this Proxy Statement is made available, the Board consists of eleven directors, divided into the
following three classes:
• Class I directors: Kevin DeNuccio, Kira Makagon and Michael Matthews, whose current terms will expire at the 2020
Annual Meeting;
• Class II directors: Christopher Bowick, Kathy Crusco, Michael Flynn and Kevin Peters, whose current terms will expire
at the 2018 Annual Meeting; and
• Class III directors: Michael Everett, Don Listwin, J. Daniel Plants and Carl Russo, whose current terms will expire at the
2019 Annual Meeting.
Mr. Flynn, one of our Class II directors, notified us of his decision to retire from the Board effective as of the end of his current
term at the 2018 Annual Meeting. In March 2018, our Board of directors appointed J. Daniel Plants to the Board of Directors and
designated Mr. Plants as a Class III director. The Board has approved changes to our classes of directors in order to rebalance the
members among the director classes following the departure of Mr. Flynn from the Board, including the nomination of Mr. Plants as a
Class II director nominee at the 2018 Annual Meeting, with such changes to be effective immediately following the 2018 Annual
Meeting subject to the directors’ resignations from their current classes, as described in further detail below under “Director
Class Changes.” Accordingly, our Nominating and Corporate Governance Committee recommended, and our Board has approved,
Christopher Bowick, Kathy Crusco, Kevin Peters and J. Daniel Plants as nominees for election to the Board as Class II directors at the
2018 Annual Meeting. Messrs. Bowick, Peters and Plants and Ms. Crusco have each agreed to stand for reelection as Class II
directors.
Each director to be elected will hold office from the date of such director’s election by the stockholders until the third
subsequent annual meeting of stockholders or until his or her successor is elected and has been qualified, or until such director’s
earlier death, resignation or removal. Shares of common stock represented by executed proxies will be voted, if authority to do so is
not withheld, for the election of the four Class II director nominees named above. In connection with Mr. Flynn’s retirement, the
Board size will be reduced to ten (10) directors effective immediately following the end of Mr. Flynn’s current term at the Annual
Meeting.
The Board expects each of the nominees to be available for election to the Board at the 2018 Annual Meeting. In the event that
any nominee should be unable to serve or for good cause will not serve, such shares will be voted for the election of such substitute
nominee as the Board may propose. Each person nominated for election has agreed to serve if elected, and management has no reason
to believe that any nominee will be unable to serve. Directors are elected by a plurality of the votes cast at the meeting.
Our Director Nominees and Board of Directors
At least annually our Nominating and Corporate Governance Committee reviews the skills and characteristics of directors and
the mix of skills and experience and diversity of the Board in the context of our business strategy, growth initiatives and our customers
and target market, our business and operating requirements and the long-term interests of our stockholders. In doing so, the
Nominating and Corporate Governance Committee seeks a board composition that can best perpetuate the success of the business and
represent stockholder interests. The Committee also considers the tenure of our directors and seeks to maintain a balance of longer
tenured directors with deep institutional knowledge and newer directors who bring new perspectives to the Board. See further
discussion under “Board Meetings and Committees — Nominating and Corporate Governance Committee” above regarding the
Nominating and Corporate Governance Committee’s evaluation and selection of director nominees.
15
Table of Contents
The Board believes that all the nominees for reelection are highly qualified and have the skills and experience required for
effective service on the Board. In particular, Messrs. Bowick and Peters bring significant industry-specific experience along with
knowledge and expertise with respect to large communications service providers representative of the markets we serve. Ms. Crusco
adds deep financial and operational expertise as well as public company leadership and governance experience, and serves on our
Audit Committee as one of the “financial experts” (as such term is defined under SEC regulations). Mr. Plants, our most recent
appointment to the Board, provides expertise in the areas of corporate governance and leadership, as well as adding stockholder
insight. We believe the skills and attributes of these nominees complement the expertise, background and experience of our other
continuing directors.
Biographical information describing the qualifications and relevant experience, skills and attributes of our Class II nominees and
our other current directors who will continue in office after the Annual Meeting as of April 3, 2018 is set forth below.
Nominees for Election to a Three-Year Term Expiring at the 2021 Annual Meeting of Stockholders
Christopher Bowick
Independent director
Age: 62
Director since 2014
Calix Board committees:
Compensation
Other current directorships:
•
•
Minerva Networks (private)
ComSonics, Inc. (private)
Mr. Bowick brings to our Board extensive experience in advising and managing
companies in the technology and telecommunications industries. Mr. Bowick is
principal of The Bowick Group, LLC, where he provides technology, product, business
and executive-development advice and counsel to clients in the cable television and
telecommunications industries.
From 1998 until his retirement in 2009, Mr. Bowick held various positions at Cox
Communications. Mr. Bowick joined Cox in 1998 as vice president, technology
development, and was named senior vice president of engineering and chief technical
officer in 2000. Mr. Bowick retired as chief technology officer of Cox in June of 2009.
At Cox, Mr. Bowick was responsible for strategic technology planning, day-to-day
technical operations and the development and deployment of technology solutions for
the company’s video, voice, high speed data and wireless products, including the
development and deployment of telecommunications services, such as circuit-switched
telephone, voice over IP, high-speed data, digital video, HDTV, video-on-demand and
interactive television. Mr. Bowick was also responsible for network engineering and
network operations for Cox’s nation-wide network infrastructure including its national
backbone, Metropolitan Area Networks and HFC networks. Prior to joining Cox,
Mr. Bowick served as group vice president of technology and chief technical officer for
Jones Intercable, Inc., while simultaneously serving as president of Jones Futurex, a
designer and manufacturer of triple DES, PC-based hardware encryption devices and
provider of contract manufacturing services. Prior to Jones, Mr. Bowick served as vice
president of engineering for Scientific Atlanta’s Transmission Systems Business
Division, and as a design engineer for Rockwell International, Collins Avionics
Division.
Mr. Bowick holds a Master of Business Administration from the University of Colorado
and a Bachelor of Science in Electrical Engineering from the Georgia Institute of
Technology.
16
Table of Contents
Kathy Crusco
Independent director
Age: 53
Director since 2017
Calix Board committees:
Audit (Audit Committee financial expert)
Other current directorships:
Mitchell International, Inc. (private)
Kevin Peters
Independent director
Age: 54
Director since 2014
Calix Board committees:
•
•
Cybersecurity (Chair)
Nominating and Corporate
Governance
Other current directorships:
•
•
•
AwareX, Inc. (private)
NetNumber Inc. (private)
UniTek Global Services, Inc.
(private)
Ms. Crusco brings to our Board a wealth of experience instilling operational rigor at
leading technology companies. Since December 2017, Ms. Crusco has served as
executive vice president and chief financial officer at Kony, Inc., a privately-held mobile
applications solutions provider.
From August 2016 until November 2017, Ms. Crusco served as executive vice president,
chief operating officer and chief financial officer at Epicor Software Corporation, a
privately-held software company. Ms. Crusco joined Epicor in May 2011 when the
company merged with Activant Solutions Inc., a business management software
company where she served as senior vice president and chief financial officer from May
2007 to November 2010, then as executive vice president and chief financial officer.
Before joining Activant, she worked for Polycom from 2002 to 2007, rising to the role
of vice president of worldwide finance during her tenure. Ms. Crusco has also held a
variety of financial roles at Documentum, Inc., Adaptec, Inc. and Price Waterhouse
LLP.
Ms. Crusco holds a Bachelor of Science in Business Administration with an emphasis in
accounting from California State University, Chico.
Cybersecurity Committee Chair
Mr. Peters brings to our Board a wealth of leadership experience gained over the course
of a 28-year career with AT&T, one of world’s largest communications companies.
Since February 2018, Mr. Peters has served as president and chief executive officer of
NetNumber Inc., a privately-held technology company.
Mr. Peters formerly served as executive vice president, global customer service for
AT&T, Inc., from 2012 until his retirement in 2014. Mr. Peters joined AT&T in 1986,
and held various functional roles, including in IT, sales, engineering and finance until
2000. Mr. Peters then served as vice president, local network planning and project
management in 2001. During his subsequent career at AT&T, Mr. Peters served in the
following capacities: senior vice president, network engineering from 2003 until 2004;
senior vice president, global network technology program management, AT&T Labs in
2005; senior vice president-enterprise systems and software engineering in 2006;
executive vice president, global network operations from 2006 until 2009; and chief
marketing officer, business from 2010 until 2011. Since retiring, Mr. Peters has provided
advisory services to a number of companies, including Accenture, a global management
consulting and professional services firm, and J&L Group, a privately-held
telecommunications company. In addition to the other current directorships described,
Mr. Peters also currently volunteers and serves on the board of directors of the Crandon
Lakes Country Club and the Yogi Berra Museum and Learning Center; and serves on
the advisory board of the Howe School of Business, Stevens Institute of Technology.
Mr. Peters holds a Master of Business Administration with honors (Beta Gamma Sigma)
from Columbia University, a Master of Science in Telecommunications Engineering
from Stevens Institute of Technology and a Bachelor of Science in Psychology from
Fairfield University, and attended the Harvard University Advanced Management
Program.
17
Table of Contents
J. Daniel Plants
Independent director
Age: 51
Director since 2018
Calix Board committees:
None
Other current directorships:
Cutera, Inc. (chairman of the board and
member of compensation committee)
Mr. Plants brings to our Board extensive experience as a successful investor, director
and advisor to public companies. Currently, Mr. Plants serves as chief investment officer
of Voce Capital Management, LLC, an investment advisor that he founded in 2011.
Mr. Plants is also admitted to the New York Bar.
From July 2007 until May 2009, Mr. Plants served as managing director and head of
communications technology and media for Needham & Company LLC, an investment
banking and asset management firm. Prior to joining Needham & Company, Mr. Plants
held a number of executive leadership roles at investment banking firms Goldman Sachs
and JPMorgan Chase. Mr. Plants also served on the board of directors of Destination
Maternity Corporation, a maternity apparel retailer, from November 2014 until
December 2016.
Mr. Plants holds a Juris Doctor from the University of Michigan Law School and a
Bachelor of Arts in economics from Baylor University.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH CLASS II DIRECTOR
NOMINEE NAMED ABOVE.
Current Directors Continuing in Office After the Annual Meeting
Kevin DeNuccio
Independent director
Age: 58
Director since 2012
Calix Board committees:
Compensation
Other current directorships:
•
•
•
GroundCntrl, Inc. (private)
Juniper Networks, Inc.
SevOne, Inc. (private)
Mr. DeNuccio brings to our Board over 25 years of leadership and governance
experience at communications technology companies and service providers worldwide.
Mr. DeNuccio is presently general partner of Wild West Capital LLC, a private
investment firm which he co-founded in July 2012.
From February 2014 until April 2017, Mr. DeNuccio served as president, chief
executive officer and a member of the board of directors of Violin Memory, Inc., a
publicly-held data storage company, which filed a voluntary petition for Chapter 11
bankruptcy protection in December 2016 and subsequently announced an acquisition bid
by a unit of Soros Fund Management LLC that has been approved by the U.S.
bankruptcy court. Mr. DeNuccio served as chief executive officer of Metaswitch
Networks, a telecommunications hardware and software company, from February 2010
until June 2012. From January 2007 until the present, Mr. DeNuccio has also worked as
a private equity investor, both individually and through Wild West Capital.
Mr. DeNuccio served as chief executive officer of Redback Networks from August 2001
until its acquisition by Ericsson in January 2007. From 1995 to 2001, he held a number
of executive positions at Cisco Systems, Inc., including senior vice president of
worldwide service provider operations. Prior to joining Cisco, Mr. DeNuccio was
founder, president, and chief executive officer of Bell Atlantic Network Integration, a
wholly owned subsidiary of Bell Atlantic (now Verizon Communications). He has also
held senior management positions at both Unisys Corporation’s and Wang Laboratories’
network integration and worldwide channel partner businesses. Mr. DeNuccio
previously served on numerous public and private boards of directors, including
Sandisk, Redback and JDS Uniphase Corporation, each a publicly-held company.
Mr. DeNuccio has a Master of Business Administration from Columbia University and a
Bachelor’s degree in Finance from Northeastern University, and currently serves on the
board of Northeastern University.
18
Table of Contents
Michael Everett
Independent director
Age: 68
Director since 2007
Calix Board committees:
Audit (Chair and Audit Committee
financial expert)
Other current directorships:
None
Don Listwin
Independent director
Age: 59
Director since 2007
Calix Board committees:
Nominating and Corporate Governance
(Chair)
Other current directorships:
•
POET Technologies Inc. (member
of audit and compensation
committees)
Robin Systems, Inc. (private)
D-Wave Systems, Inc. (private)
Teradici Corporation (private)
•
•
•
Audit Committee Chair
Mr. Everett brings to our Board over 30 years of experience in senior management and
financial operations at communications technology companies, as well as his
background as a corporate attorney. Mr. Everett was named chief financial officer of the
year by San Francisco Business Times in 2007 and is admitted to the State Bar of
California and the New York Bar.
From May 2007 until his retirement in December 2008, Mr. Everett served as vice
president of finance at Cisco Systems, Inc. From April 2003 to May 2007, Mr. Everett
was chief financial officer of WebEx Communications, Inc., a web collaboration service
provider that was acquired by Cisco. From 2001 to 2003, Mr. Everett served as chief
financial officer of Bivio Networks, Inc., a network appliance company. In 2001,
Mr. Everett served as chief financial officer of VMware, Inc., an infrastructure software
company. From February 1997 to November 2000, Mr. Everett served as executive vice
president and chief financial officer of Netro Corporation, a broadband wireless
technology provider. Mr. Everett served in several senior management positions at
Raychem Corporation from 1987 through 1996, including senior vice president and
chief financial officer from August 1988 to August 1993, and was involved in the
company’s early fiber to the home initiatives. Before joining Raychem Corporation,
Mr. Everett served as a partner in the law firm of Heller, Ehrman, White & McAuliffe
LLC. He currently serves on the board of trustees of the Santa Fe Chamber Music
Festival, and is treasurer of its endowment foundation board. Mr. Everett also formerly
served on the board of directors and as chairman of the audit committee of Smart Focus,
Ltd., a privately-held marketing analytics company, and on the board of directors of
Broncus Technologies, Inc., a privately-held medical technology company, including as
chairman of the audit committee and member of the compensation committee.
Mr. Everett holds a Juris Doctor from the University of Pennsylvania Law School and a
Bachelor of Arts in History from Dartmouth College.
Chairman of the Board
Nominating and Corporate Governance Committee Chair
Mr. Listwin has served as chairman of our Board since July 2007, and brings over 30
years of experience in the networking industry to our Board. Since January 2018,
Mr. Listwin has served as chief executive officer of iSchemaView, a privately-held
medical device company.
Mr. Listwin founded BelizeKIDS.org in 2016, a non-profit organization focused on
helping children in Belize, and Canary Foundation in 2004, a non-profit organization
devoted to the early detection of cancer, and has served on the board of directors of both
organizations since their inception. From January 2008 to January 2009, Mr. Listwin
served as chief executive officer of Sana Security, Inc., a security software company,
which was acquired by AVG Technologies. From September 2000 to October 2004,
Mr. Listwin served as chief executive officer of Openwave Systems Inc., a leader in
mobile internet infrastructure software. From August 1990 to September 2000, he served
in various capacities at Cisco Systems, Inc., most recently as executive vice president.
Mr. Listwin formerly served on the board of directors of Violin Memory, Inc., Isilon
Systems, Inc., Openwave Systems Inc. (now known as Unwired Planet, Inc.), TIBCO
Software Inc., Redback Networks, Inc. and E-Tek Dynamics Inc., each a publicly-held
company. Mr. Listwin also previously served as a member of the board of scientific
advisors of the National Cancer Institute.
Mr. Listwin holds an honorary Doctorate of Law from the University of Saskatchewan
and a Bachelor of Science in Electrical Engineering from the University of
Saskatchewan.
19
Table of Contents
Kira Makagon
Independent director
Age: 54
Director since 2017
Calix Board committees:
Cybersecurity
Other current directorships:
None
Michael Matthews
Independent director
Age: 61
Director since 2010
Calix Board committees:
•
•
Audit
Cybersecurity
Other current directorships:
•
•
AwareX, Inc. (private)
Innovolt, Inc. (private)
Ms. Makagon brings to the Board extensive experience in global platform strategy,
technology, cybersecurity, operations and high technology executive leadership. Since
August 2012, Ms. Makagon has served as executive vice president of innovation at
RingCentral, Inc., a publicly-held provider of cloud-based global collaborative
communications solutions.
From January 2012 to July 2012, Ms. Makagon served as the senior vice president of
products of iCrossing, a global digital marketing agency owned by Hearst Corporation.
From June 2009 to December 2011, she held various executive leadership roles at Red
Aril, Inc., an online media technology company, serving as founder, chief executive
officer and member of the board of directors from June 2009 to April 2010, and
president from April 2010 to December 2011. Prior to joining Red Aril, Ms. Makagon
held various executive leadership roles at NebuAd, Inc., an online data and media
company, serving as co-founder and president from September 2006 to July 2008, chief
executive officer from August 2008 to December 2008, and consultant and board
member from January 2009 to May 2009. Ms. Makagon has also served in various roles
at Exigen Group, a provider of SaaS workflow platforms and call center solutions,
including president, ventures and alliances, and executive vice president, marketing and
business development, as well as serving on the board of directors. Prior to that,
Ms. Makagon co-founded and held key executive positions in flagship online marketing
and CRM companies, including Octane Software, which was acquired by E.piphany, and
Scopus Technology, where she brought multiple generations of CRM products to
market.
Ms. Makagon holds a Bachelor of Science in computer science and a Master of Business
Administration from the University of California, Berkeley.
Mr. Matthews is a marketing and business strategy executive with significant exposure
to the telecommunications industry and to global markets. Mr. Matthews brings to our
Board over 30 years of experience in the technology industry, and a strong background
in telecommunications, software, technology and innovation. Mr. Matthews currently
serves as an advisor to the TMForum, a global trade association with over 900 member
companies including communication service providers, digital service providers and
enterprises. Since January 2016, Mr. Matthews has served as chief executive officer and
chairman of AwareX, Inc., a privately-held technology company (formerly
MobileAware, Ltd).
From January 2012 through September 2013, Mr. Matthews served as chief corporate
development officer for the information technology company AGT International
GMBH, where he was responsible for AGT’s research and development, new business
ventures and marketing. From September 2008 to December 2011, Mr. Matthews served
as head of strategy and business development at Nokia Siemens Networks, a
telecommunications company, where he directed the company’s strategic planning and
investments, mergers and acquisitions program and strategic alliances and partnerships.
From February 2003 to January 2008, Mr. Matthews served as chief marketing officer at
Amdocs Inc., a publicly-held software and services provider. From September 1999 to
March 2002 he served as the executive vice president, sales and marketing, at Groove
Networks, a privately held software company which was acquired by Microsoft
Corporation. Prior to this, he served in leadership positions across technology companies
in the United States and Australia such as Platinum Technology, Inc. a database
management software company which was acquired by Computer Associates, Inc.,
Sterling Software, a software company which was acquired by Computer Associates,
Inc., and Digital Equipment Corporation, which was acquired by Compaq Computer
Corporation.
Mr. Matthews has a degree in Civil Engineering from the University of Queensland,
Australia.
20
Table of Contents
Carl Russo
Director
Age: 61
Director since 1999
Calix Board committees:
None
Other current directorships:
None
President and Chief Executive Officer
Mr. Russo has served as Calix’s president and chief executive officer since December
2002. As Calix’s president and chief executive officer, Mr. Russo brings substantial
expertise and knowledge regarding our business strategy, markets and operations to
Calix’s board of directors. He also brings to the Board an extensive background in the
telecommunications and networking technology industries.
From November 1999 to May 2002, Mr. Russo served as vice president of optical
strategy and group vice president of optical networking of Cisco Systems, Inc. From
April 1998 to October 1999, Mr. Russo served as president and chief executive officer
of Cerent Corporation, which was acquired by Cisco. From April 1995 to April 1998,
Mr. Russo served in various capacities, including as chief operating officer, at Xircom,
Inc., which was acquired by Intel Corporation. Previously, Mr. Russo served as senior
vice president and general manager for the hyperchannel networking group of Network
Systems Corporation and as vice president and general manager of the data networking
products division of AT&T Paradyne Corporation. Mr. Russo served on the board of
directors of Vital Network Services, Inc., a privately-held company delivering network
lifecycle services, and Xirrus, Inc., a privately-held company providing products that
enable high-performance wireless networks.
Mr. Russo attended Swarthmore College and previously served on its board of
managers.
There are no family relationships among any directors, director nominees or executive officers of Calix.
Director Class Changes
As described above under “Board Composition and Qualifications,” since 2017, our Board has added three new directors bringing
substantial expertise, experience and skills to our Board, had two director retirements and, in June 2017, constituted our Cybersecurity
Committee. In addition, in February 2018, Mr. Flynn announced his decision to retire from our Board, as chair of our Compensation
Committee and as a member of our Nominating and Corporate Governance Committee at the end of his current term at the 2018
Annual Meeting.
In light of these recent changes in membership to our Board and taking into account board committee appointments, in March 2018
our Nominating and Corporate Governance Committee recommended and our Board adopted resolutions to (i) appoint Mr. Bowick to
serve as chair of our Compensation Committee, (ii) appoint Mr. Listwin to serve on our Compensation Committee, (iii) appoint
Mr. DeNuccio to serve on our Nominating and Corporate Governance Committee and (iv) make the following changes with respect to
our classes of directors in order to rebalance the members among the director classes, with such appointments and director class
changes to be effective immediately following the 2018 Annual Meeting:
Director
Chris Bowick
Kathy Crusco
Michael Everett
Don Listwin
Kira Makagon
Michael Matthews
J. Daniel Plants
Current Class
Class II
Class II
Class III
Class III
Class I
Class I
Class III
New Class
Class III
Class I
Class I
Class II
Class III
Class III
Class II
Next Election Year
2019
2020
2020
2021
2019
2019
2021
The above-noted director class changes will be effected through the resignation and immediate reappointment of the directors solely to
satisfy the requirements of the Delaware General Corporation Law, and for all other purposes, each director’s service on the Board
will be deemed to have continued uninterrupted.
21
Table of Contents
Our Executive Officers
The following is biographical information for our current executive officers who were not discussed above.
Name
Cory Sindelar
Michael Weening
Gregory Billings
Position(s)
Age
49 Chief Financial Officer
49 Executive Vice President, Sales and Marketing
50 Senior Vice President, Services
Cory Sindelar has served as Calix’s chief financial officer and principal financial officer since October 1, 2017, and previously
served as Calix’s interim chief financial officer and principal financial officer from May 31, 2017 to September 30, 2017. Prior to
joining Calix, Mr. Sindelar served from December 2011 to April 2017 as the chief financial officer of Violin Memory, Inc., a publicly-
held data storage company, which filed a voluntary petition for Chapter 11 bankruptcy protection in December 2016 and subsequently
announced an acquisition bid by a unit of Soros Fund Management LLC that has been approved by the U.S. bankruptcy court. He also
previously served as chief financial officer of Kilopass Technology, Inc. from November 2010 to December 2011, and as chief
financial officer of Ikanos Communications, Inc. from September 2006 to July 2010. From 2003 to 2006, Mr. Sindelar held various
finance positions at EMC Corporation. From 2000 to 2003, Mr. Sindelar was vice president, corporate controller and principal
accounting officer at Legato Systems, Inc., an enterprise software company, which was acquired by EMC. Mr. Sindelar holds a
Bachelor of Science in Business Administration with an emphasis in accounting from Georgetown University.
Michael Weening joined Calix as our executive vice president of sales on June 27, 2016, and as of November 2016 has served
as Calix’s executive vice president of sales and marketing. Prior to joining Calix, Mr. Weening held various executive leadership roles
at Salesforce.com, a customer relationship management company. From August 2014 until June 2016, Mr. Weening served as senior
vice president of global customer success and services at Salesforce.com, and from May 2012 until August 2014 as senior vice
president of customer and sales growth in Japan and Asia Pacific at Salesforce.com. From May 2009 until May 2012, Mr. Weening
served as vice president of business sales at Bell Mobility in Canada. Prior to joining Bell Mobility, Mr. Weening also held various
sales leadership roles at Microsoft Corporation in Canada and the United Kingdom. Mr. Weening holds a Bachelor of Arts in Business
Administration from Brock University.
Gregory Billings has served as Calix’s senior vice president of services since December 19, 2016. From October 2014 until
December 2016, Mr. Billings served as vice president of global professional services and solutions at Zebra Technologies, Inc., a
marking, tracking and computer printing technologies company, where Mr. Billings led the post-acquisition integration and growth of
the enterprise business of Motorola Solutions, Inc., a communications products, solutions and services company. From December
2011 until October 2014, Mr. Billings served as vice president of global services and solutions at Motorola Solutions. Mr. Billings has
also served as vice president and general manager of the global professional services and solutions business of Avaya, Inc., division
president and general manager of the customer management product business unit at Amdocs, and as a vice president at Ernst &
Young’s Telecom, Media & Entertainment Consulting Practice (acquired by Cap Gemini SA). Mr. Billings holds a Bachelor of Arts in
Economics and Political Science from The Colorado College.
Independence of the Board
The NYSE prescribes independence standards for listed companies. These standards require a majority of the Board to be
independent. They also require each member of the Audit Committee, Compensation Committee and Nominating and Corporate
Governance Committee of the Board to be independent. No director qualifies as independent unless the Board determines that the
director has no direct or indirect material relationship with us. The Board also evaluates each director’s independence to serve on our
Board and committees under the applicable requirements of the SEC. On an annual basis, each director and executive officer is
obligated to complete a director and officer questionnaire which requires disclosure of any transactions with us in which the director
or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. We also review our
relationship with any entity employing a director or on which the director currently serves as a member of the board.
After review of all relevant transactions or relationships between each director, or any of his or her immediate family members,
and Calix, its senior management and its independent registered public accounting firm, the Board has affirmatively determined that
all of Calix’s current directors are independent directors within the meaning of the applicable NYSE standards, except for Mr. Russo,
Calix’s current president and chief executive officer. All of the committees of our Board are comprised entirely of directors
determined by the Board to be independent within the meaning of the NYSE standards and applicable SEC regulations.
22
Table of Contents
APPROVAL OF THE CALIX, INC.
AMENDED AND RESTATED 2017 NONQUALIFIED EMPLOYEE STOCK PURCHASE PLAN
PROPOSAL NO. 2
We are asking our stockholders to approve the Calix, Inc. Amended and Restated 2017 Nonqualified Employee Stock Purchase
Plan (the “Nonqualified ESPP”) that amends certain terms and increases the number of shares authorized for issuance under the 2017
Nonqualified Employee Stock Purchase Plan (the “Prior Nonqualified ESPP”) by 2,500,000 shares, resulting in an increase to the total
shares authorized for issuance under the Prior Nonqualified ESPP from 1,000,000 to 3,500,000 shares. The Nonqualified ESPP
amends and restates in its entirety the Prior Nonqualified ESPP. If the Nonqualified ESPP is not approved by our stockholders, it will
not become effective, the Prior Nonqualified ESPP will continue in effect, and we may continue to offer employees the right to
purchase shares under the Prior Nonqualified ESPP, subject to its terms, conditions and limitations, using the shares available for
issuance thereunder. A summary of the amendments approved by our Board, upon recommendation of our Compensation Committee,
to be effective as of July 1, 2018, subject to stockholder approval, is as follows:
•
•
•
Increase number of authorized shares for issuance by 2,500,000 shares;
Expand eligibility to include certain vice president level employees who do not report to our chief executive
officer; and
Expand eligible compensation to include bonus payments.
The purpose of the Nonqualified ESPP is to assist our employees, excluding our executive officers and certain members of
senior management, in acquiring a stock ownership interest in the Company pursuant to a plan which is intended to help them provide
for their future security and to encourage them to remain in the employment of the Company. We believe that the Nonqualified ESPP
will align employee interests with that of our stockholders and will serve as a key recruiting and retention tool in a competitive
market.
We have attempted, in the design of some of the terms of the Nonqualified ESPP, to balance considerations of recruiting and
retention in a competitive labor market with the costs to our stockholders and the accounting expense to the Company. We obtained
and reviewed an independent consultant’s analyses of the potential dilution to stockholders over the term of the Nonqualified ESPP
and potential expense. Based on that information, 1) we have set the number of additional shares contained in this proposal, 2,500,000,
such that the aggregate number of shares available under the Nonqualified ESPP and our Amended and Restated Employee Stock
Purchase Plan is, we believe, reasonable under the standards of many institutional investors; 2) we have also set limits on the number
of shares that can be acquired in an Offering Period (500,000) and on the accounting expense to be incurred by the Company of
$3,000,000 per Offering Period, or $6,000,000 per year, which will similarly serve to limit dilution to stockholders; and 3) we
anticipate the additional 2,500,000 shares under the Nonqualified ESPP would provide sufficient shares for up to three years. In
addition, shares acquired under the Nonqualified ESPP are required to be held for a period of one year from the Exercise Date. We
seek, through the design of the Nonqualified ESPP, to offer a vehicle through which employees can continue to acquire an ownership
interest in the Company on favorable terms and be aligned with stockholders by acquiring equity, while also being mindful of dilution
and expense.
Under the Nonqualified ESPP, eligible employees purchase our common stock through accumulated payroll deductions, and for
each share of our common stock purchased, we issue an additional share at no cost to the employee but that is subject to vesting. The
Nonqualified ESPP is not intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code
of 1986, as amended (the “Code”).
A copy of the proposed Nonqualified ESPP is included as Appendix A to this Proxy Statement.
If approved by our stockholders, the Nonqualified ESPP will go into effect for the Offering Period commencing on July 1, 2018
and ending on December 31, 2018.
Our stockholders approved adoption of the Prior Nonqualified ESPP in May 2017, with 1,000,000 shares authorized for
issuance. As of March 19, 2018, a total of 224,362 shares have been purchased under the Nonqualified ESPP, and 224,362 Restricted
Shares (as defined below) have been issued subject to a risk of forfeiture, since its inception in May 2017.
23
Table of Contents
Background on Share Request
In its determination to approve the 2,500,000 shares increase to the Nonqualified ESPP, our Board and Compensation
Committee reviewed an analysis prepared by Radford, its compensation consultant, which included an analysis of our historical share
usage, certain dilution metrics and the costs of the Nonqualified ESPP. Specifically, our Board and Compensation Committee
considered the following:
• We issued a total of 448,724 shares out of a maximum of 500,000 shares during the initial Offering Period ending on
December 31, 2017. Based on the participation rates of our employees during 2017, we expect to exhaust the shares of our
common stock reserved for issuance under the Prior Nonqualified ESPP after the Offering Period ending on June 30,
2018. In 2017, participating employees elected to contribute an average of 11.5% of their eligible earnings to purchase
shares under the Prior Nonqualified ESPP. As such, our Board and Compensation Committee believe that the Prior
Nonqualified ESPP acts as an important incentive to both newly hired and existing employees to invest in our common
stock and aligning their interests with the interests of our stockholders.
• Our Board and Compensation Committee considered the dilutive effect of the share increase to the Nonqualified ESPP
and sought to balance such dilutive effect with the benefits of providing sufficient shares to promote employee
participation.
• No more than an aggregate of 500,000 shares may be purchased or acquired on any Exercise Date in an Offering Period,
and the Company shall not be required to recognize as an expense more than $3,000,000 in respect of rights granted in
any Offering Period. Therefore, we expect the new share reserve to permit us to operate the Nonqualified ESPP for up to 3
years after the Annual Meeting.
In light of the factors described above, and that the ability to continue to offer the opportunity to purchase shares of our common
stock and be issued matching shares of our common stock is vital to our ability to continue to attract and retain employees in the labor
markets in which we compete, our Board and our Compensation Committee have determined that the size of the increase in the share
reserve under the Nonqualified ESPP is reasonable and appropriate at this time.
A summary of the principal provisions of the Nonqualified ESPP is set forth below. The summary is qualified by reference to
the full text of the Nonqualified ESPP, which is attached as Appendix A to this Proxy Statement. Any stockholder who wishes to
obtain a copy of the Nonqualified ESPP may do so by written request to the Calix’s Corporate Secretary at our principal executive
offices.
Summary of the Nonqualified ESPP
Administration. The Nonqualified ESPP will be administered by our Compensation Committee, which, unless otherwise
determined by the Board, will consist solely of two or more members of the Board, each of whom is intended to qualify as a “non-
employee director” as defined by Rule 16b-3 of the Exchange Act and an “independent director” under the applicable exchange rules.
The Administrator has broad authority to construe the Nonqualified ESPP and to make determinations with respect to the terms and
conditions of each Offering Period under the Nonqualified ESPP, awards, designated subsidiaries and other matters pertaining to plan
administration.
Shares Available Under the Nonqualified ESPP. Under the Nonqualified ESPP, the maximum number of shares of our common
stock which will be authorized for issuance is 3,500,000, an increase of 2,500,000 shares from the initial reserve under the Prior
Nonqualified ESPP approved by our stockholders in May 2017. The shares available for issuance under the Nonqualified ESPP may
be authorized but unissued shares or reacquired shares reserved for issuance under the Nonqualified ESPP.
Offerings. Under the Nonqualified ESPP, employees have the right to acquire shares of our common stock through payroll
deductions accumulated over an Offering Period. “Offering Periods” are approximately six-month periods that are set as January 1
through June 30 and July 1 through December 31 of each year, unless otherwise determined by our Compensation Committee as
administrator of the Nonqualified ESPP.
Eligibility and Enrollment. Any employee of the Company (and such present or future subsidiaries of the Company as our Board
or Compensation Committee may designate) who (i) is customarily employed more than twenty hours a week; (ii) is customarily
employed more than five months per calendar year and (iii) who is an employee at the commencement of an Offering Period is
eligible to participate in the Nonqualified ESPP. However, the following employees are ineligible to participate in the Nonqualified
ESPP: our Chief Executive Officer, each senior management employee who reports directly to our Chief Executive Officer, and other
employees that are members of senior management as identified by the Administrator.
24
Table of Contents
By enrolling in the Nonqualified ESPP, a participant is deemed to have elected to (a) purchase the maximum number of whole
shares of common stock that can be purchased with the compensation withheld during each Offering Period for which the participant
is enrolled and (b) acquire an equal number of Restricted Shares. Restricted Shares are subject to a risk of forfeiture in the event the
participant ceases to be employed prior to the first anniversary of the date the shares are acquired. If a participant ceases to be an
eligible employee for any reason during an Offering Period, he or she will be deemed to have elected to withdraw from the
Nonqualified ESPP and any amounts credited to the participant’s account will be returned to the participant or the participant’s
beneficiary in the event of his or her death. If a participant ceases to be employed during the one year period following an Offering
Period, he or she will retain each purchased share but each Restricted Share will be forfeited.
As of March 19, 2018, approximately 640 employees in the U.S. and Canada are eligible to participate in the Nonqualified
ESPP. None of our executive officers are eligible to participate in the Nonqualified ESPP. In addition, consultants and non-employee
directors are not eligible to participate in the Nonqualified ESPP.
Payroll Deductions. The payroll deductions made for each participant may be not less than 1% nor more than 25% of a
participant’s compensation. Compensation is defined in the Nonqualified ESPP and generally includes cash remuneration that would
be reported as income for federal income tax purposes. A participant may decrease (but not increase) his or her payroll deduction
authorization once during any Offering Period. If a participant wishes to increase or decrease the rate of payroll withholding, he or she
may do so effective for the next Offering Period by submitting a new election.
Exercise Date; Purchase of Stock. The “Exercise Date” of each Offering Period occurs on the last trading day of each Offering
Period. On the Exercise Date, accumulated payroll deductions for each participant will be used to (i) purchase whole shares of
common stock at a purchase price equal to the closing trading price of our common stock on the Exercise Date (the “Purchased
Shares”) and (ii) acquire an equal number of shares of our common stock that are subject to a risk of forfeiture in the event the
participant terminates employment within the one year period immediately following the Exercise Date (the “Restricted Shares”). On
March 19, 2018, the closing price of our common stock on the NYSE was $6.85 per share.
A participant may cancel his or her payroll deduction authorization and elect to withdraw from the Nonqualified ESPP by
delivering written notice of such election to the Company. Upon cancellation, the participant may elect either to withdraw all of the
funds then credited to his or her Nonqualified ESPP account and withdraw from the Nonqualified ESPP or have the balance of his or
her account applied to the purchase of Purchased Shares and acquisition of Restricted Shares for the Offering Period in which his or
her cancellation is effective (with any remaining Nonqualified ESPP account balance returned to the participant). A participant who
ceases contributions to the Nonqualified ESPP during any Offering Period shall not be permitted to resume contributions to the
Nonqualified ESPP during the same Offering Period.
Unless a participant has previously canceled his or her participation in the Nonqualified ESPP in accordance with the terms of
the Nonqualified ESPP, the participant will be deemed to have exercised his or her option to purchase and acquire shares in full as of
each Exercise Date. Upon exercise, the participant will purchase the number of whole shares that his or her accumulated payroll
deductions will buy at the purchase price and acquire an equal number of Restricted Shares, subject to the following limitations (the
“Offering Period Limits”): No more than an aggregate of 500,000 shares may be purchased or acquired on any Exercise Date, and the
Company shall not be required to recognize as an expense more than $3,000,000 in respect of rights granted in any Offering Period.
Restrictions on Transferability. A participant may not assign, transfer, pledge or otherwise dispose of (other than by will or the
laws of descent and distribution) payroll deductions credited to a participant’s account or any rights or interest, including purchase
rights, under the Nonqualified ESPP, and during a participant’s lifetime, purchase rights under the Nonqualified ESPP shall be
exercisable only by such participant. Any such attempt at assignment, transfer, pledge or other disposition will not be given effect.
In addition, unless otherwise determined by the plan administrator, no shares issued pursuant to the Nonqualified ESPP may be
assigned, transferred, pledged or otherwise disposed by the participant until the first anniversary of the Exercise Date upon which such
shares were purchased or acquired. However, in the event a participant ceases to be an employee of the Company prior to the first
anniversary of the Exercise Date upon which the shares were purchased, the Restricted Shares will be forfeited, and the transfer
restrictions applicable to the Purchased Shares will lapse.
Adjustments upon Changes in Recapitalization, Dissolution, Liquidation, Merger or Asset Sale. In the event of any stock
dividend, stock split, combination or reclassification of shares or any other increase or decrease in the number of shares of common
stock effected without receipt of consideration, the plan administrator has broad discretion to equitably adjust the number of shares
authorized for issuance and awards under the Nonqualified ESPP to prevent the dilution or enlargement of benefits under outstanding
awards as a result of such transaction.
25
Table of Contents
In the event of a proposed liquidation or dissolution of the Company, the Offering Period then in progress will be shortened by
setting a new Exercise Date to occur prior to the consummation of the proposed liquidation or dissolution and will terminate
immediately prior to such consummation.
In the event of a proposed merger or asset sale, each outstanding purchase right will be assumed or substituted by the successor
corporation. In the event that the successor corporation refuses to assume or substitute the purchase rights, any Offering Periods then
in progress will be shortened by setting a new Exercise Date to occur prior to the date of the proposed sale or merger.
Insufficient Shares. If the total number of shares of common stock which are to be acquired under outstanding rights on any
particular date exceed the number of shares then available for issuance under the Nonqualified ESPP or if the number of shares with
respect to which rights are to be exercised exceed any of the Offering Period Limits, the plan administrator will make a pro rata
allocation of the available shares on a uniform and equitable basis.
Rights as Stockholders. A participant will have the rights and privileges of a stockholder of the Company when, but not until,
shares have been deposited in the designated brokerage account following exercise of his or her option. However, in the event a
dividend is paid in respect of shares prior to the first anniversary of the Exercise Date upon which such shares were purchased or
acquired under the Nonqualified ESPP, then no dividend will be paid on the Restricted Shares unless and until the participant
continues employment through such first anniversary.
Amendment and Termination. Our Board may amend, suspend or terminate the Nonqualified ESPP at any time. The plan
administrator may also modify or amend the Nonqualified ESPP to reduce or eliminate any unfavorable financial accounting
consequences that may result from the ongoing operation of the Nonqualified ESPP. However, the Board may not amend the
Nonqualified ESPP without obtaining stockholder approval within 12 months before or after such amendment to the extent required
by applicable laws.
Federal Income Tax Consequences
The Nonqualified ESPP is not intended to qualify as an “employee stock purchase plan” under Section 423 of the Code.
Accordingly, certain tax benefits available to participants in a Section 423 plan are not available under our Nonqualified ESPP.
For federal income tax purposes, a participant generally will not recognize taxable income on the grant of an option to purchase
and acquire shares under the Nonqualified ESPP, nor will the Company be entitled to any deduction at that time. Upon the exercise of
the option to purchase and acquire shares under the Nonqualified ESPP, a participant generally will not recognize taxable income and
instead will recognize ordinary income in the amount equal to the fair market value of the Restricted Shares when the risk of forfeiture
on the Restricted Shares lapses. The Company will be entitled to a corresponding deduction when the risk of forfeiture on the
Restricted Shares lapses. A participant’s basis in Purchased Shares, for purposes of determining the participant’s gain or loss on
subsequent disposition of such shares of common stock, generally, will be equal to the purchase price paid for such shares. A
participant’s basis in Restricted Shares, for purposes of determining the participant’s gain or loss on subsequent disposition of such
shares of common stock, generally, will be the fair market value of the shares of common stock on the date the risk of forfeiture on
such shares lapses.
Upon the subsequent sale of the shares acquired under the Nonqualified ESPP, the participant will recognize capital gain or loss
(long-term or short-term, depending on how long the shares were held following the date of purchase for Purchased Shares and the
lapse of the risk of forfeiture for Restricted Shares prior to disposing of them).
The above is a general summary under current law of the material federal income tax consequences to an employee who
participates in the Nonqualified ESPP. This summary deals with the general federal income tax principles that apply and is provided
only for general information. Some kinds of taxes, such as state, local and foreign income taxes and federal employment taxes, are not
discussed. Tax laws are complex and subject to change and may vary depending on individual circumstances and from locality to
locality. The summary above does not discuss all aspects of federal income taxation that may be relevant in light of a participant’s
personal circumstances. Further, this summarized tax information is not tax advice and a participant in the Nonqualified ESPP should
rely on the advice of his or her legal and tax advisors.
26
Table of Contents
Plan Benefits
The increase in shares authorized for issuance under the proposed Nonqualified ESPP applies to future Offering Periods, starting
with the Offering Period commencing July 1, 2018 and ending on December 31, 2018. The number of shares of common stock that
may be acquired under the Nonqualified ESPP is dependent upon the closing trading price of our common stock on the last day of
each future Offering Period, the voluntary election by each eligible employee to participate and the amount of a participant’s payroll
deductions during an Offering Period, and is not currently determinable. The following table states the amounts which were received
by each of the named individuals and groups under our Nonqualified ESPP for our last completed fiscal year, and the number of
shares of common stock purchased under the Nonqualified ESPP from its inception through March 19, 2018.
Nonqualified ESPP
Name and Position
Carl Russo (3)
President and Chief Executive Officer
Cory Sindelar (3)
Chief Financial Officer
Michael Weening (3)
Executive Vice President, Sales and Marketing
Gregory Billings (3)
Senior Vice President, Services
William Atkins (3)
Former Executive Vice President and Chief
Financial Officer
Executive Group (4)
Non-Executive Director Group (4)
Each Nominee for Election as a Director (4)
Each Associate of any of Such Directors,
Executive Officers or Nominees
Each Other Person Who Received or is to
Receive 5 Percent of Rights
Non-Executive Officer Employee Group
Payroll
Deductions Used
to Purchase
Shares in 2017
($)(1)
Number of Shares
Issued in 2017 (2)
Number of Shares
Issued from
Inception through
March 19, 2018 (2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,334,954
—
448,724
—
448,724
(1) Represents fair market value at date of purchase. The purchase price of the shares was $5.95.
(2)
(3) Messrs. Russo, Sindelar, Weening and Billings are not eligible to participate in the Nonqualified ESPP. Mr. Atkins was also not
Includes 224,362 Purchased Shares and 224,362 Restricted Shares.
eligible to participate in the Nonqualified ESPP.
(4) Groups not eligible to participate in the Nonqualified ESPP.
To be approved, this proposal must receive a “For” vote from the holders of a majority in voting power of the shares of common
stock which are present or represented by proxy and entitled to vote on the proposal. Abstentions will have the same effect as an
“Against” vote for purposes of determining whether this matter has been approved. Broker non-votes will not be counted for any
purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE
CALIX, INC. AMENDED AND RESTATED 2017 NONQUALIFIED EMPLOYEE STOCK PURCHASE PLAN AS
DISCUSSED ABOVE.
27
Table of Contents
PROPOSAL NO. 3
APPROVAL ON A NON-BINDING, ADVISORY BASIS OF THE
COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS (“SAY-ON-PAY”)
We are seeking an advisory vote from our stockholders to approve the compensation paid to our NEOs, as disclosed in this
Proxy Statement under the “Compensation Discussion and Analysis” section, or CD&A, below.
Our Compensation Committee, with advice and information from its external compensation consultant, has structured our
executive compensation program to stress a pay-for-performance philosophy. The compensation opportunities provided to our NEOs
are significantly dependent on Calix’s financial performance, the performance of Calix’s stock and the NEO’s individual performance,
which are intended to drive creation of sustainable stockholder value. The Compensation Committee intends to continue to emphasize
what it believes to be responsible compensation arrangements that attract, retain and motivate high-caliber executive officers to
achieve Calix’s short- and long-term business strategies and objectives.
Our Board previously determined to hold an advisory “say-on-pay” vote every year. In accordance with this determination and
Section 14A of the Exchange Act, you have the opportunity to vote “For” or “Against” or to “Abstain” from voting on the following
non-binding resolution relating to executive compensation:
“RESOLVED, that the stockholders approve, on an advisory basis, the compensation paid to Calix’s NEOs as disclosed in
Calix’s proxy statement for the 2018 Annual Meeting of Stockholders under the compensation disclosure rules of the SEC, including
the compensation discussion and analysis, compensation tables and narrative discussion of the proxy statement.”
In deciding how to vote on this proposal, we encourage you to consider Calix’s executive compensation philosophy and
objectives, the design principles and the elements of Calix’s executive compensation program described in our CD&A below. As
described in the CD&A, a guiding principle of our compensation philosophy is that pay should be linked to performance and that the
interests of our executives and stockholders should be aligned. Our compensation program is a mix of short- and long-term
components, cash and equity elements and fixed and contingent payments in proportions we believe will provide the proper
incentives, reward our NEOs, help us achieve our goals and increase stockholder value. For example:
• Chief Executive Officer Compensation Aligned with Stockholder Interests. A significant portion of our chief executive
officer’s compensation is performance-based and reflects a market-based cash compensation package. As a holder of more
than 10% of our common stock, our chief executive officer is a significant stockholder and his personal wealth has
consistently been, and continued to be in 2017, tied directly to sustained stock price appreciation and performance, which
provides direct alignment with stockholder interests.
• Other NEOs Compensation Substantially Tied to Performance. Our other NEOs earn a significant portion of their total
compensation based upon increases in Calix’s stock price and a significant portion of their variable cash and long-term
equity compensation is contingent upon Calix’s financial performance along with our Compensation Committee’s
assessment of individual performance.
• Change in Control and Severance Benefits Not Grossed Up. Calix provides limited change in control and severance
benefits to provide NEOs security and remain competitive. Calix does not provide for any tax gross up to any NEO in
connection with any change in control or severance benefits.
To be approved, on a non-binding and advisory basis, the compensation paid to our NEOs must receive a “For” vote from the
holders of a majority in voting power of the shares of common stock which are present or represented by proxy and entitled to vote on
the proposal. Abstentions will have the same effect as “Against” votes for purposes of determining whether this matter has been
approved. Broker non-votes will not be counted for any purpose in determining whether this matter has been approved.
While your vote on this proposal is advisory and will not be binding, we value the opinions of Calix’s stockholders on executive
compensation matters and will take the results of this advisory vote into consideration when making future decisions regarding Calix’s
executive compensation program. Unless the Board modifies its determination of the frequency of future “say on pay” advisory votes,
the next “say-on-pay” advisory vote will be held at our 2019 Annual Meeting of stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE COMPENSATION PAID
TO THE NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT UNDER THE
COMPENSATION DISCLOSURE RULES OF THE SEC.
28
Table of Contents
PROPOSAL NO. 4
RATIFICATION OF SELECTION OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Our Audit Committee has engaged KPMG LLP (“KPMG”) as our independent registered public accounting firm for the fiscal
year ending December 31, 2018, and is seeking ratification of such selection by our stockholders at the Annual Meeting. KPMG has
audited our financial statements since February 29, 2016. Representatives of KPMG are expected to be present at the Annual Meeting.
They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.
Neither our bylaws nor other governing documents or law require stockholder ratification of the selection of KPMG as our
independent registered public accounting firm. However, our Audit Committee is submitting the selection of KPMG to our
stockholders for ratification as a matter of good corporate practice. If our stockholders fail to ratify the selection, the Audit Committee
will reconsider whether or not to retain KPMG. Even if the selection is ratified, the Audit Committee in its discretion may direct the
appointment of a different independent registered public accounting firm at any time during the year if they determine that such a
change would be in the best interests of Calix and its stockholders.
To be approved, the ratification of the selection of KPMG as our independent registered public accounting firm must receive a
“For” vote from the holders of a majority in voting power of the shares of common stock which are present or represented by proxy
and entitled to vote on the proposal. Abstentions will have the same effect as an “Against” vote for purposes of determining whether
this matter has been approved. Broker non-votes will not be counted for any purpose in determining whether this matter has been
approved.
Principal Accountant Fees and Services
The following table provides information regarding the fees for the audit and other services provided by KPMG for the fiscal
years ended December 31, 2017 and 2016 (in thousands).
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total Fees
Audit Fees
Fiscal Years Ended December 31,
2016
2017
$
$
1,497
200
—
—
1,697
$
$
1,328
—
—
—
1,328
Audit fees of KPMG consist of fees billed or expected to be billed for professional services rendered for the audit of our annual
consolidated financial statements for the fiscal years ended 2017 and 2016, the audit of the effectiveness of our internal control over
financial reporting and the review of our consolidated financial statements included in our Form 10-Q quarterly reports for the fiscal
years ended 2017 and 2016. Audit fees also include services that are typically provided by the independent registered public
accounting firm in connection with statutory and regulatory filings for our international subsidiaries for those fiscal years.
Audit-Related Fees
Audit-related fees of KPMG consist of assurance and related services that are reasonably related to the performance of the audit
or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees under this category
include approximately $200,300 for consultation and review of ASC Topic 606 adoption.
Pre-Approval Policies and Procedures
Our Audit Committee pre-approves all audit and non-audit services provided by our independent registered public accounting
firm. Our Audit Committee may delegate authority to one or more members of the Audit Committee to provide such pre-approvals,
provided that such approvals are presented to the Audit Committee at a subsequent meeting. This policy is set forth in the charter of
the Audit Committee and available under “Leadership & Governance” in the Investor Relations section of our website at investor-
relations.calix.com.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE SELECTION OF
KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING
DECEMBER 31, 2018.
29
Table of Contents
Compensation Discussion and Analysis
Executive Summary
EXECUTIVE COMPENSATION
Our compensation and benefits programs reflect our philosophy of paying all of our employees, including our named executive
officers (“NEOs”), in ways that support two primary objectives:
•
•
attract, reward and retain exceptional talent in the markets in which we operate
identify and reward outstanding performance that reflects Calix principles and values and aligns with long-term
stockholder value creation
To help us achieve these objectives, a significant portion of our NEOs’ compensation is at risk with significant upside potential
for strong performance, as well as downside exposure for underperformance. NEOs with greater responsibilities and the ability to
directly impact our Company’s goals and long-term results bear a greater proportion of the risk if these goals and results are not
achieved.
The following discussion describes and analyzes our compensation objectives and policies, as well as the material components
of our compensation program for our NEOs during 2017. Our NEOs for 2017 were:
• Carl Russo, President and Chief Executive Officer
• Cory Sindelar, Chief Financial Officer
• Michael Weening, Executive Vice President, Sales and Marketing
• Gregory Billings, Senior Vice President, Services
• William Atkins, Former Executive Vice President and Chief Financial Officer
Mr. Atkins’ employment with Calix ended effective May 19, 2017. The terms of separation with Mr. Atkins are described below
under “Separation Agreement.”
Compensation Philosophy and Process
We strive to find the best talent, resources and infrastructure to serve our customers and strategically expand our product
portfolio. Our goal is to attract and retain highly qualified executives to manage and oversee each of our business functions. We seek
out individuals who we believe will be able to contribute to our business and our vision of future success, culture, principles and
values, and who will promote the long-term interests and growth of our Company. Our compensation philosophy is intended to
promote a team-oriented approach to performance as a portion of each NEO’s incentive compensation is based on achievement against
the same performance objectives as our broad-based incentive plan. In 2017, all employees were provided with the same health,
welfare and retirement benefits as our executives.
Our executive compensation program aims to achieve the following:
•
•
•
•
•
enable us to attract, retain and drive a high caliber, talented leadership team to execute on our business strategy
foster a goal-oriented leadership team with a clear understanding of long-term business objectives and shared corporate
principles and values
ensure that the elements of compensation provided to our employees and executives are balanced, individually and in
combination, and do not encourage excessive risk-taking
reflect the competitive environment of our industry and our changing business needs
allocate our resources effectively and efficiently in the development and selling of market-leading technology and
products
• maintain pay parity and fair compensation practices across our organization
In furtherance of these goals, our executive compensation program is designed to:
•
•
be market competitive by targeting compensation at approximately the 50th percentile of our peer group
emphasize pay for performance
30
Table of Contents
•
•
•
share risks and rewards with our stockholders
align the interests of our executives with those of our stockholders
reflect our principles and values
Our executive compensation program in 2017 consisted of the following components:
•
•
•
•
base salary
incentive-based cash compensation
grants of equity awards including grants that vest based solely on continued service and grants that vest contingent on
corporate performance and continued service
health, welfare and retirement benefits
In August 2017, our Compensation Committee conducted its annual review of our executive compensation program with its
independent compensation consultant, Radford, including a review of our pay philosophy, compensation mix, short and long-term
incentive plan structures, equity plan risk assessment and severance plan, and concluded that overall our executive compensation
program was consistent with market practice, and made recommendations to amend our executive change in control and severance
plan to align certain terms with market practice. In reaching these conclusions, our Compensation Committee, in consultation with
Radford, also reviewed governance and pay-for-performance guidelines issued by proxy advisory firms. In September 2017, our
Compensation Committee adopted an Amended and Restated Executive Change in Control and Severance Plan. See further discussion
under “Change in Control and Severance Benefits” below.
Stockholder Advisory Vote on Executive Compensation
We hold an advisory, non-binding stockholder vote on executive compensation every year. At our 2017 Annual Meeting of
Stockholders, our stockholders voted to approve the compensation of our NEOs, with approval of over 98% of the votes cast. Our
Compensation Committee reviewed these voting results along with the results from our 2016 Annual Meeting of Stockholders, noting
the strong level of our stockholders’ support for our NEOs’ compensation. The Compensation Committee also reviewed our
compensation programs with Radford and management, including consideration of governance and pay-for-performance guidelines
issued by proxy advisory firms. The Compensation Committee regularly reviews executive compensation programs, in conjunction
with Radford, and makes changes it determines are appropriate. The Compensation Committee intends to continue to take into
consideration the outcome of our stockholders’ future advisory “say-on-pay” votes when making future compensation decisions for
the NEOs.
Role of Our Compensation Committee
Our Compensation Committee approves and interprets our executive compensation and benefit plans and policies. The
Compensation Committee is appointed by the Board and consists entirely of directors who are non-employee directors for purposes of
Rule 16b-3 of the Exchange Act. In 2017, our Compensation Committee determined the compensation for all of our NEOs. Except for
our chief executive officer’s compensation and performance, each NEO’s individual performance and contributions to our Company
for each fiscal year is assessed by our chief executive officer who reports his recommendations regarding each element of the NEOs’
compensation to the Compensation Committee. Our chief executive officer does not participate in any formal discussion with the
Compensation Committee regarding decisions on his own compensation and he recuses himself from meetings when his compensation
is being discussed.
Competitive Market Review
The market for experienced executive leaders is highly competitive in our industry. We strive to attract and retain highly
qualified executives to effectively lead each of our business functions. In doing so, we draw upon a pool of talent that is highly sought
after by both large and established technology and telecommunications companies in our geographic area and by other competitive
companies in development or growth phases. Established organizations in our industry seek to recruit top talent from emerging
companies in the sector just as smaller organizations look to attract and retain the best talent from the industry as a whole. We also
compete for key talent on the basis of: our vision of future success; our culture and values; the cohesiveness and productivity of our
teams; and the excellence of our technical and leadership teams. The competition for technical and non-technical skills is aggressive
across the sector, and we expect it to remain high for the foreseeable future.
31
Table of Contents
Our Compensation Committee determines compensation for our NEOs, in large part based upon our financial resources as well
as competitive market data. In setting executive compensation for 2017, our Compensation Committee conducted a review of our
NEOs’ compensation, as well as the mix of elements used to compensate our NEOs, and compared that information with data
provided by Radford, as discussed below.
Our 2017 peer group criteria consisted of companies within the technology industry with revenues between $200 million and
$1 billion and market capitalizations between $150 million and $1.5 billion that we believe compete with us for executive talent. Our
2017 peer group was set by our Compensation Committee based on recommendations from Radford, consideration of ISS and Glass
Lewis peer group criteria, and discussion with management. Although Infinera is above $1.5 billion in market capitalization, our
Compensation Committee determined to retain this company in our 2017 peer group because Infinera has been included in our peer
group in prior years and is a local talent competitor. Although InterDigital is also above $1.5 billion in market capitalization, our
Compensation Committee determined to retain this company in our 2017 peer group because InterDitigal’s revenue is within range for
our peer group, and noted that InterDigital is on ISS and Glass Lewis’ peer group list for the Company.
Our 2017 peer group consisted of the following companies:
• A10 Networks, Inc.
• ADTRAN, Inc.
• Aerohive Networks, Inc.
• Barracuda Networks, Inc.
• Brocade Communications Systems, Inc. (1)
• CalAmp Corp.
• Comtech Telecommunications Corp.
• Digi International Inc.
• Extreme Networks, Inc.
• Gigamon Inc. (1)
• Harmonic Inc.
Infinera Corporation
Infoblox Inc. (1)
InterDigital, Inc.
Ixia (1)
•
•
•
•
• Nimble Storage (1)
• Oclaro, Inc.
• QLogic Corporation (1)
• Ribbon Communications, Inc. (formerly Sonus Networks,
Inc.)
ShoreTel, Inc. (1)
Silver Springs Networks, Inc. (1)
•
•
(1) Represents companies that have been subsequently acquired after our 2017 peer group evaluation and selection.
Our revenue was between the 70th and 80th percentile and our market cap was between the 10th and 20th percentile of our 2017
peer group. We determine our approximate position relative to the appropriate market benchmark by comparing our practices and
levels: by target annual cash compensation, which includes base salary, target annual incentive opportunity; and by total direct
compensation, which includes target cash compensation and equity compensation. Our Compensation Committee seeks to set the total
target cash compensation for our NEOs at approximately the 50th percentile of our 2017 peer group, when looking at the group in the
aggregate.
During 2017, our Compensation Committee continued to engage Radford as its independent executive compensation consultant.
Radford was hired directly by our Compensation Committee and works with management only at our Compensation Committee’s
direction to interpret results, make recommendations and assist in setting compensation levels for our executive officers. After review
and consultation with Radford, our Compensation Committee determined that Radford is independent and that there is no conflict of
interest resulting from retaining Radford currently or during 2017.
Weighting of Elements in our Compensation Program
The use and weight of each compensation element is based on a determination by our Compensation Committee of the
importance of each element in meeting our overall corporate objectives for each year as well as our long-term business strategy. We
also take into consideration assessments of our compensation program, including an assessment of compensation program risk,
conducted by Radford for the Compensation Committee.
32
Table of Contents
Chief Executive Officer Compensation
In January 2012, the compensation committee determined to adjust Mr. Russo’s cash compensation to reflect market practices,
our internal compensation practices for other NEOs and to be competitive relative to our peer group companies. In 2012, Mr. Russo’s
base salary was increased to $500,000 per year and he was given a performance bonus target equal to 100% of his annual base salary.
For 2017, Mr. Russo’s base salary and performance bonus target remained as set in 2012, and he was granted performance-based
stock option awards that vest subject to attainment of certain revenue and non-GAAP operating income targets for the fiscal year
ended December 31, 2017 as described below under “Equity-Based Incentives.” While the financial objectives were not attained for
these performance-based stock option awards, Mr. Russo continues to be a significant stockholder (with stock ownership of
approximately 12.66% of common stock outstanding) with his personal wealth tied directly to sustained stock price appreciation and
performance, which provides direct alignment with stockholder interests. Mr. Russo’s 2017 total target cash compensation is
approximately at the 50th percentile of our peer group of companies.
The 2017 weighting of compensation elements for our chief executive officer is as follows:
Other Current NEO Compensation
As with our chief executive officer compensation, we put a significant amount of the total potential compensation of our other
current NEOs, including compensation derived from long-term equity incentive awards, “at risk” based on our achievements of
corporate financial targets aligned with our business strategy.
The 2017 weighting of compensation elements for our other current NEOs as a group is as follows:
33
Table of Contents Compensation Arrangement with New Chief Financial Officer
In May 2017, Mr. Sindelar was appointed as our interim chief financial officer, replacing Mr. Atkins who served as our
executive vice president and chief financial officer through May 2017. From May through September 2017, Mr. Sindelar served as our
interim chief financial officer pursuant to a consulting agreement that provided for cash compensation of $25,000 per month. In
October 2017, Mr. Sindelar was appointed as our chief financial officer. After assessing Mr. Sindelar’s background, and considering
Mr. Sindelar’s contributions as our interim chief financial officer, financial leadership experience and potential, our Compensation
Committee approved an initial compensation package that provides for an annual base salary of $320,000, and as a material
inducement for Mr. Sindelar to enter into employment with the Company, an option to purchase 300,000 shares of the Company’s
common stock with an exercise price per share equal to $5.05 that vests and becomes exercisable over four years, with 25% of the
shares initially underlying the stock vesting and becoming exercisable on the one-year anniversary of the grant date and the remainder
of the shares underlying the stock option vesting and becoming exercisable quarterly thereafter in substantially equal installments over
the next 36 months, subject to Mr. Sindelar remaining continuously employed with the Company through the applicable vesting dates.
In addition, Mr. Sindelar participates in our cash incentive plan on the same terms as our other executives.
In recruiting new executive talent, our Compensation Committee aims to structure a competitive compensation package based
upon, among other factors, competitiveness of the offer compared to the executive candidate’s then-current compensation (including
the value of bonus opportunities, incentive compensation opportunities and equity awards), competing offers available to the
candidate, and market and peer group practices. Similarly, our Compensation Committee takes into account these factors, along with
competitive position benchmark data provided by its compensation consultant, in setting the initial base salary and initial equity award
for a new executive.
Base Salary
Base salary reflects the experience, skills, knowledge and responsibilities of each NEO as well as competitive market
conditions. Base salary is one component of total cash compensation.
The table below sets forth the annual base salary for each NEO as set by our compensation committee for 2017.
Name of Executive Officer
Carl Russo
Cory Sindelar (1)
Michael Weening
Gregory Billings
William Atkins (2)
Annual Base
Salary
$
500,000
320,000
320,000
300,000
345,000
(1) Mr. Sindelar joined Calix as a consultant as our interim chief financial officer on May 31, 2017 and became an employee and
our chief financial officer on October 1, 2017.
(2) Mr. Atkins resigned as our executive vice president and chief financial officer effective May 19, 2017.
The annual base salaries of our NEOs are reviewed at least once a year, and our Compensation Committee intends to make
adjustments to reflect performance-based factors as well as competitive conditions.
Cash Incentive Compensation
Our cash incentive compensation for our NEOs consists of an executive cash incentive plan. To be consistent with market
practice, our Compensation Committee, in consultation with Radford, determined that as of 2017 Mr. Weening would no longer
participate in cash incentive awards under the sales-based incentive compensation plan for our sales organization, although he would
continue to receive payments under the 2016 sales-based incentive compensation plan for shipments against bookings attained in
2016. Mr. Weening continues to participate in our executive cash incentive plan.
34
Table of Contents Cash Incentive Plan
The executive cash incentive plan consists of quarterly financial targets and assessment of the NEO’s performance and
achievement against the NEO’s goals for 2017. The cash incentive plan does not provide for any guaranteed payments. Our chief
executive officer recommends, and our Compensation Committee determines, the achievement as to individual performance of each
NEO. Our chief executive officer’s performance is evaluated and determined solely by our Compensation Committee.
Our Compensation Committee sets target incentive amounts for each NEO under the plan in an amount equal to a percentage of
the NEO’s annual base salary. We seek to align the performance targets of our cash incentive plan to our business strategy and long-
term stockholder interests. Our Compensation Committee establishes targets for our quarterly corporate goals based on the annual
operating plan approved by our Board at the beginning of the year and based on quarterly financial information prepared by
management. In general, in order for the cash incentive compensation pool to be funded, both the revenue and non-GAAP operating
income (loss) targets need to be achieved for that particular quarter, although our Compensation Committee retains discretion over
whether or not the plan is funded quarter over quarter. Non-GAAP operating income (loss), for the purposes of the cash incentive
plan, is calculated as operating income (loss) on a GAAP basis less certain items that are not considered indicative of our normal
operating performance, consisting of: non-cash stock-based compensation, amortization of certain intangible assets and restructuring
charges.
These performance metrics were selected by our Compensation Committee in order to incentivize revenue growth and
operational efficiencies as key measures of our operational performance at this stage of our development. The non-GAAP operating
income (loss) component is a measure that is required in addition to the revenue target to mitigate risks of revenue generation
activities at the expense of achieving profitability goals. The Compensation Committee believes that the use of these targets
incentivizes long-term stockholder value.
Even though our Compensation Committee has established target cash incentive opportunities for each NEO, once our corporate
performance goals are achieved and the cash incentive compensation pool is funded, our Compensation Committee retains discretion
to adjust cash incentive compensation paid to each individual up or down, ranging from 0% to 125% of the individual’s target cash
incentive opportunity, based upon assessment of individual performance by our Compensation Committee, including upon
consultation with Mr. Russo (except as to Mr. Russo’s compensation).
Sales-Based Incentive Compensation Plan
Our sales-based incentive compensation plan provides incentive cash payments for our sales organization in the form of sales
commissions and similar incentive payments based on sales targets aligned with our growth strategy. To be consistent with market
practice, our Compensation Committee, in consultation with Radford, determined that as of 2017 Mr. Weening would no longer
participate in our sales-based incentive plan. As a result, while Mr. Weening had no incentive targets for 2017 under the sales-based
incentive plan, he received $59,293 in payments in 2017 under the 2016 sales-based incentive compensation plan for shipments
against bookings attained in 2016. Under our sales-based incentive plan, incentive payments are earned and paid upon shipment of
booked orders.
A summary of the total cash incentive compensation targets set by our Compensation Committee for our NEOs for 2017 is as
follows:
Total Target Cash Incentive Opportunity
Named Executive Officer
Carl Russo
Cory Sindelar (1)
Michael Weening
Gregory Billings
William Atkins (2)
Target Cash
Incentive Plan
Opportunity
500,000
$
48,000
288,000
165,000
207,000
Target Cash
Incentive Plan
Opportunity as a
Percentage of Base
Salary
100%
60%
90%
55%
60%
(1) Pro-rated from October 1, 2017, the date Mr. Sindelar commenced employment with us.
(2) Mr. Atkins resigned as our executive vice president and chief financial officer effective May 19, 2017.
35
Table of Contents
Achievement Against Quarterly Financial Targets
The table below sets forth the quarterly financial targets under our cash incentive plan and our achievement for each fiscal
quarter of 2017 (in thousands, except for percentages).
Fiscal Quarter
First quarter
Second quarter
Third quarter
Fourth quarter
Target
Achievement
Revenue
$ 112,000
126,000
128,000
143,000
Non-GAAP
Operating Loss
(21,942)
$
(7,064)
(11,314)
(5,600)
Revenue
$ 117,518
126,123
128,827
137,899
Non-GAAP
Operating Loss (1)
(27,764)
$
(14,979)
(13,655)
(7,728)
Percent
Achievement of
Quarterly Financial
Target (2)
0%
0%
0%
0%
(1) Reconciliation of these non-GAAP amounts to GAAP is provided in Appendix B.
(2) Our executive cash incentive plan requires achievement of both quarterly revenue and non-GAAP operating loss targets in each
quarter.
Summary of Payouts of Cash Incentive Compensation
The table below summarizes payments to each NEO under the cash incentive plan and the sales-based incentive plan for 2017.
Named Executive Officer
Carl Russo
Cory Sindelar (1)
Michael Weening
Gregory Billings
William Atkins (3)
Target Opportunity
Under Cash Incentive
Plan
Awards Under Cash
Incentive Plan
Awards Under
Sales-Based
Incentive Plan (2)
Total Cash Awards
Under Incentive-
Based Plans
$
500,000 $ — $
—
—
—
—
48,000
288,000
165,000
207,000
— $
—
59,293
—
—
—
—
59,293
—
—
(1) Mr. Sindelar commenced employment on October 1, 2017. Accordingly, he was eligible only for the fourth quarter of the
quarterly financial component under the cash incentive plan.
(2) Represents payments to Mr. Weening in 2017 under the 2016 sales-based incentive compensation plan for shipments against
bookings attained in 2016. See discussion above under “Sales-Based Incentive Compensation Plan.”
(3) Mr. Atkins resigned as our executive vice president and chief financial officer effective May 19, 2017.
Discretionary Bonus
Our Compensation Committee may, from time to time, also choose to award discretionary bonuses to a NEO. Such awards are
made on an infrequent basis and are intended to recognize exemplary performance. In August 2017, our Compensation Committee
awarded Mr. Weening with a discretionary cash bonus of $140,000 in recognition of his leadership in transforming the sales and
marketing organization and his significant contributions toward the Company’s initiatives to drive revenue growth and new customers
in the first half of 2017.
Equity-Based Incentives
Our 2010 Equity Incentive Award Plan provides our key employees, including our NEOs, with stock-based incentives to align
their interests with the interests of our stockholders.
We believe that award of stock-based compensation to our key employees and executives encourages strong long-term financial
and operational performance and provides them the opportunity to participate in the long-term appreciation of our stock value. Our
Compensation Committee also reviews the equity “burn” rate annually to ensure it is aligned with peer/industry practices.
36
Table of Contents
We generally provide grants of stock-based awards to our NEOs under our 2010 Equity Incentive Award Plan on an annual
basis. Stock-based awards are generally in the form of RSUs or stock option grants with either time-based vesting or performance-
based vesting. Awards with time-based vesting typically vest as to 25% of the shares subject to the award after the first twelve months
of service and in equal quarterly installments thereafter with full vest in four years, subject to continued service through each vesting
date. Awards with performance-based vesting typically vest contingent on achievement of corporate goals or other financial targets.
Initial awards at the time of hire generally vest solely based on the continued service of the NEO. The size and terms of the
initial option or RSU grant made to each new NEO upon joining the Company is primarily based on competitive conditions applicable
to the NEO’s specific position and the value of unvested equity the executive is leaving at his or her prior company. In addition, we
consider the number of shares of our common stock underlying options and RSUs granted to other executives in comparable positions
within the Company.
Subsequent RSU awards and stock options are granted at the discretion of the Compensation Committee, generally in
recognition of a promotion or extraordinary performance, or as an annual refresh grants to continue to incentivize future performance.
Annual refresh equity awards in recent years have generally included threshold performance criteria which are intended to reduce or
eliminate the economic benefit of such awards in the event we do not perform well. Because the performance-based awards are
contingent upon the Company achieving certain financial targets as established by the Compensation Committee based on our
business strategy and long-term growth initiatives, we believe the award to each NEO is aligned to the interests of our stockholders. If
achieved, a portion of the shares underlying the performance-based awards vest immediately and a portion vests over time based on
continuous service. We believe these awards provide an appropriate blend of performance-based incentive and executive-retention
impact with a service-based vesting component. We believe that award size, performance target and vest terms are such that a
significant portion of each NEO’s total compensation would be attained only if we achieved performance aligned with our growth
initiatives and long-term stockholder value. We believe that our equity awards also provide an important retention tool for our NEOs,
as they are typically subject to vesting over a longer period of time, which is generally three to four years based on the Compensation
Committee’s assessment of the circumstances, such as timing of award, retention or other considerations.
2017 Equity Awards to NEOs
Our Compensation Committee generally evaluates annual refresh grants of stock-based awards for our executives at the end of
the year with any such equity awards expected to be tied to the following year’s financial performance and with vesting over a future
service period, generally four years from the date of grant. In particular, the Company believes that the financial performance targets
chosen for its equity awards to executives align with its objective of creating long-term stockholder value.
Performance-Based Grant – 2017 Financial Performance
At the end of 2016, the Compensation Committee considered an annual refresh grant of equity awards for our executives with a
threshold performance requirement tied to specified 2017 financial targets for revenue and non-GAAP net operating income.
However, the Compensation Committee determined to delay any equity awards to our executives pending the Company’s
reassessment of its equity incentive programs for all employees. In May 2017, we adopted the 2017 Non-Qualified Employee Stock
Purchase Plan, as approved by our stockholders, that became available to our employees as of July 1, 2017, excluding our executives
and certain key employees.
37
Table of Contents
Thereafter, in August 2017, the Compensation Committee approved the grant of performance-based stock options to our NEOs,
with the number of shares subject to such grant contingent upon achievement against a 2017 revenue target of $521 million and a 2017
non-GAAP net operating income target of $0.5 million (the “2017 Performance-Based Equity Award”). In the event the Company
were to achieve both the revenue and the non-GAAP operating income targets at 100%, then the stock option grant is considered
earned as to the full number of shares underlying the stock option grant. In the event the Company were to achieve the revenue target
at 90% or higher and the non-GAAP net operating income target at 100%, then the stock option grant is considered earned as to 75%
of the number of shares underlying the stock option grant, and forfeited as to 25% of the shares underlying the stock option grant. In
the event the Company were to achieve the revenue target at 100% and the non-GAAP net operating income target at 75% or higher,
then the stock option grant is considered earned as to 50% of the number of shares underlying the stock option grant, and forfeited as
to 50% of the shares underlying the stock option grant. In the event the Company does not meet the foregoing revenue and non-GAAP
net operating income targets, then the entire stock option grant is forfeited. If earned, the stock option grants would vest as to 25% of
the shares of common stock underlying the stock option grant upon the Compensation Committee’s certification of the achievement
against the 2017 financial targets in February 2018, and as to 75% of the shares of common stock underlying the stock option grant in
substantially equal quarterly installments over the remaining 36 months. The 2017 Performance-Based Equity Award included an
option to purchase 420,000 shares of common stock for Mr. Russo, an option to purchase 140,000 shares of common stock for
Mr. Weening and an option to purchase 75,000 shares of common stock for Mr. Billings. Mr. Sindelar was not an employee in August
2017 and did not receive a 2017 Performance-Based Equity Award.
In February 2018, the 2017 Performance-Based Equity Awards were forfeited as to all shares underlying such awards based on
the Company’s 2017 revenue and non-GAAP net operating income results, which were less than target for each metric.
Performance-Based Grant – 2018 Financial Performance
In December 2017, the Compensation Committee evaluated an annual refresh grant of equity awards for our executives for 2018
tied to specific financial targets for 2018 (the “2018 Performance-Based Equity Award”). After consideration, the Compensation
Committee approved the grant of a 2018 Performance-Based Equity Award on December 29, 2017 to each executive and key
employee that would be earned and vest, contingent upon achievement of the Company’s 2018 non-GAAP net operating income goal,
as to 50% of the shares of common stock underlying the stock option grant on January 1, 2019, subject to the Compensation
Committee’s certification of the achievement of the financial target, and as to 50% of the shares of common stock underlying the stock
option grant, in substantially equal quarterly installments over the subsequent 24 months. The 2018 Performance-Based Equity Award
included an option to purchase 108,000 shares of common stock for Mr. Sindelar, an option to purchase 204,000 shares of common
stock for Mr. Weening and an option to purchase 126,000 shares of common stock for Mr. Billings. At his request, Mr. Russo did not
receive a stock option grant in connection with the 2018 Performance-Based Equity Award. The Compensation Committee
determined to select a financial target of 2018 non-GAAP operating income for the 2018 Performance-Based Equity Award to align
the equity awards to what it considered to be a key financial metric for the Company for 2018. The Committee elected to provide for
50% vesting, subject to achievement of the target 2018 non-GAAP operating net income, in recognition that the executives and key
employees, including our NEOs, did not vest into any stock option grants under the 2017 Performance-Based Equity Award, and in
consideration of the importance of the non-GAAP net operating income target as part of the Company’s execution on its strategic
objectives and focus on long-term stockholder value.
Change in Control and Severance Benefits
We provide our NEOs with certain change in control and severance benefits under our Amended and Restated Executive
Change in Control and Severance Plan, or CICSP, which our Compensation Committee adopted in July 2010. In September 2017, our
Compensation Committee amended the CICSP to expand eligibility to include certain members of senior management and to amend
certain benefits in the event of a termination in connection with a change in control. Our Compensation Committee provides change in
control and severance benefits to our senior management to, among other things, provide security to our NEOs including in the event
of a change in control of the Company.
Under the CICSP, in the event an eligible NEO’s employment with us is terminated by us other than for Cause (as defined in the
CICSP), death or disability and such termination is outside of the Change in Control Period (as defined below), he or she is eligible to
receive (i) a cash severance payment in an amount equal to 12 months of base salary and a pro-rata portion of the eligible NEO’s
annual bonus opportunity at target, (ii) 12 months accelerated vesting of equity awards and (iii) 12 months of health insurance benefit
continuation, subject to certain exceptions.
38
Table of Contents
In the event an eligible NEO’s employment with us is terminated by us other than for Cause, or the eligible NEO terminates his
or her employment for Good Reason (as defined in the CICSP) during a period of time commencing 60 days prior to a change in
control and ending 12 months following the change in control (the “Change in Control Period”), he or she is eligible to receive (i) a
cash severance payment in an amount equal to: 24 months of base salary (in the case of Mr. Russo) or 12 months of base salary (in the
case of Messrs. Sindelar, Weening and Billings); 200% of the annual bonus opportunity at target (in the case of Mr. Russo) or 100%
of the annual bonus opportunity at target (in the case of Messrs. Sindelar, Weening and Billings); and a pro-rata portion the eligible
NEO’s annual bonus opportunity at target, subject to attainment of the performance criteria with respect to the eligible NEO’s bonus
opportunity, (ii) 100% acceleration of all equity awards and (iii) 24 months of health insurance benefit continuation (in the case of
Mr. Russo) or 12 months of health insurance benefit continuation (in the case of Messrs. Sindelar, Weening and Billings), in each case
subject to certain exceptions.
Our NEOs must execute, and not revoke during any applicable revocation period, a general release of claims against us in order
to be eligible for any severance benefits. We do not provide for any tax gross-up payments under our CICSP or otherwise in
connection with executive severance benefits.
A discussion of the terms of separation with Mr. Atkins are described below under “Separation Agreement.”
Benefits
We provide the following benefits, as applicable to all employees, including our NEOs:
• medical, dental and vision insurance
•
•
•
•
•
•
•
•
•
life insurance, accidental death and dismemberment and business travel and accident insurance
employee assistance program
health and dependent care flexible spending accounts
transportation flexible spending accounts
employee stock purchase plans
short- and long-term disability
401(k) plan for U.S. employees
pension plan for employees in the United Kingdom, Canada and certain other countries outside of the US, including for
Mr. Weening
health club membership reimbursement
Perquisites
Our NEOs participate in the same benefit programs as other employees and do not receive any other perquisites.
Policy Prohibiting Speculative Transactions and Hedging or Pledging
In accordance with our insider trading policy, we do not permit any officer, director or employee, and their respective family
members, to directly or indirectly participate in certain trading activities related to our common stock that are considered aggressive or
speculative in nature, including short sales, publicly traded options, hedging transactions, margin purchases and pledging our common
stock.
39
Table of Contents
Tax and Accounting Considerations
Section 162(m) of the Internal Revenue Code
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction for compensation in excess of $1 million paid
to our NEOs and certain former NEOs. While the Board and our Compensation Committee generally consider the financial accounting
and tax implications of their executive compensation decisions, neither element has been a material consideration in the compensation
awarded to our NEOs historically. To maintain flexibility in compensating executive officers in a manner designed to promote
corporate goals, the Compensation Committee will not limit amounts paid to those that qualify for tax deductibility.
Section 280G of the Internal Revenue Code
Section 280G of the Internal Revenue Code disallows a tax deduction for “excess parachute payments” and Section 4999 of the
Code imposes a 20% excise tax on any person who receives excess parachute payments. Our NEOs are not eligible to receive any tax
gross-up payments in the event any payments made or that may be made to them become subject to this excise tax. The Compensation
Committee will take into account the implications of Section 280G in determining potential payments to be made to our executives in
connection with a change in control. Nevertheless, to the extent that certain payments upon a change in control are classified as excess
parachute payments, such payments may not be deductible under Section 280G.
Section 409A of the Internal Revenue Code
Section 409A of the Internal Revenue Code, which governs the form and timing of payment of deferred compensation, imposes
a 20% tax and an interest penalty on the recipient of deferred compensation that is subject to but does not comply with Section 409A.
As a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements for all of our
employees and other service providers, including our NEOs, so that they are either exempt from, or satisfy the requirements of,
Section 409A of the Code. The Compensation Committee will take into account the implications of Section 409A in determining the
form and timing of compensation awarded to our executives and will strive to structure any nonqualified deferred compensation plans
or arrangements to be exempt from or to comply with the requirements of Section 409A.
Accounting for Stock-Based Compensation
We follow Financial Accounting Standards Board Accounting Standards Codification Topic 718, or ASC Topic 718, for our
stock-based compensation awards. ASC Topic 718 requires companies to calculate the grant date “fair value” of their stock-based
awards using a variety of assumptions. ASC Topic 718 also requires companies to recognize the compensation cost of their stock-
based awards in their income statements over the period that an employee is required to render service in exchange for the award.
Grants of stock options, restricted stock, RSUs and other stock-based awards under our equity incentive award plans will be accounted
for under ASC Topic 718. Our Compensation Committee will regularly consider the accounting implications of significant
compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As
accounting standards change, we may revise certain programs to appropriately align accounting expenses of our equity awards with
our overall executive compensation philosophy and objectives.
40
Table of Contents
Summary Compensation Table
The following table sets forth all of the compensation awarded to, earned by or paid to our NEOs during 2017, 2016 and 2015.
Salary
($)
Bonus
($) (1)
Stock
Awards
($) (2)
Option
Awards
($) (3)
Non-Equity
Incentive
Plan
Compen-
sation
($) (4)
All
Other
Compen-
sation
($) (5)
Total
($)
500,000 — — 1,440,222
500,000 — —
—
—
500,000 — —
73,846 — — 1,026,959
—
225,000
250,000
— 1,940,222
— 725,000
— 750,000
— 102,215 1,203,020
Name and Principal Position
Carl Russo
President and Chief
Executive Officer
Cory Sindelar (6)
Chief Financial Officer
Year
2017
2016
2015
2017
Michael Weening
2017
320,000 140,000 — 1,012,738
59,293
5,813 1,537,844
Executive Vice President,
Sales and Marketing
Gregory Billings (7)
Senior Vice President,
Services
William Atkins (8)
Former Executive Vice
President and Chief
Financial Officer
2016
2017
166,154 50,000 — 1,249,098
300,000 85,000 — 721,066
144,450
—
2,066 1,611,768
7,691 1,113,757
2017
139,327 — —
2016
344,394 — 371,000
2015
310,125 — —
—
—
—
— 582,157 721,484
86,250
5,531 807,175
78,375
29,989 418,489
(1) Amounts reported in 2017 represent (i) a discretionary cash performance bonus, which our Compensation Committee makes on
an infrequent basis and which is intended to recognize exemplary performance, of $140,000 to Mr. Weening in recognition of
his leadership in transforming the sales and marketing organization and his significant contributions toward the Company’s
initiatives to drive revenue growth and new customers in the first half of 2017 and (ii) a cash performance bonus of $85,000 to
Mr. Billings for exceeding expectations in achievement of performance targets pursuant to the terms of his offer letter, including
his leadership in restructuring the services organization and accelerating the completion of key project milestones.
(2) Amount reported represents the aggregate grant date fair value, calculated in accordance with ASC Topic 718 for share-based
payment transactions and excludes the impact of estimated forfeitures related to service-based vesting conditions. We value
RSUs that vest based solely upon continued service at the closing market price of our common stock on the date of grant. Grant
date fair value of performance-based RSUs were calculated assuming 100% performance and are not adjusted for subsequent
changes in our stock performance or the level of ultimate vesting as our performance-based RSUs are market condition based
only. For a discussion of the assumptions used in the valuations of the performance-based RSUs, see Note 8 of the Notes to
Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.
(3) Amounts reported in 2017 represent the 2017 Performance-Based Equity Awards granted to Messrs. Russo, Weening and
Billings that were eligible to vest based on attainment of 2017 financial performance metrics and the 2018 Performance-Based
Equity Awards granted to Messrs. Sindelar, Weening and Billings that may vest based on attainment of 2018 financial
performance metrics. Attainment of the 2017 financial performance metrics was not achieved, and the 2017 Performance-Based
Equity Awards were forfeited in February 2018 upon certification of non-performance by our Compensation Committee. For a
further discussion on these performance-based stock option awards, see above under “2017 Equity Awards to NEOs.” The
amounts reported represent the aggregate grant date fair value for stock options, calculated in accordance with ASC Topic 718
and exclude the impact of estimated forfeitures related to service-based vesting conditions. The grant date fair value of
performance-based options was calculated assuming 100% performance and are not adjusted for subsequent changes in our
stock performance or the level of ultimate vesting. For a discussion of the assumptions used in the valuations of the stock
options, see Note 8 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2017.
(4) Amounts reported for 2017 for Mr. Weening represent $59,293 in payments in 2017 under the 2016 sales-based incentive
compensation plan for shipments against bookings attained in 2016. See discussion above under “Sales-Based Incentive
Compensation Plan.”
41
Table of Contents
(5) Amounts reported for 2017 represent (i) compensation in the amount of $100,000 we made to Mr. Sindelar under a consulting
arrangement pursuant to which Mr. Sindelar served as our interim chief financial officer and principal financial officer,
(ii) employer matching contributions of $2,215 we made for Mr. Sindelar pursuant to our U.S. 401(k) Plan, (iii) employer
matching contributions of $5,813 we made for Mr. Weening to the Canadian Pension Plan, which is a tax-qualified defined
contribution plan in which Calix employees in Canada (other than Quebec) participate, (iv) employer matching contributions of
$7,961 we made for Mr. Billings pursuant to our U.S. 401(k) Plan, (v) employer matching contributions of $5,178 we made for
Mr. Atkins pursuant to our U.S. 401(k) Plan and (vi) severance payments in the amount of $576,979 pursuant to Mr. Atkins’
separation agreement, which is further described under “Separation Agreement” below. Payments under the Canadian Pension
Plan are set in Canadian dollars and were converted to U.S. dollars using an average exchange rate of CAD1.00 to US$0.7697.
(6) Mr. Sindelar was appointed as our interim chief financial officer, principal financial officer and as an executive officer on
May 31, 2017. His employment with Calix as our chief financial officer commenced on October 1, 2017.
(7) Mr. Billings’ employment with Calix commenced on December 19, 2016. He was designated a named executive officer for
2017.
(8) Mr. Atkins resigned as our executive vice president and chief financial officer effective May 19, 2017.
Grants of Plan-Based Awards in 2017
The following table lists grants of plan-based awards to our NEOs in 2017 and their related fair value as of the respective grant
date.
Estimated Possible
Payouts Under
Non-Equity Incentive
Plan
Awards
Target
($)
Grant
Date
—
8/1/2017
—
10/1/2017
12/29/2017
—
8/1/2017
12/29/2017
—
8/1/2017
11/1/2017
12/29/2017
—
500,000(1)
—
48,000(1)
—
—
288,000(1)
—
—
165,000(1)
—
—
—
207,000(1)
Name
Carl Russo
Cory Sindelar
Michael Weening
Gregory Billings
William Atkins (7)
Estimated Possible
Payouts
Under Equity
Incentive Plan
Awards
Threshold
(#)
—
Target
(#)
—
210,000 420,000(2)
—
—
—
—
— 108,000(3)
—
—
70,000 140,000(2)
— 204,000(3)
—
37,500
—
— 126,000(3)
—
—
75,000(2)
—
—
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
Exercise
or Base
Price of
Option
Awards
($/Sh)
Grant Date
Fair Value
of
Option and
Stock
Awards
($) (6)
—
—
—
300,000(4)
—
—
—
—
—
—
50,000(5)
—
—
—
—
6.95 1,440,222
—
—
744,960
5.05
281,999
5.95
—
—
480,074
6.95
532,664
5.95
—
—
257,182
6.95
134,885
5.45
328,999
5.95
—
—
(1) These amounts represent possible payouts if the incentive plan performance goals are achieved at target level under our cash
incentive plan for 2017, which do not provide for threshold or maximum levels. No amounts were paid under our cash incentive
plan for 2017.
(2) Amounts represent the 2017 Performance-Based Equity Awards, which do not provide for achievement above target levels, with
the number of shares subject to such stock option grants eligible to vest contingent upon achievement based on a sliding scale
against 2017 revenue and non-GAAP net operating income targets, with 25% of the shares earned based on performance
scheduled to vest on the date of certification and the remaining 75% scheduled to vest in substantially equal quarterly
installments over 36 months following certification. Attainment of the performance metrics was not achieved, and the stock
option grants were forfeited in February 2018 upon certification of non-performance by our Compensation Committee. See
discussion above under “Performance-Based Grant – 2017 Financial Performance.”
(3) Amounts represent the 2018 Performance-Based Equity Awards, which do not provide for threshold levels, and with the number
of shares subject to such stock option grants eligible to vest contingent upon achievement of 2018 financial performance
metrics, with 50% of the shares earned based on performance scheduled to vest on January 1, 2019 and the remaining 50%
scheduled to vest in substantially equal installments over the subsequent 24 months. See discussion above under “Performance-
Based Grant – 2018 Financial Performance.”
42
Table of Contents
(4) Represents Mr. Sindelar’s inducement award stock option grant pursuant to his offer letter. The stock option grant vests over
four years, with 25% of the common stock subject to the grant vesting and becoming exercisable on the one-year anniversary of
the grant date, and the remainder vesting and becoming exercisable quarterly thereafter in substantially equal installments over
the next 36 months, subject to Mr. Sindelar’s continued employment with Calix through the applicable vesting dates.
(5) Represents Mr. Billings’ performance-based stock option grant pursuant to his amended offer letter. The stock option grant vests
over four years, with 25% of the common stock subject to the grant vesting and becoming exercisable on December 19, 2017
and the remainder vesting and becoming exercisable quarterly thereafter in substantially equal installments over the next 36
months, subject to Mr. Billings’ continued employment with Calix through the applicable vesting dates.
(6) Amounts reported represent the aggregate grant date fair value, calculated in accordance with ASC Topic 718 for share-based
payment transactions and exclude the impact of estimated forfeitures related to service-based vesting conditions. Grant date fair
value of performance-based stock option awards were calculated assuming 100% performance.
(7) Mr. Atkins resigned as our executive vice president and chief financial officer effective May 19, 2017.
Outstanding Equity Awards at December 31, 2017
The following table lists all outstanding equity awards held by our NEOs as of December 31, 2017.
Option Awards
Number of Securities
Underlying Unexercised
Options Exercisable
(#)
Number of Securities
Underlying Unexercised
Options Unexercisable
(#)
Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options
(#)
—
117,500
200,000
100,000
—
—
—
—
142,500
—
12,500
—
75,000
—
2,500(2)
—
—
300,000(4)
237,500(4)
37,500(5)
225,000(4)
—
420,000(1)
108,000(3)
204,000(3)
140,000(1)
126,000(3)
75,000(1)
—
Option
Exercise
Price
($)
Option
Expiration
Date
8/1/2027
6.95
1/28/2024
8.18
2/21/2023
8.41
19.75
2/24/2021
5.95 12/29/2027
5.05
10/1/2027
5.95 12/29/2027
8/1/2027
5.05
6.38
6/27/2026
5.95 12/29/2027
11/1/2027
5.45
6.95
8/1/2027
7.70 12/21/2026
—
—
Grant
Date
8/1/2017
1/28/2014
2/21/2013
2/24/2011
12/29/2017
10/1/2017
12/29/2017
8/1/2017
6/27/2016
12/29/2017
11/1/2017
8/1/2017
12/21/2016
—
Name
Carl Russo
Cory Sindelar
Michael Weening
Gregory Billings
William Atkins (6)
(1) Represents the 2017 Performance-Based Equity Awards that were eligible to vest based on attainment of 2017 financial
performance metrics, with 25% of the shares earned based on performance scheduled to vest on the date of certification and the
remaining 75% scheduled to vest in substantially equal quarterly installments over 36 months following certification.
Attainment of the performance metrics was not achieved, and the 2017 Performance-Based Equity Awards were forfeited in
February 2018 upon certification of non-performance by our Compensation Committee. See discussion above under
“Performance-Based Grant – 2017 Financial Performance.”
(2) This option grant vests on a monthly basis over a four-year period from the grant date, subject to the executive’s continued
service through the applicable vesting date.
(3) Represents the 2018 Performance-Based Equity Awards that are eligible to vest based on attainment of 2018 financial
performance metrics with 50% of the shares earned based on performance scheduled to vest on January 1, 2019 and the
remaining 50% scheduled to vest in substantially equal installments over the subsequent 24 months. See discussion above under
“Performance-Based Grant – 2018 Financial Performance.”
(4) The stock option grant vests over four years, with 25% of the common stock subject to the grant vesting on the one-year
anniversary of the grant date, and the remainder vesting quarterly thereafter in substantially equal installments over the next 36
months, subject to the NEO’s continued employment with Calix through the applicable vesting dates.
43
Table of Contents
(5) Represents Mr. Billings’ performance-based stock option grant pursuant to his amended offer letter. The stock option grant vests
over four years, with 25% of the common stock subject to the grant vesting and becoming exercisable on December 19, 2017
and the remainder vesting and becoming exercisable quarterly thereafter in substantially equal installments over the next 36
months, subject to Mr. Billings’ continued employment with Calix through the applicable vesting dates.
(6) Mr. Atkins’ employment with Calix ended effective May 19, 2017. Mr. Atkins held no outstanding equity awards as of
December 31, 2017.
Option Exercises and Stock Vested in 2017
The following table shows information regarding exercises of stock option and the issuance of shares upon vesting of RSU
awards for each of our NEOs during the year ended December 31, 2017. None of our NEOs exercised stock options during 2017.
Name
Carl Russo
Cory Sindelar
Michael Weening
Gregory Billings
William Atkins
Option Awards
Stock Awards
Number of
Shares Acquired
on Exercise (#)
Value Realized
on Exercise
($)
Number of
Shares Acquired
on Vesting (#)
Value Realized
on Vesting
($) (1)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
50,000
—
—
—
—
341,250
(1) Based on the closing trading price of the vested shares on the vesting date.
Potential Payments Upon Termination or Change of Control
Each of our current NEOs is entitled to severance upon a termination without cause or, only during a change in control, a
resignation for good reason under our CICSP. See the section above entitled “Change in Control and Severance Benefits” for more
information regarding the benefits provided under our CICSP.
44
Table of Contents
The table below sets forth the estimated payments and benefits that would be provided to each of our NEOs upon a termination
of employment without cause or, following a change in control, resignation for good reason if our NEO’s employment had terminated
on December 31, 2017 or a change in control was consummated on December 31, 2017, as applicable, taking into account the NEO’s
compensation as of that date.
Executive Benefits and Payments upon
Termination
Carl Russo
Cash severance (1)
Value of accelerated vesting of equity
awards (2)
Company-paid health care premiums (3)
Total
Cory Sindelar
Cash severance (1)
Value of accelerated vesting of equity
awards (2)
Company-paid health care premiums (3)
Total
Michael Weening
Cash severance (1)
Value of accelerated vesting of equity
awards (2)
Company-paid health care premiums (3)
Total
Gregory Billings
Cash severance (1)
Value of accelerated vesting of equity
awards (2)
Company-paid health care premiums (3)
Total
Involuntary Termination for Reasons Other Than
Cause, Death or Disability, or Voluntary Termination
for Good Reason Only During a Change in Control
Not in Connection with a
Change in Control
($)
60 Days Prior to
or 12 Months
Following a
Change in Control
($)
$
$
$
$
$
$
$
$
1,000,000
$
2,500,000
—
17,543
1,017,543
512,000
67,500
17,172
596,672
608,000
—
3,034
611,034
465,000
6,250
33,194
$
$
$
$
$
$
504,444
$
—
35,086
2,535,086
704,000
270,000
17,172
991,172
896,000
—
3,034
899,034
630,000
18,750
33,194
681,944
(1)
(2)
In the event of termination not in connection with a Change in Control, an eligible NEO is eligible to receive a cash severance
payment in an amount equal to 12 months base salary and a pro-rata portion of the eligible NEO’s annual bonus opportunity at
target. In the event of termination in connection with a Change in Control, an eligible NEO is eligible to receive a cash
severance payment in an amount equal to: 24 months of base salary (in the case of Mr. Russo) or 12 months of base salary (in
the case of Messrs. Sindelar, Weening and Billings); 200% of the annual bonus opportunity at target (in the case of Mr. Russo)
or 100% of the annual bonus opportunity at target (in the case of Messrs. Sindelar, Weening and Billings); and a pro-rata portion
the eligible NEO’s annual bonus opportunity at target, subject to attainment of the performance criteria with respect to the
eligible NEO’s bonus opportunity.
In the event of termination not in connection with a Change in Control, an eligible NEO is eligible to receive 12 months
accelerated vesting of equity awards. In the event of termination in connection with a Change in Control, an eligible NEO is
eligible to receive 100% acceleration of all equity awards. The value of accelerated vesting of equity awards amounts was
calculated based on a closing trading price of $5.95 per share at December 29, 2017. The value associated with stock option
grants for which the per share exercise price is higher than the closing trading price of $5.95 per share is reflected as zero.
45
Table of Contents
(3)
In the event of termination not in connection with a Change in Control, an eligible NEO is eligible to receive 12 months of
health insurance benefit continuation. In the event of termination in connection with a Change in Control, an eligible NEO is
eligible to receive) 24 months of health insurance benefit continuation (in the case of Mr. Russo) or 12 months of health
insurance benefit continuation (in the case of Messrs. Sindelar, Weening and Billings). The amount included in Mr. Weening’s
health insurance benefit reflects the value of employer payments with respect to a Canadian Pension Plan that is a tax-qualified
defined contribution plan in which Calix employees in Canada (other than Quebec) participate. Payments under the Canadian
Pension Plan are set in Canadian dollars and were converted to US dollars using an average exchange rate of CAD1.00 to
US$0.7697.
Separation Agreement
William Atkins
On March 31, 2017, Mr. Atkins gave notice of his resignation from Calix effective May 19, 2017. Mr. Atkins joined Calix in
February 2014 as executive vice president and chief financial officer. In connection with Mr. Atkins’ resignation, we entered into a
separation agreement with Mr. Atkins pursuant to which Mr. Atkins received the following severance benefits: (i) a lump sum cash
payment of $345,000 representing 12 months of current base salary, (ii) a lump sum cash payment of $207,000 equal to Mr. Atkins’
then current cash incentive plan opportunity at target, (iii) reimbursement of up to 12 months of health insurance premiums under
COBRA (estimated total value of $24,979) and (iv) acceleration of vesting as to such equity awards as would have otherwise vested if
Mr. Atkins remained employed for a period of 24 months following his employment termination date and agreed to customary
covenants regarding confidential information, non-disparagement and a general release in favor of Calix. Under the separation
agreement, Mr. Atkins continued in his role as executive vice president, chief financial officer and principal financial officer, and
provided transition services from March 31, 2017 through May 19, 2017. During this transition period, Mr. Atkins was paid his
current annual base salary and accrued bonus for the fiscal quarter ended April 1, 2017, accrued paid vacation and was eligible for
employee benefits plans.
Limitation of Liability and Indemnification
Calix’s amended and restated certificate of incorporation contains provisions that limit the liability of Calix’s directors for
monetary damages to the fullest extent permitted by Delaware law. Consequently, Calix’s directors will not be personally liable to
Calix or Calix’s stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
•
•
•
•
any breach of the director’s duty of loyalty to Calix or Calix’s stockholders;
any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
any transaction from which the director derived an improper personal benefit.
Calix’s amended and restated certificate of incorporation and amended and restated bylaws provide that Calix is required to
indemnify Calix’s directors and officers, in each case to the fullest extent permitted by Delaware law. Calix’s amended and restated
bylaws also provide that Calix is obligated to advance expenses incurred by a director or officer in advance of the final disposition of
any action or proceeding, and permit Calix to secure insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in that capacity regardless of whether Calix would otherwise be permitted to indemnify him or
her under the provisions of Delaware law. Calix has entered into and expects to continue to enter into agreements to indemnify Calix’s
directors, executive officers and other employees as determined by the Board. With specified exceptions, these agreements provide for
indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred
by any of these individuals in any action or proceeding. Calix believes that these provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers. Calix also maintains directors’ and officers’ liability
insurance.
46
Table of Contents The limitation of liability and indemnification provisions in Calix’s amended and restated certificate of incorporation and
amended and restated bylaws may discourage stockholders from bringing a lawsuit against Calix’s directors and officers for breach of
their fiduciary duty. They may also reduce the likelihood of derivative litigation against Calix’s directors and officers, even though an
action, if successful, might benefit Calix and other stockholders. Further, a stockholder’s investment may be adversely affected to the
extent that Calix pays the costs of settlement and damage awards against directors and officers as required by these indemnification
provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Calix’s directors, officers and
controlling persons under the above provisions, or otherwise, Calix has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. At present, there is no
pending litigation or proceeding involving any of Calix’s directors, officers or employees for which indemnification is sought, and
Calix is not aware of any threatened litigation that may result in claims for indemnification.
CEO PAY RATIO
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of
Regulation S-K, we are required to disclose the ratio of our principal executive officer’s annual total compensation to the annual total
compensation of our median employee.
During fiscal 2017, Mr. Russo was the principal executive officer of Calix. For 2017, the annual total compensation for
Mr. Russo was $1,940,222, as disclosed under the Summary Compensation Table above, and the annual total compensation for our
median employee was $118,581, calculated using the same methodology as applied for Mr. Russo in the Summary Compensation
Table above, resulting in a pay ratio of approximately 16:1.
In accordance with Item 402(u) of Regulation S-K, we identified the median employee by (i) aggregating for each applicable
employee, as of October 1, 2017 (the median employee determination date): (A) annual base salary for permanent salaried employees,
or hourly rate multiplied by expected work schedule, for hourly employees and (B) the target incentive compensation for 2017, and
(ii) ranking this compensation measure for our employees from lowest to highest. This calculation was performed for all employees,
excluding Mr. Russo, whether employed on a full-time, part-time, or seasonal basis.
As disclosed under the Summary Compensation Table above, Mr. Russo’s annual total compensation includes a performance-
based stock option grant. See discussion at “Performance-Based Grant –2017 Financial Performance.”
We believe the pay ratio reported above is a reasonable estimate calculated in a manner consistent with SEC rules. Because the
SEC rules allow companies to utilize different methodologies and companies have different employee populations and compensation
practices, the pay ratio reported by other companies may not be comparable to the pay ratio reported above.
47
Table of Contents
Cash Compensation
DIRECTOR COMPENSATION
Members of the Board who are employees of Calix do not receive any additional compensation for their services as directors.
Under Calix’s Non-Employee Director Cash Compensation Policy, as last amended in June 2017, directors who were not employed by
Calix or one of our affiliates received the following cash retainers for their service on the Board (including service on committees of
the Board) during 2017:
Base Retainer
Board and Committee Chair Service Premiums (in addition to Base
Retainer)
Board Chair
Audit Committee Chair
Compensation Committee Chair
Nominating and Corporate Governance Committee Chair
Cybersecurity Committee Chair
Non-Chair Committee Service Premiums (in addition to Base
Retainer)
Audit Committee
Compensation Committee
Nominating and Corporate Governance Committee
Cybersecurity Committee
Amount
$ 40,000
40,000
35,000
20,000
10,000
10,000
10,000
7,500
5,000
5,000
Equity Compensation
Under our Non-Employee Director Equity Compensation Policy, as last amended in April 2016, non-employee directors will
automatically be granted RSUs valued at $200,000 (based on the per share closing price of our common stock on the date such
director commences service) upon their election or appointment to the Board. The initial grants will be prorated based on the non-
employee director’s start date through the applicable vesting date, and will vest with respect to 100% of the RSUs on the earlier of the
one-year anniversary of the date of grant or the day immediately preceding the date of the next annual meeting of stockholders
following the year of grant.
Each director who is a non-employee director immediately following each annual meeting of stockholders (provided that such
director has served as a director for at least six months prior to such date) will also automatically be granted RSUs valued at $120,000
(based on the per share closing price of our common stock on the date of such annual meeting of stockholders). The annual grants vest
as to 100% of the RSUs on the day immediately prior to the date of the next annual meeting of stockholders following the date of
grant, subject to continued service to Calix through the applicable vesting date.
Members of the Board who are Calix employees and who subsequently terminate employment with Calix and remain on the
Board are not eligible for initial grants of RSUs but are eligible, after termination of employment with Calix, for annual grants of
RSUs.
All options, RSUs and other equity awards held by a non-employee director, regardless of when granted, automatically
accelerate in the event of a change in control of Calix.
Director Stock Ownership
Under our director stock ownership guidelines, each director is expected to acquire and maintain ownership of Calix common
stock having a value of no less than four (4) times the annual Board cash retainer, which achievement of the requisite stock ownership
expected on or before the date five years after the initial appointment date of such director. If a director fails to meet these guidelines,
shares from such director’s annual equity grants will be held until the guidelines are met. Each of our directors are currently in
compliance with our director stock ownership guidelines.
48
Table of Contents
Other Arrangements
We reimburse non-employee directors for travel, lodging and other expenses incurred in connection with their attendance at
Board and committee meetings.
Director Compensation Table
The following table sets forth information regarding compensation earned by our non-employee directors during the year ended
December 31, 2017.
Name
Don Listwin
Christopher Bowick
Kathy Crusco
Kevin DeNuccio
Michael Everett
Michael Flynn
Kira Makagon
Michael Matthews
Thomas Pardun (2)
Kevin Peters
$
Fees Earned or
Paid in Cash
94,080
53,057
12,465
43,420
75,000
65,000
20,522
59,926
18,750
50,852
Stock
Awards (1)
$ 120,000
120,000
133,333
120,000
120,000
120,000
166,660
120,000
—
120,000
Total
$214,080
173,057
145,798
163,420
195,000
185,000
187,182
179,926
18,750
170,852
(1) Amounts reflect the grant date fair value of RSUs granted in 2017 calculated in accordance with ASC Topic 718 for share-based
payment transactions and exclude the impact of estimated forfeitures related to service-based vesting conditions. We value
RSUs based on the closing trading price of our common stock on the date of grant.
(2) Mr. Pardun retired from the Board effective as of the Annual Meeting on May 17, 2017.
As of December 31, 2017, outstanding options and RSUs held by our current non-employee directors were as follows:
Name
Don Listwin
Christopher Bowick
Kathy Crusco
Kevin DeNuccio
Michael Everett
Michael Flynn
Kira Makagon
Michael Matthews
Kevin Peters
Stock
Options
Outstanding
(#)
Restricted
Stock Units
That Have Not Vested
(#)
7,500
—
—
—
10,000
12,500
—
12,500
—
17,910
17,910
26,936
17,910
17,910
17,910
24,330
17,910
17,910
49
Table of Contents
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain information as of December 31, 2017, with respect to all of our equity compensation plans
in effect on that date.
Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options and
Restricted
Stock Units
(a)
Weighted-
Average
Exercise
Price of
Outstanding
Options
(b)
Number of
Securities
Remaining
Available for
Future
Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column(a))
7,631,782 (3)
300,000
7,931,782
$
$
$
7.50 (4)
3,288,327(5)
5.05
7.37
—
3,288,327
Plan Category
Equity Compensation Plans Approved by
Stockholders (1)
Equity Compensation Plans Not Approved by
Stockholders (2)
Total
(2)
(1)
Includes our Amended and Restated 2002 Stock Plan, 2010 Equity Incentive Award Plan, Amended and Restated Employee
Stock Purchase Plan and 2017 Nonqualified Employee Stock Purchase Plan. Also includes 47,536 stock options assumed
through our acquisitions of Optical Solutions, Inc. in 2006 and Occam Networks in 2011.
Includes a Nonstatutory Inducement Stock Option Grant, which constitutes an employment inducement award for Mr. Sindelar
under NYSE Listed Company Manual Rule 303A.08 that was approved by the Calix Compensation Committee on
September 28, 2017. The NYSE approved the Supplemental Listing Application for the Inducement Award on October 30,
2017. The Nonstatutory Inducement Stock Option Grant was awarded on October 1, 2017 and provides Mr. Sindelar the right to
purchase up to 300,000 shares of our common stock for an exercise price of $5.05 per share. The Nonstatutory Inducement
Stock Option Grant has a term of 10 years and vests and becomes exercisable over four years from the date of grant. In the event
of a termination of Mr. Sindelar’s employment, the unvested portion of the Nonstatutory Inducement Stock Option Grant would
be immediately forfeited and Mr. Sindelar would have three months, or 12 months in the case of death or disability, to exercise
the option.
Includes 1,725,658 shares of common stock subject to RSUs that will entitle each holder the issuance of one share of common
stock for each unit, 150,000 shares of common stock subject to performance-based RSUs, 2,989,124 shares of common stock
subject to stock options and 2,767,000 shares of common stock subject to performance-based stock options.
(4) The weighted-average exercise price of outstanding options excludes RSUs, which do not have an exercise price.
(5)
Includes 2,455,691 shares available for future issuance under the Amended and Restated Employee Stock Purchase Plan and
551,276 shares available for future issuance under the 2017 Nonqualified Employee Stock Purchase Plan. The 2010 Equity
Incentive Award Plan contains an “evergreen” provision under which the number of shares of common stock reserved for
issuance under the plan will be increased on the first day of each fiscal year through 2020, equal to the lesser of (A) 666,666
shares, (B) 2% of the shares of stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal
year and (C) such smaller number of shares of stock as determined by our Board.
(3)
50
Table of Contents
COMPENSATION COMMITTEE REPORT
The information contained in this report shall not be deemed to be “soliciting material,” to be “filed” with the SEC or be
subject to Regulation 14A or Regulation 14C (other than as provided in Item 407 of Regulation S-K) or to the liabilities of Section 18
of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in future filings with the SEC except
to the extent that Calix specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
The Compensation Committee of the Board has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation
Committee of the Board recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy
Statement.
Compensation Committee
Michael Flynn, Chair
Christopher Bowick
Kevin DeNuccio
51
Table of Contents
AUDIT COMMITTEE REPORT
The information contained in this report shall not be deemed to be “soliciting material,” to be “filed” with the SEC or be
subject to Regulation 14A or Regulation 14C (other than as provided in Item 407 of Regulation S-K) or to the liabilities of Section 18
of the Securities Exchange Act of 1934, and shall not be deemed to be incorporated by reference in future filings with the SEC except
to the extent that Calix specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
The Audit Committee has reviewed and discussed with Calix management and KPMG LLP the audited consolidated financial
statements of Calix contained in the Calix Annual Report on Form 10-K for the year ended December 31, 2017. The Audit Committee
has also discussed with KPMG LLP the matters required to be discussed by AS No. 1301, as amended, as adopted by the Public
Company Accounting Oversight Board in Rule 3200T.
The Audit Committee has received the written disclosures and the letter from KPMG LLP required by the Public Company
Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning
independence, and has discussed with KPMG LLP its independence.
Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the
audited consolidated financial statements be included in Calix’s Annual Report on Form 10-K for its year ended December 31, 2017
for filing with the Securities and Exchange Commission.
Audit Committee
Michael Everett, Chair
Kathy Crusco
Michael Matthews
52
Table of Contents
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Calix’s Board and Audit Committee have adopted a written related person transaction policy that sets forth the policies and
procedures for the review and approval or ratification of related person transactions that may be deemed “related person transactions”
under the rules of the SEC. This policy covers any transaction, arrangement or relationship, or any series of similar transactions,
arrangements or relationships, in which Calix was or is to be a participant, the amount involved exceeds $120,000 and a related person
had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the
related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness or employment
by Calix of a related person. For purposes of the policy, a “related person” is a director, officer or greater than 5% beneficial owner of
Calix’s stock and their immediate family members.
Calix recognizes that related person transactions can present potential or actual conflicts of interest or create the appearance of a
conflict of interest. Management presents to the Audit Committee each proposed related person transaction, including all relevant facts
and circumstances, and the Audit Committee reviews the relevant facts and circumstances of each related person transaction,
including if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third
party and the extent of the related person’s interest in the transaction, takes into account the conflicts of interest and corporate
opportunity provisions of Calix’s Code of Business Conduct and Ethics, and either approves or disapproves the related person
transaction. Any related person transaction may be consummated and shall continue only if the Audit Committee has approved or
ratified such transaction in accordance with the guidelines set forth in the policy. No director may participate in approval of a related
person transaction for which he or she is a related person. As required under rules issued by the SEC, transactions that are determined
to be directly or indirectly material to a related person are or will be disclosed in Calix’s proxy statements.
During fiscal year 2017, Calix has not participated in any transactions, nor are there any currently proposed transactions in
which Calix will participate, where the amount involved exceeds, or would exceed, $120,000, and in which any related person had or
will have a direct or indirect material interest.
HOUSEHOLDING OF PROXY MATERIALS
The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for
Notices of Internet Availability of Proxy Materials, proxy statements and annual reports with respect to two or more stockholders
sharing the same address by delivering a single Notice of Internet Availability of Proxy Materials, or proxy statement and annual
report, as applicable, addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially
means extra convenience for stockholders and cost savings for companies.
This year, a number of brokers with account holders who are Calix stockholders will be “householding” our proxy materials. A
single Notice of Internet Availability of Proxy Materials may be delivered to multiple stockholders sharing an address unless contrary
instructions have been received from the affected stockholders. Once you have received notice from your broker that it will be
“householding” communications to your address, “householding” will continue until you are notified otherwise or until you notify
your broker or Calix that you no longer wish to participate in “householding.”
If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate Notice of Internet
Availability of Proxy Materials, you may (1) notify your broker, (2) direct your written request to: Investor Relations, Calix, Inc.,
1035 N. McDowell Boulevard, Petaluma, California 94954 or (3) contact our Investor Relations department by telephone at
(408) 474-0080. Stockholders who currently receive multiple copies of the Notice of Internet Availability of Proxy Materials at their
address and would like to request “householding” of their communications should contact their broker. In addition, Calix will
promptly deliver, upon written or oral request to the address or telephone number above, a separate copy of the Notice of Internet
Availability of Proxy Materials to a stockholder at a shared address to which a single copy of the documents was delivered.
The Board knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are
properly brought before the Annual Meeting, it is the intention of the persons named in the proxy card to vote on such matters in
accordance with their best judgment.
OTHER MATTERS
53
Table of Contents ANNUAL REPORTS
The 2017 Annual Report to Stockholders, including our 2017 Annual Report on Form 10-K (which is not a part of our proxy
soliciting materials), will be mailed with this Proxy Statement to those stockholders that request and receive a copy of the proxy
materials in the mail. Stockholders that received the Notice of Internet Availability of Proxy Materials can access this Proxy Statement
and our 2017 Annual Report at www.proxyvote.com.
We have filed our Annual Report on Form 10-K for the year ended December 31, 2017 with the SEC. It is available free of
charge in the “SEC Filings” section of our website at investor-relations.calix.com or at the SEC’s website at www.sec.gov. Upon
written request by a Calix stockholder, we will mail without charge a copy of our Annual Report on Form 10-K, including the
financial statements and financial statement schedules, but excluding exhibits to the Annual Report on Form 10-K. Exhibits to the
Annual Report on Form 10-K are available upon payment of a reasonable fee, which is limited to our expenses in furnishing the
requested exhibit. All requests should be directed to Investor Relations, Calix, Inc., 1035 N. McDowell Boulevard, Petaluma,
California 94954.
By Order of the Board of Directors
April 3, 2018
Suzanne Tom
Corporate Secretary
54
Table of Contents
Appendix A
CALIX, INC.
AMENDED AND RESTATED 2017 NONQUALIFIED EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I.
PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN
1.1. Purpose and Scope. The purpose of the Calix, Inc. Amended and Restated 2017 Nonqualified Employee Stock Purchase
Plan (as amended from time to time, the “Plan”) is to assist employees of Calix, Inc., a Delaware corporation (the “Company”) and its
Participating Subsidiaries in acquiring a stock ownership interest in the Company pursuant to a plan which is intended to help such
employees provide for their future security and to encourage them to remain in the employment of the Company and its Subsidiaries.
The Plan is not intended to qualify as an “employee stock purchase plan” under Section 423 of the Code. The Plan amends and
restates the 2017 Nonqualified Employee Stock Purchase Plan (the “Prior Plan”) in its entirety, subject to stockholder approval of this
Plan at the annual meeting of the Company’s stockholders in 2018. In the event the Company’s stockholders fail to approve the Plan
as set forth herein at the annual meeting of the Company’s stockholders in 2018, then this Plan shall be deemed void ab initio and the
Prior Plan shall continue in effect in accordance with its terms.
ARTICLE II.
DEFINITIONS
2.1 “Agent” means the brokerage firm, bank or other financial institution, entity or person(s), if any, engaged, retained,
appointed or authorized to act as the agent of the Company or an Employee with regard to the Plan.
2.2 “Administrator” shall mean the Committee, or such individuals to which authority to administer the Plan has been delegated
under Section 7.1 hereof.
2.3 “Affiliate” shall mean the Company and any Parent or Subsidiary.
2.4 “Code” shall mean the Internal Revenue Code of 1986, as amended.
2.5 “Committee” shall mean the Compensation Committee of the Board, or another committee or subcommittee of the Board or
the Compensation Committee described in Article 7 hereof.
2.6 “Common Stock” shall mean common stock, par value $0.025, of the Company.
2.7 “Compensation” of an Employee shall mean the regular straight-time earnings, base salary, cash incentive compensation,
cash bonuses (e.g., quarterly or annual bonuses or other corporate bonuses), one-time bonuses (e.g., retention or sign-on bonuses),
taxable profit sharing payments, commissions, vacation pay, holiday pay, jury duty pay, funeral leave pay or military pay paid to the
Employee from the Company or any Participating Subsidiary or any Affiliate on each Payday as compensation for services to the
Company or any Participating Subsidiary or any Affiliate before deduction for any salary deferral contributions made by the
Employee to any tax-qualified or nonqualified deferred compensation plan of the Company, any Participating Subsidiary or any
Affiliate, but excluding overtime, shift differential payments, fringe benefits (including, without limitation, employer gifts), education
or tuition reimbursements, imputed income arising under any Company, Participating Subsidiary or Affiliate group insurance or
benefit program, travel expenses, business and moving reimbursements, income received in connection with any stock options, stock
appreciation rights, restricted stock, restricted stock units or other compensatory equity awards and all contributions made by the
Company, any Participating Subsidiary or any Affiliate for the Employee’s benefit under any employee benefit plan now or hereafter
established. Such Compensation shall be calculated before deduction of any income or employment tax withholdings, but shall be
withheld from the Employee’s net income.
2.8 “Effective Date” shall mean May 17, 2017.
A-1
Table of Contents 2.9 “Eligible Employee” means an Employee of the Company or any Participating Subsidiary (i) who is customarily employed
for at least twenty (20) hours per week and (ii) who is customarily employed for more than five (5) months per calendar year; but
excluding (a) the Company’s Chief Executive Officer, (b) each senior management Employee who reports directly to the Company’s
Chief Executive Officer, and (c) each other senior management Employee as identified in writing by the Administrator as being
ineligible for the Plan.
2.10 “Employee” shall mean any person who renders services to the Company or a Participating Subsidiary in the status of an
employee within the meaning of Section 3401(c) of the Code. “Employee” shall not include any director of the Company or a
Participating Subsidiary who does not render services to the Company or a Participating Subsidiary in the status of an employee
within the meaning of Section 3401(c) of the Code.
2.11 “Enrollment Date” shall mean the first date of each Offering Period.
2.12 “Exercise Date” shall mean the last trading day of each Offering Period, except as provided in Section 5.2 hereof.
2.13 “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
2.14 “Fair Market Value” shall mean, as of any date, the value of a Share determined as follows:
(a) If the Common Stock is (i) listed on any established securities exchange (such as the New York Stock Exchange, the
NASDAQ Global Market and the NASDAQ Global Select Market), (ii) listed on any national market system or (iii) listed, quoted or
traded on any automated quotation system, its Fair Market Value shall be the closing sales price for a Share as quoted on such
exchange or system for such date or, if there is no closing sales price for a Share on the date in question, the closing sales price for a
Share on the last preceding date for which such quotation exists, as reported in The Wall Street Journal or such other source as the
Administrator deems reliable;
(b) If the Common Stock is not listed on an established securities exchange, national market system or automated
quotation system, but the Common Stock is regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean
of the high bid and low asked prices for such date or, if there are no high bid and low asked prices for a Share on such date, the high
bid and low asked prices for a Share on the last preceding date for which such information exists, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable; or
(c) If the Common Stock is neither listed on an established securities exchange, national market system or automated
quotation system nor regularly quoted by a recognized securities dealer, its Fair Market Value shall be established by the
Administrator in good faith.
2.15 “New Exercise Date” shall have such meaning as set forth in Section 5.2(b) hereof.
2.16 “Offering Period” shall mean, unless otherwise determined by the Administrator, each approximately six (6)-month period
during the term of the Plan (i) commencing on January 1 and ending on June 30 and (ii) commencing on July 1 and ending on
December 31.
2.17 “Option” shall mean the right to purchase Shares pursuant to the Plan during each Offering Period.
2.18 “Parent” shall mean any entity (other than the Company), whether domestic or foreign, in an unbroken chain of entities
ending with the Company if each of the entities other than the Company beneficially owns, at the time of the determination, securities
or interests representing more than fifty percent (50%) of the total combined voting power of all classes of securities or interests in one
of the other entities in such chain.
2.19 “Participant” shall mean any Eligible Employee who elects to participate in the Plan.
2.20 “Participating Subsidiary” shall mean each Subsidiary that has been designated by the Board or Committee from time to
time in its sole discretion as eligible to participate in the Plan in accordance with Section 7.2 hereof, in each case, including any
Subsidiary in existence on the Effective Date and any Subsidiary formed or acquired following the Effective Date.
2.21 “Payday” shall mean the regular and recurring established day for payment of Compensation to an Employee of the
Company or any Participating Subsidiary.
A-2
Table of Contents
2.22 “Plan Account” shall mean a bookkeeping account established and maintained by the Company in the name of each
Participant.
2.23 “Share” shall mean a share of Common Stock.
2.24 “Subsidiary” shall mean (a) a corporation, association or other business entity of which fifty percent (50%) or more of the
total combined voting power of all classes of capital stock is owned, directly or indirectly, by the Company and/or by one or more
Subsidiaries, (b) any partnership or limited liability company of which fifty percent (50%) or more of the equity interests are owned,
directly or indirectly, by the Company and/or by one or more Subsidiaries, and (c) any other entity not described in clauses (a) or (b)
above of which fifty percent (50%) or more of the ownership and the power (whether voting interests or otherwise), pursuant to a
written contract or agreement, to direct the policies and management or the financial and the other affairs thereof, are owned or
controlled by the Company and/or by one or more Subsidiaries.
2.25 “Withdrawal Election” shall have such meaning as set forth in Section 6.1(a) hereof.
ARTICLE III.
PARTICIPATION
3.1 Eligibility. Any Eligible Employee who shall be employed by the Company or a Participating Subsidiary on a given
Enrollment Date for an Offering Period shall be eligible to participate in the Plan during such Offering Period, subject to the
requirements of Articles IV and V hereof.
3.2 Election to Participate; Payroll Deductions
(a) Except as provided in Section 3.3 hereof, an Eligible Employee may become a Participant in the Plan only by means of
payroll deduction. Each individual who is an Eligible Employee as of the Enrollment Date of the applicable Offering Period may elect
to participate in such Offering Period and the Plan by delivering to the Company an enrollment form for the Plan designating payroll
deduction authorization by such date specified by the Company.
(b) Payroll deductions with respect to an Offering Period (i) shall be equal to at least one percent (1%) of the Participant’s
Compensation as of each Payday during the applicable Offering Period, but not more than twenty-five percent (25%) of the
Participant’s Compensation as of each Payday during the applicable Offering Period and (ii) may be expressed either as (A) a whole
number percentage or (B) a fixed dollar amount (as determined by the Administrator). Amounts deducted from a Participant’s
Compensation with respect to an Offering Period pursuant to this Section 3.2 shall be deducted each Payday through payroll deduction
and credited to the Participant’s Plan Account.
(c) Following at least one (1) payroll deduction, a Participant may decrease (to as low as 0%) the amount deducted from
such Participant’s Compensation only once during an Offering Period upon ten (10) calendar days’ prior written or electronic notice to
the Company. A Participant may not increase the amount deducted from such Participant’s Compensation during an Offering Period.
(d) Notwithstanding the foregoing, upon the completion of an Offering Period, each Participant in such Offering Period
shall automatically participate in the Offering Period that commences immediately following the completion of such Offering Period
at the same payroll deduction percentage or fixed amount as in effect at the completion of the prior Offering Period, unless such
Participant delivers to the Company a different election with respect to the successive Offering Period in accordance with Section 3.1
hereof, or unless such Participant becomes ineligible for participation in the Plan.
3.3 Leave of Absence. During leaves of absence approved by the Company meeting the requirements of Treasury Regulation
Section 1.421-1(h)(2) under the Code, an individual shall be treated as an Employee of the Company or Participating Subsidiary that
employs such individual immediately prior to such leave.
A-3
Table of Contents
ARTICLE IV.
PURCHASE OF SHARES
4.1 Grant of Option; Automatic Exercise. Each Participant shall be granted an Option with respect to an Offering Period on the
applicable Exercise Date. On the Exercise Date for such Offering Period, the Option will be automatically exercised to (a) purchase
that number of Shares calculated by dividing (i) such Participant’s payroll deductions accumulated on or prior to such Exercise Date
and retained in the Participant’s Plan Account on such Exercise Date by (ii) the Fair Market Value of a Share on such Exercise Date
(the “Purchased Shares”) and (b) acquire a number of Shares equal to the Purchased Shares that are subject to a risk of forfeiture (the
“Restricted Shares”). The balance, if any, remaining in the Participant’s Plan Account (after exercise of such Participant’s Option) as
of such Exercise Date shall be carried forward to the next Offering Period, unless the Participant has elected to withdraw from the
Plan pursuant to Section 6.1 hereof or, pursuant to Section 6.2 hereof, such Participant has ceased to be an Eligible Employee.
4.2 Restricted Shares. The risk of forfeiture on the Restricted Shares shall automatically lapse on the first anniversary of the
Exercise Date, subject to the Participant continuing to be an Employee through such date.
4.3 Share Issuance. As soon as practicable following the applicable Exercise Date (but in no event more than thirty (30) days
thereafter), the Purchased Shares and Restricted Shares shall be delivered (either in share certificate or book entry form), in the
Company’s sole discretion, to either (i) the Participant or (ii) an account established in the Participant’s name at a stock brokerage or
other financial services firm designated by the Company. If the Company is required to obtain from any commission or agency
authority to issue any such Shares, the Company shall seek to obtain such authority. Inability of the Company to obtain from any such
commission or agency authority which counsel for the Company deems necessary for the lawful issuance of any such shares shall
relieve the Company from liability to any Participant except to refund to the Participant such Participant’s Plan Account balance,
without interest thereon.
4.4 Transferability.
(a) An Option granted under the Plan shall not be transferable, other than by will or the applicable laws of descent and
distribution, and shall be exercisable during the Participant’s lifetime only by the Participant. No Option or interest or right to the
Option shall be available to pay off any debts, contracts or engagements of the Participant or his or her successors in interest or shall
be subject to disposition by pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary
or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempt at disposition of the Option shall have no effect.
(b) Unless otherwise determined by the Administrator, no Shares issued upon exercise of an Option under the Plan may be
assigned, transferred, pledged or otherwise disposed of in any way by the Participant until the first anniversary of the Exercise Date
upon which such Shares were purchased. Notwithstanding the foregoing, in the event a Participant ceases to be an Employee prior to
the first anniversary of the Exercise Date upon which Shares were purchased, the Restricted Shares acquired on such Exercise Date
shall be forfeited for no consideration, and the transfer restrictions applicable to the Purchased Shares purchased on such Exercise
Date shall immediately lapse.
4.5 Limitations on the Purchase of Shares. Notwithstanding any provision in the Plan to the contrary, no more than an aggregate
of five hundred thousand (500,000) Shares (the “Offering Period Share Limit”) shall be purchased by one or more Participants on any
Exercise Date. In addition, the Company shall not be required to recognize as an expense more than an aggregate of three million
dollars ($3,000,000) in respect of the Options granted in any Offering Period (together with the Offering Period Share Limit, the
“Offering Period Limits”). Prior to the commencement of an Offering Period, the Administrator may provide for a limit on individual
contributions or a maximum number of Shares a Participant may acquire in such Offering Period and any such limit or maximum shall
be deemed to constitute an Offering Period Limit hereunder. In the event the Company determines that, on a given Exercise Date, the
number of Shares with respect to which Options are to be exercised may exceed one or both of the Offering Period Limits, the
Administrator shall make a pro rata allocation of the Shares available for issuance on such Exercise Date in as uniform a manner as
shall be practicable and as it shall determine in its sole discretion to be equitable among all Participants exercising Options to purchase
Shares on such Exercise Date. For the avoidance of doubt, any such pro rata allocation shall be applied to an equal extent between
Purchased Shares and Restricted Shares.
A-4
Table of Contents
ARTICLE V.
PROVISIONS RELATING TO COMMON STOCK
5.1 Common Stock Reserved. Subject to adjustment as provided in Section 5.2 hereof, the maximum number of Shares that
shall be made available for sale under the Plan shall be three million five hundred thousand (3,500,000) Shares. Shares made available
for sale under the Plan may be authorized but unissued shares or reacquired shares reserved for issuance under the Plan.
5.2 Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares
which have been authorized for issuance under the Plan but not yet placed under an Option, as well as the price per share and the
number of Shares covered by each Option under the Plan which has not yet been exercised shall be proportionately adjusted for any
increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock or any other increase or decrease in the number of Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed
to have been “effected without receipt of consideration.” Such adjustment shall be made by the Administrator, whose determination in
that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the “New Exercise Date”), and such Offering Period shall
terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the
Administrator. The New Exercise Date shall be before the date of the Company’s proposed dissolution or liquidation. The
Administrator shall notify each Participant in writing, at least ten (10) business days prior to the New Exercise Date, that the next
Exercise Date for the Participant’s Option has been changed to the New Exercise Date and that the Participant’s Option shall be
exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offering Period as
provided in Section 6.1(a)(i) hereof or the Participant has ceased to be an Eligible Employee as provided in Section 6.2 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, each outstanding Option shall be assumed or an equivalent Option
substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the Option is not
assumed or substituted, any Offering Periods then in progress shall be shortened by setting a New Exercise Date and any Offering
Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company’s
proposed sale or merger. The Administrator shall notify each Participant in writing, at least ten (10) business days prior to the New
Exercise Date, that the next Exercise Date for the Participant’s Option has been changed to the New Exercise Date and that the
Participant’s Option shall be exercised automatically on the New Exercise Date, unless prior to such date the Participant has
withdrawn from the Offering Periods as provided in Section 6.1(a)(i) hereof or the Participant has ceased to be an Eligible Employee
as provided in Section 6.2 hereof.
5.3 Insufficient Shares. If the Administrator determines that, on a given Exercise Date, the number of Shares with respect to
which Options are to be exercised may exceed the number of Shares remaining available for sale under the Plan on such Exercise
Date, the Administrator shall make a pro rata allocation of the Shares available for issuance on such Exercise Date in as uniform a
manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all Participants exercising Options
to purchase Shares on such Exercise Date, and unless additional shares are authorized for issuance under the Plan, no further Offering
Periods shall take place and the Plan shall terminate pursuant to Section 7.5 hereof. If an Offering Period is so terminated, then the
balance of the amount credited to the Participant’s Plan Account which has not been applied to the purchase of Shares shall be paid to
such Participant in one (1) lump sum in cash within thirty (30) days after such Exercise Date, without any interest thereon.
5.4 Rights as Stockholders. With respect to Shares subject to an Option, a Participant shall not be deemed to be a stockholder of
the Company and shall not have any of the rights or privileges of a stockholder. A Participant shall have the rights and privileges of a
stockholder of the Company when, but not until, Shares have been deposited in the designated brokerage account following exercise
of his or her Option. Notwithstanding the foregoing, in the event a dividend is paid in respect of Restricted Shares, such dividend shall
not be paid to the Participant holding such Restricted Shares unless and until the risk of forfeiture thereon lapses.
A-5
Table of Contents
ARTICLE VI.
TERMINATION OF PARTICIPATION
6.1 Cessation of Contributions; Voluntary Withdrawal.
(a) A Participant may cease payroll deductions during an Offering Period and elect to withdraw from the Plan by
delivering written or electronic notice of such election (a “Withdrawal Election”) to the Company in such form and at such time prior
to the Exercise Date for such Offering Period as may be established by the Administrator. A Participant electing to withdraw from the
Plan may elect to either (i) withdraw all of the funds then credited to the Participant’s Plan Account as of the date on which the
Withdrawal Election is received by the Company, in which case amounts credited to such Plan Account shall be returned to the
Participant in one (1) lump-sum payment in cash within thirty (30) days after such election is received by the Company, without any
interest thereon, and the Participant shall cease to participate in the Plan and the Participant’s Option for such Offering Period shall
terminate; or (ii) subject to Section 6.2 below, exercise the Option for the maximum number of whole Shares on the applicable
Exercise Date with any remaining Plan Account balance returned to the Participant in one (1) lump-sum payment in cash within thirty
(30) days after such Exercise Date, without any interest thereon, and after such exercise cease to participate in the Plan. As soon as
practicable following the Company’s receipt of a Withdrawal Election, the Participant’s payroll deduction authorization and his or her
Option to purchase Shares under the Plan shall terminate.
(b) A Participant’s withdrawal from the Plan shall not have any effect upon his or her eligibility to participate in any
similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the
termination of the Offering Period from which the Participant withdraws.
(c) A Participant who ceases contributions to the Plan during any Offering Period shall not be permitted to resume
contributions to the Plan during such Offering Period.
6.2 Termination of Eligibility. Upon a Participant’s ceasing to be an Eligible Employee for any reason, such Participant’s
Option for the applicable Offering Period shall automatically terminate, he or she shall be deemed to have elected to withdraw from
the Plan, and such Participant’s Plan Account shall be paid to such Participant or, in the case of his or her death, to the person or
persons entitled thereto as set forth in an applicable beneficiary designation form (or, if there is no such applicable form, pursuant to
applicable law), within thirty (30) days after such cessation of being an Eligible Employee, without any interest thereon.
7.1 Administration.
ARTICLE VII.
GENERAL PROVISIONS
(a) The Plan shall be administered by the Committee (or another committee or a subcommittee of the Board assuming the
functions of the Committee under the Plan), which, unless otherwise determined by the Board, shall consist solely of two or more
members of the Board, each of whom is intended to qualify as a “non-employee director” as defined by Rule 16b-3 of the Exchange
Act and an “independent director” under the rules of any securities exchange or automated quotation system on which the Shares are
listed, quoted or traded, in each case, to the extent required under such provision. The Committee may delegate administrative tasks
under the Plan to the services of an Agent and/or Employees to assist in the administration of the Plan, including establishing and
maintaining an individual securities account under the Plan for each Participant.
(b) It shall be the duty of the Administrator to conduct the general administration of the Plan in accordance with the
provisions of the Plan. The Administrator shall have the power, subject to, and within the limitations of, the express provisions of the
Plan:
i. To establish and terminate Offering Periods;
(which need not be identical);
ii. To determine when and how Options shall be granted and the provisions and terms of each Offering Period
iii. To select Participating Subsidiaries in accordance with Section 7.2 hereof; and
A-6
Table of Contents
iv. To construe and interpret the Plan, the terms of any Offering Period and the terms of the Options and to adopt
such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret, amend or
revoke any such rules. The Administrator, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan,
any Offering Period or any Option, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(c) The Administrator may adopt rules or procedures relating to the operation and administration of the Plan to
accommodate the specific requirements of local laws and procedures. Without limiting the generality of the foregoing, the
Administrator is specifically authorized to adopt rules and procedures regarding handling of participation elections, payroll
deductions, payment of interest, conversion of local currency, payroll tax, withholding procedures and handling of stock certificates
which vary with local requirements. In its absolute discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Administrator under the Plan.
(d) The Administrator may adopt sub-plans applicable to particular Participating Subsidiaries or locations. The rules of
such sub-plans may take precedence over other provisions of this Plan, with the exception of Section 5.1 hereof, but unless otherwise
superseded by the terms of such sub-plan, the provisions of this Plan shall govern the operation of such sub-plan.
(e) All expenses and liabilities incurred by the Administrator in connection with the administration of the Plan shall be
borne by the Company. The Administrator may, with the approval of the Committee, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Administrator, the Company and its officers and directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the
Administrator in good faith shall be final and binding upon all Participants, the Company and all other interested persons. No member
of the Board or Administrator shall be personally liable for any action, determination or interpretation made in good faith with respect
to the Plan or the options, and all members of the Board or Administrator shall be fully protected by the Company in respect to any
such action, determination or interpretation.
7.2 Designation of Participating Subsidiaries. The Board or Committee shall designate from among the Subsidiaries, as
determined from time to time, the Subsidiary or Subsidiaries that shall constitute Participating Subsidiaries. The Board or Committee
may designate a Subsidiary, or terminate the designation of a Subsidiary, without the approval of the stockholders of the Company.
7.3 Accounts. Individual accounts shall be maintained for each Participant in the Plan.
7.4 No Right to Employment. Nothing in the Plan shall be construed to give any person (including any Participant) the right to
remain in the employ of the Company, a Parent or a Subsidiary or to affect the right of the Company, any Parent or any Subsidiary to
terminate the employment of any person (including any Participant) at any time, with or without cause, which right is expressly
reserved.
7.5 Amendment, Suspension and Termination of the Plan
(a) The Board may, in its sole discretion, amend, suspend or terminate the Plan at any time and from time to time;
provided, however, that without approval of the Company’s stockholders given within twelve (12) months before or after action by the
Board, the Plan may not be amended to increase the maximum number of Shares subject to the Plan or in any other manner that
requires the approval of the Company’s stockholders under applicable law or applicable stock exchange rules or regulations. No
Option may be granted during any period of suspension of the Plan or after termination of the Plan. For the avoidance of doubt,
without the approval of the Company’s stockholders and without regard to whether any Participant rights may be considered to have
been “adversely affected,” the Board or the Committee, as applicable, shall be entitled to change the terms of an Offering Period, limit
the frequency and/or number of changes in the amount withheld during an Offering Period, permit payroll withholding in excess of the
amount designated by a Participant in order to adjust for delays or mistakes in the Company’s processing of properly completed
withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that
amounts applied toward the purchase of Shares for each Participant properly correspond with amounts withheld from the Participant’s
Compensation, and establish such other limitations or procedures as the Board or the Committee, as applicable, determines in its sole
discretion advisable which are consistent with the Plan.
(b) In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable financial
accounting consequences, the Administrator may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan
to reduce or eliminate such accounting consequence including, but not limited to:
Period underway at the time of the Administrator action; and
i. shortening any Offering Period so that the Offering Period ends on a new Exercise Date, including an Offering
A-7
Table of Contents
ii. allocating Shares.
Such modifications or amendments shall not require stockholder approval or the consent of any Participant.
(c) Upon termination of the Plan, the balance in each Participant’s Plan Account shall be refunded as soon as practicable
after such termination, without any interest thereon.
7.6 Use of Funds; No Interest Paid. All funds received by the Company by reason of purchase of Shares under the Plan shall be
included in the general funds of the Company free of any trust or other restriction and may be used for any corporate purpose. No
interest shall be paid to any Participant or credited under the Plan.
7.7 Effect Upon Other Plans. The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the
Company, any Parent or any Subsidiary. Nothing in the Plan shall be construed to limit the right of the Company, any Parent or any
Subsidiary (a) to establish any other forms of incentives or compensation for Employees of the Company or any Parent or any
Subsidiary or (b) to grant or assume Options otherwise than under the Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options in connection with the acquisition, by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association.
7.8 Conformity to Securities Laws. Notwithstanding any other provision of the Plan, the Plan and the participation in the Plan
by any individual who is then subject to Section 16 of the Exchange Act shall be subject to any additional limitations set forth in any
applicable exemption rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that
are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan shall be deemed
amended to the extent necessary to conform to such applicable exemptive rule.
7.9 Tax Withholding. The Company or any Participating Subsidiary shall have the authority and the right to deduct or withhold,
or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the
Participant’s FICA or employment tax obligation) required by law to be withheld with respect to any taxable event concerning a
Participant arising as a result of the Plan. The Administrator may in its sole discretion and in satisfaction of the foregoing requirement
withhold or have surrendered, or allow a Participant to elect to have the Company withhold or surrender, Restricted Shares for which
the risk of forfeiture has lapsed. Unless determined otherwise by the Administrator, the number of Shares which may be so withheld
or surrendered shall be limited to the number of shares which have a Fair Market Value on the date of withholding or surrender no
greater than the aggregate amount of such liabilities based on the maximum statutory withholding rates for federal, state, local and
foreign income tax and payroll tax purposes that are applicable to such supplemental taxable income. The Administrator shall also
have the authority and right to initiate, or permit a Participant to initiate, a broker- assisted sell-to-cover transaction whereby Shares
are sold by such broker and the proceeds of such sale are remitted to the Company to satisfy tax withholding obligations.
7.10 Governing Law. The Plan and all rights and obligations thereunder shall be construed and enforced in accordance with the
laws of the State of Delaware.
7.11 Notices. All notices or other communications by a Participant to the Company under or in connection with the Plan shall be
deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by
the Company for the receipt thereof (including without limitation the Company’s stock plan administrator).
7.12 Conditions to Issuance of Shares.
(a) Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates
or make any book entries evidencing Shares pursuant to the exercise of an Option by a Participant, unless and until the Board or the
Committee has determined, with advice of counsel, that the issuance of such Shares is in compliance with all applicable laws,
regulations of governmental authorities and, if applicable, the requirements of any securities exchange or automated quotation system
on which the Shares are listed or traded, and the Shares are covered by an effective registration statement or applicable exemption
from registration. In addition to the terms and conditions provided herein, the Board or the Committee may require that a Participant
make such reasonable covenants, agreements, and representations as the Board or the Committee, in its discretion, deems advisable in
order to comply with any such laws, regulations or requirements.
A-8
Table of Contents
(b) All certificates for Shares delivered pursuant to the Plan and all Shares issued pursuant to book entry procedures are
subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal, state
or foreign securities or other laws, rules and regulations and the rules of any securities exchange or automated quotation system on
which the Shares are listed, quoted or traded. The Committee may place legends on any certificate or book entry evidencing Shares to
reference restrictions applicable to the Shares.
(c) The Committee shall have the right to require any Participant to comply with any timing or other restrictions with
respect to the settlement, distribution or exercise of any Option, including a window-period limitation, as may be imposed in the sole
discretion of the Committee.
(d) Notwithstanding any other provision of the Plan, unless otherwise determined by the Committee or required by any
applicable law, rule or regulation, the Company may, in lieu of delivering to any Participant certificates evidencing Shares issued in
connection with any Option, record the issuance of Shares in the books of the Company (or, as applicable, its transfer agent or stock
plan administrator).
7.13 Section 409A. Neither the Plan nor any Option granted hereunder is intended to constitute or provide for “nonqualified
deferred compensation” within the meaning of Section 409A of the Code and the Department of Treasury regulations and other
interpretive guidance issued thereunder, including without limitation any such regulations or other guidance issued after the Effective
Date (together, “Section 409A”). Notwithstanding any provision of the Plan to the contrary, if the Administrator determines that any
Option may be or become subject to Section 409A of the Code, the Administrator may adopt such amendments to the Plan and/or
adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions
as the Administrator determines are necessary or appropriate to avoid the imposition of taxes under Section 409A of the Code, either
through compliance with the requirements of Section 409A of the Code or with an available exemption therefrom.
******
A-9
Table of Contents
Calix, Inc.
Reconciliation of GAAP to non-GAAP Measures
(In thousands)
(Unaudited)
Three Months Ended
September 30,
2017
April 1,
2017
$ (32,816)
July 1,
2017
$ (18,714)
Appendix B
December 31,
2017
Year Ended
December 31,
2017
$
(17,263)
$
(12,763)
$
(81,556)
GAAP operating income (loss)
Adjustments to reconcile GAAP operating
income (loss) to non-GAAP operating
income (loss):
Stock-based compensation
Amortization of intangible assets
Restructuring charges
3,540
813
699
2,778
—
957
2,996
—
612
3,054
—
1,981
12,368
813
4,249
Non-GAAP operating income (loss)
$ (27,764)
$ (14,979)
$
(13,655)
$
(7,728)
$
(64,126)
Use of Non-GAAP Financial Information
Calix uses certain non-GAAP financial measures to supplement its consolidated financial statements, which are presented in
accordance with GAAP. In this proxy statement, Calix has presented non-GAAP operating income (loss). This non-GAAP measure is
provided as a performance target in our executive cash incentive plan as the measure primarily excludes certain non-cash charges for
stock-based compensation, amortization of intangible assets and restructuring charges, which Calix believes are not indicative of its
core operating results. The presentation of this non-GAAP measure is not meant to be a substitute for results presented in accordance
with GAAP, but rather should be evaluated in conjunction with the comparable GAAP measure. A reconciliation of the non-GAAP
measure to the most directly comparable GAAP measure is provided above. The non-GAAP financial measures used by Calix may be
calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.
B-1
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34674
Calix, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
1035 N. McDowell Blvd.
Petaluma, California
(Address of Principal Executive Offices)
68-0438710
(I.R.S. Employer
Identification No.)
94954
(Zip Code)
Registrant’s telephone number, including area code (707) 766-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.025 par value
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes:
No:
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes:
No:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes:
No:
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes:
No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Table of Contents
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:
No:
The aggregate market value of the Common Stock held by non-affiliates of the registrant based upon the closing sale price on the New
York Stock Exchange on June 30, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter, was
approximately $294 million. Shares held by each executive officer, director and by each other person (if any) who owns more than 10% of
the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 2, 2018, the number of shares of the registrant’s common stock outstanding was 51,708,364.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2018 annual meeting of stockholders are incorporated by reference in Items 10,
11, 12, 13 and 14 of Part III.
Table of Contents Calix, Inc.
Form 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business..................................................................................................................................................
Item 1A.
Risk Factors............................................................................................................................................
Item 1B.
Unresolved Staff Comments ..................................................................................................................
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties................................................................................................................................................
Legal Proceedings ..................................................................................................................................
Mine Safety Disclosures.........................................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ....................................................................................................................................
Selected Financial Data ..........................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations.................
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk ...............................................................
Item 8.
Item 9.
Financial Statements and Supplementary Data ......................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................
Item 9A.
Controls and Procedures.........................................................................................................................
Item 9B.
Other Information...................................................................................................................................
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.....................................................................
Item 11.
Executive Compensation........................................................................................................................
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters....................................................................................................................................................
Item 13.
Certain Relationships and Related Transactions, and Director Independence.......................................
Item 14.
Principal Accountant Fees and Services.................................................................................................
PART IV
Item 15.
Exhibits and Financial Statement Schedules..........................................................................................
Item 16.
Form 10-K Summary .............................................................................................................................
Signatures ...............................................................................................................................................
5
17
35
35
35
35
36
37
39
52
54
85
85
85
86
86
86
86
86
87
89
90
3
Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that involve substantial risks and uncertainties. All statements other than
statements of historical facts contained in this report, including statements regarding Calix’s future financial position, business
strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as “believe,” “could,” “expect,” “may,” “estimate,” “continue,”
“anticipate,” “intend,” “should,” “plan,” “predict,” “will,” “would,” “project,” “potential” or the negative of these terms or
other similar expressions. Forward-looking statements include Calix’s expectations concerning the outlook for its business,
productivity, plans and goals for future operational improvements and capital investments, operational performance, future
market conditions or economic performance and developments in the capital and credit markets and expected future financial
performance.
Forward-looking statements involve a number of risks, uncertainties and assumptions, and actual results or events may differ
materially from those projected or implied in those statements. Important factors that could cause such differences include:
• our ability to predict our revenue and reduce and control costs related to our products or service offerings,
including larger scale turnkey network improvement projects that may span several quarters;
• our ability to increase our sales to larger communications service providers, or CSPs, globally;
• the capital spending patterns of CSPs, and any decrease or delay in capital spending by CSPs due to macro-
economic conditions, regulatory uncertainties, or other reasons;
• the impact of government-sponsored programs on our customers;
• intense competition;
• our ability to develop new products or enhancements that support technological advances and meet changing
CSP requirements;
• our ability to achieve market acceptance of our products and CSPs’ willingness to deploy our new products;
• the concentration of our customer base as well as our dependence on a limited number of key customers;
• the length and unpredictability of our sales cycles and timing of orders;
• our lack of long-term, committed-volume purchase contracts with our customers;
• our exposure to the credit risks of our customers;
• fluctuations in our gross margin;
• the interoperability of our products with CSP networks;
• our dependence on sole-, single- and limited-source suppliers;
• our ability to manage our relationships with our third-party, including contract manufacturers, ODMs, logistics
providers, component suppliers and development partners;
• our ability to forecast our manufacturing requirements and manage our inventory;
• our products’ compliance with industry standards;
• our ability to expand our international operations;
• our ability to protect our intellectual property and the cost of doing so;
• the quality of our products, including any undetected hardware defects or bugs in our software;
• our ability to estimate future warranty obligations due to product failure rates;
• our ability to obtain necessary third-party technology licenses at reasonable costs;
• the regulatory and physical impacts of climate change and other natural events;
• the attraction and retention of qualified employees and key management personnel;
• our ability to build and sustain an adequate and secure information technology infrastructure; and
• our ability to maintain proper and effective internal controls.
Calix cautions you against placing undue reliance on forward-looking statements, which reflect our current beliefs and are
based on information currently available to us as of the date a forward-looking statement is made. Forward-looking statements
set forth in this Annual Report on Form 10-K speak only as of the date of its filing. We undertake no obligation to revise
forward-looking statements to reflect future events, changes in circumstances or changes in beliefs. In the event that we do
update any forward-looking statements, no inference should be made that we will make additional updates with respect to that
statement, related matters or any other forward-looking statements.
4
Table of Contents PART I
ITEM 1.
Business
Company Overview
Calix, Inc. (together with its subsidiaries, “Calix,” “we,” “our” or “us”) was incorporated in August 1999 and is a Delaware
corporation. Calix is the leading global provider of cloud and software platforms, systems and services required to deliver the
unified access network and smart premises of tomorrow. Our mission is to connect everyone and everything. Calix platforms
empower our customers to build new business models, rapidly deploy new services and make the promise of the smart home
and business a reality. Innovative CSPs rely on Calix platforms to help them master and monetize the complex infrastructure
between their subscribers and the cloud. Our platforms and services help our customers build next generation networks by
embracing a DevOps operating model, optimizing the subscriber experience by leveraging big data analytics and turning the
complexity of the smart home and business into new revenue streams.
We are the pioneer in software defined access, or SDA, and our portfolio of solutions is designed to help CSPs meet emerging
threats from web-scale players and reinvent how they serve their device-enabled subscribers. Our platforms enable our
customers to capitalize on the opportunity that is being generated by the Internet of Things, or IoT, augmented and virtual
reality applications and autonomous technologies. Our customers who are embracing our strategic platforms recognize that
providing a sensational subscriber experience via an infrastructure that is Always On, can be enhanced at a DevOps pace and is
intelligent enough to run itself enables them to compete in the future. We also provide cloud analytics designed to help service
providers create and market new offerings that monetize their investments in the network. Finally, we strive to put our
customers and their brands first to ensure that they will always have a central place in their subscribers’ lives. Our solution
strategy is intended to help our customers build and re-enforce their brand presence within their subscribers’ premises. We
believe this must be an element of their strategy for sustaining and growing their businesses.
Our current customers include CSPs of almost every size and type. Our solutions may be used by any entity providing
communications services to a subscriber. This universe includes local and competitive exchange carriers, cable operators,
wireless internet service providers, or wireless ISPs, over builders such as municipalities and electric cooperatives, hospitality
providers and others globally. We market and sell our portfolio to CSPs globally through our direct sales force as well as in
partnership with a number of resellers. We have enabled over 1,400 customers to deploy gigabit passive optical network, or
GPON, Active Ethernet and point-to-point Ethernet fiber access networks.
We have a single reportable operating segment. Additional information about geographic areas required by this item is
incorporated herein by reference to Note 13, “Segment Information” of Notes to Consolidated Financial Statements included in
this Annual Report on Form 10-K.
Industry Background and Trends
CSPs compete in a rapidly changing market to deliver a range of services to their residential and business subscribers.
Subscribers now purchase an array of services from providers, starting with basic voice and data through advanced broadband
services such as high-speed Internet, Internet protocol television, or IPTV, mobile broadband, high-definition and ultra high-
definition video, and over-the-top video and online gaming from a variety of CSPs. Consumers are also rapidly adding devices
that require high bandwidth, low latency services such as virtual and augmented reality as well as IoT devices that bring
significant complexity to the premises network. It is likely that adoption of autonomous technologies such as self-driving cars
will dramatically increase demand and complexity.
The rapid growth in new technologies is generating increased network traffic and putting pressure on CSPs to cost effectively
upgrade and enhance their networks to meet demand. For example, Cisco Systems, Inc. estimates that global Internet protocol,
or IP, traffic will grow at a compound annual growth rate of 24% per year from 2016 to reach approximately 278 exabytes per
month in 2021. At the same time, the proliferation of new technologies creates a tremendous opportunity for CSPs to offer new
services and revenue streams by mastering the complexity of the smart home and business for their subscribers.
The Emergence of Web-Scale Players as a Competitive Force
The level of competition among CSPs – wireline and wireless service providers, cable multiple system operators, or cable
MSOs, and other CSPs – has increased over the last decade as traditional service boundaries have fallen. All providers are now
competing for the same residential and business subscribers using similar types of IP-based services. The explosion of new
technologies in the subscriber premises creates significant new opportunities for all CSPs. Technology innovators of all types
and sizes are moving aggressively to seize that opportunity. Perhaps the most significant recent change in the competitive
dynamic across the communications space is the aggressive entrance of web-scale players into subscribers’ homes and
5
Table of Contents businesses. These entrants, such as Google and Amazon, are extending their current platforms (e.g., data driven search, e-
commerce) into the subscriber premises with new devices and services that are helping to reshape the home environment. Their
use of data enables them to rapidly deploy new services and command a central place in the subscriber’s daily life. The level of
insight that they generate by mining user data, coupled with their DevOps business model, positions them to offer and deploy
services to subscribers at pace that a traditional CSP model cannot match.
To address this challenge and establish control of the device-enabled subscriber, CSPs must respond by leveraging analytical
tools that utilize network data and subscriber behavioral data to tailor services that meet the individual subscribers’ needs.
These services include high-bandwidth packages, managed Wi-Fi, whole home Wi-Fi and smart home services. We believe
these new services represent the CSPs’ greatest opportunity to create new revenue streams and higher average revenue per user,
or ARPU, while reducing churn. CSPs must also mine network and subscriber data to streamline and automate subscriber
facing functions such as customer service. These data-driven approaches can significantly reduce service costs, improve
profitability and support investment in new services and technologies. Increasingly, companies in the communications space
will embrace strategies that apply machine learning and artificial intelligence technologies that promise to dramatically
improve the subscriber experience, build subscriber intimacy and loyalty while increasing ARPU. By leveraging data to build a
tighter bond with their subscribers and deliver high-value services, CSPs can more effectively meet the challenge presented by
web-scale players.
The Rise of Smart Premises
In many ways 2017 was a significant inflection point for the smart home market. The Amazon Echo was the top selling item on
the entire Amazon marketplace – reaching 22 million units sold and selling-out during the year-end holiday season. IoT, virtual
reality and other connected devices have become mainstream for many consumers and they are increasingly prevalent on
subscriber premises. Parks and Associates estimates that the proliferation of connected home devices has led to an average of
9.1 connected devices per U.S. broadband home and projects annual sales of all connected home devices reaching 442 million
units by 2020. McKinsey and Company, Incorporated estimates that globally the total IoT market will grow at a 32.6%
compounded annual growth rate through 2020. These connected devices are already creating complexity and management
challenges for the CSPs who are often contacted by their subscribers when performance issues arise. Increasingly, subscribers
view any device that is connected to home network as the purview and responsibility of their CSP. As the number and type of
devices continues to expand, CSPs must develop strategies and adopt technologies that help them manage the complexity.
To improve performance and coverage throughout their homes, many subscribers are purchasing Wi-Fi routers and gateways
via consumer channels and introducing them into the home network. These devices compound management challenges for
CSPs as the subscribers generally contact their CSP when issues arise with the Wi-Fi performance. Since these consumer
devices do not provide carrier class management capabilities that enable remote diagnostics, management and trouble-shooting,
performance issues can create a cost burden for the service provider and satisfaction issues for the subscriber.
Recognizing that many subscribers see the CSP as the logical source of insights and services that enable the smart home and
business, innovative CSPs are developing strategies and business models that embrace these new technologies via carrier class
premises systems. Over the last year, several of the largest and most innovative CSPs have announced strategies that
incorporate the latest technologies such as voice interaction and IoT connectivity. By leveraging cloud management
technologies and developing a proactive strategy for smart device connectivity, voice interaction, security and premises system
instrumentation, CSPs can position themselves as the critical enabler of the smart home and business. Winners will embrace
software platforms that enable all of these capabilities and premises systems that provide a foundation for turning the burden of
the smart home into new services and revenue streams.
The Shift to a DevOps Business Model
Access networks, traditionally known as the local loop or last mile, directly and physically connect the residential or business
subscriber to the CSP’s data center, central office or similar facilities and create the onramp to the Internet. The access network
is critical for service delivery as it governs the bandwidth capacity, service quality available to subscribers and ultimately the
services and experience CSPs can provide to subscribers. Providing differentiated, high-quality, high-speed connectivity has
become increasingly critical for CSPs to retain and expand their subscriber base and launch new revenue-generating services.
To meet the demands of device-enabled subscribers, CSPs are starting to deploy access technologies that are software defined
and leverage next generation Passive Optical Network, or PON, architectures such as NG-PON2, XGS-PON and 10G EPON.
In doing so they will address many of limitations of legacy access systems:
• Limited capacity of outdated access architectures – Network architectures have physical limitations in their ability to
scale bandwidth, avoid latency issues and deliver the advanced broadband services subscribers demand today and are
expected to increasingly demand in the future.
6
Table of Contents • Inflexible networks that constrain subscriber offerings – Networks were designed to support a narrow range of
services, and as a result, they limit the ability of CSPs to deploy the advanced broadband services increasingly
demanded by their subscribers.
• Expensive to deploy and operate – With a wide variety of equipment installed, networks require significant downtime
and labor for maintenance and upgrades, thereby placing a significant and recurring capital and operating expense
burden on CSPs.
• Back-office systems slow deployment of new services – Traditional methods for operationalizing new products and
services often require significant testing and lengthy back-office integration activities. This often places CSPs at a
competitive disadvantage relative to emerging service providers that are leveraging agile management practices.
By replacing traditional hardware functions with software defined networking, or SDN, CSPs can overcome these operational
challenges and bring new products and services to market faster. Many CSPs are embracing SDN and SDA to help accelerate
innovation, deploy automation, bring agility to their network and significantly reduce service disruptions. By embracing
standards-based, modular software platforms that abstract software functions from hardware, CSPs can free themselves from a
dependence on specific hardware technologies and upgrade their access network to enable a DevOps business model. The
winning service providers of the future will embrace SDA platforms and transform their access networks into a competitive
weapon. Ultimately, this new model will enable CSPs to manage a complete range of access systems across nearly every
deployment scenario (e.g., central office, head-end, cabinet, mounted on a pole) in a consistent manner. With this shift they will
introduce services at a pace that can then match the speed of the web-scale players.
The imperative to develop lean operating models
CSPs face a dual challenge in the coming years – mounting competitive pressure and the requirement to increase their
investments in technologies that can deliver the new services that their subscribers will demand. Most will need to make shifts
in their operating models to thrive in the coming decade. They must implement a lean operating model that reduces the cost to
run the business and deliver services to subscribers at an accelerated pace and at a significantly lowered cost. The adoption of
new technologies that provide automation and intelligence, such as SDA, will help service providers adopt agile operating
models and reduce the burden of network and back-office operations.
The role of governments in supporting technology investment
As CSPs face increasing competitive pressure, they must accelerate their investments to upgrade their access networks and
deploy new subscriber facing technologies. Governments around the world recognize the importance of expanding broadband
networks and delivering advanced broadband services to more people and businesses. As a result, many governments have
established stimulus programs or other incentives for broadband investment.
In the United States, programs like the Connect America Fund, or CAF, and E-Rate provide billions of dollars each year to
CSPs in the form of capital investment incentives, grants and loans to encourage broadband network investment in unserved or
underserved communities and schools. For example, in 2015, the CAF program was authorized to distribute $1.5 billion per
year through 2020 to offset the costs of installing and operating CSP operated broadband and voice networks for Tier 1 and Tier
2 service providers in the United States. In 2016, this program was extended to the Tier 3 service providers to distribute $2.0
billion annually over the next ten years to offset the costs of installing and operating CSP operated broadband and voice
networks. In addition, the E-Rate program was authorized to offer $1.5 billion in grants to build gigabit capable network
connections to schools. The E-Rate program targeted at networks is funded at its current level indefinitely. The Canadian
Radio-television and Telecommunications Commission in 2016 created a fund targeted at increasing broadband coverage and
speeds that made available up to $750 million available over the next five years, and the European Commission is pursuing
similar goals via its Connecting Europe Facility and other programs.
With the increasing importance of broadband connectivity and the evolution of the smart home and business market, we expect
this investment focus to continue and potentially increase. World-class connectivity and service are becoming essential
capabilities for individuals, as well as businesses and nations who strive to remain economically competitive in an increasingly
global and connected market place.
Strategy Overview
We believe that many CSPs can and will evolve to providing the most relevant services and experience to their subscribers.
Today, many CSPs command a privileged and strategic position in their subscribers’ premises. They provide a service that is
becoming a necessity for many subscribers. With significant new technologies coming into the marketplace, the opportunities
to generate new revenue streams are manifold. However, the journey from connectivity provider to essential provider of high
bandwidth connectivity and services to the smart home and business will require significant transformation for most CSPs. Our
7
Table of Contents strategy is to position Calix as the essential provider of platforms and services that enable this transformation. The principal
elements of our strategy are:
Increase Focus on Strategic Platforms – Our strategy centers on our three strategic platforms – Calix Cloud, EXOS
(Experience eXtensible Operating System) and AXOS (Access eXtensible Operating System).
• Calix Cloud is a cloud analytics platform that leverages network data and subscriber behavioral data to deliver
analytics and intelligence to communications professionals via role specific dashboards. Calix Cloud provides the
subscriber analytics to deliver the targeted services and experiences to build customer intimacy and loyalty.
• EXOS is a carrier class premises operating system that supports residential, business and mobile subscribers. EXOS,
coupled with our market leading GigaFamily premises systems, provides a unique platform for mastering and
monetizing the complexity of the smart home and business.
• AXOS is an operating system for access networks that allows a service provider to deliver all services on a single,
elastic, converged access network that is always on. AXOS, coupled with our eSeries systems, provides a unique
platform for the software defined access network that enables CSPs to transform their business processes and deliver
new services at DevOps speed.
Extend Portfolio of Calix Services – Our services team assists CSPs define their transformation strategy, build new skills,
implement new technologies and deploy new subscriber services. Calix Services addresses a CSP’s entire network and service
delivery lifecycle.
Engage Directly with Customers – Calix continues to invest in our direct sales capabilities to ensure that we engage deeply
with our customers to help them understand the differentiable value that our platforms deliver. As an innovator and a market
leader, it is important that our sales and solution engineering resources continually drive the adoption of our strategic platforms.
Our direct model is complemented outside of North America with a selective program for Calix Channel Partners who have
established local market expertise and demonstrated the ability to generate new market opportunities and support sales of
cutting-edge technologies.
Expand Customer Footprint Across Our Expanded Total Addressable Market – Our diverse and growing customer footprint
is a critical source of our growth as we expand our portfolio and sell additional platforms to both new and existing customers.
Our platforms have dramatically expanded our total addressable market, and as such we intend to build on our recent
momentum in penetrating service provider segments where our current share is relatively low (e.g., cable MSO, Tier 1
telecommunications providers and international markets) and continue to engage emerging providers who are creating entirely
new customer segments (e.g., utilities and hospitality).
Pursue Strategic Relationships – We expect to continue to pursue strategic technology and distribution relationships, alliances
and acquisitions that help us align us with CSPs’ strategic priorities. We continue to invest to assure interoperability across the
ecosystems that support our customers’ most critical business processes through our Calix Compatible Program. This program
has dozens of technology members and it is designed to enable our customers to rapidly deploy qualified solutions globally.
Portfolio Overview
By embracing open, modular, standards-based strategies, we provide intelligence and flexibility across a CSP’s entire network
– from their data centers to their subscribers’ connected devices. Calix platforms are designed to provide our customers the
agility that they need to offer the managed services that their subscribers demand. While we continue to support our non-AXOS
and non-EXOS systems and our traditional cloud and software products, we are focused on driving the evolution and market
penetration of our strategic platforms and services.
The Calix portfolio allows for a broad range of subscriber services to be provisioned and delivered over a single unified
network. These systems can deliver voice and data services, advanced broadband services, mobile broadband, as well as high-
definition video and online gaming. Our premises systems allow CSPs to master the complexity of the smart home and
business and offer new services to their device enabled subscribers. All of these platforms and systems can be monitored,
analyzed, managed and supported by Calix Cloud.
8
Table of Contents Representation of how Calix platforms and services support a CSP’s entire network:
Calix Cloud
Calix Cloud is an analytics platform that leverages network data and subscriber behavioral data to deliver intelligence to
communications professionals via role specific dashboards. Calix Cloud provides customer support personnel with
troubleshooting dashboards and tailored analytics that reduce call volumes, reduce call times and lower “truck rolls”. Calix
Cloud provides marketing personnel with segmentation dashboards and tailored analytics that reduce churn, increase ARPU
and improve marketing return on investment. Calix Cloud transforms insights into action for CSPs, enabling them to:
• Analyze: Calix Cloud allows CSPs a deeper understanding of their subscribers and their satisfaction. As a result, CSPs
can directly address churn risk and improve marketing campaigns.
• Engage: Calix Cloud provides CSPs real-time insights into network issues, allowing CSPs to be responsive in
resolving issues and offering solutions.
• Grow: Calix Cloud analytics combine multiple information sources to build a full picture of subscribers, which can
enable higher marketing success rates.
Calix Cloud is composed of two subscription-based offerings that complement each other to provide a powerful platform that
CSP employees utilize within their daily work flows to increase the effectiveness of their marketing campaigns, address support
issues and improve the subscriber experience.
Representation that summarizes the main capabilities of Calix Cloud:
9
Table of Contents Calix Support Cloud (CSC) – Recent Calix studies demonstrate that a large portion of support calls result from Wi-Fi
performance issues. Since Wi-Fi related support calls take approximately three-times as long to complete as the average
support call, reducing these calls can significantly improve operational efficiency. CSC enables more informed and efficient
conversations between CSP customer service representatives and their subscribers. Support personnel utilize troubleshooting
dashboards and tailored analytics that are built directly into their work flows to quickly identify issues with network, devices
and Wi-Fi performance. Once the issues are identified, many can be resolved via CSC with a simple click of a button. Recent
enhancements to CSC include automation capabilities that can fix many common issues without any manual intervention. We
intend to incorporate more advanced machine learning and artificial intelligence capabilities into CSC to help CSPs optimize
their support processes and improve subscriber experiences.
Calix Marketing Cloud (CMC) – CMC enables marketers to move away from a one size fits all approach to marketing and
deliver personalized campaigns. CMC provides insights regarding subscriber behavior including website visits, social channel
engagement, device usage and bandwidth consumption. CMC also helps CSPs identify subscribers who are experiencing
service issues and exhibiting behaviors that correlate with higher churn rates (e.g., running speed tests). By delivering these
insights through intuitive segmentation dashboards and tailored analytics, CMC helps CSPs deliver the right message, at the
optimal time, via the optimal channel. CMC enables CSPs to adopt data-driven strategies to effectively compete with web-scale
players.
Calix Cloud software is hosted in a cloud data center and Calix offers an array of support and service offerings that are
designed to ensure rapid deployment and easy adoption.
EXOS
EXOS is a carrier class premises operating system introduced in the fall of 2017 that supports residential, business and mobile
subscribers. EXOS is the first carrier class premises operating system designed to help CSPs deliver a managed experience for
the smart home and business. EXOS can help CSPs address the unique needs of every subscriber by helping them:
• Connect: Leverage the ecosystems, applications, cloud services and devices that deliver services to subscribers.
• Manage: Control the total subscriber experience while adapting to new technologies that are introduced into the home
or business network.
• Secure: Provide software-enabled security with the ability to integrate with a global ecosystem of partners.
• Analyze: Improve the delivery of services by converting subscriber, device and network data into actionable insight.
Representation that summarizes the main capabilities of EXOS:
Approximately 50% of smart home device owners experience problems when setting up their devices. These challenges create
opportunities for service providers who can eliminate these issues and remove the management burden from the subscriber.
EXOS is designed to eliminate subscribers’ smart device challenges and support a broad array of smart home technologies
including IoT, virtual reality and home automation systems. EXOS incorporates a software model that is standards-based and
fully abstracted from the hardware, providing CSPs with the flexibility to offer services on the premises system of their choice.
This flexibility also allows CSPs to offer managed smart home and business services such as security and home automation.
We expect to implement EXOS in the next generation of GigaFamily smart premises systems that will launch in 2018. The
EXOS-powered GigaFamily will target both home and small-to-medium sized business use cases.
10
Table of Contents Representation of the next generation EXOS-powered GigaFamily:
While EXOS powered systems represent a significant inflexion point for the Calix premises portfolio, our current GigaFamily
systems continue to offer CSPs a unique value proposition. As a carrier class system, the GigaCenter supports smart channel
selection and dynamic frequency selection. The GigaCenter also supports interoperability with IPTV set top boxes and Wi-Fi
analytics. When deployed in conjunction with the Calix Cloud, the GigaCenter provides the complete set of capabilities
required for a fully managed Wi-Fi offering to deliver optimized services to subscribers.
With the recent introduction of the 804Mesh system to the GigaFamily, CSPs can now also offer a whole-home Wi-Fi service
to their subscribers that is carrier class. When paired with the 804Mesh systems, the GigaCenter can extend Wi-Fi coverage to
distant corners of the subscriber premises, enabling the highest quality connection throughout an entire home or small business
network.
Representation of the Calix GigaCenter and 804Mesh satellite:
AXOS
AXOS is a software platform built for the specific needs of the access network. The AXOS platform is an architecture built to
leverage the best of data center software design and network virtualization across the challenging and variable environment of
the access network. With an always-on architecture and consistent provisioning services, a CSP can leverage AXOS to deliver
all services on a single, elastic, converged access network that is always on. By supporting all existing and next generation
PON architectures (anyPON), any silicon chipset (anyPHY) and any CSP operating model (anySDN), AXOS provides
unmatched flexibility to our customers.
11
Table of Contents Representation that summarizes the main capabilities of AXOS:
We believe AXOS offers a revolutionary way for CSPs to operate their access network and accelerate their business
transformation. AXOS achieves this through containerized software components that operate on top of a unique hardware
abstraction layer that preserves software independence from the underlying hardware. This architecture simplifies upgrades to
non-events, supports stateful, self-healing operation and facilitates virtualization of processes and services. All components and
operational functions within AXOS use standard NETCONF protocol and YANG data models that enable AXOS-powered
systems to fit into any open SDN orchestration and control framework. Open, published APIs also allow customers to directly
program unique network applications and services.
With AXOS, CSPs can collapse and automate networks functions such a subscriber management and routing to streamline
deployment of services and simplify operations. This functionality is supported via software modules including AXOS RPm
(Routing Protocol module), AXOS SMm (Subscriber Management module) and connectors such as SMx (Service Management
Connector), AXOS DPx (virtualized DOCSIS connector), AXOS OFx (OpenFlow connector) and AXOS Sandbox – an SDA
virtual environment for system design and testing. The AXOS platform removes the complexity of network deployments by
reducing the need for complex and costly integrated hardware and software that is pieced together via middleware. AXOS
offers CSPs a path to the intelligent, unified access network that can accelerate time-to revenue, increase service velocity,
eliminate service disruptions and reduce total cost of ownership.
AXOS is currently implemented in our E-series family of modular, non-blocking systems including the E9-2, E7-2, E3-2,
E3-16F, E5-16F and E5 business systems. By offering AXOS on the entire eSeries family of systems, Calix offers our
customers both small and large form factors that can be deployed in a variety of deployment scenario. The Calix Access system
portfolio is designed for high availability and purpose-built for the demands of access network deployments. Our access
systems are built and tested to meet or exceed network equipment-building system standards, which are a set of safety, spatial
and environmental design guidelines for communications equipment. Our products are highly compatible and designed to be
easily integrated into the existing operational and management infrastructure of CSP access networks.
Representation of the AXOS E-Series systems portfolio and where they are typically placed in the CSP network:
12
Table of Contents Traditional Products
Calix continues to support and sell our portfolio of non-AXOS and non-EXOS systems and traditional software and Compass
Cloud products that are widely deployed in customer networks. For many CSPs, the process of operationalizing new systems
and transitioning to new products can be lengthy. We expect that these products will continue to be utilized in our customers’
networks for many years. These products include:
• Compass Cloud – Consists of Flow Analyze Plus (a tool that provides an in-depth view of the traffic in CSP networks
on a real-time basis) and Consumer Connect Plus (a tool that enables service providers to remotely activate new
broadband devices and manage home networks, creating new revenue sources, improved customer satisfaction and
reduced service delivery costs) and Service Verify (a tool that gives service providers the tools to comprehensively
validate quality of service commitments for their business subscribers).
• Non-AXOS E-Series Access Systems and Nodes: A small subset of our E-Series access systems and access nodes
that are designed to support an array of advanced IP-based service and run our EXA operating system. These systems
are not supported by AXOS.
• Calix C-Series Multiservice Access Systems: Designed to support a wide array of basic voice and data services
offered by CSPs while also supporting advanced, high-speed, packet-based services such as Gigabit Ethernet, GPON,
digital subscriber line, or DSL, (including very high-speed DSL 2, or VDSL2) and advanced applications.
• Calix B-Series Access Nodes – Consist of chassis-based nodes that are designed to support an array of advanced IP-
based services offered by CSPs, including Ethernet transport and aggregation, as well as voice, data and video services
over both fiber- and copper-based network architectures.
• P-Series Optical Network Terminals and Residential Gateways: A broad range of non-EXOS customer premises
solutions, including optical network terminals, or ONTs, and residential gateways for residential and business use in
conjunction with our E-Series, C-Series and B-Series systems.
Calix Services
Calix Services assists CSPs define their strategy, implement new services and manage their networks. CSPs choose Calix
platforms because of their ability to simplify network management and support an agile service delivery model, and Calix
Services spans the entirety of the network and service delivery lifecycle. Our expertise, developed over many years of building
cutting-edge software platforms and providing critical services to our customers, positions us to be the vendor of choice. Today,
the Calix Services team delivers services to CSPs of every size and every type. We intend to expand our portfolio of service
offerings to ensure that our customers realize the full potential of our platforms.
• Calix Professional Services utilizes defined service packages to accelerate network design and deployment, optimize
performance and scalability and apply field-proven best practices, processes and tools. Use Cases for Calix
Professional Services includes the collapse of multiple network silos into a single software defined access architecture,
the seamless migration to next-generation PON architectures, the deployment of managed whole home Wi-Fi services
and facilitated OSS/BSS integration services.
• Calix Support and Managed Services: These offerings optimize CSP end-to-end processes, from operations to
technology deployment to service lifecycle management. On our new platform-based products, Calix offers three tiers
of support services that focus on software updates, the agility of operational workflows, service uptime and customer
experience. Calix support tiers are designed to provide optimal support to our customers who are adopting our
strategic platforms – Calix Cloud, EXOS and AXOS. On our traditional systems and cloud products, we continue to
offer Calix Advantage support. Calix Managed Services focus on transitioning CSPs from reactive break-fix problem
solving to a proactive analytics-driven approach. Calix technical and managed support options include technical
support, remote monitoring and managed services.
• Calix Education Services: Calix offers an array of self-service and instructor-led, remote and onsite learning and
certifications solutions to help CSPs build the skills required to successfully execute deployments and effectively run
next generation networks.
Customers
We operate a differentiated customer engagement model that focuses on direct alignment with our customers through sales,
service and support. In order to allocate our product development and sales efforts efficiently, we believe that it is critical to
target markets, customers and applications deliberately. We have traditionally targeted CSPs, which own, build and upgrade
their own access networks and value strong relationships with their systems and software suppliers.
13
Table of Contents The United States Incumbent Local Exchange Carrier, or ILEC, market is composed of three distinct “tiers” of carriers, which
we categorize based on their subscriber line counts and geographic coverage. Tier 1 CSPs are very large with wide geographic
footprints. They have greater than ten million subscriber lines, and they generally correspond with the former Regional Bell
Operating Companies. Tier 2 CSPs also operate typically within a wide geographic footprint, but are smaller in scale with
subscriber line counts that range from approximately half a million to approximately seven million subscriber lines. Their
service coverage areas are predominantly regional in scope, and therefore they are often known as Regional Local Exchange
Carriers. Tier 3 CSPs consist primarily of over 1,000 predominantly local operators (often called IOCs) typically focused on a
single community or a cluster of communities, although they also include a growing number of municipalities, electric
cooperatives, fiber over builders and wireless ISPs. These entities range in size from a few hundred to approximately half a
million subscriber lines.
To date, we have focused primarily on CSPs in the North American market. Our existing customers’ networks serve over 100
million subscriber lines. In North America, our customers span Tier 1s, 2s and 3s, including Verizon Communications Inc.;
CenturyLink, Inc., or CenturyLink; Frontier Communications Corporation; Windstream Holdings, Inc., or Windstream;
Telephone and Data Systems, Inc., or TDS; Allo Communications; HTC Communications and Grande Communications. We
serve many other major players in the broadband services market, including cable MSOs, utilities and municipalities.
We have a few large customers who have represented a significant portion of our sales in any given period. CenturyLink
accounted for 31% of total revenue in 2017, 21% in 2016 and 22% in 2015. Windstream accounted for 15% of our revenue in
2016 and less than 10% of our revenue in 2017 and 2015.
Some of our customers within the United States use or expect to use government-supported loan programs or grants to finance
capital spending. Loans and grants through Rural Utility Service, or RUS, which is a part of the United States Department of
Agriculture, are used to promote the development of telecommunications infrastructure in rural areas.
Sales to customers outside the United States represented approximately 11% of our total revenue in 2017, 9% in 2016 and 12%
in 2015. Historically, our sales outside the United States were predominantly to customers in the Caribbean, Canada and
Europe.
Customer Engagement Model
We design, market and sell our Calix Cloud and software platforms, systems and Calix Services predominantly through our
direct sales force, supported by marketing and product management personnel. We have expanded this model to include a small
number of select channel partners in North America, dozens of international channel partners, who are part of our Fiber
Forward Partner Program, and a global reseller relationship with Ericsson. Our sales effort is organized either by named
accounts or regional responsibilities. Account teams comprise sales managers, supported by solution engineers and account
managers, who work to target and sell to existing and prospective CSPs. The sales process includes analyzing CSPs’ existing
networks and identifying how they can utilize our products and services within their networks. Even in circumstances where a
channel partner is involved, our sales and marketing personnel are often selling side-by-side with the channel partner. We
believe that our direct customer engagement approach provides us with significant differentiation in the customer sales process
by aligning us more closely with our customers’ changing needs.
Research and Development
Continued investment in research and development is critical to our business. Our research and development team is composed
of engineers with expertise in hardware, software and optics. Our teams of engineers are located in our Petaluma, San Jose and
Santa Barbara facilities located in California; our Minneapolis, Minnesota facility and our Nanjing, China facility. We also
outsource a portion of our software development to domestic and international third parties. Our research and development
team is responsible for designing, developing and enhancing our Cloud and software platforms and systems, performing
product and quality assurance testing and ensuring the compatibility of our products with third-party hardware and software
products. We have made significant investments in the Calix portfolio. We intend to continue to dedicate significant resources
to research and development to develop, enhance and deliver new platform features and capabilities, including investment in
innovative technologies that support our business strategy. Our research and development expenses totaled $127.5 million in
2017, $106.9 million in 2016 and $89.7 million in 2015.
Manufacturing
We work closely with third parties to manufacture and deliver our products. Our manufacturing organization consists primarily
of supply chain managers, new product introduction personnel and test engineers. We outsource our manufacturing and order
fulfillment and tightly integrate our supply chain management and new product introduction activities. Although we have
multiple contract manufacturing arrangements and original development manufacturers, or ODMs, we primarily utilize Flex
Ltd., or Flex, as our contract manufacturer. Our relationship with Flex allows us to conserve working capital, reduce product
costs and minimize delivery lead times while maintaining high product quality. Generally, new product introduction occurs in
14
Table of Contents Flex’s facilities in Suzhou, China. Once product manufacturing quality and yields reach a satisfactory level, volume production
and testing of circuit board assemblies also occur in Suzhou, China. Final system assembly and testing are performed in Flex’s
facilities in Guadalajara, Mexico. Order fulfillment is performed by Pegasus Logistics Group, Inc. in Texas. We also evaluate
and utilize other vendors for various portions of our supply chain from time to time, including order fulfillment of our circuit
boards. This model allows us to operate with lower inventory levels while maintaining the ability to scale quickly to handle
increased order volume.
Product reliability is essential for our customers, who place a premium on continuity of service for their subscribers. We
perform rigorous in-house quality control testing to help ensure the reliability of our systems. Our internal manufacturing
organization designs, develops and implements complex test processes to help ensure the quality and reliability of our products.
The manufacturing of our products by contract manufacturers is a complex process and involves certain risks, including the
potential absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies and the
reduced control over delivery schedules, manufacturing yields, quality and costs. As such, we may experience production
problems or manufacturing delays. Additionally, shortages in components that we use in our systems are possible and our
ability to predict the availability of such components, some sourced from a single or limited source of supply, may be limited.
Our systems include some components that are proprietary in nature and only available from a single source, as well as some
components that are generally available from a number of suppliers. The lead times associated with certain components are
lengthy and preclude rapid changes in product specifications or delivery schedules. In some cases, significant time would be
required to establish relationships with alternate suppliers or providers of proprietary components. We generally do not have
long-term contracts with component providers that guarantee the supply of components or their manufacturing services. If we
experience any difficulties in managing relationships with our contract manufacturers, or any interruption in our own
operations or our contract manufacturers operations or if a supplier is unable to meet our needs, we may encounter
manufacturing delays that could impede our ability to meet our customers’ requirements and harm our business, operating
results and financial condition. Our ability to deliver products in a timely manner to our customers would be adversely
impacted materially if we needed to qualify replacements for any of the components used in our systems.
Seasonality
Fluctuations in our revenue occur due to many factors, including the varying budget cycles and seasonal buying patterns of our
customers. More specifically, our customers tend to spend less in the first fiscal quarter as they are finalizing their annual
capital spending budgets, and in certain regions, customers are also challenged by winter weather conditions that inhibit outside
fiber deployment.
Intellectual Property
Our success depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a
combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks as well as customary
contractual protections. In addition, we generally control access to and the use of our proprietary technology and other
confidential information. This protection is accomplished through a combination of internal and external controls, including
contractual protections with employees, contractors, customers and partners and through a combination of U.S. and
international intellectual property laws.
As of December 31, 2017, we held 119 U.S. patents and had 14 pending U.S. patent applications. One of the U.S. patents is
also covered by granted international patents in three countries. As of December 31, 2017, we had no pending international
patent applications. U.S. patents generally have a term of twenty years from filing. We have added to our patent portfolio since
our inception. The remaining terms on the individual patents vary from one to 19 years.
We rely on intellectual property laws as well as nondisclosure agreements, licensing arrangements and confidentiality
provisions to establish and protect our proprietary rights. U.S. patent, copyright and trade secret laws afford us only limited
protection and the laws of some foreign countries do not protect proprietary rights to the same extent. Our pending patent
applications may not result in issued patents, and the issued patents may not be enforceable. Any infringement of proprietary
rights could result in significant litigation costs. Further, any failure by us to adequately protect our proprietary rights could
result in competitors offering similar products, resulting in the loss of our competitive advantage and decreased sales.
We believe that the frequency of assertions of patent infringement continues to increase in our industry. In particular, patent
holders, including entities and organizations that purchase or hold patents to monetize such rights, assert patent infringement
claims as a competitive tactic as well as a source of revenue. Any claim of infringement from a third party, even claims without
merit, could cause us to incur substantial costs defending against such claims and could distract our management from
operating our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay
substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our
products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be
15
Table of Contents available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology,
which would require significant effort and expense and may ultimately not be successful.
Competition
The communications equipment market is highly competitive. Competition in this market is based on any one or a combination
of the following factors:
• price;
• functionality;
• existing business and customer relationships;
• the ability of products and services, including turnkey professional services capabilities, to meet customers’ immediate
and future network requirements;
• product quality;
• installation capability;
• service and support;
• scalability; and
• manufacturing capability.
We compete with a number of companies within markets that we serve, and we anticipate that competition will intensify.
Suppliers with which we compete include ADTRAN, Inc., or ADTRAN; Arris Group, Inc.; Ciena Corporation; Cisco Systems
Inc.; Huawei Technologies Co. Ltd.; Juniper Networks Inc.; Nokia Corporation and ZTE Corporation. There are also a number
of smaller companies with which we compete in various geographic or vertical markets, including DASAN Zhone Solutions,
Inc. While most of these smaller competitors lack broad national scale and product portfolios, they can offer strong competition
on a deal-by-deal basis. As we expand into adjacent markets, we expect to encounter new competitors. Many of our
competitors have substantially greater name recognition, manufacturing capacity and technical, financial and marketing
resources as well as better established relationships with CSPs than we do. Many of our competitors have greater resources to
develop products or pursue acquisitions and more experience in developing or acquiring new products and technologies and in
creating market awareness for their products and technologies. In addition, a number of our competitors have the financial
resources to offer competitive products at below market pricing levels that could prevent us from competing effectively.
Employees
As of December 31, 2017, we employed a total of 1,031 employees, of which 762 employees were located in the United
States. Our United States employees are not represented by a labor union with respect to their employment with us. Two of our
French employees are subject to collective bargaining arrangements. We have not experienced any work stoppages, and we
consider our relations with our employees to be good.
Corporate Information
Calix, Inc., a Delaware corporation, was founded in August 1999. Our principal executive offices are located at 1035 N.
McDowell Boulevard, Petaluma, California 94954, and our telephone number is (707) 766-3000. Our website address is
www.calix.com. We do not incorporate the information on or accessible through our website into this Annual Report on Form
10-K, and you should not consider any information on, or that can be accessed through, our website as part of this Annual
Report on Form 10-K. Calix®, the Calix logo design, E3®, E5®, E7®, E9 TM, Calix Cloud SM, Compass®, Consumer Connect
SM, Fiber Forward TM and other trademarks or service marks of Calix appearing in this Annual Report on Form 10-K are the
property of Calix. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-
K are the property of the respective holders. Calix is subject to the information and periodic reporting requirements of the
Securities Exchange Act of 1934, or Exchange Act, and files periodic reports, proxy statements and other information with the
Securities and Exchange Commission, or SEC. Such periodic reports, proxy statements and other information are available for
inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549 or may be obtained
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy
statements and other information regarding issuers that file electronically with the SEC. We post on the Investor Relations page
of our website, www.calix.com, a link to our filings with the SEC free of charge, as soon as reasonably practical after they are
filed electronically with the SEC.
16
Table of Contents ITEM 1A.
Risk Factors
We have identified the following additional risks and uncertainties that may affect our business, financial condition and/or
results of operations. Investors should carefully consider the risks described below, together with the other information set
forth in this Annual Report on Form 10-K, before making any investment decision. The risks described below are not the only
ones we face. Additional risks not currently known to us or that we currently believe are immaterial may also significantly
impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock
could decline due to any of these risks, and investors may lose all or part of their investment.
Risks Related to Our Business and Industry
Our markets are rapidly changing, which makes it difficult to predict our future revenue and plan our expenses
appropriately.
We compete in markets characterized by rapid technological change, changing needs of CSPs, evolving industry standards and
frequent introductions of new products and services. We invest significant amounts to pursue innovative technologies that we
believe would be adopted by CSPs. In addition, on an ongoing basis we expect to reposition our product and service offerings
and introduce new products and services as we encounter rapidly changing CSP requirements and increasing competitive
pressures. If we cannot keep pace with rapid technological developments to meet our customers’ needs and compete with
evolving industry standards or if the technologies we choose to invest in fail to meet customer needs or are not adopted by
customers, the use of our products and our revenue could decline, making it difficult to forecast our future revenue and plan our
operating expenses appropriately.
We have a history of losses, and we may not be able to generate positive operating income and positive cash flows in the
future.
We have experienced net losses in each year of our existence. We incurred net losses of $83.0 million in 2017, $27.4 million in
2016 and $26.3 million in 2015. As of December 31, 2017, we had an accumulated deficit of $667.4 million.
We expect to continue to incur significant expenses and cash outlays for research and development associated with the
platforms and systems that make up our product portfolio, growth of our cloud and services operations, investments in
innovative technologies, expansion of our product portfolio, sales and marketing, customer support and general and
administrative functions as we expand our business and operations and target new customer segments, primarily larger CSPs
including cable MSOs. Given our growth rate and the intense competitive pressures we face, we may be unable to control our
operating costs.
We cannot guarantee that we will achieve profitability in the future. We will have to generate and sustain significant and
consistent increased revenue, while continuing to control our expenses, in order to achieve and then maintain profitability. We
may also incur significant losses in the future for a number of reasons, including the risks discussed in this “Risk Factors”
section and other factors that we cannot anticipate. We have incurred higher than expected costs associated with the growth of
our professional services business and, if we are unable to scale that business and attain operational efficiencies, we will
continue to incur losses. If we are unable to generate positive operating income and positive cash flows from operations, our
liquidity, gross margin, results of operations and financial condition will be adversely affected. If we are unable to generate
cash flows to support our operational needs, we may need to seek other sources of liquidity, including additional borrowings, to
support our working capital needs. In addition, we may choose to seek other sources of liquidity even if we believe we have
generated sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may
be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of
liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-
cutting measures, all of which would adversely impact our business and growth.
Our quarterly and annual operating results may fluctuate significantly, which may make it difficult to predict our future
performance and could cause the market price of our stock to decline.
A number of factors, many of which are outside of our control, may cause or contribute to significant fluctuations in our
quarterly and annual operating results. These fluctuations may make financial planning and forecasting difficult. 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. If our revenue or operating results fall below the expectations of investors or securities
analysts, or below any guidance we may provide to the market, the market price of our stock would likely decline. Moreover,
we may experience delays in recognizing revenue under applicable revenue recognition rules. For example, revenue associated
with large turnkey network improvement projects, which include projects that are funded by the CAF program, is generally
deferred until customer acceptance is received and may be subject to delays, rework requirements and unexpected costs, among
other uncertainties. Certain government-funded contracts, such as those funded by U.S. Department of Agriculture’s RUS, also
include acceptance and administrative requirements that delay revenue recognition. The extent of these delays and their impact
17
Table of Contents on our revenue can fluctuate considerably depending on the number and size of purchase orders under these contracts for a
given time period. In addition, unanticipated decreases in our available liquidity due to fluctuating operating results could limit
our growth and delay implementation of our expansion plans.
In addition to the other risk factors listed in this “Risk Factors” section, factors that have in the past and may continue to
contribute to the variability of our operating results include:
• our ability to predict our revenue and reduce and control product costs, including larger scale turnkey network
improvement projects that may span several quarters;
• our ability to increase our sales to larger CSPs globally;
• the capital spending patterns of CSPs and any decrease or delay in capital spending by CSPs due to macro-economic
conditions, regulatory uncertainties or other reasons;
• the impact of government-sponsored programs on our customers;
• intense competition;
• our ability to develop new products or enhancements that support technological advances and meet changing CSP
requirements;
• our ability to achieve market acceptance of our products and CSPs’ willingness to deploy our new products;
• the concentration of our customer base as well as our dependence on a limited number of key customers;
• the length and unpredictability of our sales cycles and timing of orders;
• our lack of long-term, committed-volume purchase contracts with our customers;
• our exposure to the credit risks of our customers;
• fluctuations in our gross margin;
• the interoperability of our products with CSP networks;
• our dependence on sole-, single- and limited-source suppliers;
• our ability to manage our relationships with our third-party vendors, including contract manufacturers, ODMs,
logistics providers, component suppliers and development partners;
• our ability to forecast our manufacturing requirements and manage our inventory;
• our products’ compliance with industry standards;
• our ability to expand our international operations;
• our ability to protect our intellectual property and the cost of doing so;
• the quality of our products, including any undetected hardware defects or bugs in our software;
• our ability to estimate future warranty obligations due to product failure rates;
• our ability to obtain necessary third-party technology licenses at reasonable costs;
• the regulatory and physical impacts of climate change and other natural events;
• the attraction and retention of qualified employees and key management personnel;
• our ability to build and sustain an adequate and secure information technology infrastructure; and
• our ability to maintain proper and effective internal controls.
Our gross margin may fluctuate over time, and our current level of gross margin may not be sustainable.
Our current level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:
• changes in customer, geographic or product mix, including the mix of configurations within each product group;
• the pursuit or addition of new large customers;
• increased price competition, including the impact of customer discounts and rebates;
• our ability to reduce and control product costs;
• an increase in revenue mix toward services, which typically have lower margin;
• changes in component pricing;
• changes in contract manufacturer rates;
• charges incurred due to inventory holding periods if parts ordering does not correctly anticipate product demand;
• introduction of new products and new technologies, which may involve higher component costs;
• our ability to scale our services business in order to gain desired efficiencies;
• changes in shipment volume;
• changes in or increased reliance on distribution channels;
• potential liabilities associated with increased reliance on third-party vendors;
• increased expansion efforts into new or emerging markets;
• increased warranty costs;
• excess and obsolete inventory and inventory holding charges;
• expediting costs incurred to meet customer delivery requirements; and
• potential costs associated with contractual liquidated damages obligations.
18
Table of Contents An increase in revenue mix towards services will adversely affect our gross margin.
Customers are demanding greater professional and support services for our products, which usually have a lower gross margin
than product purchases. In particular, we have experienced increased demand for professional services associated with network
improvement projects, which typically are turnkey projects whereby we supply products and related professional services such
as network planning, product installation, testing and network turn up. Revenue recognized from such professional services
may be delayed because of the timing of completion and acceptance of a project or milestone, including third-party delays that
may be outside our control. Additionally, if we are unable to meet project deadlines for professional and support services due to
our suppliers’ inability to meet our demands for components or for any other reasons, we will incur additional costs, including
higher premiums to source necessary components, additional costs and expedited fees to meet project deadlines, all of which
would negatively impact our gross margin. We also rely upon third-party subcontractors to assist with some of our services
projects, which generally result in higher costs and increased risk of cost overruns, including expenditures for costly rework,
which would also negatively impact our gross margin. Furthermore, we incurred ramp up costs to grow our professional service
business to meet customer demand, but we may not achieve the desired efficiencies and scale in our professional services
business, which will have an adverse impact on our gross margin. Increases in professional services as a proportion of our
revenue mix have resulted in lower overall gross margin and may continue to result in lower overall gross margin in future
periods. This negative impact on gross margin is exacerbated in periods where we experience accelerated levels of activity to
meet project requirements and customer deadlines. Moreover, the increase in our professional services projects has resulted in
increased deferred costs, including costs directly associated with the delivery of the professional services for the arrangement,
that are recognized as cost of revenue only when all revenue recognition criteria are met for the arrangement. In the event some
or all of such deferred costs are deemed unrecoverable, including as a result of cost overruns, we will incur additional charges
to cost of revenue in the period such deferred costs are determined to be unrecoverable. Any charge to cost of revenue for
deferred costs determined to be unrecoverable would negatively impact our gross margin.
Our business is dependent on the capital spending patterns of CSPs, and any decrease or delay in capital spending by CSPs
in response to economic conditions, seasonality, uncertainties associated with the implementation of regulatory reform or
otherwise would reduce our revenue and harm our business.
Demand for our products depends on the magnitude and timing of capital spending by CSPs as they construct, expand, upgrade
and maintain their access networks. Any future economic downturn may cause a slowdown in telecommunications industry
spending, including in the specific geographies and markets in which we operate. In response to reduced consumer spending,
challenging capital markets or declining liquidity trends, capital spending for network infrastructure projects of CSPs could be
delayed or canceled. In addition, capital spending is cyclical in our industry, sporadic among individual CSPs and can change
on short notice. As a result, we may not have visibility into changes in spending behavior until nearly the end of a given
quarter.
CSP spending on network construction, maintenance, expansion and upgrades is also affected by reductions in their budgets,
delays in their purchasing cycles, access to external capital (such as government grants and loan programs or the capital
markets) and seasonality and delays in capital allocation decisions. For example, our CSP customers tend to spend less in the
first quarter as they are still finalizing their annual budgets and in certain regions customers are also challenged by winter
weather conditions that inhibit outside fiber deployment, resulting in weaker demand for our products in the first quarter of our
fiscal year. Also, softness in demand across any of our customer markets, including due to macro-economic conditions beyond
our control or uncertainties associated with the implementation of regulatory reform, has in the past and could in the future lead
to unexpected slowdown in capital expenditures by service providers.
Many factors affecting our results of operations are beyond our control, particularly in the case of large CSP orders and
network infrastructure deployments involving multiple vendors and technologies where the achievement of certain thresholds
for acceptance is subject to the readiness and performance of the CSP or other providers and changes in CSP requirements or
installation plans. Further, CSPs may not pursue infrastructure upgrades that require our access systems and software.
Infrastructure improvements may be delayed or prevented by a variety of factors including cost, regulatory obstacles (including
uncertainties associated with the implementation of regulatory reforms), mergers, lack of consumer demand for advanced
communications services and alternative approaches to service delivery. Reductions in capital expenditures by CSPs,
particularly CSPs that are significant customers, may have a material negative impact on our revenue and results of operations
and slow our rate of revenue growth. As a consequence, our results for a particular period may be difficult to predict, and our
prior results are not necessarily indicative of results in future periods.
Government-sponsored programs could impact the timing and buying patterns of CSPs, which may cause fluctuations in
our operating results.
We sell to CSPs, which include U.S.-based IOCs, which have revenue that is particularly dependent upon interstate and
intrastate access charges and federal and state subsidies. The Federal Communications Commission, or FCC, and some states
may consider changes to such payments and subsidies, and these changes could reduce IOC revenue. Furthermore, many IOCs
19
Table of Contents use or expect to use government-supported loan programs or grants, such as RUS loans and grants, to finance capital spending.
Changes to these programs, including uncertainty from government and administrative change, could reduce the ability of IOCs
to access capital and thus reduce our revenue opportunities.
Many of our customers were awarded grants or loans under government stimulus programs such as the Broadband Stimulus
programs under the American Recovery and Reinvestment Act of 2009, or ARRA, and the funds distributed under the FCC’s
CAF program, and have purchased and will continue to purchase products from us or other suppliers while such programs and
funding are available. However, customers may substantially curtail purchases as funding winds down or as planned purchases
are completed.
In addition, any changes in government regulations and subsidies could cause our customers to change their purchasing
decisions, which could have an adverse effect on our operating results and financial condition.
We face intense competition that could reduce our revenue and adversely affect our financial results.
The market for our products is highly competitive, and we expect competition from both established and new companies to
increase. Our competitors include companies such as ADTRAN, Arris Group, Inc., Ciena Corporation, Cisco Systems Inc.,
Huawei Technologies Co. Ltd., Juniper Networks Inc., Nokia Corporation, ZTE Corporation and DASAN Zhone Solutions,
Inc., among others.
Our ability to compete successfully depends on a number of factors, including:
• the successful development of new products;
• our ability to anticipate CSP and market requirements and changes in technology and industry standards;
• our ability to differentiate our products from our competitors’ offerings based on performance, cost-effectiveness or
other factors;
• our ongoing ability to successfully integrate acquired product lines and customer bases into our business;
• our ability to meet increased customer demand for professional services associated with network improvement
projects;
• our ability to gain customer acceptance of our products; and
• our ability to market and sell our products.
The broadband access equipment market has undergone and continues to undergo consolidation, as participants have merged,
made acquisitions or entered into partnerships or other strategic relationships with one another to offer more comprehensive
solutions than they individually had offered. Recent examples include Arris’ acquisition of Pace plc in January 2016; Nokia’s
acquisition of Alcatel-Lucent in January 2016; and the merger of DASAN Zhone Solutions with DASAN Network Solutions in
September 2016. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an
evolving industry.
Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases
and significantly greater financial, technical, sales, marketing and other resources than we do and are better positioned to
acquire and offer complementary products and services. Many of our competitors have broader product lines and can offer
bundled solutions, which may appeal to certain customers. Our competitors may also invest additional resources in developing
more compelling product offerings. Potential customers may also prefer to purchase from their existing suppliers rather than a
new supplier, regardless of product performance or features, because the products that we and our competitors offer require a
substantial investment of time and funds to qualify and install.
Some of our competitors may offer substantial discounts or rebates to win new customers or to retain existing customers. If we
are forced to reduce prices in order to secure customers, we may be unable to sustain gross margin at desired levels or achieve
profitability. Competitive pressures could result in increased pricing pressure, reduced profit margin, increased sales and
marketing expenses and failure to increase, or the loss of, market share, any of which could reduce our revenue and adversely
affect our financial results.
Product development is costly, and if we fail to develop new products or enhancements that meet changing CSP
requirements, we could experience lower sales.
Our industry is characterized by rapid technological advances, frequent new product introductions, evolving industry standards
and unanticipated changes in subscriber requirements. Our future success will depend significantly on our ability to anticipate
and adapt to such changes, and to offer, on a timely and cost-effective basis, products and features that meet changing CSP
demands and industry standards. We intend to continue making significant investments in developing new products and
enhancing the functionality of our existing products. Developing our products is expensive and complex and involves
uncertainties. We may not have sufficient resources to successfully manage lengthy product development cycles. Our research
and development expenses were $127.5 million, or 25% of our revenue, in 2017, $106.9 million, or 23% of our revenue, in
2016 and $89.7 million, or 22% of our revenue, in 2015. We believe that we must continue to dedicate a significant amount of
resources to our research and development efforts, including increased reliance on third-party development partners, to
20
Table of Contents maintain our competitive position. These investments may take several years to generate positive returns, if ever. In addition,
we may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development,
introduction or marketing of new products and enhancements. If we fail to meet our development targets, demand for our
products will decline.
In addition, the introduction of new or enhanced products also requires that we manage the transition from older products to
these new or enhanced products in order to minimize disruption in customer ordering patterns, fulfill ongoing customer
commitments and ensure that adequate supplies of new products are available for delivery to meet anticipated customer
demand. If we fail to maintain compatibility with other software or equipment found in our customers’ existing and planned
networks, we may face substantially reduced demand for our products, which would reduce our revenue opportunities and
market share. Moreover, as customers complete infrastructure deployments, they may require greater levels of service and
support than we have provided in the past. We may not be able to provide products, services and support to compete effectively
for these market opportunities. If we are unable to anticipate and develop new products or enhancements to our existing
products on a timely and cost-effective basis, we could experience lower sales, which would harm our business.
Our new products are early in their life cycles and subject to uncertain market demand. If our customers are unwilling to
install our new products or deploy our new services, or we are unable to achieve market acceptance of our new products,
our business and financial results will be harmed.
Our new products are early in their life cycles and subject to uncertain market demand. They also may face obstacles in
manufacturing, deployment and competitive response. Potential customers may choose not to invest the additional capital
required for initial system deployment of new products. In addition, demand for new products is dependent on the success of
our customers in deploying and selling advanced services to their subscribers. Our products support a variety of advanced
broadband services, such as high-speed Internet, Internet protocol television, mobile broadband, high-definition video and
online gaming. If subscriber demand for such services does not grow as expected or declines or our customers are unable or
unwilling to deploy and market these services, demand for our products may decrease or fail to grow at rates we anticipate.
Our customer base is concentrated, and there are a limited number of potential customers for our products. The loss of any
of our key customers, a decrease in purchases by our key customers or our inability to grow our customer base would
adversely impact our revenue and results of operations and any delays in payment by a key customer could negatively
impact our cash flows and working capital.
Historically, a large portion of our sales has been to a limited number of customers. For example, one customer accounted for
31% of our revenue in 2017, 21% of our revenue in 2016 and 22% of our revenue in 2015, and another customer accounted for
15% of our revenue in 2016. However, we cannot anticipate the level of purchases in the future by these customers. Customer
purchases may be delayed or impacted due to financial difficulties, spending cuts or corporate consolidations. For example, one
of our key customers recently completed a large acquisition, which continues to disrupt its normal expenditure plans, including
continued delays and reduction in purchases of our products and services as it finalizes its transition activities and corporate
strategies. Any decrease or delay in purchases and/or capital expenditure plans of any of our key customers, or our inability to
grow our sales with existing customers, may have a material negative impact on our revenue and results of operations.
We anticipate that a large portion of our revenue will continue to depend on sales to a limited number of customers. In addition,
some larger customers may demand discounts and rebates or desire to purchase their access systems and software from multiple
providers. As a result of these factors, our future revenue opportunities may be limited, our margins could be reduced and our
profitability may be adversely impacted. The loss of, or reduction in, orders from any key customer would significantly reduce
our revenue and harm our business. Furthermore, delays in payment and/or extended payment terms from any of our key or
larger customers could have a material negative impact on our cash flows and working capital to support our business
operations.
Furthermore, in recent years, the CSP market has undergone substantial consolidation. Industry consolidation generally has
negative implications for equipment suppliers, including a reduction in the number of potential customers, a decrease in
aggregate capital spending and greater pricing leverage on the part of CSPs over equipment suppliers. Continued consolidation
of the CSP industry and among ILEC and IOC customers, who represent a large part of our business, could make it more
difficult for us to grow our customer base, increase sales of our products and maintain adequate gross margin.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our
sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to
fluctuate significantly.
The timing of our revenue is difficult to predict. Our sales efforts often involve educating CSPs about the use and benefits of
our products. CSPs typically undertake a significant evaluation process, which frequently involves not only our products but
also those of our competitors and results in a lengthy sales cycle. Sales cycles for larger customers are relatively longer and
require considerably more time and expense. We spend substantial time, effort and money in our sales efforts without any
21
Table of Contents assurance that our efforts will produce sales. In addition, product purchases are frequently subject to budget constraints,
multiple approvals and unplanned administrative, processing and other delays. The timing of revenue related to sales of
products and services that have installation requirements may be difficult to predict due to interdependencies that may be
beyond our control, such as CSP testing and turn-up protocols or other vendors’ products, services or installations of equipment
upon which our products and services rely. In addition, larger projects may have longer periods between project
commencement and completion and recognition of revenue. Such delays may result in fluctuations in our quarterly revenue. If
sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, we may not achieve our
revenue forecasts and our financial results would be adversely affected.
Our focus on CSPs with relatively small networks limits our revenue from sales to any one customer and makes our future
operating results difficult to predict.
A large portion of our sales efforts continue to be focused on CSPs with relatively small networks, cable MSOs and selected
international CSPs. Our current and potential customers generally operate small networks with limited capital expenditure
budgets. Accordingly, we believe the potential revenue from the sale of our products to any one of these customers is limited.
As a result, we must identify and sell products to new customers each quarter to continue to increase our sales. In addition, the
spending patterns of many of our customers are characterized by small and sporadic purchases. As a consequence, we have
limited backlog and will likely continue to have limited visibility into future operating results.
We do not have long-term, committed-volume purchase contracts with our customers, and therefore have no guarantee of
future revenue from any customer.
We typically have not entered into long-term, committed-volume purchase contracts with our customers, including our key
customers which account for a material portion of our revenue. As a result, any of our customers may cease to purchase our
products at any time. In addition, our customers may attempt to renegotiate terms of sale, including price and quantity. If any of
our key customers stop purchasing our access platforms, systems and software for any reason, our business and results of
operations would be harmed.
Our efforts to increase our sales to CSPs globally, including cable MSOs, may be unsuccessful.
Our sales and marketing efforts have been focused on CSPs in North America. Part of our long-term strategy is to increase sales
to CSPs globally, including cable MSOs. We have devoted and continue to devote substantial technical, marketing and sales
resources to the pursuit of these larger CSPs, who have lengthy equipment qualification and sales cycles, without any assurance
of generating sales. In particular, sales to these larger CSPs may require us to upgrade our products to meet more stringent
performance criteria and interoperability requirements, develop new customer-specific features or adapt our product to meet
international standards. For example, we have been engaged by a large CSP in testing and laboratory trials for our NG-PON2
technology along with our partner Ericsson. We have invested and expect to continue to invest considerable time, effort and
expenditures, including investment in product research and development, related to this opportunity without any assurance that
our efforts will produce orders or revenue. If we are unable to successfully increase our sales to larger CSPs, our operating
results, financial condition, cash flows and long-term growth may be negatively impacted.
We are exposed to the credit risks of our customers; if we have inadequately assessed their creditworthiness, we may have
more exposure to accounts receivable risk than we anticipate. Failure to collect our accounts receivable in amounts that we
anticipate could adversely affect our operating results and financial condition.
In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to
risks associated with uncollectible accounts receivable. We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability or unwillingness of our customers to make required payments. However, these allowances are based
on our judgment and a variety of factors and assumptions.
We perform credit evaluations of our customers’ financial condition. However, our evaluation of the creditworthiness of
customers may not be accurate if they do not provide us with timely and accurate financial information or if their situations
change after we evaluate their credit. While we attempt to monitor these situations carefully, adjust our allowances for doubtful
accounts as appropriate and take measures to collect accounts receivable balances, we have written down accounts receivable
and written off doubtful accounts in prior periods and may be unable to avoid additional write-downs or write-offs of doubtful
accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they
occur, and could harm our financial condition.
Our products must interoperate with many software applications and hardware products found in our customers’ networks.
If we are unable to ensure that our products interoperate properly, our business will be harmed.
Our products must interoperate with our customers’ existing and planned networks, which often have varied and complex
specifications, utilize multiple protocol standards, include software applications and products from multiple vendors and
contain multiple generations of products that have been added over time. As a result, we must continually ensure that our
22
Table of Contents products interoperate properly with these existing and planned networks. To meet these requirements, we must undertake
development efforts that require substantial capital investment and employee resources. We may not accomplish these
development goals quickly or cost-effectively, if at all. If we fail to maintain compatibility with other software or equipment
found in our customers’ existing and planned networks, we may face substantially reduced demand for our products, which
would reduce our revenue opportunities and market share.
We have entered into interoperability arrangements with a number of equipment and software vendors for the use or integration
of their technology with our products. These arrangements give us access to and enable interoperability with various products
that we do not otherwise offer. If these relationships fail, we may have to devote substantially more resources to the
development of alternative products and processes and our efforts may not be as effective as the combined solutions under our
current arrangements. In some cases, these other vendors are either companies that we compete with directly or companies that
have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of
those customers. Some of our competitors have stronger relationships with some of our existing and other potential
interoperability partners, and as a result, our ability to have successful interoperability arrangements with these companies may
be harmed. Our failure to establish or maintain key relationships with third-party equipment and software vendors may harm
our ability to successfully sell and market our products.
The quality of our support and services offerings is important to our customers, and if we fail to continue to offer high
quality support and services, we could lose customers, which would harm our business.
Once our products are deployed within our customers’ networks, they depend on our support organization to resolve any issues
relating to those products. A high level of support is critical for the successful marketing and sale of our products. Furthermore,
our services to customers have increasingly broadened to include network design and services to deploy our products within
our customers’ networks, such as our professional services associated with turnkey network improvement projects for our
customers. If we do not effectively assist our customers in deploying our products, succeed in helping them quickly resolve
post-deployment issues or provide effective ongoing support, it could adversely affect our ability to sell our products to existing
customers and harm our reputation with potential new customers. As a result, our failure to maintain high quality support and
services could result in the loss of customers, which would harm our business.
Our products are highly technical and may contain undetected hardware defects or software bugs, which could harm our
reputation and adversely affect our business.
Our products are highly technical and, when deployed, are critical to the operation of many networks. Our products have
contained and may contain undetected defects, bugs or security vulnerabilities. Some defects in our products may only be
discovered after a product has been installed and used by customers and may in some cases only be detected under certain
circumstances or after extended use. Any errors, bugs, defects or security vulnerabilities discovered in our products after
commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and
warranty and retrofit costs, any of which could adversely affect our business, operating results and financial condition. In
addition, we could face claims for product liability, tort or breach of warranty. Our contracts with customers contain provisions
relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit,
is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In
addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or
at all, our business, operating results and financial condition could be adversely impacted.
Our estimates regarding future warranty or product obligations may change due to product failure rates, shipment volumes,
field service obligations and rework costs incurred in correcting product failures. If our estimates change, the liability for
warranty or product obligations may be increased, impacting future cost of revenue.
Our products are highly complex, and our product development, manufacturing and integration testing may not be adequate to
detect all defects, errors, failures and quality issues. Quality or performance problems for products covered under warranty
could adversely impact our reputation and negatively affect our operating results and financial position. The development and
production of new products with high complexity often involves problems with software, components and manufacturing
methods. If significant warranty or other product obligations arise due to reliability or quality issues arising from defects in
software, faulty components or improper manufacturing methods, our operating results and financial position could be
negatively impacted by:
• cost associated with fixing software or hardware defects;
• high service and warranty expenses;
• high inventory obsolescence expense;
• delays in collecting accounts receivable;
• payment of liquidated damages for performance failures; and
• declining sales to existing customers.
23
Table of Contents We do not have manufacturing capabilities, and therefore we depend upon a small number of outside contract
manufacturers and ODMs. We do not have supply contracts with all of these contract manufacturers and ODMs;
consequently, our operations could be disrupted if we encounter problems with any of these contract manufacturers or
ODMs.
We do not have internal manufacturing capabilities and rely upon a small number of contract manufacturers and ODMs to build
our products. In particular, we rely on Flex for the manufacture of most of our products. Our reliance on a small number of
contract manufacturers and ODMs makes us vulnerable to possible capacity constraints and reduced control over component
availability, delivery schedules, manufacturing yields and costs.
We do not have supply contracts with some of our contract manufacturers and ODMs. Consequently, these contract
manufacturers are not obligated to supply products to us for any specific period, in any specific quantity or at any certain price.
In addition, we are dependent upon our contract manufacturers’ and ODMs’ quality systems and controls and the adherence of
such systems and controls to applicable standards. If our contract manufacturers and ODMs fail to maintain levels of quality
manufacture suitable for us or our customers, we may incur higher costs and our relationships with our customers may be
harmed.
The revenue that Flex and other contract manufacturers generate from our orders represent a relatively small percentage of
those manufacturers’ overall revenue. As a result, fulfilling our orders may not be considered a priority if such manufacturers
are constrained in their ability to fulfill all of their customer obligations in a timely manner. In addition, a substantial part of our
manufacturing is done in our contract manufacturer and ODM facilities that are located outside of the United States, including
Flex’s facilities. We believe that the location of these facilities outside of the United States increases supply risk, including the
risk of supply interruptions or reductions in manufacturing quality or controls. Moreover, regulatory changes or government
actions relating to export or import regulations, economic sanctions or related legislation, or the possibility of such changes or
actions, may create uncertainty or result in changes to or disruption in our operations with our contract manufacturers.
If Flex or any of our other contract manufacturers or ODMs were unable or unwilling to continue manufacturing our products
in required volumes and at high quality levels, we would have to identify, qualify and select acceptable alternative contract
manufacturers. An alternative contract manufacturer may not be available to us when needed or may not be in a position to
satisfy our production requirements at commercially reasonable prices and quality. Any significant interruption in
manufacturing would require us to reduce our supply of products to our customers, which in turn would reduce our revenue and
harm our relationships with our customers.
We and our business partners, including our contract manufacturers and suppliers, depend on sole-source, single-source
and limited-source suppliers for some key components. If we and our business partners are unable to source these
components on a timely basis, we will not be able to deliver our products to our customers.
We and our business partners, including our contract manufacturers and suppliers, depend on sole-source, single-source and
limited-source suppliers for some key components of our products. For example, certain of our application-specific integrated
circuit processors and resistor networks are purchased from sole-source suppliers.
Any of the sole-source, single-source and limited-source suppliers upon whom we or our business partners rely could stop
producing our components, cease operations, or enter into exclusive arrangements with our competitors. We may also
experience shortages or delay of critical components as a result of growing demand in the industry or other sectors. For
example, growth in electronic and IoT devices, wireless products, automotive electronics and artificial intelligence all drive
increased demand for certain components, such as chipsets and memory products, which may result in lower availability and
increased prices for such components.
In addition, purchase volumes of such components may be too low for Calix to be considered a priority customer by these
suppliers. As a result, these suppliers could stop selling to us and our business partners at commercially reasonable prices, or at
all. Any such interruption or delay may force us and our business partners to seek similar components from alternative sources,
which may not be available. Switching suppliers could also require that we redesign our products to accommodate new
components and could require us to re-qualify our products with our customers, which would be costly and time-consuming.
Any interruption in the supply of sole-source, single-source or limited-source components for our products would adversely
affect our ability to meet scheduled product deliveries to our customers, could result in lost revenue or higher expenses and
would harm our business.
We utilize domestic and international third-party vendors to assist in the design, development and manufacture of certain of
our products, and to provide logistics services in the distribution of our products. If these vendors fail to provide these
services, we could incur additional costs and delays or lose revenue.
From time to time we enter into ODM, original equipment manufacturer, or OEM, and development agreements for the design,
development and/or manufacture of certain of our products in order to enable us to offer products on an accelerated basis. For
example, a third party assisted in the design and currently manufactures portions of our E-Series systems and nodes family. We
24
Table of Contents also rely upon limited third party vendors for logistics services to distribute our products. If any of these third-party vendors
stop providing their services, for any reason, we would have to obtain similar services from alternative sources, which may not
be available on commercially reasonable terms, if at all. We also have limited control over disruptions that may occur at the
facilities of these third-party partners, such as supply interruptions or manufacturing quality that may occur at ODM and OEM
facilities and strikes or systems failures that may interrupt transportation and logistics services. In addition, switching
development firms or manufacturers could require us to extend our development timeline and/or re-qualify our products with
our customers, which would also be costly and time-consuming. Any interruption in the development, supply or distribution of
our products would adversely affect our ability to meet scheduled product deliveries to our customers and could result in lost
revenue or higher costs, which would negatively impact our margins and operating results and harm our business.
If we fail to forecast our manufacturing requirements accurately or fail to properly manage our inventory with our contract
manufacturers, we could incur additional costs, experience manufacturing delays and lose revenue.
We bear inventory risk under our contract manufacturing arrangements and our ODM and OEM agreements. Lead times for the
materials and components that we order through our manufacturers vary significantly and depend on numerous factors,
including the specific supplier, contract terms and market demand for a component at a given time. Lead times for certain key
materials and components incorporated into our products are currently lengthy, requiring our manufacturers to order materials
and components several months in advance of manufacture.
If we overestimate our production requirements, our manufacturers may purchase excess components and build excess
inventory. If our manufacturers, at our request, purchase excess components that are unique to our products or build excess
products, we could be required to pay for these excess parts or products and their storage costs. Historically, we have
reimbursed our primary contract manufacturers for a portion of inventory purchases when our inventory has been rendered
excess or obsolete. Examples of when inventory may be rendered excess or obsolete include manufacturing and engineering
change orders resulting from design changes or in cases where inventory levels greatly exceed projected demand. If we incur
payments to our manufacturers associated with excess or obsolete inventory, this may have an adverse effect on our gross
margin, financial condition and results of operations.
We have experienced unanticipated increases in demand from customers, which resulted in delayed shipments and variable
shipping patterns. If we underestimate our product requirements, our manufacturers may have inadequate component inventory,
which could interrupt manufacturing of our products, increase our cost of product revenue associated with expedite fees and air
freight and/or result in delays or cancellation of sales.
As the market for our products evolves, changing customer requirements may adversely affect the valuation of our
inventory.
Customer demand for our products can change rapidly in response to market and technology developments. Demand can be
affected not only by customer- or market-specific issues, but also by broader economic and/or geopolitical factors. We may,
from time to time, adjust inventory valuations downward in response to our assessment of demand from our customers for
specific products or product lines. The related excess inventory charges may have an adverse effect on our gross margin,
financial condition and results of operations.
If we fail to comply with evolving industry standards, sales of our existing and future products would be adversely affected.
The markets for our products are characterized by a significant number of standards, both domestic and international, which are
evolving as new technologies are developed and deployed. As we expand into adjacent markets and increase our international
footprint, we are likely to encounter additional standards. Our products must comply with these standards in order to be widely
marketable. In some cases, we are compelled to obtain certifications or authorizations before our products can be introduced,
marketed or sold in new markets or to customers that we have not historically served. For example, our ability to maintain
Operations System Modification for Intelligent Network Elements certification for our products will affect our ongoing ability
to continue to sell our products to Tier 1 CSPs.
In addition, our ability to expand our international operations and create international market demand for our products may be
limited by regulations or standards adopted by other countries that may require us to redesign our existing products or develop
new products suitable for sale in those countries. Although we believe our products are currently in compliance with domestic
and international standards and regulations in countries in which we currently sell, we may not be able to design our products
to comply with evolving standards and regulations in the future. This ongoing evolution of standards may directly affect our
ability to market or sell our products. Further, the cost of complying with the evolving standards and regulations or the failure
to obtain timely domestic or foreign regulatory approvals or certifications could prevent us from selling our products where
these standards or regulations apply, which would result in lower revenue and lost market share.
25
Table of Contents We may be unable to successfully expand our international operations. In addition, we may be subject to a variety of
international risks that could harm our business.
We currently generate most of our sales from customers in North America and have limited experience marketing, selling and
supporting our products and services outside North America or managing the administrative aspects of a worldwide operation.
Our ability to expand our international operations is dependent on our ability to create or maintain international market demand
for our products. In addition, as we expand our operations internationally, our support organization will face additional
challenges including those associated with delivering support, training and documentation in languages other than English. If
we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a
timely manner, our business, financial condition and results of operations may suffer.
In the course of expanding our international operations and operating overseas, we will be subject to a variety of risks,
including:
• differing regulatory requirements, including tax laws, trade laws, data privacy laws, labor regulations, tariffs, export
quotas, custom duties or other trade restrictions;
• liability or damage to our reputation resulting from corruption or unethical business practices in some countries;
• exposure to effects of fluctuations in currency exchange rates if, over time, international customer contracts are
increasingly denominated in local currencies;
• longer collection periods and difficulties in collecting accounts receivable;
• greater difficulty supporting and localizing our products;
• different or unique competitive pressures as a result of, among other things, the presence of local equipment
suppliers;
• challenges inherent in efficiently managing an increased number of employees over large geographic distances,
including the need to implement appropriate systems, policies and compensation, benefits and compliance
programs;
• limited or unfavorable intellectual property protection;
• risk of change in international political or economic conditions, terrorist attacks or acts of war; and
• restrictions on the repatriation of earnings.
We engage resellers to promote, sell, install and support our products to some customers in North America and
internationally. Their failure to do so or our inability to recruit or retain appropriate resellers may reduce our sales and thus
harm our business.
We engage some value added resellers, or VARs, who provide sales and support services for our products. In particular, the
non-exclusive reseller agreement entered into with Ericsson in 2012 has provided us with an extensive global reseller channel.
More recently we have partnered with Ericsson on larger customer opportunities. We compete with other telecommunications
systems providers for our VARs’ business and many of our VARs, including Ericsson, are free to market competing products.
Our use of VARs and other third-party support partners and the associated risks of doing so are likely to increase as we expand
sales outside of North America. If Ericsson or any other VAR promotes a competitor’s products to the detriment of our products
or otherwise fails to market our products and services effectively, we could lose market share. In addition, the loss of a key
VAR or the failure of VARs to provide adequate customer service could have a negative effect on customer satisfaction and
could cause harm to our business. If we do not properly recruit and train VARs to sell, install and service our products, our
business, financial condition and results of operations may suffer.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on
global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national
referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at
least two years after the government of the United Kingdom formally initiated the withdrawal process in March 2017.
Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and
the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines
which European Union laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for
the governments of other European Union member states to consider withdrawal. These developments, or the perception that
any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the
stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market
participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access
to capital, or the access to capital of our customers or partners, which could have a material adverse effect on our operations in
the United Kingdom, and generally on our business, financial condition and results of operations and reduce the price of our
securities.
26
Table of Contents We may have difficulty evolving and scaling our business and operations to meet customer and market demand, which could
result in lower profitability or cause us to fail to execute on our business strategies.
In order to grow our business, we will need to continually evolve and scale our business and operations to meet customer and
market demand. Evolving and scaling our business and operations places increased demands on our management as well as our
financial and operational resources to effectively:
• manage organizational change;
• manage a larger organization;
• accelerate and/or refocus research and development activities;
• expand our manufacturing, supply chain and distribution capacity;
• increase our sales and marketing efforts;
• broaden our customer-support and services capabilities;
• maintain or increase operational efficiencies;
• scale support operations in a cost-effective manner;
• implement appropriate operational and financial systems; and
• maintain effective financial disclosure controls and procedures.
If we cannot evolve and scale our business and operations effectively, we may not be able to execute our business strategies in
a cost-effective manner and our business, financial condition, profitability and results of operations could be adversely affected.
We may not be able to protect our intellectual property, which could impair our ability to compete effectively.
We depend on certain proprietary technology for our success and ability to compete. We rely on intellectual property laws as
well as nondisclosure agreements, licensing arrangements and confidentiality provisions to establish and protect our proprietary
rights. U.S. patent, copyright and trade secret laws afford us only limited protection and the laws of some foreign countries do
not protect proprietary rights to the same extent. Our pending patent applications may not result in issued patents, and our
issued patents may not be enforceable. Any infringement of our proprietary rights could result in significant litigation costs.
Further, any failure by us to adequately protect our proprietary rights could result in our competitors offering similar products,
resulting in the loss of our competitive advantage and decreased sales.
Despite our efforts to protect our proprietary rights, attempts may be made to copy or reverse engineer aspects of our products
or to obtain and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary rights
against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our intellectual property is
difficult and costly. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs,
diversion of resources and harm to our business.
We could become subject to litigation regarding intellectual property rights that could harm our business.
We may be subject to intellectual property infringement claims that are costly to defend and could limit our ability to use some
technologies in the future. Third parties may assert patent, copyright, trademark or other intellectual property rights to
technologies or rights that are important to our business. Such claims may originate from non-practicing entities, patent holding
companies or other adverse patent owners who have no relevant product revenue, and therefore, our own issued and pending
patents may provide little or no deterrence to suit from these entities.
We have received in the past and expect that in the future we may receive communications from competitors and other
companies alleging that we may be infringing their patents, trade secrets or other intellectual property rights; offering licenses
to such intellectual property; threatening litigation or requiring us to act as a third-party witness in litigation. In addition, we
have agreed, and may in the future agree, to indemnify our customers for expenses or liabilities resulting from certain claimed
infringements of patents, trademarks or copyrights of third parties. Such indemnification may require us to be financially
responsible for claims made against our customers, including costs of litigation and damages awarded, which could negatively
impact our results of operations. Any claims asserting that our products infringe the proprietary rights of third parties, with or
without merit, could be time-consuming, result in costly litigation and divert the efforts of our engineering teams and
management. These claims could also result in product shipment delays or require us to modify our products or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available to us on acceptable
terms, if at all.
Our use of open source software could impose limitations on our ability to commercialize our products.
We incorporate open source software into our products. Although we closely monitor our use of open source software, the
terms of many open source software licenses have not been interpreted by the courts, and there is a risk that such licenses could
be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such
event, we could be required to make our proprietary software generally available to third parties, including competitors, at no
cost, to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue
27
Table of Contents the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could
adversely affect our revenue and operating expenses.
If we are unable to obtain necessary third-party technology licenses, our ability to develop new products or product
enhancements may be impaired.
While our current licenses of third-party technology generally relate to commercially available off-the-shelf technology, we
may from time to time be required to license additional technology from third parties to develop new products or product
enhancements. These third-party licenses may be unavailable to us on commercially reasonable terms, if at all. Our inability to
obtain necessary third-party licenses may force us to obtain substitute technology of lower quality or performance standards or
at greater cost, or may increase the time-to-market of our products or product enhancements, any of which could harm the
competitiveness of our products and result in lost revenue.
Our ability to incur debt and the use of our funds could be limited by borrowing base restrictions and restrictive covenants
in our loan and security agreement for our revolving credit facility.
The Loan and Security Agreement, or the Loan Agreement, we entered into in August 2017 with Silicon Valley Bank, or SVB,
provides for a revolving credit facility based on a customary accounts receivable borrowing base, subject to certain exceptions
and exclusions, such that borrowings available to us are limited by eligible accounts receivable (as defined in the Loan
Agreement). If our financial position deteriorates, our borrowing capacity under the credit facility may be reduced. In addition,
the Loan Agreement includes affirmative and negative covenants and requires that we maintain a specified minimum liquidity
ratio and maintenance of Adjusted EBITDA (as defined in the Loan Agreement). The negative covenants also include, among
others, restrictions on our and our subsidiaries’ transferring collateral, making changes to the nature of our business or the
business of the applicable subsidiary, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends
or making other distributions, making investments, engaging in transactions with affiliates, making payments in respect of
subordinated debt, creating liens and selling assets, in each case subject to certain exceptions. Failure to maintain these
restrictive covenants and requirements can limit the amount of borrowings that are available to us, increase the cost of
borrowings under the facility, and/or require us to make immediate payments to reduce borrowings. For the month ended
November 30, 2017, we were not able to maintain the minimum Adjusted Quick Ratio (as defined in the Loan Agreement) at
the level required in the Loan Agreement, which constituted an event of default. Although SVB waived this event of default
effective as of November 30, 2017 and, therefore, this default did not terminate our ability to borrow under the Loan
Agreement, we were required to pay an amendment fee and amend certain covenants under the Loan Agreement and, in
February 2018, we entered into an amendment to the Loan Agreement that, among other things, amended certain affirmative
financial covenants, including reductions to the required minimum level of the Adjusted Quick Ratio (as defined in the Loan
Agreement) and the inclusion of an additional financial covenant related to the maintenance of Adjusted EBITDA (as defined
in the Loan Agreement). Events beyond our control could have a material adverse impact on our results of operations, financial
condition or liquidity, in which case we may not be able to meet our financial covenants. The Loan Agreement covenants may
also affect our ability to obtain future financing and to pursue attractive business opportunities and our flexibility in planning
for, and reacting to, changes in business conditions. These covenants could place us at a disadvantage compared to some of our
competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions.
Our failure or the failure of our manufacturers to comply with environmental and other legal regulations could adversely
impact our results of operations.
The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to
environmental, health and safety regulations, or materials subject to laws restricting the use of conflict minerals. Our failure or
the failure of our contract manufacturers, ODMs and OEMs to comply with any of these requirements could result in regulatory
penalties, legal claims or disruption of production. In addition, our failure or the failure of our manufacturers to properly
manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to
increased costs or liabilities. Existing and future environmental regulations and other legal requirements may restrict our use of
certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our results of
operations by increasing our expenses and/or requiring us to alter our manufacturing processes.
Regulatory and physical impacts of climate change and other natural events may affect our customers and our contract
manufacturers, resulting in adverse effects on our operating results.
As emissions of greenhouse gases continue to alter the composition of the atmosphere, affecting large-scale weather patterns
and the global climate, any new regulation of greenhouse gas emissions may result in additional costs to our customers and our
contract manufacturers. In addition, the physical impacts of climate change and other natural events, including changes in
weather patterns, drought, rising ocean and temperature levels, earthquakes and tsunamis, may impact our customers, suppliers
and contract manufacturers, and our operations. These potential physical effects may adversely affect our revenue, costs,
production and delivery schedules, and cause harm to our results of operations and financial condition.
28
Table of Contents We have in the past pursued, and may in the future continue to pursue, acquisitions which involve a number of risks and
uncertainties. If we are unable to address and resolve these risks and uncertainties successfully, such acquisitions could
disrupt our business and result in higher costs than we anticipate.
We acquired Occam in 2011 and Ericsson’s fiber access assets in 2012. We may in the future acquire other businesses, products
or technologies to expand our product offerings and capabilities, customer base and business. We have evaluated and expect to
continue to evaluate a wide array of potential strategic transactions. We have limited experience making such acquisitions or
integrating these businesses after such acquisitions. Unanticipated costs to us from these historical transactions as well as both
anticipated and unanticipated costs to us related to any future transactions could exceed amounts that are covered by insurance
and could have a material adverse impact on our financial condition and results of operations. For example, the Occam
acquisition resulted in litigation with defense costs that were in excess of available directors' and officers' liability insurance
coverage, including costs for which coverage was denied by our insurance carriers. In addition, the anticipated benefit of any
acquisitions may never materialize or the process of integrating acquired businesses, products or technologies may create
unforeseen operating difficulties and expenditures.
Some of the areas where we have experienced and may in the future experience acquisition-related risks include:
• expenses and distractions, including diversion of management time related to litigation;
• expenses and distractions related to potential claims resulting from any possible future acquisitions, whether or not
they are completed;
• retaining and integrating employees from acquired businesses;
• issuance of dilutive equity securities or incurrence of debt;
• integrating various accounting, management, information, human resource and other systems to permit effective
management;
• incurring possible write-offs, impairment charges, contingent liabilities, amortization expense of intangible assets or
impairment of goodwill and intangible assets with finite useful lives;
• difficulties integrating and supporting acquired products or technologies;
• unexpected capital expenditure requirements;
• insufficient revenue to offset increased expenses associated with acquisitions; and
• opportunity costs associated with committing capital to such acquisitions.
If our goodwill becomes impaired, we may be required to record a significant charge to our results of operations. We review
our goodwill for impairment annually or when events or changes in circumstances indicate the carrying value may not be
recoverable, such as a sustained or significant decline in stock price and market capitalization. If the carrying value of goodwill
was deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the estimated fair
value would be recognized. Any such impairment could materially and adversely affect our financial condition and results of
operations.
Foreign acquisitions would involve risks in addition to those mentioned above, including those related to integration of
operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks
associated with specific countries. We may not be able to address these risks and uncertainties successfully, or at all, without
incurring significant costs, delays or other operating problems.
Our inability to address or anticipate any of these risks and uncertainties could disrupt our business and could have a material
impact on our financial condition and results of operations.
Our use of and reliance upon development resources in China may expose us to unanticipated costs or liabilities.
We operate a wholly foreign owned enterprise in Nanjing, China, where a dedicated team of engineers performs product
development, quality assurance, cost reduction and other engineering work. We also outsource a portion of our software
development to a team of software engineers based in Shenyang, China. Our reliance upon development resources in China
may not enable us to achieve meaningful product cost reductions or greater resource efficiency. Further, our development
efforts and other operations in China involve significant risks, including:
• difficulty hiring and retaining appropriate engineering resources due to intense competition for such resources and
resulting wage inflation;
• the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or
confidential information, including information that is proprietary to us, our customers and third parties;
• heightened exposure to changes in the economic, security and political conditions of China;
• fluctuation in currency exchange rates and tax risks associated with international operations;
• development efforts that do not meet our requirements because of language, cultural or other differences associated
with international operations, resulting in errors or delays; and
• uncertainty with regards to actions the Trump administration may take with respect to international trade agreements
and U.S. tax provisions related to international commerce that could adversely affect our international operations.
29
Table of Contents Difficulties resulting from the factors above and other risks related to our operations in China could expose us to increased
expense, impair our development efforts, harm our competitive position and damage our reputation.
Our customers are subject to government regulation, and changes in current or future laws or regulations that negatively
impact our customers could harm our business.
The FCC has jurisdiction over all of our U.S. customers. FCC regulatory policies that create disincentives for investment in
access network infrastructure or impact the competitive environment in which our customers operate may harm our business.
For example, future FCC regulation affecting providers of broadband Internet access services could impede the penetration of
our customers into certain markets or affect the prices they may charge in such markets. Similarly, changes to regulatory tariff
requirements or other regulations relating to pricing or terms of carriage on communication networks could slow the
development or expansion of network infrastructures. Consequently, such changes could adversely affect the sale of our
products and services. Furthermore, many of our customers are subject to FCC rate regulation of interstate telecommunications
services and are recipients of CAF capital incentive payments, which are intended to subsidize broadband and
telecommunications services in areas that are expensive to serve. Changes to these programs, rules and regulations that could
affect the ability of IOCs to access capital, and which could in turn reduce our revenue opportunities, remain possible.
In addition, many of our customers are subject to state regulation of intrastate telecommunications services, including rates for
such services, and may also receive funding from state universal service funds. Changes in rate regulations or universal service
funding rules, either at the U.S. federal or state level, could adversely affect our customers’ revenue and capital spending plans.
Moreover, various international regulatory bodies have jurisdiction over certain of our non-U.S. customers. Changes in these
domestic and international standards, laws and regulations, or judgments in favor of plaintiffs in lawsuits against CSPs based
on changed standards, laws and regulations could adversely affect the development of broadband networks and services. This,
in turn, could directly or indirectly adversely impact the communications industry in which our customers operate.
Many jurisdictions, including international governments and regulators, are also evaluating, implementing and enforcing
regulations relating to cyber security, privacy and data protection, which can affect the market and requirements for networking
and communications equipment. To the extent our customers are adversely affected by laws or regulations regarding their
business, products or service offerings, our business, financial condition and results of operations would suffer.
Privacy concerns relating to our products and services could affect our business practices, damage our reputation and deter
customers from purchasing our products and services.
Government and regulatory authorities in the United States and around the world have implemented and are continuing to
implement laws and regulations concerning data protection. For example, in July 2016, the European Commission adopted the
EU-U.S. Privacy Shield to replace Safe Harbor as a compliance mechanism for the transfer of personal data from the European
Union to the United States. In addition, the General Data Protection Regulation adopted by the EU Parliament goes into effect
in May 2018 to harmonize data privacy laws across Europe. The interpretation and application of these data protection laws and
regulations are often uncertain and in flux, and it is possible that they may be interpreted and applied in a manner that is
inconsistent with our data practices. Complying with these various laws could cause us to incur substantial costs or require us
to change our business practices in a manner adverse to our business.
Concerns about or regulatory actions involving our practices with regard to the collection, use, disclosure, or security of
customer information or other privacy related matters, even if unfounded, could damage our reputation and adversely affect
operating results. While we strive to comply with all data protection laws and regulations, the failure or perceived failure to
comply may result in inquiries and other proceedings or actions against us by government entities or others, or could cause us
to lose customers, which could potentially have an adverse effect on our business.
We are subject to cybersecurity and privacy risks.
Our information systems and data centers (including third-party data centers) contain sensitive information that help us operate
our business efficiently, interface with and provide software solutions to customers, maintain financial accuracy and accurately
produce our financial statements. In addition, we host sensitive data in data centers, including subscriber data, in the course of
providing services and solutions to customers. Malicious hackers may attempt to gain access to our network or data centers;
steal proprietary information related to our business, products, employees and customers; or interrupt our systems and services
or those of our customers or others. The theft, loss or misuse of personal data collected, used, stored or transferred by us to run
our business could result in significantly increased security and remediation costs or costs related to defending legal claims. If
we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we
could be subject to cyberattacks, transaction errors, processing inefficiencies, the loss of customers, business disruptions or the
loss of or damage to intellectual property through security breaches. If our data management systems, including those of our
third-party data centers, do not effectively and securely collect, store, process and report relevant data for the operation of our
business, whether due to cyberattacks, equipment malfunction or constraints, software deficiencies or human error, our ability
to effectively plan, forecast and execute our business plan and comply with laws and regulations will be impaired, perhaps
30
Table of Contents materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows,
the timeliness with which we internally and externally report our operating results and our business and reputation.
While we have applied multiple layers of security to control access to our information technology systems and use encryption
and authentication technologies to secure the transmission and storage of data, these security measures may be compromised as
a result of third-party security breaches, employee error, malfeasance, faulty password management or other irregularity, and
result in persons obtaining unauthorized access to our data or accounts. Third parties may attempt to fraudulently induce
employees into disclosing user names, passwords or other sensitive information, which may in turn be used to access our
information technology systems.
While we seek to apply best practice policies and devote significant resources to network security, data encryption and other
security measures to protect our information technology and communications systems and data, these security measures cannot
provide absolute security. We or our third-party hosting providers may experience a system breach and be unable to protect
sensitive data. The costs to us to eliminate or alleviate network security problems, bugs, viruses, worms, malicious software
programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and
could result in unexpected interruptions, delays and cessation of service which may harm our business operations.
Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, cyberattacks, viruses, denial-of-service attacks, human error, hardware or software
defects or malfunctions, and similar events or disruptions. Some of our systems are not fully redundant, and our disaster
recovery planning is not sufficient for all eventualities. Our systems are also subject to break-ins, sabotage and intentional acts
of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, a decision by any of our third-party
hosting providers to close a facility we use without adequate notice for financial or other reasons, a data breach or other
unanticipated problems at our hosting facilities could cause system interruptions and delays which may result in loss of critical
data and lengthy interruptions in our services.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete
in additional international markets.
Our products are subject to U.S. export and trade controls and restrictions. International shipments of certain of our products
may require export licenses or are subject to additional requirements for export. In addition, the import laws of other countries
may limit our ability to distribute our products, or our customers’ ability to buy and use our products, in those countries.
Changes in our products or changes in export and import regulations or duties may create delays in the introduction of our
products in international markets, prevent our customers with international operations from deploying our products or, in some
cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations,
duties or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries,
persons or technologies targeted by such regulations, could negatively impact our ability to sell, profitably or at all, our
products to existing or potential international customers.
If we lose any of our key personnel, or are unable to attract, train and retain qualified personnel, our ability to manage our
business and continue our growth would be negatively impacted.
Our success depends, in large part, on the continued contributions of our key management, engineering, sales and marketing
personnel, many of whom are highly skilled and would be difficult to replace. None of our senior management or key technical
or sales personnel is bound by a written employment contract to remain with us for a specified period. In addition, we do not
currently maintain key person life insurance covering our key personnel. If we lose the services of any key personnel, our
business, financial condition and results of operations may suffer.
Competition for skilled personnel, particularly those specializing in engineering and sales, is intense. We cannot be certain that
we will be successful in attracting and retaining qualified personnel, or that newly hired personnel will function effectively,
both individually and as a group. In particular, we must continue to expand our direct sales force, including hiring additional
sales managers, to grow our customer base and increase sales. If we are unable to effectively recruit, hire and utilize new
employees, execution of our business strategy and our ability to react to changing market conditions may be impeded, and our
business, financial condition and results of operations may suffer.
Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key personnel. Our
executive officers and employees hold a substantial number of shares of our common stock and vested stock options.
Employees may be more likely to leave us if the shares they own or the shares underlying their equity awards decline in value,
or if the exercise prices of stock options that they hold are significantly above the market price of our common stock. If we are
unable to retain our employees, our business, operating results and financial condition will be harmed.
31
Table of Contents If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely
basis could be impaired, which would adversely affect our operating results, our ability to operate our business and our
stock price.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial
statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We have in the past
discovered, and may in the future discover areas of our internal financial and accounting controls and procedures that need
improvement.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal
control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been
detected.
We are required to comply with Section 404 of the Sarbanes-Oxley Act, or SOX, which requires us to expend significant
resources in developing the required documentation and testing procedures. We cannot be certain that the actions we have taken
and are taking to improve our internal controls over financial reporting will be sufficient to maintain effective internal controls
over financial reporting in subsequent reporting periods or that we will be able to implement our planned processes and
procedures in a timely manner. In addition, new and revised accounting standards and financial reporting requirements may
occur in the future and implementing changes required by new standards, requirements or laws may require a significant
expenditure of our management’s time, attention and resources which may adversely affect our reported financial results. If we
are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our
financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to
finance our operations and growth.
We incur significant costs as a result of operating as a public company, which may adversely affect our operating results
and financial condition.
As a public company, we incur significant accounting, legal and other expenses, including costs associated with our public
company reporting requirements. We also anticipate that we will continue to incur costs associated with corporate governance
requirements, including requirements and rules under SOX and the Dodd-Frank Wall Street Reform and Consumer Protection
Act, or Dodd-Frank, among other rules and regulations implemented by the SEC, as well as listing requirements of the New
York Stock Exchange, or NYSE. Furthermore, these laws and regulations could make it difficult or costly for us to obtain
certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy
limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements
could also make it difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board
committees or as executive officers.
New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the
provisions of SOX and the Dodd-Frank Act and rules adopted by the SEC and the NYSE, would likely result in increased costs
to us as we respond to their requirements. We continue to invest resources to comply with evolving laws and regulations, and
this investment may result in increased general and administrative expense.
Risks Related to Ownership of Our Common Stock
Our stock price may continue to be volatile, and the value of an investment in our common stock may decline.
The trading price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline
substantially within a short period of time and could fluctuate widely in response to various factors, some of which are beyond
our control. These factors include those discussed in the “Risk Factors” section of this Annual Report on Form 10-K and others
such as:
• quarterly variations in our results of operations or those of our competitors;
• failure to meet any guidance that we have previously provided regarding our anticipated results;
• changes in earnings estimates or recommendations by securities analysts;
• failure to meet securities analysts’ estimates;
• announcements by us or our competitors of new products, significant contracts, commercial relationships,
acquisitions or capital commitments;
• developments with respect to intellectual property rights;
• our ability to develop and market new and enhanced products on a timely basis;
32
Table of Contents • our commencement of, or involvement in, litigation and developments relating to such litigation;
• changes in governmental regulations; and
• a slowdown in the communications industry or the general economy.
In recent years, the stock market in general, and the market for technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those
companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our
actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price
of a particular company’s securities, securities class action litigation has often been instituted against these companies. This
litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or
misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts
publish about us or our business. If any of the analysts who cover us issue an adverse or misleading opinion regarding our
stock, our stock price would likely decline. If several of these analysts cease coverage of our company or fail to publish reports
on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to
decline.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider
favorable and may lead to entrenchment of our management and board of directors.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the
effect of delaying or preventing changes in control or changes in our management or our Board of Directors. These provisions
include:
• a classified Board of Directors with three-year staggered terms, which may delay the ability of stockholders to
change the membership of a majority of our Board of Directors;
• no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director
candidates;
• the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the
Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to
fill vacancies on our Board of Directors;
• the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of
those shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
• a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or
special meeting of our stockholders;
• the requirement that a special meeting of stockholders may be called only by the chairman of the Board of
Directors, the chief executive officer or the Board of Directors, which may delay the ability of our stockholders to
force consideration of a proposal or to take action, including the removal of directors; and
• advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of
Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise
attempting to obtain control of us.
We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in
general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the
stock for three years or, among other things, the Board of Directors has approved the transaction.
We may need additional capital in the future to finance our business.
We may need to raise additional capital to fund operations in the future. Although we believe that, based on our current level of
operations and anticipated growth, our existing cash, cash equivalents and borrowings available under our Loan Agreement will
provide adequate funds for ongoing operations, planned capital expenditures and working capital requirements for at least the
next twelve months, our working capital needs and cash use have continued to increase to support our growth initiatives, and
we may need additional capital if our current plans and assumptions change. Failure to maintain certain restrictive covenants
and requirements under the Loan Agreement could result in limiting the amount of borrowings that are available to us, increase
the cost of borrowings under the credit facility, and/or cause us to make immediate payments to reduce borrowings or result in
an event of default. If future financings involve the issuance of equity securities, our then-existing stockholders would suffer
dilution. If we raise additional debt financing, we may be subject to restrictive covenants that limit our ability to conduct our
business. If we are unable to generate positive operating income and positive cash flows from operations, our liquidity, results
of operations and financial condition will be adversely affected. Furthermore, if we are unable to generate sufficient cash flows
33
Table of Contents to support our operational needs, we may need to seek additional sources of liquidity, including borrowings, to support our
working capital needs. In addition, we may choose to seek other sources of liquidity even if we believe we have generated
sufficient cash flows to support our operational needs. There is no assurance that any other sources of liquidity may be
available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows or obtain other sources of
liquidity, we will be forced to limit our development activities, reduce our investment in growth initiatives and institute cost-
cutting measures, all of which would adversely impact our business and growth.
We do not currently intend to pay dividends on our common stock and, consequently, our stockholders’ ability to achieve a
return on their investment will depend on appreciation in the price of our common stock.
We do not currently intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to
invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay
dividends under certain circumstances. Therefore, our stockholders are not likely to receive any dividends on our common
stock for the foreseeable future.
34
Table of Contents ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
Properties
We currently lease approximately 226,300 square feet of office space worldwide. Information concerning our principal leased
properties as of December 31, 2017 is set forth below:
Location
Petaluma, California
Principal Use
Corporate headquarters, sales, marketing, product design, service
and repair engineering, distribution, research and development
San Jose, California
Product design, research and development, administration
Nanjing, China
Research and development
Minneapolis, Minnesota
Product design, research and development, service and repair
engineering
Richardson, Texas
Service and test engineering
Santa Barbara, California
Research and development
Square
Footage
Lease
Expiration Date
82,100
February 2019
46,100
42,800
28,500
14,400
12,400
August 2018
February 2021
March 2019
January 2022
June 2019
We believe that our facilities are in good condition and are generally suitable to meet our needs for the foreseeable future. We
believe that prior to expiration of our current office space leases that we can renew or obtain suitable lease space on
commercially reasonable terms for our business needs. In addition, we may continue to seek additional space as needed, and we
believe this space will be available on commercially reasonable terms.
In March 2018, we entered a new office space lease in San Jose, California for 65,000 square feet, which commences in August
2018 for a term of 87 months.
ITEM 3.
Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business. We are not
currently a party to any legal proceedings that, if determined adversely to us, in our opinion, are currently expected to
individually or in the aggregate have a material adverse effect on our business, operating results or financial condition taken as
a whole.
ITEM 4.
Mine Safety Disclosures
Not applicable.
35
Table of Contents PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Comparative Stock Prices
Our common stock has been trading on the New York Stock Exchange, under the trading symbol “CALX” since our initial
public offering on March 24, 2010. Prior to this time, there was no public market for our common stock. The following table
sets forth, for the fiscal periods indicated, the high and low sale prices per share of our common stock as reported on NYSE.
Fiscal Year 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
$
High
7.76
7.35
7.10
7.20
7.87
7.76
8.20
8.10
$
$
Low
6.15
6.30
4.65
5.05
5.64
6.24
6.30
6.15
Number of Common Stock Holders
As of March 2, 2018, the approximate number of holders of our common stock was 351 (not including beneficial owners of
stock held in street name).
Dividends
We have never declared or paid any cash dividends on our common stock, and we do not currently intend to pay any cash
dividends on our common stock in the foreseeable future. In addition, our credit facility requires Silicon Valley Bank's consent
before dividends can be declared. See Note 6, “Credit Facility” of Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
None.
36
Table of Contents Performance Graph
The following graph shows a comparison of the cumulative total stockholder return on our common stock with the cumulative
total returns of the Russell 2000 Index and the Morningstar Communication Equipment Index. The graph tracks the
performance of a $100 investment in our common stock and in each of the indexes during the last five fiscal years ended
December 31, 2017. Data for the Russell 2000 Index and the Morningstar Communication Equipment Index assume
reinvestment of dividends. Stockholder returns over the indicated period are based on historical data and should not be
considered indicative of future stockholder returns.
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities under that Section, and shall not be
deemed to be incorporated by reference into any filing of Calix, Inc. under the Securities Act of 1933, as amended.
ITEM 6.
Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and
the related notes thereto, of this Annual Report on Form 10-K, the section titled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the other financial information and data appearing elsewhere in this Annual
Report on Form 10-K. The selected financial data included in this section is not intended to replace and is not a substitute for,
the consolidated financial statements and related notes in this Annual Report on Form 10-K.
We derived the statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the balance sheet data
as of December 31, 2017 and 2016 from our audited consolidated financial statements and related notes thereto of this Annual
Report on Form 10-K. We derived the statements of operations data for the years ended December 31, 2014 and 2013, and the
balance sheet data as of December 31, 2015, 2014 and 2013 from our audited consolidated financial statements and related
notes which are not included in this Annual Report on Form 10-K. Historical results for any prior period are not necessarily
indicative of future results for any period.
37
Table of Contents Statement of Operations Data:
Revenue
Cost of revenue (1)
Gross profit
Operating expenses:
Research and development (1)
Sales and marketing (1)
General and administrative (1)
Restructuring charges
Amortization of intangible assets
Litigation settlement gain
Total operating expenses
Loss from operations
Interest and other income (expense), net (2)
Loss before provision for (benefit from) income taxes
Provision for (benefit from) income taxes
Net loss
Net loss per common share:
Basic and diluted
Weighted-average number of shares used to compute net
loss per common share:
Basic and diluted
(1) Includes stock-based compensation as follows:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total
(2) 2013 includes $1.7 million of gain from utilization of
inventory credit.
Balance Sheet Data:
Cash, cash equivalents and marketable securities
Working capital
Total assets
Common stock and additional paid-in capital
Total stockholders’ equity
Years Ended December 31,
2017
2016
2015
2014
2013
(In thousands, except per share data)
$
510,367
337,477
172,890
$
458,787
257,569
201,218
$
407,463
217,034
190,429
$
401,227
223,438
177,789
$
382,618
211,544
171,074
127,541
82,781
39,875
4,249
—
—
254,446
(81,556)
(233)
(81,789)
1,243
(83,032)
(1.66)
50,155
749
4,869
3,433
3,317
12,368
106,869
83,675
41,592
—
1,701
(4,500)
229,337
(28,119)
1,064
(27,055)
347
(27,402)
(0.56)
48,730
672
5,125
4,586
3,902
14,285
$
$
$
$
89,714
78,563
38,454
—
10,208
—
216,939
(26,510)
712
(25,798)
535
(26,333)
(0.51)
51,489
709
4,797
4,712
3,587
13,805
$
$
$
$
80,311
76,283
31,371
—
10,208
—
198,173
(20,384)
151
(20,233)
581
(20,814)
(0.41)
50,808
1,120
5,056
5,601
4,240
16,017
$
$
$
$
79,299
68,075
31,945
—
10,208
—
189,527
(18,453)
1,174
(17,279)
(14)
(17,265)
(0.35)
49,419
1,468
4,896
5,577
7,980
19,921
$
$
$
$
December 31,
2017
2016
2015
2014
2013
(In thousands)
39,775
34,123
295,070
852,475
144,963
$
78,107
97,926
355,475
837,931
212,964
$
73,590
115,561
323,886
820,080
235,785
$
111,679
131,693
370,221
803,101
272,591
$
82,747
114,366
383,599
783,509
273,923
$
$
$
$
$
38
Table of Contents ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking
statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of
1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). All statements other than
statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on
current expectations, estimates, forecasts and projections about the industry in which we operate and the beliefs and
assumptions of our management. In some cases, forward-looking statements can be identified by the use of words such as
“believe,” “expect,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “predict,” “will,” “project,”
“potential,” or the negative thereof or other comparable terminology. In addition, any statements that refer to projections of
our future financial performance, our anticipated growth and trends in our businesses and other characterizations of future
events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only
predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified in the
Risk Factors discussed in Item 1A, in the discussion below, as well as in other sections of this Annual Report on Form 10-K.
Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. All
forward-looking statements and reasons why results may differ included in this report 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 a leading global provider of cloud and software platforms, systems and software for fiber- and copper-based network
architectures and a pioneer in software defined access and cloud products focused on access networks and the subscriber.
Calix’s portfolio allows for a broad range of subscriber services to be provisioned and delivered over a single unified network.
Our access systems can deliver voice and data services, advanced broadband services, mobile broadband, as well as high-
definition video and online gaming. Our premises systems will allow CSPs to master the complexity of the smart home and
business and offer new services to their device enabled subscribers. And, all of these platforms and systems can be monitored,
analyzed, managed and supported by Calix Cloud.
We market our cloud and software platforms, systems and services to CSPs globally through our direct sales force as well as a
number of resellers. As of December 31, 2017, over 25 million ports of the Calix portfolio have been deployed at a growing
number of CSPs worldwide. Our customers range from smaller, regional CSPs to some of the world’s largest CSPs. We have
enabled over 1,400 customers to deploy gigabit passive optical network, Active Ethernet and point-to-point Ethernet fiber
access networks.
Our revenue increased to $510.4 million for 2017 from $458.8 million for 2016 and $407.5 million for 2015. Our revenue and
continued revenue growth will depend on our ability to sell and license our cloud and software platforms, systems and services
to existing customers and to attract new customers, particularly larger CSPs, globally. During 2017, we continued to see growth
in our services business to meet customer demand for turnkey solutions that include professional services together with the
supply of equipment and materials, including projects that are funded by the FCC’s current CAF program. Specifically, during
2017, we completed a significant turnkey network improvement project that we had commenced in 2015 and the vast majority
of previously-awarded CAF projects by the fourth quarter of 2017. Revenue for such projects is generally recognized only
when all project requirements are completed, which typically requires longer periods depending on the nature and scope of the
project. Similarly, some of the costs incurred by us for such projects, including labor and related costs, are deferred and
recognized to cost of revenue when the associated revenue is recognized.
Revenue fluctuations result from many factors, including: increases or decreases in customer orders for our products and
services, market or other factors that may delay or materially impact customer purchasing decisions, 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 tend to spend less in the first quarter as they are finalizing their annual budgets, and in certain
regions, customers are also challenged by winter weather conditions that inhibit fiber deployment in outside infrastructure. Our
revenue is also dependent upon our customers’ timing of purchases and capital expenditure plans, including expenditure plans
for turnkey solutions projects, which are generally non-recurring in nature. In particular, at the end of 2017, we experienced
significantly lower order volumes by our largest customer due to the timing of their recent acquisition, and we expect that this
acquisition may continue to disrupt the customer’s normal expenditure plans, including continued delays and reduction in
purchases of our products and services as it implements its transition activities and corporate strategies. The timing of
recognition of deferred revenue may cause significant fluctuations in our revenue and operating results from period to period.
Cost of revenue is strongly correlated to revenue and tends to fluctuate due to all of the above factors that could impact
revenue. Factors that impacted our cost of revenue for 2017, and that may impact cost of revenue in future periods, also
include: changes in the mix of products delivered, customer location and regional mix, changes in product warranty and
incurrence of retrofit costs, changes in the cost of our inventory and inventory write-downs. Cost of services revenue has been
impacted during 2017 by increases in the pace of professional services activity due to customer requirements and project
39
Table of Contents deadlines, higher than anticipated costs associated with delivery of professional services for which project pricing is typically
set at the outset of the project, charges related to cost overruns on service projects and inefficiencies associated with delays
resulting from third party dependencies and incremental costs to rework. Cost of revenue also includes fixed expenses related
to our internal operations, which could impact our cost of revenue as a percentage of revenue if there are large fluctuations in
revenue.
Cost of revenue has a direct impact on gross profit and gross margin. During 2017, our gross profit and gross margin continued
to be negatively impacted by an increase in our services revenue, which carried negative gross margin associated with our
turnkey network improvement projects, as a mix of total revenue. We have continued to incur higher costs related to our
professional services business for turnkey network improvement projects, largely associated with projects initiated in 2016.
Overall, our gross profit and gross margin fluctuate based on timing of factors such as new product introductions or upgrades to
existing products, changes in customer mix, changes in the mix of products demanded and sold (and any related write-downs of
existing inventory), increases in mix of revenue towards professional services, 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, customer rebates and incentive programs due to
competitive pressure. To the extent that deferred costs related to the professional services portion of turnkey projects is
determined to be unrecoverable, we incur a charge to cost of services revenue in the period such cost is determined to be
unrecoverable. In connection with our recoverability assessment as of December 31, 2017, we did not have any write downs of
our deferred costs. See the risk factor titled “An increase in revenue mix towards services will adversely affect our gross
margin” above in the “Risk Factors” section of this Annual Report on Form 10-K.
Our operating expenses have fluctuated based on the following factors: changes in headcount and personnel costs which
comprise a significant portion of our operating expenses, timing of variable compensation expenses due to fluctuations in order
volumes, timing of research and development expenses including investments in innovative solutions, such as next generation
solutions and new customer segments, prototype builds and outsourced development projects, fluctuations in stock-based
compensation expenses due to timing of equity grants or other factors affecting vesting, changes in acquisition-related expenses
and timing of litigation-related costs. During 2017, our total operating expenses increased due to an increase in headcount and
outside contractors, primarily for research and development and, to a lesser extent, as a result of restructuring charges incurred
during 2017. In March 2017, we adopted a restructuring plan to realign our business to increase focus towards investments in
software defined access and cloud products and to reduce the expense structure in our traditional systems business, for which
we incurred pre-tax restructuring charges of $4.2 million during 2017.
Our net loss was $83.0 million in 2017, $27.4 million in 2016 and $26.3 million in 2015. Since our inception, we have incurred
significant losses, and as of December 31, 2017, we had an accumulated deficit of $667.4 million. Further, as a result of the
fluctuations described above and a number of other factors, many of which are outside our control, our annual 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.
Product Line Divestiture
In February 2018, we sold our outdoor cabinet product line to Clearfield, Inc. for $10.4 million in cash and the assumption by
Clearfield of related product warranty liabilities and open purchase order commitments with our contract manufacturer. The
divestiture of this non-strategic product line reflects our continued focus on execution on our platforms and business strategy.
See Note 15, “Subsequent Events” of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-
K.
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. We base our 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.
We evaluate our estimates, assumptions and judgments on an ongoing basis.
We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of
our financial statements.
Revenue Recognition
We derive revenue primarily from the sale of access and premise systems, services and cloud and software platforms. Revenue
is recognized when all of the following criteria have been met:
40
Table of Contents • Persuasive evidence of an arrangement exists. We generally rely upon sales agreements and customer purchase orders
as evidence of an arrangement.
• Delivery has occurred. We use the shipping terms of the arrangement or evidence of customer acceptance to verify
delivery or performance.
• Sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on the payment
terms and whether the sales price is subject to refund or adjustment. Payment terms to customers can range from net 30
up to net 180 days.
• Collectability is reasonably assured. We assess collectability based primarily on creditworthiness of customers and their
payment histories.
Revenue from installation and training services is recognized as the services are completed. Revenue from post-sales software
support and extended warranty services are deferred and recognized ratably over the period during which the services are to be
performed. In instances where substantive acceptance provisions are specified in the customer agreement, revenue is deferred
until the acceptance criteria have been met. From time to time, we offer customers sales incentives, which include volume
rebates and discounts. These amounts are estimated on a quarterly basis and recorded as a reduction of revenue.
We enter into arrangements with certain of our customers who receive government supported loans and grants from the RUS to
finance capital spending. Under the terms of a RUS equipment contract that includes installation services, the customer does
not take possession and control and title does not pass until formal acceptance is obtained from the customer. Under this type of
arrangement, we do not recognize revenue until we have received formal acceptance from the customer. For RUS arrangements
that do not involve installation services, we recognize revenue when all of the revenue recognition criteria as described above
have been met.
Our products contain both software and non-software components that function together to deliver the products’ essential
functionality. When we enter into sales arrangements that consist of multiple deliverables of our product and service offerings,
we allocate the total consideration of the arrangement to each separable deliverable based on their relative selling price. We
limit the amount allocable to delivered elements to the amount that is not contingent upon the delivery of additional items or
meeting specified performance conditions, and we recognize revenue on each deliverable in accordance with our revenue
policy. The determination of selling price for each deliverable is based on a selling price hierarchy, which is vendor-specific
objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is not available, or estimated selling price, or
ESP, if neither VSOE nor TPE is available. VSOE of selling price is based on the price charged when the element is sold
separately. In determining VSOE, we generally require that a substantial majority of the selling prices of an element fall within
a narrow range when each element is sold separately. We have established VSOE for our training and post-sales software
support services based on the normal pricing practices of these services when sold separately. TPE of selling price is
established by evaluating whether there are similar competitor products or services that are sold in stand-alone sales transaction
to similarly situated customers. Generally, our marketing strategy differs from that of our peers and our offerings contain a
significant level of customization and differentiation such that the comparable pricing of products with similar functionality
cannot be obtained. Additionally, as we are unable to reliably determine what similar competitor products’ selling prices are on
a stand-alone basis, we are not typically able to determine TPE. ESP is established considering multiple factors including, but
not limited to geographies market conditions, competitive landscape, internal costs, gross margin objectives, characteristics of
targeted customers and pricing practices. The determination of ESP is made through consultation with and formal approval by
management, taking into consideration the go-to-market strategy. See “Recent Accounting Pronouncements Not Yet Adopted –
Revenue from Contracts with Customers” below.
Stock-Based Compensation
Stock-based awards are recorded at fair value as of the grant date and recognized to expense over the employee’s requisite
service period (generally the vesting period), which we have elected to amortize on a straight-line basis.
We value restricted stock units, or RSUs, and employee stock purchase right under Nonqualified Employee Stock Purchase
Plan, or Nonqualified ESPP, at the closing market price of our common stock on the date of grant.
Stock-based compensation expense associated with performance restricted stock units, or PRSUs, with graded vesting features
and which contain both a performance and a service condition is measured based on the closing market price of our common
stock on the date of grant, and is recognized, net of forfeitures, as expense over the requisite service period using the graded
vesting attribution method. Compensation expense is only recognized if we have determined that it is probable that the
performance condition will be met. We reassess the probability of vesting at each reporting period and adjusts compensation
expense based on this probability assessment.
Stock-based compensation expense associated with performance-based stock options with graded vesting features and which
contain both a performance and a service condition is measured based on fair value of stock option estimated at the grant date
41
Table of Contents using the Black-Scholes option valuation model, and is recognized, net of forfeitures, as expense over the requisite service
period using the graded vesting attribution method.
We estimate the fair value of stock options and employee stock purchase rights under our Amended and Restated Employee
Stock Purchase Plan, or ESPP, at the grant date using the Black-Scholes option-pricing model. This model requires the use of
highly judgmental assumptions, including expected stock price volatility and expected life of the stock options, which have a
significant impact on the fair value estimates and are discussed in detail in Note 8, “Stockholders’ Equity” of Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K. Changes to these estimates will cause the fair values
of our stock options and employee stock purchase right under the ESPP and related stock-based compensation expense that we
record to vary.
In addition, we apply an estimated forfeiture rate to awards granted and record stock-based compensation expense only for
those awards that are expected to vest. Forfeiture rates are estimated at the time of grant based on our historical experience.
Further, to the extent our actual forfeiture rates are different from our estimates, stock-based compensation is adjusted
accordingly.
Inventory Valuation
Inventory, which primarily consists of finished goods purchased from contract manufacturers, is stated at the lower of cost,
determined by the first-in, first-out method, and net realizable value. Inbound shipping costs are included in the cost of
inventory. In addition, we, from time to time, procure component inventory primarily as a result of manufacturing
discontinuation of critical components by suppliers. We regularly monitor inventory quantities on-hand and record write-downs
for excess and obsolete inventories based on our estimate of demand for our products, potential obsolescence of technology,
product life cycle and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated
selling price. These factors are impacted by market and economic conditions, technology changes and new product
introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted
demand and may have a material effect on gross profit. If inventory is written down, a new cost basis is established that cannot
be increased in future periods. The sale of previously reserved inventory has not had a material impact on our gross margin.
Income Taxes
We evaluate our tax positions and estimate our current tax exposure in each jurisdiction in which we operate. This includes
assessing the temporary differences resulting from differing treatment of items not currently deductible for tax purposes. These
differences result in deferred tax assets and liabilities on our consolidated balance sheets, which are calculated based upon the
difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect
when these differences reverse. In general, deferred tax assets represent future tax benefits to be received when certain
expenses previously recognized in our consolidated statements of comprehensive loss become deductible expenses under
applicable income tax laws or loss or credit carry-forwards are utilized. Since realization of our deferred tax assets is dependent
on future taxable income against which these deductions, losses and credits can be utilized, we must assess the likelihood that
our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is below the more
likely than not threshold, we must establish a valuation allowance against the net deferred tax asset. Significant judgment is
required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets.
Since inception, we have incurred operating losses and accordingly have federal and state net operating loss carry-forwards of
$604.1 million and $210.2 million, respectively, as of December 31, 2017. The U.S. federal net operating loss carryforwards
will expire at various dates beginning in 2019 and through 2037, if not utilized. The state net operating loss carryforwards will
expire at various dates beginning in 2018 and through 2037, if not utilized. Additionally, we had U.S. federal, California and
other U.S. states research and development credits of approximately $31.0 million, $33.4 million and $3.2 million, respectively,
as of December 31, 2017. The U.S. federal research and development credits will begin to expire in 2020 and through 2036 and
the California research and development credits have no expiration date. The credits related to other various U.S. states will
begin to expire in 2018 and through 2032. These two items account for the bulk of our gross deferred tax asset of $198.8
million as of December 31, 2017. Excluding our foreign operations, we have recorded a full valuation allowance against the
gross deferred assets at each balance sheet date presented. We believe that based on the available evidence and history of
operation losses, it is more likely than not that we will not be able to utilize all of our deferred assets, with the exception of
certain foreign deferred tax assets, before expiration. We intend to maintain the full valuation allowance until sufficient
evidence exists to support the reversal of the valuation allowance.
Loss Contingencies
We accrue loss contingencies when the loss is probable and reasonably estimable. In addition, disclosure of a loss contingency
is required if there is at least a reasonable possibility that a loss (or an additional loss above the amount accrued) has been
incurred.
42
Table of Contents From time to time, we are involved in legal proceedings arising from the normal course of business activities. We evaluate the
likelihood of an unfavorable outcome of legal proceedings to which we are a party and accrue a loss contingency when the loss
is probable and reasonably estimable. Assessing legal contingencies involves significant judgment and estimates and the
outcome of litigation is inherently uncertain and subject to numerous factors outside our control. Significant judgment is
required when we assess the likelihood of any adverse judgments or outcomes, including the potential range of possible losses,
and whether losses are probable and reasonably estimable.
We offer initial limited warranties for our hardware products for a period of one, three or five years, depending on the product
type. Under certain circumstances, we also provide fixes on specifically identified performance failures for products that are
outside of the standard warranty period and recognize estimated costs related to retrofit activities upon identification of such
product failures. We estimate costs related to warranty and retrofit activities based upon historical and projected product failure
and claim rates, historical costs incurred in correcting product failures along with other relevant information available related to
any specifically identified product failures. We recognize estimated warranty and retrofit costs when it is probable that a
liability has been incurred and the amount of loss is reasonably estimable. Significant judgment is required in estimating costs
associated with warranty and retrofit activities and our estimates are limited to information available to us at the time of such
estimates. In some cases, such as when a specific product failure is first identified or a new product is introduced, we may
initially have limited information and limited historical failure and claim rates upon which to base our estimates, and such
estimates may require revision in future periods.
Because of uncertainties related to these matters, our estimates of whether a loss contingency is probable or reasonably
possible, as well as the reasonable range of possible losses associated with each loss contingency, is based only on the
information available at the time. As additional information becomes available, and at least quarterly, we reassess the potential
liability on each significant matter and may revise our estimates. These revisions could have a material impact on our business,
operating results or financial condition, and the actual outcomes may materially differ from our estimates of potential liability,
which could have a material adverse effect on our business, operating results or financial condition.
Recent Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2016-02,
Leases (Topic 842), or ASU 2016-02, which requires recognition of an asset and liability for lease arrangements longer than
twelve months. ASU 2016-02 will be effective for us beginning in the first quarter of 2019. Early application is permitted, and
it is required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective
approach. We are not planning to early adopt, and accordingly, will adopt the new standard effective January 1, 2019. We
intend to elect the available practical expedients on adoption. We are currently assessing the potential impact of adopting this
new guidance on our consolidated financial statements. We expect our assets and liabilities to increase as the new standard
requires recognition of right-of-use assets and lease liabilities for operating leases, but do not expect any material impact on our
income (loss) from operations or net income (loss) as a result of the adoption of this standard.
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic
606), or ASU 2014-09, which provides guidance for revenue recognition. ASU 2014-09 supersedes the revenue recognition
requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. Additionally, it supersedes some cost
guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts, and creates
new Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. The standard’s core principle is that a
company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will
need to use more judgment and make more estimates than under the previous guidance. These may include identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation. On August 12, 2015, the FASB issued Accounting
Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, or ASU
2015-14, to defer the effective date of ASU 2014-09 by one year. ASU 2015-14 permits early adoption of the new revenue
standard, but not before its original effective date. In April 2016, the FASB issued Accounting Standards Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, or ASU 2016-10,
which further clarifies guidance related to identifying performance obligations and licensing implementation guidance
contained in ASU 2014-09. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, ASU 2016-12, which addresses
narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition and
provides a practical expedient for contract modifications at transition and an accounting policy election related to the
presentation of sales taxes and other similar taxes collected from customers.
43
Table of Contents The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of
adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized
at the date of initial application and providing certain additional disclosures. We adopted the new standard effective January 1,
2018 using the modified retrospective transition method applied to those contracts which are not completed as of that date,
which will result in a cumulative catch up adjustment to decrease our accumulated deficit as of January 1, 2018, by
approximately $1 million and will require additional disclosures, including disclosures comparing results under the new
standard to current GAAP during 2018. We are still assessing the final impact of adoption on one minor revenue stream, but
expect the impact to be immaterial.
A description of the impact of the new standard on our business is as follows:
• For stand-alone purchase orders, while the allocation of revenue to deliverables between products and services may
change due to new methodologies under the standard, we expect that the impact of this adjustment will not be
significant.
• For products sold with our turnkey network improvement projects, the recognition of revenue under current GAAP
was often delayed until project completion as a result of our not meeting certain recognition criteria. Under the new
standard, revenue from these arrangements may be accelerated as revenue on products may be recognized upon
delivery and services may be recognized over time as the services are performed. As there were minimal open projects
under turnkey arrangements as of December 31, 2017, the impact of this change on our accumulated deficit is not
expected to be significant although it could have a material impact on the timing of revenue recognition in the future.
• Revenue from our Cloud product offerings is not expected to be impacted by the adoption of the new standard.
• Under current GAAP, revenue from software licenses is recognized ratably over the term of the related post-contract
support, or PCS, as we did not have VSOE for PCS for the licenses sold to date. Under the new standard, revenue
allocated to the licenses is expected to be recognized upon delivery while the revenue allocated to PCS is expected to
be recognized ratably. The impact of this change was not material to our accumulated deficit upon adoption as we only
began selling software licenses in 2017.
In connection with the adoption of the new revenue standard effective January 1, 2018, we also adopted ASC 340-40, Other
Assets and Deferred Costs – Contracts with Customers, with respect to capitalization and amortization of incremental costs of
obtaining a contract. As a result, we will capitalize additional costs of obtaining a contract, including sales commissions, as the
guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have
incurred if the contract had not been obtained, provided it expects to recover the costs. We have determined that sales
commissions as a result of obtaining extended warranty customer contracts are recoverable, and as a result, we will defer $0.8
million of related sales commissions, which will result in a cumulative catch up adjustment to decrease our accumulated deficit
as of January 1, 2018, and amortize them over the period that the related revenue is recognized. The adoption of this standard is
not expected to have a material impact to our consolidated financial statements.
Results of Operations for Years Ended December 31, 2017, 2016 and 2015
Revenue
Our revenue is comprised of the following:
• Products – includes revenue from the sale of access and premises systems, platform software licenses and cloud-based
software subscriptions.
• Services – includes revenue from professional services, customer support, software and cloud-based maintenance,
extended warranty subscriptions, training and managed services.
44
Table of Contents The following table sets forth our revenue (in thousands, except for percentages):
Revenue:
Products
Services
Percent of total revenue:
Products
Services
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
2017
2016
2015
$
%
$
%
$ 421,890
88,477
$ 510,367
$ 428,584
30,203
$ 458,787
$ 385,679
21,784
$ 407,463
$
$
(6,694)
58,274
51,580
(2)%
193 %
11 %
$
$
42,905
8,419
51,324
11%
39%
13%
83%
17%
100%
93%
7%
100%
95%
5%
100%
Our revenue is principally derived in the United States. Revenue generated in the United States represented approximately 89%
of our total revenue in 2017, 91% in 2016 and 88% in 2015.
2017 compared to 2016: The increase in revenue during 2017 compared with 2016 resulted from an increase in services
revenue by $58.3 million, or 193%, primarily driven by the substantial completion of services associated with a significant
turnkey network improvement project during the first quarter of 2017 and the completion of the vast majority of sites from
previously-awarded CAF projects by the fourth quarter of 2017. Our product revenue decreased by $6.7 million mainly due to
lower shipments to one of our large Tier 2 customers relative to the prior year period related to a significant turnkey network
improvement project in 2016, which was completed in the first half of 2017. We expect our services revenue to decline in 2018
as the significant turnkey network improvement project completed in early 2017 for this customer is not expected to reoccur
and we expect the overall volume of CAF projects to be lower in 2018 relative to 2017. These decreases are expected to be
partially offset by an increase in services revenue associated with sales of our platform solutions. We believe that the divestiture
of our cabinet product line in February 2018 reduces our operational complexity as we focus on deployments of our platform
products to capitalize on the revenue growth opportunity as our industry transforms.
We had one customer that accounted for more than 10% of our total revenue in 2017 and 2015 and two customers that each
accounted for more than 10% of our total revenue in 2016. See Note 1 to the Consolidated Financial Statements set forth in this
report for more details on concentration of revenue for the periods presented.
2016 compared to 2015: The increase in revenue during 2016 compared with 2015 resulted from stronger bookings and
shipments as customer demand increased. This was led by higher demand from our larger domestic customers for both products
and services with the increase in services associated with our turnkey network improvement projects. The increase in revenue
was partially offset by lower demand from our international markets and lower revenue derived from contracts funded by the
Broadband Stimulus programs under the ARRA as we completed and closed our existing contracts. The extended date for
completion of projects funded under the Broadband Initiatives Program, which is administered by the RUS, ended on July 31,
2015.
Cost of Revenue, Gross Profit and Gross Margin
The following table sets forth our cost of revenue (in thousands, except for percentages):
Cost of revenue:
Products
Services
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
2017
2016
2015
$
%
$
%
$ 236,137
101,340
$ 337,477
$ 228,976
28,593
$ 257,569
$ 204,726
12,308
$ 217,034
$
$
7,161
72,747
79,908
3%
254%
31%
$
$
24,250
16,285
40,535
12%
132%
19%
2017 compared to 2016: The increase in cost of revenue of $79.9 million during 2017 as compared to 2016 was primarily
attributable to an increase in cost of services revenue by $72.7 million, as we experienced higher levels of service activities, as
well as higher costs attributed to rework, delays, unanticipated costs and overruns (including third party costs) for our turnkey
network improvement projects. Our cost of product revenue increased by $7.2 million during 2017 compared with 2016
primarily due to a product mix shift to lower margin products, partially offset by the lower volume of revenue. Cost of product
revenue also included an increase in inventory write-downs of $2.9 million attributed to slow moving inventories, partially
offset by a decrease in warranty and retrofit costs of $1.2 million primarily related to certain retrofit charges for two specific
product families.
45
Table of Contents 2016 compared to 2015: The increase in cost of revenue of $40.5 million during 2016 as compared to 2015 was primarily
attributed to an increase in cost of product revenue of $24.3 million mainly due to higher shipments. In addition, our warranty
and retrofit costs increased by approximately $5.2 million primarily driven by certain retrofit charges for two specific product
families. This was partially offset by a decrease in inventory write-downs attributed to slow moving inventories by
approximately $3.5 million. Additionally, amortization of intangible assets decreased by $4.2 million in 2016 as compared to
2015 as one intangible asset reached completion of its amortization period before the end of the first quarter of fiscal 2016.
Hence, we have a shorter amortization period for that particular intangible asset during 2016 as compared with full
amortization in 2015. Our cost of services revenue increased by $16.3 million as we continued to ramp up our professional
services business to meet demand for turnkey professional services solutions and incurred higher costs as we accelerated
activity at the end of the year to meet project schedules.
The following table sets forth our gross profit and gross margin (dollars in thousands):
Gross profit:
Products
Services
Total gross profit
Gross margin:
Products
Services
Total gross margin
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
2017
2016
2015
$
%
$
%
$ 185,753
(12,863)
$ 172,890
$ 199,608
1,610
$ 201,218
$ 180,953
9,476
$ 190,429
$
$
(13,855)
(14,473)
(28,328)
(7)%
(899)%
(14)%
$
$
18,655
(7,866)
10,789
10 %
(83)%
6 %
44 %
(15) %
34 %
47 %
5 %
44 %
47 %
43 %
47 %
2017 compared to 2016: Gross profit decreased by $28.3 million to $172.9 million during 2017 from $201.2 million during
2016. Gross margin decreased to 34% during 2017 from 44% during 2016. The decrease in gross profit and gross margin
during 2017 was primarily due to an increase in revenue mix toward service revenue as we continued to grow our professional
services business, an increased level of activities in our turnkey network improvement projects and higher costs attributed to
services rework and overruns. The rework costs and overruns generally relate to projects that were started in 2016 that incurred
higher than anticipated costs from third party contractors, project delays, third party dependencies, quality issues associated
with subcontracted work, rework to meet customer requirements and longer than anticipated time to complete. The vast
majority of these 2016 projects were completed by the end of 2017. Looking forward, we expect to continue to drive
efficiencies in our delivery of professional services for turnkey network improvement projects to improve services gross
margin.
The decrease in the product gross margin was primarily attributed to product and regional mix as well as higher inventory
write-downs, partly offset by lower warranty and retrofit charges as described above.
2016 compared to 2015: Gross profit increased by $10.8 million from $190.4 million during 2015 to $201.2 million during
2016 mainly due to higher product shipments, partially offset by higher cost of revenue from professional services projects.
Gross margin decreased to 44% during 2016 from 47% during 2015. The decrease in gross margin during 2017 was primarily
due to an increase in revenue mix toward services revenue as we continued to ramp our services business in 2016. Services
revenue typically has higher associated costs and lower margins. The decrease in gross margin was partially offset by the
impact of lower amortization of intangible assets during 2016 as compared to 2015.
Operating Expenses
Research and Development Expenses
Research and development expenses represent the largest component of our operating expenses and include personnel costs,
outside contractor and consulting services, depreciation on lab equipment, costs of prototypes and overhead allocations. The
following table sets forth our research and development expenses (in thousands, except for percentages):
Research and development
Percent of total revenue
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
2017
2016
2015
$
%
$
$ 127,541
$ 106,869
$ 89,714
$
20,672
19%
$
17,155
%
19%
25%
23%
22%
2017 compared to 2016: The increase in research and development expenses during 2017 compared with 2016 was primarily
due to an increase in expenses for outside contractors by $15.0 million and expenditures relating to prototype and expendable
equipment used for research and development activities by $0.8 million, primarily for development services including
46
Table of Contents investments in our cloud and software platforms and next generation systems to pursue broader growth opportunities. Our
personnel for research and development also increased in 2017 as compared to 2016, which resulted in higher compensation
and employee benefits (other than bonuses) of $4.8 million. This increase was partially offset by lower employee bonuses of
$0.6 million in 2017 as compared to 2016.
Research and development expenses as a percentage of total revenue increased from 23% in 2016 to 25% in 2017 as we
accelerated our research and development investments in 2017 in order to deliver our next generation cloud and software
platforms and systems and address new market segments. With our platforms spanning a growing share of our systems products
and moving into commercial deployments, we anticipate that the bulk of the fundamental development work on our platforms
is complete. Going forward, we expect our ability to leverage these platforms will allow us to significantly reduce the costs to
develop incremental functionality, while, more importantly, accelerating our time to market. Accordingly, we expect research
and development expenses to decrease in 2018 in absolute dollars and as a percentage of total revenue.
2016 compared to 2015: The increase in research and development expenses during 2016 compared with 2015 was primarily
due to an increase in personnel for research and development, resulting in higher compensation and employee benefits of $7.3
million, to support our growing product portfolio, strategic investments in new solutions, including next generation solutions
and new customer segments and international market expansion. Expenses for outside contractors increased by $6.8 million
and expenditures relating to prototype and expendable equipment used for research and development activities increased by
approximately $3.8 million, primarily for development services including investments in next generation technologies to
pursue broader growth opportunities.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel costs, employee sales commissions, marketing programs, software tools and
travel-related expenses. The following table sets forth our sales and marketing expenses (in thousands, except for percentages):
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
Sales and marketing
$ 82,781
$ 83,675
$ 78,563
$
(894)
(1)%
$
5,112
Percent of total revenue
16%
18%
19%
2017
2016
2015
$
%
$
%
7%
2017 compared to 2016: Sales and marketing expenses decreased by $0.9 million during 2017 compared with 2016 primarily
due to decreases in personnel costs of $1.7 million as headcount decreased and a decrease in stock-based compensation of $1.2
million. These decreases were partially offset by an increase in marketing expenses of $1.4 million as we invested more in
ConneXions, our annual user conference, and other industry and marketing events and an increase in software tools of $0.9
million.
Sales and marketing expenses as a percentage of total revenue decreased from year to year.
We expect to continue our investments in sales and marketing in order to extend our market reach and grow our business in
support of our key strategic initiatives.
2016 compared to 2015: The increase in sales and marketing expenses during 2016 compared with 2015 was primarily due to
an increase in compensation and employee benefits of $3.3 million mainly attributed to higher commissions due to increased
shipments. Additionally, expenses relating to marketing events, trade shows and promotional items related to marketing
programs also increased by $1.0 million.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs related to our executive, finance, human resources,
information technology and legal organization, outside consulting services, insurance, allocated facilities and fees for
professional services. Professional services consist of outside audit, legal, accounting and tax services. The following table sets
forth our general and administrative expenses (in thousands, except for percentages):
General and administrative
Percent of total revenue
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
2017
2016
2015
$
%
$
$ 39,875
$ 41,592
$ 38,454
$
(1,717)
(4)%
$
3,138
%
8%
8%
9%
9%
2017 compared to 2016: The decrease in general and administrative expenses during 2017 compared with 2016 included legal
fees and expenses related to the Occam litigation of $6.4 million that did not recur in 2017 as the litigation was settled in 2016.
The decrease was partially offset by increases in professional services of $2.5 million primarily related to outside consulting
services for migrating of our on-premise enterprise resource planning infrastructure to a cloud model, compensation and
47
Table of Contents employee benefits of $1.0 million, primarily due to increase in headcount and severance benefits of $0.5 million related to our
separation agreement with our former Chief Financial Officer and an increase in legal expenses of $0.5 million. The increase in
compensation and employee benefits includes reductions in employee bonuses of $0.7 million and stock-based compensation
of $0.6 million during 2017 as compared to 2016.
Our general and administrative expenses as a percentage of total revenue remained relatively flat from year to year. We expect
our general and administrative expenses to decrease as a percentage of revenue over time.
2016 compared to 2015: The increase in general and administrative expenses during 2016 compared with 2015 was primarily
due to an increase in our compensation and employee benefits by $2.0 million mainly due to an increase in headcount for our
support organizations. Additionally, legal fees and expenses related to defense costs in the Occam litigation that were not
reimbursable under our Directors & Officers liability insurance or were otherwise in excess of the insurance coverage increased
by $2.8 million. See “Litigation Settlement Gain” section below. The increase was partially offset by a $1.3 million decrease in
consulting and contracted labor services.
Restructuring Charges
In March 2017, we adopted a restructuring plan to realign our business to increase focus on our investments in cloud and
software platforms, while reducing our expense structure around our traditional systems. Under this plan, we incurred
restructuring charges of $4.2 million for the year ended December 31, 2017, consisting primarily of severance and other
termination related benefits. Actions under this plan were complete as of December 31, 2017. Any changes to the estimates of
executing the restructuring plan will be reflected in our future results of operations.
Amortization of Intangible Assets
The intangible asset related to customer relationships had reached completion of its amortization period during the first quarter
of 2016.
Litigation Settlement Gain
During 2016, we recognized a litigation settlement gain of $4.5 million as a reduction to operating expenses. This litigation
settlement gain consisted of a litigation settlement accrual of $4.5 million as a partial recovery of out-of-pocket costs related to
the Occam litigation. Please refer to Note 7, “Commitments and Contingencies – Litigation” of Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K.
Interest and Other Income (Expense), Net
The following table sets forth our interest and other income (expense), net (in thousands, except for percentages):
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
2017
2016
2015
$
%
$
%
Interest and other income
(expense), net
$
(233)
$
1,064
$
712
$
(1,297)
(122)%
$
352
49%
2017 compared to 2016: The decrease in interest and other income (expense), net during 2017 compared with 2016 is primarily
due to a reduction in interest income resulting from lower levels of marketable securities investments in 2017, an increase in
interest expense resulting from initiating line of credit borrowings in 2017 and a decrease in foreign currency gain (loss).
2016 compared to 2015: The fluctuations in interest and other income (expense), net were primarily due to the level of cash
and investment balances during the periods presented, partially offset by the fluctuations in interest expense during those
respective periods primarily attributed to amortization of premiums relating to available-for-sale securities.
Provision for Income Taxes
The provisions for income taxes primarily consist of state and foreign income taxes. The following table sets forth our
provision for income taxes (in thousands, except percentages):
Years Ended December 31,
2017 vs 2016 Change
2016 vs 2015 Change
2017
2016
2015
$
%
$
%
Provision for income taxes
$
1,243
$
Effective tax rate
(1.5)%
$
347
(1.3)%
535
(2.1)%
$
896
258%
$
(188)
(35)%
2017 compared to 2016: Income tax expense increased by $0.9 million from $0.3 million in 2016 to $1.2 million in 2017. The
increase was primarily due to the write-off of a foreign entity’s deferred tax assets in 2017.
48
Table of Contents On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act, or the Tax Act. The significant impacts from the Tax Act include a net, one-time transition tax of $1.1 million on
unrepatriated earnings of foreign subsidiaries, which was offset by our current net operating loss, as well as tax expense of
$84.4 million related to the revaluation of our deferred tax assets and liabilities due to the reduction of the U.S. corporate tax
rate from 34% to 21%, which was offset by a reduction in our valuation allowance.
As of December 31, 2017, we had unrecognized tax benefits of $20.3 million, none of which would affect our effective tax rate
if recognized.
2016 compared to 2015: Income tax expense decreased by $0.2 million from $0.5 million in 2015 to $0.3 million in 2016. The
decrease was primarily due to the reversal of a foreign entity’s deferred tax assets valuation allowance.
As of December 31, 2016, we had unrecognized tax benefits of $18.3 million, none of which would affect our effective tax rate
if recognized.
Liquidity and Capital Resources
We have funded our operations and investing activities primarily through cash generated from operations, borrowing on our
line of credit and sales of our common stock. At December 31, 2017, we had cash and cash equivalents of $39.8 million, which
consisted of deposits held at banks and money market mutual funds held at major financial institutions. This includes $2.9
million of cash held by our foreign subsidiaries primarily in China. As of December 31, 2017, our liability for taxes that would
be payable as a result of repatriation of undistributed earnings of our foreign subsidiaries to the United States was not
significant and limited to withholding taxes considering our existing net operating loss carryovers.
The following table presents the cash inflows and outflows by activity during 2017, 2016 and 2015 (in thousands):
Net cash provided by (used in) operating activities
Net cash provided by investing activities
Net cash provided by (used in) financing activities
Operating Activities
Years Ended December 31,
2017
2016
2015
$
$
(62,772)
19,734
31,990
$
24,419
12,083
(9,243)
(5,341)
4,665
(24,141)
Our operating activities used cash of $62.8 million in 2017, provided cash of $24.4 million in 2016 and used cash of $5.3
million in 2015. The increase in net cash used in operating activities during 2017 as compared to 2016 was due primarily to an
unfavorable change of $60.8 million in our operating results after adjustment of non-cash charges and a $26.4 million decrease
in net cash inflow resulting from changes in operating assets and liabilities. In 2017, cash used in operating activities increased
as we continued to invest in research and development to pursue broader market and customer opportunities. Furthermore,
during this period we continued to experience losses due to higher costs, delays, overruns and other inefficiencies associated
with our professional services business for turnkey network improvement projects (including CAF projects). As described
below, these turnkey network improvement projects generally involve greater working capital needs at the outset as services
and products are supplied, while revenue and cash collections occur after projects are accepted or agreed-upon milestones are
reached.
In 2017, cash outflows from changes in operating assets and liabilities primarily consisted of an increase in net accounts
receivable of $29.1 million, mainly due to the delayed payments by a large customer until early January 2018, and a decrease in
accrued liabilities of $20.2 million primarily due to a decrease in customer advance payments for turnkey services projects for
one of our customers and partly due to the timing of our payments of payroll, sales commissions and other expenses. Cash
outflows from changes in operating assets and liabilities primarily consisted of a decrease in deferred cost of revenue of $32.4
million, partly offset by a decrease in deferred revenue of $14.4 million mainly due to recognition of associated costs related to
turnkey network improvement projects that are either accepted or for which agreed-upon milestones are reached, a decrease in
inventory of $13.0 million due to higher inventory turnover, an increase in accounts payable of $11.8 million primarily due to
the timing of inventory receipts and payments to our contract manufacturers and a decrease in prepaid expenses and other
assets of $2.8 million. Non-cash charges were $23.6 million, the majority of which consist of stock-based compensation
expense, amortization expenses and depreciation.
The increase in net cash provided by operating activities during 2016 as compared to 2015 was due primarily to a $45.6
million increase in net cash inflow resulting from changes in operating assets and liabilities, partially offset
by unfavorable change of $15.8 million in our operating results after adjustment of non-cash charges. In 2016, cash inflows
from changes in operating assets and liabilities primarily consisted of an increase in accrued liabilities of $34.9 million
primarily due to customer advance payments for certain turnkey projects, and due to the timing of our payroll, sales
commissions and other expenses accruals and payout, an increase in accounts payable of $4.2 million primarily due to the
49
Table of Contents timing of inventory receipts and payments to our contract manufacturers and a decrease in inventory of $3.1 million due to
higher inventory turnover. Cash outflows from changes in operating assets and liabilities primarily consisted of a net decrease
in deferred revenue and deferred cost of revenue of $13.4 million as a result of revenue and cost recognition for previous
shipments related to certain turnkey projects and RUS-funded contracts, an increase in net accounts receivable of $4.2 million
due to higher revenue in 2016, an increase in prepaid expenses and other assets of $1.2 million and a decrease in other long-
term liabilities of $0.4 million. Non-cash charges were $28.8 million, the majority of which consist of stock-based
compensation expense, amortization expenses and depreciation.
Investing Activities
In 2017, net cash provided by investing activities of $19.7 million consisted of net sales and maturities of marketable securities
of $27.8 million partially offset by capital expenditures of $8.0 million for purchases of test equipment, computer equipment
and software.
In 2016, our net cash provided by investing activities of $12.1 million consisted of net maturities of marketable securities of
$21.9 million, partially offset by capital expenditures of $9.8 million for purchases of test equipment, computer equipment and
software.
In 2015, our net cash provided by investing activities of $4.7 million consisted of net maturities of marketable securities of
$11.9 million, partially offset by capital expenditures of $7.3 million for purchases of test equipment, computer equipment and
software.
Financing Activities
In 2017, net cash provided by financing activities of $32.0 million primarily consisted of net proceeds from our line of credit of
$30.0 million and the proceeds from the issuance of common stock under our employee stock purchase plans of $4.9 million,
partially offset by the payment of payroll taxes for the vesting of awards under our 2010 Equity Incentive Award Plan of $2.8
million and payments to originate our line of credit with SVB of $0.2 million.
In 2016, net cash used in financing activities of $9.2 million consisted of the repurchases of common stock of $12.8 million and
the payment of payroll taxes for the vesting of awards under our 2010 Equity Incentive Award Plan of $2.1 million, partially
offset by the proceeds from the issuance of common stock under our ESPP of $5.7 million.
In 2015, net cash used in financing activities of $24.1 million consisted of the repurchases of common stock of $27.2 million,
the payment of payroll taxes for the vesting of awards under our 2010 Equity Incentive Award Plan of $2.4 million and
payments to originate an extension of the line of credit then in place with Bank of America of $0.1 million, partially offset by
the proceeds from the issuance of common stock under our ESPP of $4.9 million and the proceeds from the exercises of stock
options of $0.6 million.
Stock Repurchase Program
On April 26, 2015, our Board of Directors approved a program to repurchase up to $40 million of our common stock from time
to time. This stock repurchase program commenced in May 2015 and concluded in March 2016. During the year ended
December 31, 2015, we repurchased 3,540,530 shares of common stock for $27.2 million at an average price of $7.68 per
share. During the year ended December 31, 2016, we repurchased a total of 1,789,287 shares of common stock for $12.8
million at an average price of $7.16 per share.
Working Capital and Capital Expenditure Needs
We currently have no material cash commitments, except for contractual obligations under our Loan Agreement, normal
recurring trade payables, expense accruals, operating leases and non-cancelable firm purchase commitments. Our working
capital needs related to turnkey network improvement arrangements have been substantial, as under such arrangements we
generally purchase substantial equipment, components and materials and pay our subcontractors at the outset and through the
course of a project, but we may not receive payment from our customers until completion and acceptance of the associated
services, which may be one or more quarters later. We expect our working capital needs related to turnkey network
improvement projects, including CAF projects, to decrease significantly as we have completed the vast majority of such
projects as of December 31, 2017 and expect the volume of such projects to be lower in 2018 relative to 2017. We believe that
our outsourced approach to manufacturing provides us significant flexibility in both managing inventory levels and financing
our inventory. In the event that our revenue plan does not meet our expectations, we may eliminate or curtail expenditures to
mitigate the impact on our working capital.
50
Table of Contents In August 2017, we entered into the Loan Agreement for a senior secured revolving credit facility with SVB, which provides
for a revolving credit facility of up to $30.0 million based on a customary accounts receivable borrowing base, subject to
certain exceptions for accounts originating outside the United States and certain specific accounts, which could reduce the
amount available to us under the credit facility. The Loan Agreement includes affirmative and negative covenants and requires
us to maintain a liquidity ratio at minimum levels specified in the Loan Agreement. The credit facility matures, and all
outstanding amounts become due and payable, on August 7, 2019. For the month ended November 30, 2017, we were not able
to maintain the minimum Adjusted Quick Ratio (as defined in the Loan Agreement) at the level required in the Loan
Agreement, which constituted an event of default. Although SVB waived this event of default effective as of November 30,
2017 and, therefore, this default did not change our ability to borrow under the Loan Agreement, we were required to amend
certain covenants under the Loan Agreement and, in February 2018, we entered into an amendment to the Loan Agreement
that, among other things, amended certain affirmative financial covenants, including reductions to the required minimum level
of the Adjusted Quick Ratio (as defined in the Loan Agreement) and the inclusion of an additional financial covenant related to
the maintenance of Adjusted EBITDA (as defined in the Loan Agreement). As of December 31, 2017, our Adjusted Quick
Ratio was 1.05 as compared to the requirement of 0.925. As of December 31, 2017, we had borrowings of $30.0 million under
this line of credit. For a detailed discussion of our credit facility, please refer to Note 6, “Credit Facility” of Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K.
In addition to the restructuring plan adopted in March 2017 as discussed above, we established a new restructuring plan in early
2018 to further realign our business resources based on the production releases of our platform offerings. We expect to incur
restructuring charges of approximately $4.0 million, consisting of primarily of severance and other termination related benefits,
in the first quarter of 2018. These actions are expected to result in annualized savings of over $16.0 million.
In February 2018, we sold our outdoor cabinet product line to Clearfield, Inc. for $10.4 million in cash and the assumption by
Clearfield of the related product warranty liabilities and open purchase order commitments with our contract manufacturer. We
believe the divestiture of this non-strategic product line reflects our strategic focus on our platforms. We expect the proceeds
from this sale will be used to continue our execution on our business strategy. See Note 15, “Subsequent Events” of Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K.
We believe, based on our current operating plan and expected operating cash flows, that our existing cash, cash equivalents and
marketable securities, along with available borrowings under our SBV line of credit, will be sufficient to meet our anticipated
cash needs for at least the next twelve months. We expect that we may from time to time draw on the SVB line of credit to
support our working capital needs. Our future capital requirements will depend on many factors including our rate of revenue
growth, timing of customer payments and payment terms, particularly of larger customers, the timing and extent of spending to
support development efforts, particularly research and development related to growth initiatives such as our software defined
access portfolio, our ability to partner with third parties to outsource our research and development projects, our ability to
manage product cost efficiencies and maintain product margin levels, the timing, extent and size of turnkey professional
services projects and our ability to develop operational efficiencies and successfully scale that business, the expansion of sales
and marketing activities, the timing of introductions of new products and enhancements to existing products, the acquisition of
new capabilities or technologies and the continued market acceptance of our products. If we are unable to execute to our
current operating plan or generate positive operating income and positive cash flows, our liquidity, results of operations and
financial condition will be adversely affected. We may need to seek other sources of liquidity, including the sale of equity or
incremental borrowings, to support our working capital needs. In addition, we may choose to seek other sources of liquidity
even if we believe we have generated sufficient cash flows to support our operational needs. There is no assurance that any
other sources of liquidity may be available to us on acceptable terms or at all. If we are unable to generate sufficient cash flows
or obtain other sources of liquidity, we will be forced to limit our development activities, reduce our investment in growth
initiatives and institute cost-cutting measures, all of which may adversely impact our business and growth.
Contractual Obligations and Commitments
Our principal commitments as of December 31, 2017 consisted of our contractual obligations under the Loan Agreement,
operating leases for office space and non-cancelable outstanding purchase obligations. The following table summarizes our
contractual obligations at December 31, 2017 (in thousands):
Line of credit, including interest (1)
Operating lease obligations (2)
Non-cancelable purchase commitments (3)
Total
Total
32,760
4,956
60,505
98,221
$
$
Payments Due by Period
Less Than 1
Year
1-3 Years
3-5 Years
More Than 5
Years
31,725
2,805
60,505
95,035
$
$
1,035
1,845
—
2,880
$
$
— $
306
—
306
$
—
—
—
—
$
$
51
Table of Contents (1) Line of credit contractual obligations include projected interest payments over the term of the Loan Agreement, assuming interest
rate in effect for the outstanding borrowings as of December 31, 2017 and as if the entire line of credit will be outstanding during the
term. The line of credit borrowings are reflected as due in less than one year based on the liquidity ratio conditions in the Loan
Agreement that, as of December 31, 2017, required us to apply cash collections to the line of credit, following which we may make
additional draws based on the applicable borrowing base.
(2) Future minimum operating lease obligations in the table above include primarily payments for our office space in Petaluma,
California, and for our facilities in Minneapolis, Minnesota; Nanjing, China; Richardson, Texas; and San Jose and Santa Barbara,
California, which expire at various dates through 2022. See Note 7, “Commitments and Contingencies” of Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our operating leases.
(3) Represents outstanding purchase commitments for inventory and component parts to be delivered by our suppliers, including
contract manufacturers, ODMs and/or other manufacturing partners. See Note 7, “Commitments and Contingencies” of Notes to
Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our outstanding
purchase commitments.
Off-Balance Sheet Arrangements
As of December 31, 2017 and 2016, we did not have any off-balance sheet arrangements.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without
significantly increasing risk. By policy, we do not enter into investments for trading or speculative purposes. At December 31,
2017, we had cash and cash equivalents of $39.8 million, which were held primarily in cash and money market funds. Due to
the nature of these money market funds, we believe that we do not have any material exposure to changes in the fair value of
our cash equivalents as a result of changes in interest rates.
Our exposure to interest rate risk also relates to the amount of interest we must pay on our borrowings under our revolving
credit facility pursuant to our Loan Agreement with SVB. Borrowings under the Loan Agreement will bear interest through
maturity at a variable annual rate based upon an annual rate of either a prime rate or a LIBOR rate, plus an applicable margin
between 0.50% to 1.50% for prime rate advances and between 2.00% and 3.00% for LIBOR advances based on the Company’s
maintenance of an applicable liquidity ratio. As of December 31, 2017, we had $30.0 million outstanding in borrowings under
the Loan Agreement.
Foreign Currency Exchange Risk
Our primary foreign currency exposures are described below.
Economic Exposure
The direct effect of foreign currency fluctuations on our sales and expenses has not been material because our sales and
expenses are primarily denominated in U.S. dollars, or USD. However, we are indirectly exposed to changes in foreign
currency exchange rates to the extent of our use of foreign contract manufacturers whom we pay in USD. Increases in the local
currency rates of these vendors in relation to USD could cause an increase in the price of products that we purchase.
Additionally, if the USD strengthens relative to other currencies, such strengthening could have an indirect effect on our sales
to the extent it raises the cost of our products to non-U.S. customers and thereby reduces demand. A weaker USD could have
the opposite effect. The precise indirect effect of currency fluctuations is difficult to measure or predict because our sales are
influenced by many factors in addition to the impact of such currency fluctuations.
Translation Exposure
Our sales contracts are primarily denominated in USD and, therefore, the majority of our revenue is not subject to foreign
currency risk. We are directly exposed to changes in foreign exchange rates to the extent such changes affect our expenses
related to our foreign assets and liabilities with our subsidiaries in Brazil, China and the United Kingdom, whose functional
currencies are the Brazilian Real, or BRL, Chinese Renminbi, or RMB, and British Pounds Sterling, or GBP, respectively.
Our operating expenses are incurred primarily in the United States, with a small portion of expenses incurred in Brazil
associated with the administration of the entity, in China associated with our research and development operations that are
maintained there, and in the United Kingdom for our international sales and marketing activities. Our operating expenses are
generally denominated in the functional currencies of our subsidiaries in which the operations are located. The percentages of
our operating expenses denominated in the following currencies for the indicated fiscal years were as follows:
52
Table of Contents USD
RMB
GBP
BRL
Years Ended December 31,
2017
2016
2015
89%
7%
3%
1%
100%
88%
7%
4%
1%
100%
89%
5%
5%
1%
100%
If the currency exchange rates in 2017 had been the same as in 2016, our 2017 operating expenses would have increased by
approximately $0.8 million. If the U.S. dollar had appreciated or depreciated by 10% relative to RMB, GBP and BRL, our
operating expenses for 2017 would have decreased or increased by $2.8 million, or approximately 1%. We do not currently
enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any derivative financial
instruments. In the future, we may consider entering into hedging transactions to help mitigate our foreign currency exchange
risk.
Foreign exchange rate fluctuations may also adversely impact our financial position as the assets and liabilities of our foreign
operations are translated into USD in preparing our Consolidated Balance Sheets. The effect of foreign exchange rate
fluctuations on our consolidated financial position for the year ended December 31, 2017 was a net translation gain of
approximately $0.5 million. This gain is recognized as an adjustment to stockholders’ equity through accumulated other
comprehensive loss.
Transaction Exposure
We have certain assets and liabilities, primarily receivables and accounts payable (including inter-company transactions) that
are denominated in currencies other than the relevant entity’s functional currency. In certain circumstances, changes in the
functional currency value of these assets and liabilities create fluctuations in our reported consolidated financial position, cash
flows and results of operations. Transaction gains and losses on these foreign currency denominated assets and liabilities are
recognized each period within other income (expense), net in our Consolidated Statements of Comprehensive Loss. During the
year ended December 31, 2017, we recognized a net loss related to these foreign exchange assets and liabilities of
approximately $0.4 million.
53
Table of Contents ITEM 8.
Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets, As of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Loss, Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows, Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
55
57
58
59
60
61
54
Table of Contents Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Calix, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Calix, Inc. and subsidiaries (the Company) as of December 31, 2017 and
2016, the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two-year
period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). We also have audited the
Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period
ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item
9A, Controls and Procedures. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion
on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 2016.
San Francisco, California
March 13, 2018
/s/ KPMG LLP
55
Table of Contents Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Calix, Inc.
We have audited the accompanying consolidated statements of comprehensive loss, stockholders' equity and cash flows for the
year ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of
Calix, Inc.’s operations and its cash flows for the year ended December 31, 2015, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
San Jose, California
February 25, 2016, except as to Note 2, which is as of March 13, 2018.
56
Table of Contents CALIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Inventory
Deferred cost of revenue
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Other assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Line of credit
Total current liabilities
Long-term portion of deferred revenue
Other long-term liabilities
Total liabilities
Commitments and contingencies (See Note 7)
Stockholders’ equity:
December 31,
2017
2016
$
39,775
$
—
80,392
31,529
2,395
8,364
162,455
15,681
116,175
759
50,359
27,748
51,336
44,545
34,763
10,571
219,322
17,984
116,175
1,994
$
295,070
$
355,475
$
$
35,977
49,279
13,076
30,000
128,332
20,645
1,130
150,107
23,827
69,715
27,854
—
121,396
20,237
878
142,511
Preferred stock, $0.025 par value; 5,000 shares authorized; no shares issued and outstanding as of
December 31, 2017 and December 31, 2016
—
—
Common stock, $0.025 par value; 100,000 shares authorized; 56,839 shares issued and 51,509
shares outstanding as of December 31, 2017, and 54,722 shares issued and 49,392 shares
outstanding as of December 31, 2016
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Treasury stock, 5,330 shares as of December 31, 2017 and December 31, 2016
Total stockholders’ equity
1,421
851,054
(169)
(667,357)
(39,986)
144,963
1,368
836,563
(656)
(584,325)
(39,986)
212,964
$
295,070
$
355,475
See accompanying notes to consolidated financial statements.
57
Table of Contents CALIX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share data)
Revenue:
Products
Services
Total revenue
Cost of revenue:
Products (1)
Services (1)
Total cost of revenue
Gross profit
Operating expenses:
Research and development (1)
Sales and marketing (1)
General and administrative (1)
Restructuring charges
Amortization of intangible assets
Litigation settlement gain
Total operating expenses
Loss from operations
Interest and other income (expense), net:
Interest income (expense), net
Other income (expense), net
Total interest and other income (expense), net
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss per common share:
Basic and diluted
Years Ended December 31,
2017
2016
2015
421,890
88,477
510,367
236,137
101,340
337,477
172,890
127,541
82,781
39,875
4,249
—
—
254,446
(81,556)
(160)
(73)
(233)
(81,789)
1,243
(83,032)
(1.66)
$
$
$
428,584
30,203
458,787
228,976
28,593
257,569
201,218
106,869
83,675
41,592
—
1,701
(4,500)
229,337
(28,119)
152
912
1,064
(27,055)
347
(27,402)
(0.56)
$
$
$
385,679
21,784
407,463
204,726
12,308
217,034
190,429
89,714
78,563
38,454
—
10,208
—
216,939
(26,510)
141
571
712
(25,798)
535
(26,333)
(0.51)
$
$
$
Weighted-average number of shares used to compute net loss per common share:
Basic and diluted
50,155
48,730
51,489
Net loss
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale
marketable securities, net
Foreign currency translation adjustments, net
Total other comprehensive income (loss), net of tax
Comprehensive loss
(1) Includes stock-based compensation as follows:
Cost of revenue:
Products
Services
Research and development
Sales and marketing
General and administrative
$
(83,032)
$
(27,402)
$
(26,333)
$
$
6
481
487
(82,545)
473
276
4,869
3,433
3,317
$
$
88
(549)
(461)
(27,863)
465
207
5,125
4,586
3,902
$
$
(36)
(239)
(275)
(26,608)
595
114
4,797
4,712
3,587
See accompanying notes to consolidated financial statements.
58
Table of Contents CALIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Balance at December 31, 2014
Stock-based compensation
Exercise of stock options
Issuance of vested performance
restricted stock units and restricted
stock units, net of taxes withheld
Stock issued under employee stock
purchase plan
Shares withheld for taxes for vested
restricted stock awards
Net loss
Other comprehensive loss
Repurchases of common stock
Balance at December 31, 2015
Stock-based compensation
Exercise of stock options
Issuance of vested performance
restricted stock units and restricted
stock units, net of taxes withheld
Stock issued under employee stock
purchase plan
Net loss
Other comprehensive loss
Repurchases of common stock
Balance at December 31, 2016
Stock-based compensation
Exercise of stock options
Issuance of vested performance
restricted stock units and restricted
stock units, net of taxes withheld
Stock issued under employee stock
purchase plans
Net loss
Other comprehensive income
Balance at December 31, 2017
Common Stock
Shares
51,628
Amount
1,291
$
—
97
583
762
(20)
—
—
(3,541)
49,509
—
3
659
1,010
—
—
(1,789)
49,392
—
11
994
1,112
—
—
—
2
14
19
—
—
—
—
1,326
—
—
17
25
—
—
—
1,368
—
—
24
29
—
—
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
$
801,810
$
13,805
636
(2,206)
4,869
(160)
—
—
—
818,754
14,285
17
(2,118)
5,625
—
—
—
836,563
12,368
62
(2,788)
4,849
—
—
80
—
—
—
—
—
—
(275)
—
(195)
—
—
—
—
—
(461)
—
(656)
—
—
—
—
—
487
Accumulated
Deficit
Treasury
Stock
Total
Stockholders’
Equity
$
(530,590)
$
— $
272,591
—
—
—
—
—
(26,333)
—
—
(556,923)
—
—
—
—
(27,402)
—
—
(584,325)
—
—
—
—
(83,032)
—
—
—
—
—
—
—
—
(27,177)
(27,177)
—
—
—
—
—
—
(12,809)
(39,986)
—
—
—
—
—
—
13,805
638
(2,192)
4,888
(160)
(26,333)
(275)
(27,177)
235,785
14,285
17
(2,101)
5,650
(27,402)
(461)
(12,809)
212,964
12,368
62
(2,764)
4,878
(83,032)
487
51,509
$
1,421
$
851,054
$
(169)
$
(667,357)
$ (39,986)
$
144,963
See accompanying notes to consolidated financial statements.
59
Table of Contents CALIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Stock-based compensation
Depreciation and amortization
Amortization of intangible assets
Loss on retirement of property and equipment
Amortization of premium (discount) relating to available-for-sale securities
Changes in operating assets and liabilities:
Restricted cash
Accounts receivable, net
Inventory
Deferred cost of revenue
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Deferred revenue
Other long-term liabilities
Net cash provided by (used in) operating activities
Investing activities:
Purchases of property and equipment
Purchases of marketable securities
Sales of marketable securities
Maturities of marketable securities
Net cash provided by investing activities
Financing activities:
Proceeds from exercise of stock options
Proceeds from employee stock purchase plans
Payments for repurchases of common stock
Taxes paid for awards vested under equity incentive plan
Proceeds from line of credit
Repayments of line of credit
Payments to originate the line of credit
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Non-cash investing activities:
Changes in accounts payable and accrued liabilities related to purchases of property
and equipment
Years Ended December 31,
2017
2016
2015
$
(83,032)
$
(27,402)
$
(26,333)
12,368
10,178
813
280
(6)
—
(29,056)
13,016
32,368
2,842
11,759
(20,184)
(14,370)
252
(62,772)
(8,026)
(8,732)
5,051
31,441
19,734
62
4,878
—
(2,764)
171,268
(141,268)
(186)
31,990
464
(10,584)
50,359
39,775
313
915
$
$
14,285
8,319
5,805
—
382
—
(4,185)
3,122
(29,845)
(1,197)
4,236
34,913
16,398
(412)
24,419
(9,839)
(16,478)
—
38,400
12,083
17
5,650
(12,809)
(2,101)
—
—
—
(9,243)
(526)
26,733
23,626
50,359
127
965
$
$
13,805
10,262
18,561
24
907
295
(16,411)
(915)
162
2,889
(4,021)
(3,781)
(422)
(363)
(5,341)
(7,278)
(60,002)
—
71,945
4,665
638
4,888
(27,177)
(2,352)
—
—
(138)
(24,141)
(386)
(25,203)
48,829
23,626
127
483
(55)
$
(478)
$
—
$
$
$
See accompanying notes to consolidated financial statements.
60
Table of Contents CALIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Significant Accounting Policies
Company
Calix, Inc. (together with its subsidiaries, “Calix” or the “Company”) was incorporated in August 1999, and is a Delaware
corporation. The Company is a leading global provider of the cloud and software platforms, systems and services required to
deliver the unified access network and smart premises of tomorrow. The Company’s platforms and services help its customers
build next generation networks by embracing a DevOps operating model, optimize the subscriber experience by leveraging big
data analytics and turn the complexity of the smart home and business into new revenue streams. The Company's cloud and
software platforms, systems and services enable communication service providers (“CSPs”) to provide a wide range of
revenue-generating services, from basic voice and data to advanced broadband services, over legacy and next-generation access
networks. The Company focuses on CSP access networks, the portion of the network that governs available bandwidth and
determines the range and quality of services that can be offered to subscribers.
Basis of Presentation
The accompanying 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”). In the
opinion of management, the consolidated 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 significant intercompany
balances and transactions have been eliminated in consolidation.
Liquidity and Capital Resources
Since its inception, the Company has incurred significant losses, and as of December 31, 2017, the Company had an
accumulated deficit of $667.4 million. Based on its current operating plan and operating cash flows, management plans to
finance its future operations and capital expenditures with existing cash and cash equivalents, which it believes will be
sufficient to fund its operations and capital expenditures through at least the next twelve months. In addition, the Company may
use its existing $30.0 million credit facility from time to time to support its working capital needs. The Company may also need
to seek other sources of liquidity, including the sale of equity or incremental borrowings, to support its working capital needs.
However, there can be no assurances that such capital will be available on terms which are acceptable to the Company or at all
or that the Company will achieve profitable operations. If the Company is unable to generate sufficient cash flows or obtain
other sources of liquidity, the Company will be forced to limit its development activities, reduce its investment in growth
initiatives and institute cost-cutting measures, all of which may adversely impact the Company’s business and growth. The
accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Applicable Accounting Guidance
Any reference in these notes to applicable accounting guidance (“guidance”), is meant to refer to the authoritative U.S.
generally accepted accounting principles (“GAAP”) as found in the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”).
Use of Estimates
The preparation of financial statements is in conformity with U.S. GAAP, which requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For the
Company, these estimates include, but are not limited to: allowances for doubtful accounts and sales returns, excess and
obsolete inventory, allowances for obligations to its contract manufacturers, valuation of stock-based compensation, useful
lives assigned to long-lived assets and acquired intangible assets, standard and extended warranty costs, and contingencies.
Actual results could differ from those estimates, and such differences could be material to the Company’s financial position and
results of operations.
Revenue Recognition
The Company derives revenue primarily from the sale of access and premises systems, services and cloud and software
platforms. Revenue is recognized when all of the following criteria have been met:
• Persuasive evidence of an arrangement exists. The Company generally relies upon sales agreements and customer
purchase orders as evidence of an arrangement.
61
Table of Contents • Delivery has occurred. The Company uses the shipping terms of the arrangement or evidence of customer acceptance to
verify delivery or performance.
• Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on
the payment terms and whether the sales price is subject to refund or adjustment. Payment terms to customers can range
from net 30 to net 180 days.
• Collectability is reasonably assured. The Company assesses collectability based primarily on creditworthiness of
customers and their payment histories.
Revenue from installation and training services is recognized as the services are completed. Post-sales software support
revenue and extended warranty services revenue are deferred and recognized ratably over the period during which the services
are to be performed. In instances where substantive acceptance provisions are specified in the customer agreement, revenue is
deferred until acceptance criteria have been met. From time to time, the Company offers customers sales incentives, which
include volume rebates and discounts. These amounts are estimated on a quarterly basis and recorded as a reduction of revenue.
The Company enters into arrangements with certain of its customers who receive government supported loans and grants from
the U.S. Department of Agriculture’s Rural Utility Service (“RUS”) to finance capital spending. Under the terms of an RUS
equipment contract that includes installation services, the customer does not take possession and control and title does not pass
until formal acceptance is obtained from the customer. Under this type of arrangement, the Company does not recognize
revenue until it has received formal acceptance from the customer. For RUS arrangements that do not involve installation
services, the Company recognizes revenue when all of the revenue recognition criteria as described above have been met.
The Company’s products contain both software and non-software components that function together to deliver the products’
essential functionality. When the Company enters into sales arrangements that consist of multiple deliverables of its product
and service offerings, the Company allocates the total consideration of the arrangement to each separable deliverable based on
its relative selling price. The Company limits the amount allocable to delivered elements to the amount that is not contingent
upon the delivery of additional items or meeting specified performance conditions, and recognizes revenue on each deliverable
in accordance with its revenue recognition policy. The determination of selling price for each deliverable is based on a selling
price hierarchy, which is vendor-specific objective evidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is
not available or estimated selling price (“ESP”) if neither VSOE nor TPE is available. VSOE of selling price is based on the
price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of
the selling prices of an element fall within a narrow range when each element is sold separately. The Company has established
VSOE for its training and post-sales software support services based on the normal pricing practices of these services when
sold separately. TPE of selling price is established by evaluating whether there are similar competitor products or services that
are sold in stand-alone sales transaction to similarly situated customers. Generally, the Company’s marketing strategy differs
from that of its peers and its offerings contain a significant level of customization and differentiation such that the comparable
pricing of products with similar functionality cannot be obtained. Additionally, as the Company is unable to reliably determine
what similar competitor products’ selling prices are on a stand-alone basis, it is not typically able to determine TPE. ESP is
established considering multiple factors including, but not limited to, geographies market conditions, competitive landscape,
internal costs, gross margin objectives, characteristics of targeted customers and pricing practices. The determination of ESP is
made through consultation with and formal approval by management, taking into consideration the go-to-market strategy.
Cost of Revenue
Cost of revenue consists primarily of finished goods inventory purchased from the Company’s contract manufacturers, payroll
and related expenses associated with managing the relationships with contract manufacturers, depreciation of manufacturing
test equipment, warranty and retrofit costs, excess and obsolete inventory costs, shipping charges and amortization of certain
intangible assets. It also includes contractor and other costs of services incurred directly related to the delivery of services to
customers.
Warranty and Retrofit
The Company offers limited warranties for its hardware products for a period of one, three or five years, depending on the
product type. The Company recognizes estimated costs related to warranty activities as a component of cost of revenue upon
product shipment or upon identification of a specific product failure. Under certain circumstances, the Company also provides
fixes on specifically identified performance failures for products that are outside of the standard warranty period and recognizes
estimated costs related to retrofit activities as a component of cost of revenue upon identification of such product failures. The
Company recognizes estimated warranty and retrofit costs when it is probable that a liability has been incurred and the amount
of loss is reasonably estimable. The estimates are based upon historical and projected product failure and claim rates, historical
costs incurred in correcting product failures and information available related to any specifically identified product failures.
Significant judgment is required in estimating costs associated with warranty and retrofit activities and the Company estimates
are limited to information available to the Company at the time of such estimates. In some cases, such as when a specific
62
Table of Contents product failure is first identified or a new product is introduced, the Company may initially have limited information and
limited historical failure and claim rates upon which to base its estimates, and such estimates may require revision in future
periods. The recorded amount is adjusted from time to time for specifically identified warranty and retrofit exposure. Actual
warranty and retrofit expenses are charged against the Company’s estimated warranty and retrofit liability when incurred.
Factors that affect the Company’s warranty and retrofit liability include the number of active installed units and historical and
anticipated rates of warranty and retrofit claims and cost per claim.
Stock-Based Compensation
Stock-based compensation expense associated with stock options, restricted stock units (“RSUs”), performance restricted stock
units (“PRSUs”) and purchase rights under the Company’s Amended and Restated Employee Stock Purchase Plan (“ESPP”)
and Nonqualified Employee Stock Purchase Plan (“Nonqualified ESPP”) is measured at the grant date based on the fair value
of the award, and is recognized, net of forfeitures, as expense over the remaining requisite service period (generally the vesting
period) on a straight-line basis.
The fair value of stock option and employee stock purchase right under the ESPP is estimated at the grant date using the Black-
Scholes option valuation model. The fair value of RSUs and employee stock purchase right under the Nonqualified ESPP is
based on closing market price of the Company’s common stock on the date of grant.
Stock-based compensation expense associated with PRSUs with graded vesting features and which contain both a performance
and a service condition is measured based on the closing market price of the Company’s common stock on the date of grant,
and is recognized, net of forfeitures, as expense over the requisite service period using the graded vesting attribution method.
Stock-based compensation expense associated with performance-based stock options with graded vesting features and which
contain both a performance and a service condition is measured based on fair value of stock options estimated at the grant date
using the Black-Scholes option valuation model, and is recognized, net of forfeitures, as expense over the requisite service
period using the graded vesting attribution method.
Compensation expense associated with PRSUs and performance-based stock option awards with graded vesting features and
which contain both a performance and a service condition is only recognized if the Company has determined that it is probable
that the performance condition will be met. The Company reassesses the probability of vesting at each reporting period and
adjusts compensation expense based on its probability assessment.
Research and Development
Research and development costs include costs of developing new products and processes, as well as design and engineering
costs. Such costs are charged to research and development expense as incurred.
Development costs related to software incorporated in the Company’s products incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated useful lives of the related products. Technological
feasibility is established upon completion of a working model.
Loss Contingencies
From time to time, the Company is involved in legal proceedings arising from the normal course of business activities. The
Company evaluates the likelihood of an unfavorable outcome of legal proceedings to which it is a party and accrues a loss
contingency when the loss is probable and reasonably estimable. Assessing legal contingencies involves significant judgment
and estimates and the outcome of litigation is inherently uncertain and subject to numerous factors outside the Company’s
control. Significant judgment is required when the Company assesses the likelihood of any adverse judgments or outcomes,
including the potential range of possible losses, and whether losses are probable and reasonably estimable.
Because of uncertainties related to these matters, the Company bases its estimates of whether a loss contingency is probable or
reasonably possible, as well as the reasonable range of possible losses associated with each loss contingency, only on the
information available at the time. As additional information becomes available, and at least quarterly, the Company reassesses
the potential liability on each significant matter and may revise its estimates. These revisions could have a material impact on
the Company’s business, operating results or financial condition. The actual outcome of these legal proceedings may materially
differ from the Company’s estimates of potential liability, which could have a material adverse effect on the Company’s
business, operating results or financial condition.
Credit Risk and Inventory Supplier Concentrations
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. Cash equivalents consist of money market funds, which are invested through
financial institutions in the United States. Deposits in these financial institutions may, at times, exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company also has approximately $2.9 million of cash held
63
Table of Contents by its foreign subsidiaries in Brazil, China and the United Kingdom. Management believes that the financial institutions that
hold the Company’s cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to
these cash and cash equivalents.
Concentrations of credit risk in relation to customers with an accounts receivable balance of 10% or greater of total accounts
receivable and customers with net revenue of 10% or greater of total revenue are presented below for the periods indicated.
CenturyLink
Windstream
Percentage of Accounts Receivable
December 31,
2017
42%
*
2016
28%
13%
Percentage of Revenue
Years Ended December 31,
2016
21%
15%
2015
22%
*
2017
31%
*
* Less than 10% of total accounts receivable or revenue.
The Company depends primarily on a small number of outside contract manufacturers for the bulk of its finished goods
inventory. In particular, the Company relies on Flex for the manufacture of a large percentage of its products. The Company
generally purchases its products through purchase orders with its suppliers or contract manufacturers. While the Company
seeks to maintain a sufficient supply of its products, the Company’s business and results of operations could be adversely
affected by a stoppage or delay in receiving such products, the receipt of defective parts, an increase in price of such products
or the Company’s inability to obtain lower prices from its contract manufacturers and suppliers in response to competitive
pressures.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable securities, trade receivables, accounts payable, line of credit
and other accrued liabilities approximate their fair value due to their relatively short-term nature.
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
corporate debt instruments, commercial paper and U.S. government agency securities. The Company considers all investments
with maturities of three months or less when purchased to be cash equivalents. Marketable securities represent highly liquid
corporate debt instruments, commercial paper and U.S. government agency securities with maturities greater than 90 days at
date of purchase. Marketable securities with maturities greater than one year are classified as current because management
considers all marketable securities to be available for current operations.
Cash equivalents and marketable securities are stated at amounts that approximate fair value based on quoted market prices.
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 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 income to results of operations as other
income (expense).
The Company, to date, has not determined that any of the unrealized losses on its investments are considered to be other-than-
temporary. The Company reviews its investment portfolio to determine if any security is other-than-temporarily impaired,
which would require the Company to record an impairment charge in the period any such determination is made. In making this
judgment, the Company evaluates, among other things: the duration and extent to which the fair value of a security is less than
its cost; the financial condition of the issuer and any changes thereto; and the Company’s intent and ability to hold its
investment for a period of time sufficient to allow for any anticipated recovery in market value, or whether the Company will
more likely than not be required to sell the security before recovery of its amortized cost basis. The Company had no
investments as of December 31, 2017.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments. The Company records a specific allowance based on an analysis of individual past-due balances.
Additionally, based on historical write-offs and the Company’s collection experience, the Company records an additional
allowance based on a percentage of outstanding receivables. The Company performs credit evaluations of its customers’
financial condition. These evaluations require significant judgment and are based on a variety of factors including, but not
limited to, current economic trends, payment history and a financial review of the customer. Actual collection losses may differ
from management’s estimates, and such differences could be material to our financial position and results of operations.
64
Table of Contents Inventory Valuation
Inventory, which primarily consists of finished goods purchased from contract manufacturers, is stated at the lower of cost,
determined by the first-in, first-out method, or market value. Inbound shipping costs are included in cost of inventory. In
addition, the Company, from time to time, procures component inventory primarily as a result of manufacturing discontinuation
of critical components by suppliers. The Company regularly monitors inventory quantities on hand and records write-downs for
excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of
technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its
estimated selling price. These factors are impacted by market and economic conditions, technology changes and new product
introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted
demand and may have a material effect on gross profit. If inventory is written down, a new cost basis is established that cannot
be increased in future periods. Shipments from suppliers or contract manufacturers before the Company receives them are
recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company.
Deferred Revenue and Deferred Cost of Revenue
Deferred revenue results from transactions where the Company billed the customer for product shipped or services performed
but not all revenue recognition criteria have been met. When the Company’s products have been shipped, but the product
revenue associated with the arrangement has been deferred as a result of not meeting the criteria for immediate revenue
recognition, the Company also defers the related inventory costs for the delivered items until all criteria are met for revenue
recognition. The Company defers tangible direct costs associated with hardware products delivered based on the inventory cost
at the time of shipment.
Certain costs directly related to the delivery of professional services that cannot be accounted for separately from the
undelivered items included in a multiple element arrangement or have not been earned yet are also capitalized and deferred, if
deemed recoverable, until all revenue recognition criteria are met. Accordingly, all cost of services incurred directly related to
the delivery of a professional service item in which revenue has not yet been recognized are deferred and recorded within
“Deferred cost of revenue” in the Company’s Consolidated Balance Sheets.
As of December 31, 2017 and 2016, deferred cost of revenue was $2.4 million and $34.8 million, respectively.
The Company evaluates deferred cost of revenue for recoverability based on multiple factors, including whether net revenue
will exceed the amount of deferred cost of revenue applicable to each deliverable specified in the arrangement. To the extent
that deferred cost of revenue is determined to be unrecoverable, the Company adjusts deferred cost of revenue with a charge to
cost of revenue in the current period. In connection with its recoverability assessments as of year end, the Company did not
write down any deferred costs at December 31, 2017 and wrote down deferred costs by $2.2 million at December 31, 2016.
The Company recognizes deferred revenue and associated deferred cost of revenue, as revenue and cost of revenue
respectively, in the Consolidated Statements of Comprehensive Loss once all revenue recognition criteria have been met.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation, and are depreciated using the straight-line method
over the estimated useful life of each asset. Computer equipment is depreciated over two years; purchased software is
depreciated over three years; test equipment is depreciated over three years; furniture and fixtures are depreciated over seven
years; and leasehold improvements are depreciated over the shorter of the respective lease term or the estimated useful life of
the asset. Maintenance and repairs are charged to expense as incurred.
Software Development Costs
Software development costs are capitalized beginning when a product’s technological feasibility has been established by
completion of a working model of the product and amortization begins when a product is available for general release to
customers. The period between the achievement of technological feasibility and the general release of the Company’s products
has typically been of a short duration. Costs incurred for the years ended 2017, 2016 and 2015 were not material.
Goodwill
Goodwill was recorded as a result of the Company’s acquisitions of Occam Networks, Inc. (“Occam”) in February 2011 and
Optical Solutions, Inc. in February 2006. The Company records goodwill when consideration paid in a business acquisition
exceeds the fair value of the net tangible assets and the identified intangible assets acquired. Goodwill is not amortized but
instead is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that it may be
impaired. The Company evaluates goodwill on an annual basis as of the end of the second quarter of each fiscal year.
Management has determined that it operates as a single reporting unit and, therefore, evaluates goodwill impairment at the
enterprise level.
65
Table of Contents In an annual impairment test, the Company first assesses qualitative factors to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. In assessing the qualitative factors, management considers the impact of these
key factors: macro-economic conditions, industry and market environment, overall financial performance of the Company, cash
flow from operating activities, market capitalization and stock price. If the Company determines as a result of the qualitative
assessment that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is
less than its carrying amount, then the quantitative test is required. Otherwise, no further testing is required.
In a quantitative test, the Company compares its fair value to its carrying value including goodwill. The Company determines
its fair value using both an income approach and a market approach. Under the income approach, the Company determines fair
value based on estimated future cash flows, discounted by an estimated weighted-average cost of capital, which reflects the
overall level of inherent risk of the Company and the rate of return an outside investor would expect to earn. Under the market-
based approach, the Company utilizes information regarding the Company as well as publicly available industry information to
determine earnings multiples that are used to value the Company. If the carrying value of the Company exceeds its fair value,
the Company will determine the amount of impairment loss by comparing the implied fair value of goodwill with the carrying
value of goodwill. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair
value.
At the end of the second quarter of 2017, the Company completed its annual goodwill impairment test. Based on its assessment
of the above qualitative factors, management concluded that the fair value of the Company was more likely than not greater
than its carrying amount as of July 1, 2017. As such, it was not necessary to perform the two-step quantitative goodwill
impairment test at the time.
There have been no significant events or changes in circumstances subsequent to the 2017 annual impairment test that would
more likely than not indicate that the carrying value of goodwill may have been impaired as of December 31, 2017. Therefore,
there was no impairment to the carrying value of the Company’s goodwill as of December 31, 2017. There were no impairment
losses for goodwill in the years ended December 31, 2016 or 2015.
Income Taxes
The Company evaluates its tax positions and estimates its current tax exposure along with assessing temporary differences that
result from different book to tax treatment of items not currently deductible for tax purposes. These differences result in
deferred tax assets and liabilities on the Company’s balance sheets, which are estimated based upon the difference between the
financial statement and tax bases of assets and liabilities using the enacted tax rates that will be in effect when these differences
reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized
in the Company’s statements of operations become deductible expenses under applicable income tax laws or loss or credit
carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income
against which these deductions, losses and credits can be utilized.
The Company must assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income,
and to the extent the Company believes that recovery is not more likely than not, the Company must establish a valuation
allowance. Management judgment is required in determining the Company’s provision for income taxes, the Company’s
deferred tax assets and liabilities and any valuation allowance recorded against the Company’s net deferred tax assets.
Excluding foreign operations, the Company recorded a full valuation allowance at each balance sheet date presented because,
based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize all of its
deferred tax assets in the future. The Company intends to maintain the full valuation allowance until sufficient evidence exists
to support the reversal of the valuation allowance.
Foreign Currency Translation
Assets and liabilities of the Company’s wholly owned foreign subsidiaries are translated from their respective functional
currencies at exchange rates in effect at the balance sheet date, and revenue and expenses are translated at the monthly average
exchanges rates. Translation adjustments are reflected as a separate component of stockholders’ equity. Realized foreign
currency transaction gains and losses were not significant during the years ended December 31, 2017, 2016 and 2015.
Newly Adopted Accounting Standards
Stock-Based Compensation
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic
718): Improvements to Employee Share – Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of
the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting
for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows.
The Company adopted ASU 2016-09 in the first quarter of 2017 and had the following impact:
66
Table of Contents a. Accounting for Income Taxes – The primary impact of the adoption was the recognition of excess tax benefits and
tax deficiencies through the statement of operations when the awards vest or are settled rather than through paid-in
capital. The new guidance eliminates the requirement to delay the recognition of excess tax benefits until it reduces
current taxes payable and requires the recognition of excess tax benefits and tax deficiencies in the period they arise.
The Company adopted this guidance on a modified retrospective basis beginning on January 1, 2017, and the
adoption had a cumulative-effect adjustment to the beginning balance of deferred tax asset and was fully offset by the
corresponding valuation allowance as of January 1, 2017. The adoption had no cumulative-effect adjustment on
January 1, 2017 accumulated deficit as the Company’s net operating loss carryforwards are offset by a full valuation
allowance.
b. Classification of Excess Tax Benefits on the Statement of Cash Flows – ASU 2016-09 requires all tax-related cash
flows resulting from share-based payments to be reported as operating activities on the statement of cash flows, a
change from the previous requirement to present windfall tax benefits as an inflow from financing activities and an
outflow from operating activities. The Company adopted this guidance prospectively beginning on January 1, 2017.
The adoption of ASU 2016-09 as it relates to this matter had no impact to the Company’s consolidated financial
statements.
c. Forfeitures – The Company has historically recognized stock-based compensation expense net of estimated
forfeitures on all unvested awards and elected to continuously do so with the adoption of this new guidance. Hence,
the adoption of ASU 2016-09 as it relates to this matter had no impact to the Company’s consolidated financial
statements.
d. Minimum Statutory Tax Withholding Requirements – ASU 2016-09 allows companies to withhold an amount up to
the employee’s maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of
the award. The Company adopted this guidance using a modified retrospective approach. The adoption had no impact
on the January 1, 2017 accumulated deficit as the Company had no outstanding liability awards that would otherwise
qualify for equity classification under this new guidance.
e. Classification of Employee Taxes Paid on the Statement of Cash Flows When an Employer Withholds Shares for
Tax-Withholding Purposes – ASU 2016-09 clarifies that all cash payments made to taxing authorities on the
employees’ behalf for withheld shares should be presented as financing activities on the statement of cash flows. The
Company has historically presented the taxes paid related to net share settlement of equity awards as a financing
activity on the statements of cash flows. Hence, the adoption of ASU 2016-09 as it relates to this matter had no
impact to the Company’s consolidated financial statements.
Inventory
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330): Simplifying the
Measurement of Inventory (“ASU 2015-11”), which requires measurement of inventory at lower of cost and net realizable
value, versus lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less
reasonably predictable costs of completion, disposal and transportation. The Company adopted ASU 2015-11 prospectively
beginning on January 1, 2017. The adoption of this standard had no material impact on the Company’s consolidated financial
statements.
Recent Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which
requires recognition of an asset and liability for lease arrangements longer than twelve months. ASU 2016-02 will be effective
for the Company beginning in the first quarter of 2019. Early application is permitted, and it is required to recognize and
measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is not
planning to early adopt, and accordingly, it will adopt the new standard effective January 1, 2019. The Company intends to
elect the available practical expedients on adoption. The Company is currently assessing the potential impact of adopting this
new guidance on its consolidated financial statements. The Company expects its assets and liabilities to increase as the new
standard requires recognition of right-of-use assets and lease liabilities for operating leases, but does not expect any material
impact on its income (loss) from operations or net income (loss) as a result of the adoption of this standard.
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 supersedes the revenue recognition
requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. Additionally, it supersedes some cost
67
Table of Contents guidance included in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts, and creates
new Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers. The standard’s core principle is that a
company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will
need to use more judgment and make more estimates than under the previous guidance. These may include identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation. On August 12, 2015, the FASB issued Accounting
Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date (“ASU
2015-14”) to defer the effective date of ASU 2014-09 by one year. ASU 2015-14 permits early adoption of the new revenue
standard, but not before its original effective date. In April 2016, the FASB issued Accounting Standards Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”),
which further clarifies guidance related to identifying performance obligations and licensing implementation guidance
contained in ASU 2014-09. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, ASU 2016-12, which addresses
narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition and
provides a practical expedient for contract modifications at transition and an accounting policy election related to the
presentation of sales taxes and other similar taxes collected from customers.
The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of
adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized
at the date of initial application and providing certain additional disclosures. The Company adopted the new standard effective
January 1, 2018 using the modified retrospective transition method applied to those contracts which are not completed as of
that date, which will result in a cumulative catch up adjustment to decrease the Company’s accumulated deficit as of January 1,
2018, by approximately $1 million and will require additional disclosures, including disclosures comparing results under the
new standard to current GAAP during 2018. The Company is still assessing the final impact of adoption on one minor revenue
stream, but expect the impact to be immaterial.
A description of the impact of the new standard on the Company’s business is as follows:
• For stand-alone purchase orders, while the allocation of revenue to deliverables between products and services may
change due to new methodologies under the standard, the Company expects that the impact of this adjustment will not
be significant.
• For products sold with the Company’s turnkey network improvement projects, the recognition of revenue under
current GAAP was often delayed until project completion as a result of the Company not meeting certain recognition
criteria. Under the new standard, revenue from these arrangements may be accelerated as revenue on products may be
recognized upon delivery and services may be recognized over time as the services are performed. As there were
minimal open projects under turnkey arrangements as of December 31, 2017, the impact of this change on the
Company’s accumulated deficit is not expected to be significant although it could have a material impact on the timing
of revenue recognition in the future.
• Revenue from the Company’s Cloud product offerings is not expected to be impacted by the adoption of the new
standard.
• Under current GAAP, revenue from software licenses is recognized ratably over the term of the related post-contract
support (“PCS”) as the Company did not have VSOE for PCS for the licenses sold to date. Under the new standard,
revenue allocated to the licenses is expected to be recognized upon delivery while the revenue allocated to PCS is
expected to be recognized ratably. The impact of this change was not material to the Company’s accumulated deficit
upon adoption as the Company only began selling software licenses in 2017.
In connection with the adoption of the new revenue standard effective January 1, 2018, the Company also adopted ASC
340-40, Other Assets and Deferred Costs – Contracts with Customers, with respect to capitalization and amortization of
incremental costs of obtaining a contract. As a result, the Company will capitalize additional costs of obtaining a contract,
including sales commissions, as the guidance requires the capitalization of all incremental costs incurred to obtain a contract
with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs.
The Company has determined that sales commissions as a result of obtaining extended warranty customer contracts are
recoverable, and as a result, the Company will defer $0.8 million of related sales commissions, which will result in a
cumulative catch up adjustment to decrease the Company’s accumulated deficit as of January 1, 2018, and amortize them over
the period that the related revenue is recognized. The adoption of this standard is not expected to have a material impact to the
Company’s consolidated financial statements.
68
Table of Contents 2. Prior Period Recast
The Company’s revenue from services for the year ended December 31, 2017 represents more than 10% of total revenue;
hence, the services revenue and the associated cost of revenue are presented separately in the accompanying Consolidated
Statements of Comprehensive Loss. Services include professional services, customer support, software maintenance, extended
warranty subscriptions, training and managed services. Accordingly, revenue and cost of revenue for the years ended
December 31, 2016 and 2015 are recast solely to conform with the current year presentation. The recast does not affect total
revenue, total cost of revenue, gross profit, operating expenses or net loss.
3. Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities consisted of the following (in thousands):
December 31,
2017
2016
Cash and cash equivalents:
Cash
Money market funds
Commercial paper
Total cash and cash equivalents
Marketable securities:
Corporate debt securities
Commercial paper
U.S. government agency securities
Total marketable securities
$
35,999
$
3,776
—
39,775
—
—
—
—
Total cash, cash equivalents and marketable securities
$
39,775
$
34,340
15,020
999
50,359
17,272
6,275
4,201
27,748
78,107
The carrying amounts of the Company’s money market funds approximate their fair values due to their nature, duration and
short maturities.
As of December 31, 2016, the amortized cost and fair value of marketable securities were as follows (in thousands):
Corporate debt securities
Commercial paper
U.S. government agency securities
Total marketable securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
17,279
$
6,275
4,200
27,754
$
1
—
1
2
$
$
(8)
$
17,272
—
—
6,275
4,201
(8)
$
27,748
As of December 31, 2016, there were no marketable securities classified and accounted for as available-for-sale securities that
had been in a continuous unrealized loss position in excess of twelve months.
4. Fair Value Measurements
The Company measures its cash equivalents and marketable securities at fair value on a recurring basis. Fair value is an exit
price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. The Company utilizes the following three-tier
value hierarchy which prioritizes the inputs used in measuring fair value:
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level 2 – Observable inputs other than quoted prices included in Level 1 for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and model-driven valuations in
which all significant inputs and significant value drivers are observable in active markets.
Level 3 – Unobservable inputs to the valuation derived from fair valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. The fair value hierarchy also requires the Company
69
Table of Contents to maximize the use of observable inputs, when available, and to minimize the use of unobservable inputs when
determining inputs and determining fair value.
The following table sets forth the Company’s financial assets measured at fair value as of December 31, 2017 and 2016,
based on the three-tier fair value hierarchy (in thousands):
As of December 31, 2017
Money market funds
Commercial paper
U.S. government agency securities
Total
As of December 31, 2016
Money market funds
Corporate debt securities
Commercial paper
U.S. government agency securities
Total
$
$
$
Level 1
Level 2
Total
3,776
$
— $
3,776
—
—
—
—
—
—
3,776
$
— $
3,776
Level 1
Level 2
Total
15,020
$
— $
—
—
—
17,272
7,274
4,201
15,020
17,272
7,274
4,201
$
15,020
$
28,747
$
43,767
The fair values of money market funds classified as Level 1 were derived from quoted market prices as active markets for
these instruments exist. The fair values of corporate debt securities, commercial paper and U.S. government agency securities
classified as Level 2 were derived from quoted market prices for similar instruments indexed to prevailing market yield rates.
The Company has no level 3 financial assets. The Company did not have any transfers between Level 1 and Level 2 of the
fair value hierarchy during the twelve months ended December 31, 2017 and 2016.
5. Balance Sheet Details
Accounts receivable, net consisted of the following (in thousands):
Accounts receivable
Allowance for doubtful accounts
Product return reserve
December 31,
2017
2016
$
$
81,793
(579)
(822)
80,392
$
$
52,792
(518)
(938)
51,336
The table below summarizes the changes in allowance for doubtful accounts and product return reserve for the periods
indicated (in thousands):
Year Ended December 31, 2017
Allowance for doubtful accounts
Product return reserve
Year Ended December 31, 2016
Allowance for doubtful accounts
Product return reserve
Year Ended December 31, 2015
Allowance for doubtful accounts
Product return reserve
Balance at
Beginning of
Year
Additions
Charged to
Costs or
Expenses or
Revenue
Deductions
and Write
Offs
Balance at
End of Year
$
$
$
$
$
$
518
938
501
663
241
508
$
$
$
103
3,682
232
3,679
405
4,224
$
$
$
(42)
(3,798)
(215)
(3,404)
(145)
(4,069)
579
822
518
938
501
663
70
Table of Contents Inventory consisted of the following (in thousands):
Raw materials
Finished goods
Property and equipment, net consisted of the following (in thousands):
Test equipment
Computer equipment and purchased software
Furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
December 31,
2017
2016
1,211
30,318
31,529
$
$
1,827
42,718
44,545
December 31,
2017
2016
39,952
32,175
2,714
6,029
80,870
(65,189)
15,681
$
$
43,580
30,306
2,831
6,898
83,615
(65,631)
17,984
$
$
$
$
Depreciation and amortization expense was $10.2 million, $8.3 million and $10.3 million for the years ended December 31,
2017, 2016 and 2015, respectively.
Accrued liabilities consisted of the following (in thousands):
Accrued compensation and related benefits
Accrued professional and consulting fees
Accrued warranty and retrofit
Accrued excess and obsolete inventory at contract manufacturers
Accrued non-income related taxes
Accrued restructuring charges
Accrued business events
Advance customer payments
Accrued insurance
Accrued freight
Accrued customer rebates
Accrued other
December 31,
2017
2016
15,563
9,604
8,708
2,430
1,778
1,417
1,272
1,050
827
593
382
5,655
49,279
$
$
19,541
8,205
12,214
1,327
699
—
—
20,726
804
1,198
1,931
3,070
69,715
$
$
Accrued Warranty and Retrofit
The Company provides a standard warranty for its hardware products. Hardware generally has a one-, three-, or five-year
standard warranty from the date of shipment. Under certain circumstances, the Company also provides fixes on specifically
identified performance failures for products that are outside of the standard warranty period and recognizes estimated costs
related to retrofit activities upon identification of such product failures. The Company accrues for potential warranty and
retrofit claims based on the Company’s historical product failure rates and historical costs incurred in correcting product
failures along with other relevant information related to any specifically identified product failures. The Company’s warranty
and retrofit accruals are based on estimates of losses that are probable based on information available. The adequacy of the
accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available.
Changes in the Company’s accrued warranty and retrofit liability were as follows (in thousands):
71
Table of Contents Balance at beginning of period
Provision for warranty and retrofit charged to cost of revenue
Utilization of reserve
Adjustments to pre-existing reserve
Balance at end of period
Years Ended December 31,
2016
2015
2017
$
$
12,214
8,720
(12,226)
—
8,708
$
$
9,564
9,898
(6,816)
(432)
12,214
$
$
9,553
4,661
(4,115)
(535)
9,564
Advance customer payments as of December 31, 2017 and 2016 primarily included $0.9 million and $20.3 million,
respectively, which the Company received as payments in advance of completion of final customer acceptance of the
products and services provided in connection with turnkey network improvement projects for a customer.
Deferred revenue consisted of the following (in thousands):
Current:
Product and services
Extended warranty
Non-current:
Product and services
Extended warranty
6. Credit Facility
December 31,
2017
2016
$
$
9,125
3,951
13,076
18
20,627
20,645
33,721
$
$
24,472
3,382
27,854
22
20,215
20,237
48,091
On August 7, 2017, the Company entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank
(“SVB”). In connection with the entry into the Loan Agreement, the Company contemporaneously terminated its credit
agreement previously entered into with Bank of America, N.A. on July 29, 2013 (as amended on December 23, 2015, the
“Credit Agreement”). The Credit Agreement provided for a revolving facility in the aggregate principal amount of up to $50.0
million, with any borrowings limited to a maximum consolidated leverage ratio of consolidated funded indebtedness to
consolidated EBITDA (as defined in the Credit Agreement).
The Loan Agreement provides for a senior secured revolving credit facility with SVB, pursuant to which SVB agreed to make
revolving advances available to the Company in a principal amount of up to $30.0 million based on a customary accounts
receivable borrowing base, subject to certain exceptions for accounts originating outside the United States and certain specific
accounts, which could reduce the amount available to the Company under the credit facility. The credit facility includes a $10.0
million sublimit for the issuance of letters of credit. The letters of credit issued under the Loan Agreement will reduce, on a
dollar-for-dollar basis, the amount available under the credit facility. The credit facility matures, and all outstanding amounts
become due and payable, on August 7, 2019. Subject to certain exceptions, the Company will also be required to pay to SVB a
fee of $0.3 million if it terminates the credit facility prior to August 7, 2018. The credit facility is secured by substantially all of
the Company’s assets, including the Company’s intellectual property. Loans under the credit facility will bear interest through
maturity at a variable annual rate based upon an annual rate of either a prime rate or a LIBOR rate, plus an applicable margin
between 0.50% to 1.50% for prime rate advances and between 2.00% and 3.00% for LIBOR advances based on the Company’s
maintenance of an applicable liquidity ratio. Depending on applicable liquidity ratio, the Company may be required to apply
cash collections on its accounts receivable against any outstanding balance. The Company may thereafter borrow funds again
subject to the availability under the line of credit.
The credit facility includes affirmative and negative covenants applicable to the Company and its subsidiaries. Furthermore, the
Loan Agreement requires the Company to maintain a liquidity ratio at minimum levels set forth in more detail in the Loan
Agreement. The credit facility also includes events of default, the occurrence and continuation of which would provide SVB
with the right to demand immediate repayment of any principal and unpaid interest under the credit facility, and to exercise
remedies against the Company and the collateral securing the loans under the credit facility. For the month ended November
30, 2017, the Company was not able to maintain the minimum Adjusted Quick Ratio (as defined in the Loan Agreement) at the
level required in the Loan Agreement, which constituted an event of default. Although SVB waived this event of default
effective as of November 30, 2017 and, therefore, this default did not change the Company’s ability to borrow under the Loan
Agreement, the Company was required to amend certain covenants under the Loan Agreement. In February 2018, the Company
entered into an amendment to the Loan Agreement that, among other things, amended certain affirmative financial covenants,
72
Table of Contents including reductions to the required minimum level of the Adjusted Quick Ratio (as defined in the Loan Agreement) and the
inclusion of an additional financial covenant related to the maintenance of Adjusted EBITDA (as defined in the Loan
Agreement). As of December 31, 2017, the Company was in compliance with these requirements.
As of December 31, 2017, the Company had borrowings outstanding of $30.0 million, representing the full amount available
under the line of credit.
7. 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 December 31, 2017 (in thousands):
Year Ending December 31,
Minimum Future
Lease Payments
2018
2019
2020
2021
2022
Total
$
$
2,805
1,094
751
287
19
4,956
The Company leases its primary office space in Petaluma, California under a lease agreement (“Petaluma Lease”) that, as
amended, expires February 2019. In January 2013, the Company entered into an amendment to its Petaluma Lease
(“Amendment”) to extend the lease term to February 2019. In connection with the Petaluma Lease and the Amendment, the
Company received lease incentives of $1.2 million and $0.4 million, respectively, which can be used for leasehold
improvements or be applied as credits to rent payments. The Company capitalized the full amount of the lease incentives
upon inception of the respective agreement and these incentives are being amortized to reduce rent expense over the
extended lease term. As of December 31, 2017, the total unamortized lease incentive is not significant. Payments under the
Company’s operating leases that escalate over the term of the lease are recognized as rent expense on a straight-line basis.
The above table also includes future minimum lease payments primarily for our facilities in Minneapolis, Minnesota;
Nanjing, China; Richardson, Texas; and San Jose and Santa Barbara, California, which expire at various dates through 2022.
For the years ended December 31, 2017, 2016 and 2015, total rent expense of the Company was $3.7 million, $3.7 million
and $3.5 million, respectively.
Purchase Commitments
The Company’s primary contract manufacturers place orders for 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 contract manufacturers to build the products included in the build forecasts. The Company generally does not take
ownership of the components held by contract manufacturers. The Company places purchase orders with its contract
manufacturers in order to fulfill its monthly finished product inventory requirements. The Company incurs a liability when
the contract manufacturer has converted the component inventory to a finished product and takes ownership of the inventory
when transferred to the designated shipping warehouse. In the event of termination of services with a contract manufacturer,
the Company may be required to purchase the remaining components inventory held by the contract manufacturer as well as
any outstanding orders pursuant to the contractual provisions with such contract manufacturer. As of December 31, 2017, the
Company had approximately $60.5 million of outstanding purchase commitments for inventories to be delivered by its
suppliers, including contract manufacturers, within one year.
The Company has from time to time, and subject to certain conditions, reimbursed its primary contract manufacturer 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 parts by its suppliers, or in
cases where inventory levels 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 $2.4 million and $1.3 million as of December 31, 2017 and 2016, respectively. The
Company records the related charges in cost of product revenue in its Consolidated Statements of Comprehensive Loss.
73
Table of Contents Contingencies
The Company evaluates the circumstances regarding outstanding and potential litigation and other contingencies on a
quarterly basis to determine whether there is at least a reasonable possibility that a loss exists requiring accrual or disclosure,
and if so, whether an estimate of the possible loss or range of loss can be made. When a loss is probable and reasonably
estimable, the Company accrues for such amount based on its estimate of the probable loss considering information available
at that time. When a loss is reasonably possible, the Company discloses the estimated possible loss or range of loss in excess
of amounts accrued if material. Except as otherwise disclosed below, the Company does not believe that there was a
reasonable possibility that a material loss may have been incurred during the period presented with respect to the matters
disclosed.
Litigation
From time to time, the Company is involved in various legal proceedings arising from the normal course of business
activities.
Steinhardt v. Howard-Anderson, et al.
As previously disclosed, in connection with the Company's 2011 merger transaction with Occam Networks, Inc. (“Occam”) a
complaint was filed in 2010 by stockholders of Occam in the Delaware Court of Chancery styled as Steinhardt v. Howard-
Anderson, et al. (Case No. 5878-VCL). The complaint, as initially amended, sought injunctive relief rescinding the merger
transaction and an award of damages in an unspecified amount, as well as plaintiffs' costs, attorneys' fees and other relief, and
also alleged that Occam (which has since merged into Calix), each Occam director and the Occam CFO breached their
fiduciary duties by failing to attempt to obtain the best purchase price for Occam and failing to disclose certain allegedly
material facts about the merger transaction in the preliminary proxy statement and prospectus included in the Registration
Statement on Form S-4 for the transaction. In April 2016, the parties entered into a memorandum of understanding of a
settlement in principle (“Settlement”) to resolve all of the claims pending before the Delaware Court of Chancery and related
claims for a total settlement consideration of $35.0 million. In September 2016, the court issued its Order and Final
Judgment, terminating the case before the Delaware Court of Chancery. Under the Settlement terms, Calix did not pay for
any portion of the settlement consideration.
Under the terms of the Settlement (and separate from the settlement consideration), the Company received a cash payment of
$4.5 million in partial recovery of its out-of-pocket expenses incurred in the litigation in November 2016. Accordingly, the
Company recognized $4.5 million as “Litigation settlement gain” in the year ended December 31, 2016, presented as a
reduction to operating expenses in the accompanying Consolidated Statements of Comprehensive Loss. The Company
recorded litigation defense costs and expenses in excess of its insurance coverage of $6.4 million and $3.7 million for the
years ended December 31, 2016 and 2015, respectively, as operating expenses in the accompanying Consolidated Statements
of Comprehensive Loss. The Company also did not previously accrue any estimated loss in connection with this action and,
as a result of the Settlement, did not recognize any loss related to this action.
The Company is not currently a party to any legal proceedings that, if determined adversely to the Company, in
management’s opinion, are 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.
Indemnifications
The Company from time to time enters into contracts that require it to indemnify various parties against claims from third
parties. These contracts primarily relate to (i) certain real estate leases, under which the Company may be required to
indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the
applicable premises, (ii) agreements with the Company’s officers, directors and certain employees, under which the Company
may be required to indemnify such persons for liabilities arising out of their relationship with the Company, (iii) contracts
under which the Company may be required to indemnify customers against third-party claims that a Company product
infringes a patent, copyright or other intellectual property right and (iv) agreements under which the Company may be
required to indemnify the counterparty for certain claims that may be brought against them arising from the Company’s acts
or omissions with respect to the transactions contemplated by such agreements.
Because any potential obligation associated with these types of contractual provisions are not quantified or stated, the overall
maximum amount of the obligation cannot be reasonably estimated. Historically, the Company has not been required to make
payments under these obligations, and no liabilities have been recorded for these obligations in the accompanying
Consolidated Balance Sheets.
74
Table of Contents 8. Stockholders’ Equity
Preferred Stock
The Board of Directors has the authority, without action by stockholders with the exception of stockholders who hold board
positions, to designate and issue up to 5.0 million shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock.
The issuance of the Company’s preferred stock could adversely affect the voting power of holders of common stock and the
likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of
preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate
action. Subsequent to the Company’s initial public offering and the conversion of all preferred stock outstanding at that date,
the Board of Directors has not designated any rights, preference or powers of any preferred stock and no shares of preferred
stock have been issued.
Common Stock
Holders of the Company’s common stock are entitled to receive dividends, if any, as may be declared from time to time by the
Board of Directors out of legally available funds. No dividends have been declared or paid as of December 31, 2017. In the
event of the Company’s liquidation, dissolution or winding up, holders of the Company’s common stock will be entitled to
share ratably in the net assets legally available for distribution to stockholders after the payment of all of the Company’s debts
and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of
preferred stock.
Equity Incentive Plans
As of December 31, 2017, the Company maintained two equity incentive plans, the 2002 Stock Plan (“2002 Plan”) and the
2010 Equity Incentive Award Plan (“2010 Plan”). These plans were approved by the Company's stockholders at the time of
adoption. Under the 2002 Plan, the Company granted stock options at a price not less than 100% of the fair market value of the
common stock on the date of grant. The majority of the stock options granted under the 2002 Plan vested over 4 years and
expire in 10 years.
The 2010 Plan allows the Company to grant stock options, restricted stock awards (“RSAs”), RSUs, PRSUs, stock appreciation
rights, dividend equivalents, deferred stock and stock payments to employees, directors and consultants of the Company. A total
of 4.7 million shares of common stock were initially reserved for future issuance under the 2010 Plan, which became effective
upon the completion of the Company’s initial public offering of common stock. In addition, on the first day of each year
beginning in 2011 and ending in 2020, the 2010 Plan provides for an annual automatic increase to the shares reserved for
issuance equal to the lesser of: i) 2% of the outstanding shares at the end of the previous year or ii) 666,666 shares. No more
than 17.2 million shares of Common Stock may be issued upon the exercise of Incentive Stock Options. Pursuant to the
automatic annual increase, a total of 4.7 million additional shares had been reserved as of December 31, 2017 under the 2010
Plan since 2011.
Upon the effectiveness of the 2010 Plan, equity awards were granted only under the 2010 Plan and shares of common stock
previously reserved for issuance under the prior plan became available for issuance under the 2010 Plan. To date, awards
granted under the 2010 Plan consist of stock options, RSAs, RSUs and PRSUs.
Stock options granted under the 2010 Plan are granted in general at a price not less than 100% of the fair market value of the
common stock on the date of grant. Stock options issued under the 2010 Plan through 2016 generally vest 25% on the first
anniversary of the vesting commencement date and on a monthly basis thereafter for a period of an additional three years.
Stock options granted during 2017 vest 25% on the first anniversary of the vesting commencement date and on a quarterly
basis thereafter for a period of an additional three years. The options have a maximum term of ten years.
Each RSU granted under the 2010 Plan represents a right to receive one share of the Company’s common stock (subject to
adjustment for certain specified changes in the capital structure of the Company) upon the completion of a specific period of
continued service. The majority of RSUs granted vest over four years.
In February 2016, the Company granted 0.6 million shares of PRSUs to its executives. These particular performance-based
awards contained a one-year performance period and a subsequent two-year service period. The performance target was based
on the Company’s revenue during the performance period and accounted for as a performance condition. In February 2017, the
Compensation Committee of the Company’s Board of Directors determined that the performance condition related to PRSUs
granted to executives in 2016 was met based on the Company’s actual revenue recognized during 2016. As such, each PRSU
award vested in respect to 50% of the PRSUs subject to the award in February 2017; and 25% will vest in February 2018 and
75
Table of Contents 25% will vest in February 2019, subject to the executive’s continuous service with the Company from the grant date through
the remaining vesting date.
In August 2017, the Company granted 1.2 million shares of performance-based stock option awards to its executives. These
performance-based stock option awards contained a one-year performance period and a subsequent three-year service period.
The performance target was based on a combination of the Company’s fiscal year 2017 revenue and non-GAAP operating
income and was accounted for as a performance condition. In February 2018, the Compensation Committee of the Company’s
Board of Directors concluded that the performance target was not met and all such performance-based stock options were
forfeited and canceled.
In October 2017, in connection with the hiring of its Chief Financial Offer, the Company made an “inducement” award of non-
qualified stock options to purchase 0.3 million shares of the Company's common stock with an exercise price of $5.05 per
share, equal to the grant date fair value based upon the closing price of the Company's common stock. The stock option was
granted outside the terms of the Company's 2010 Equity Incentive Award Plan (under the employee inducement award
exemption under the New York Stock Exchange Listed Company Manual Rule 303A.08). The stock option will vest and
become exercisable over four years from the date of grant, with 25% of the shares vesting on the one-year anniversary of the
grant date and the remaining shares vesting quarterly thereafter over the next three years, subject to continued employment with
the Company.
In December 2017, the Company granted 1.6 million shares of performance-based stock option awards to its executives. These
performance-based stock option awards contain a one-year performance period and a subsequent two-year service period. The
performance target is based on the Company’s non-GAAP operating income during the performance period and accounted for
as a performance condition. After the one-year performance period, if the performance target is met and subject to certification
by the Compensation Committee of the Company’s Board of Directors, each performance-based stock option award shall vest
with respect to 50% of the earned shares on January 1, 2019 and 6.25% of the earned shares quarterly thereafter, subject to the
executive’s continuous service with the Company from the grant date through the respective vesting dates. If the performance
target is not met, all such performance-based stock options shall be immediately forfeited and canceled.
Stock Options
The following table summarizes the activity of stock options under the Company’s equity incentive plans (in thousands, except
per share data):
Stock Options
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding as of December 31, 2017
Vested and expected to vest as of December 31, 2017
Options exercisable as of December 31, 2017
Weighted-
Average
Exercise Price
Per Share
Number of
Shares
3,209
3,527
(11)
(13)
(956)
5,756
2,857
1,753
$
$
$
$
10.14
6.31
5.68
8.38
12.72
7.38
8.39
9.46
Weighted-
Average
Remaining
Contractual
Life
(in years)
Aggregate
Intrinsic
Value (1)
7.1
8.1
5.6
$
$
$
328
295
34
(1) Amounts represent the difference between the exercise price and the fair market value of common stock at December 31,
2017 of $5.95 per share for all in the money options outstanding.
During the years ended December 31, 2017, 2016 and 2015, total intrinsic value of stock options exercised was $10 thousand,
$5 thousand and $0.3 million, respectively. Total cash received from employees as a result of stock option exercises in 2017,
2016 and 2015 was $0.1 million, $17 thousand and $0.6 million, respectively. Total fair values of stock options vested during
2017, 2016 and 2015 were $2.1 million, $1.9 million and $2.8 million, respectively.
76
Table of Contents Restricted Stock Units and Performance Restricted Stock Units
The following table summarizes the activities of the Company’s RSUs and PRSUs under the Company’s equity incentive plans
(in thousands, except per share data):
Outstanding at December 31, 2016
Granted
Vested
Canceled
Outstanding at December 31, 2017
RSUs
PRSUs
Weighted-
Average
Grant Date
Fair Value
Per Share
Number of
Shares
2,598
505
(1,072)
(305)
1,726
$
$
7.86
6.75
7.92
7.70
7.53
Weighted-
Average
Grant Date
Fair Value
Per Share
Number of
Shares
565
—
(325)
(90)
150
$
$
7.51
—
7.42
8.01
7.42
Upon vesting of certain RSUs and PRSUs, the Company withheld shares with value equivalent to the employees’ minimum
statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing
authorities. The number of shares withheld was based on the value of the RSUs or PRSUs on their vesting date as determined
by the Company’s closing stock price. The withheld shares are reserved for future grant and issuance under the 2010 Plan.
Employee Stock Purchase Plans
The Company’s ESPP allows employees to purchase shares of the Company’s common stock through payroll deductions of up
to 15 percent of their annual compensation subject to certain Internal Revenue Code limitations. In addition, no participant may
purchase more than 2,000 shares of common stock in each offering period.
The offering periods under the ESPP are six-month periods. In July 2016, the Compensation Committee of the Company’s
Board of Directors approved a change in those six-month period commencement dates to May 15 and November 15 of each
year, effective May 15, 2017. The ending date of the ESPP offering period commencing on November 2, 2016 was extended
until May 14, 2017 as a result of this change. The price of common stock purchased under the ESPP is 85 percent of the lower
of the fair market value of the common stock on the commencement date and exercise date of each six-month offering period.
The ESPP provides for the issuance of a maximum of 7.3 million shares of common stock. For the year ended December 31,
2017, shares totaling 0.7 million were purchased and issued. As of December 31, 2017, there were 2.5 million shares available
for issuance.
On March 30, 2017, the Company’s Board of Directors, upon recommendation of the Compensation Committee, approved the
adoption of the Nonqualified ESPP. The Nonqualified ESPP was approved by the Company's stockholders on May 17, 2017,
with the initial offering period commencing July 1, 2017. Under the Nonqualified ESPP, eligible employees can purchase
shares of the Company’s common stock through payroll deductions of up to 25 percent of their annual compensation. Eligible
employees have the right to (a) purchase the maximum number of whole shares of common stock that can be purchased with
the elected payroll deductions during each offering period for which the employee is enrolled at a purchase price equal to the
closing price of the Company’s common stock on the last day of such offering period and (b) receive an equal number of shares
of the Company’s common stock that are subject to a risk of forfeiture in the event the employee terminates employment within
the one year period immediately following the purchase date. The Nonqualified ESPP provides two six-month offering periods,
from January 1 through June 30 and July 1 through December 31 of each year. The maximum number of shares of common
stock authorized for issuance under the Nonqualified ESPP as of December 31, 2017 was 1.0 million shares, with a maximum
of 0.5 million shares allocated per purchase period. During the year ended December 31, 2017, shares totaling 0.2 million were
purchased and issued, with an additional equal number of shares issued subject to a risk of forfeiture. As of December 31, 2017,
there were 0.6 million shares available for future issuance.
Stock-Based Compensation
Stock-based compensation expense associated with stock options, RSUs, PRSUs and purchase rights under the Company’s
ESPP and Nonqualified ESPP is measured at the grant date based on the fair value of the award, and is recognized, net of
forfeitures, as expense over the remaining requisite service period on a straight-line basis. During the years ended
December 31, 2017, 2016 and 2015, the Company recorded stock-based compensation expense of $12.4 million, $14.3 million
and $13.8 million, respectively.
77
Table of Contents The following table summarizes the weighted-average grant date fair values of the Company’s stock-based awards granted in
the periods indicated:
Stock options
RSUs
PRSUs
ESPP
Nonqualified ESPP
Years Ended December 31,
2016
2015
2017
$
$
$
$
$
$
$
$
3.19
6.75
N/A
1.76
6.90
$
$
$
3.58
6.91
7.42
1.92
N/A
4.56
8.59
N/A
2.03
N/A
The Company values the RSUs and employee stock purchase right under the Nonqualified ESPP at the closing market price of
the Company’s common stock on the date of grant.
Stock-based compensation expense associated with PRSUs and performance-based stock option awards with graded vesting
features and which contain both a performance and a service condition is only recognized if the Company has determined that
it is probable that the performance condition will be met. The Company reassesses the probability of vesting at each reporting
period and adjusts compensation expense based on its probability assessment. The probability of meeting the performance
condition related to performance-based stock option awards granted to executives in August 2017 and December 2017 was
assessed as not probable as of December 31, 2017; as such, no stock-based compensation expense was recognized for these
performance-based stock option awards as of December 31, 2017.
The Company estimates the fair value of stock options and employee stock purchase right under the ESPP at the grant date
using the Black-Scholes option-pricing model. This model requires the use of the following assumptions:
(i) Expected volatility of the Company’s common stock – The Company computes its expected volatility assumption
based on a blended volatility (50% historical volatility and 50% implied volatility from traded options on the
Company’s common stock). The selection of a blended volatility assumption was based upon the Company’s
assessment that a blended volatility is more representative of the Company’s future stock price trend as it weighs the
historical volatility with the future implied volatility.
(ii) Expected life of the option award – Represents the weighted-average period that the stock options are expected to
remain outstanding. The Company’s computation of expected life utilizes the simplified method in accordance with
Staff Accounting Bulletin No. 110 (“SAB 110”) due to the lack of sufficient historical exercise data to provide a
reasonable basis upon which to estimate expected term. The mid-point between the vesting date and the expiration
date is used as the expected term under this method.
(iii) Expected dividend yield – Assumption is based on the Company’s history of not paying dividends and no future
expectations of dividend payouts.
(iv) Risk-free interest rate – Based on the U.S. Treasury yield curve in effect at the time of grant with maturities
approximating the grant’s expected life.
The following table summarizes the weighted-average assumptions used in estimating the grant-date fair value of stock options
and of each employee’s purchase right under the ESPP in the periods indicated:
Stock Options
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rate
ESPP
Expected volatility
Expected life (years)
Expected dividend yield
Risk-free interest rate
Years Ended December 31,
2016
2015
2017
52%
5.88
—
2.10%
53%
6.25
—
1.60%
52%
6.25
—
1.56%
Years Ended December 31,
2016
2015
2017
45%
0.49
—
1.24%
46%
0.52
—
0.47%
46%
0.46
—
0.18%
In addition, the Company applies an estimated forfeiture rate to awards granted and records stock-based compensation expense
only for those awards that are expected to vest. Forfeiture rates are estimated at the time of grant based on the Company’s
78
Table of Contents historical experience. Further, to the extent the Company’s actual forfeiture rate is different from management’s estimate, stock-
based compensation is adjusted accordingly.
As of December 31, 2017, unrecognized stock-based compensation expenses by award type, net of estimated forfeitures, and
their expected weighted-average recognition periods are summarized in the following table (in thousands).
Unrecognized stock-based compensation expense
Weighted-average amortization period (in years)
December 31, 2017
Stock Option
3,766
$
2.8
$
RSU
PRSU
ESPP Plans
$
8,431
1.9
$
222
0.7
1,689
0.7
The Company expects to recognized stock-based compensation expense of $8.1 million in 2018, $3.6 million in 2019, $2.0
million in 2020 and $0.4 million in 2021.
Common Stock Warrants
Warrants to purchase convertible preferred stock that did not expire at the close of the Company's initial public offering, in
March 2010, converted to warrants to purchase common stock at the applicable conversion rate for the related preferred stock.
All warrants outstanding as of December 31, 2016 expired unexercised in September 2017.
Shares Reserved for Future Issuance
The Company had common shares reserved for future issuance as follows (in thousands):
Stock options outstanding
Restricted stock units outstanding
Performance restricted stock units outstanding
Shares available for future grant under 2010 Plan
Shares available for future issuance under ESPP
Shares available for future issuance under Nonqualified ESPP
Common stock warrants
December 31,
2017
2016
5,756
1,726
150
281
2,456
551
—
10,920
3,209
2,598
565
1,603
119
—
15
8,109
9. Employee Benefit Plan
The Company sponsors a 401(k) tax-deferred savings plan for all employees who meet certain eligibility requirements.
Participants may contribute, on a pre-tax basis, a percentage of their annual compensation, but not to exceed a maximum
contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company, at the discretion of the Board of
Directors, may make additional matching contributions on behalf of the participants. The Company made matching
contributions totaling $3.0 million, $2.1 million and $1.8 million in 2017, 2016 and 2015, respectively.
10. Accumulated Other Comprehensive Loss
The table below summarizes the changes in accumulated other comprehensive loss by component:
Balance at December 31, 2015
Other comprehensive income (loss)
Balance at December 31, 2016
Other comprehensive income
Balance at December 31, 2017
Unrealized
Gains and
Losses on
Available-for-
Sale
Marketable
Securities
Foreign
Currency
Translation
Adjustments
(94)
88
(6)
6
(101)
(549)
(650)
481
$
— $
(169)
$
Total
(195)
(461)
(656)
487
(169)
Realized gains and losses on sales of available-for-sale marketable securities, if any, are reclassified from accumulated other
comprehensive loss to “Other income (expense), net” in our Consolidated Statements of Comprehensive Loss.
79
Table of Contents 11. Income Taxes
The domestic and foreign components of loss before provision for incomes taxes were as follows (in thousands):
Domestic
Foreign
Provision for income taxes consisted of the following (in thousands):
Current:
State
Foreign
Current income tax
Deferred:
Foreign
Deferred income tax
Years Ended December 31,
2017
2016
2015
(84,387)
2,598
(81,789)
$
$
(28,931)
1,876
(27,055)
$
$
(27,674)
1,876
(25,798)
Years Ended December 31,
2016
2015
2017
115
577
692
551
551
1,243
$
$
102
673
775
(428)
(428)
347
$
$
90
493
583
(48)
(48)
535
$
$
$
$
The differences between the statutory tax rate and the effective tax rate, expressed as a percentage of loss before income taxes,
were as follows:
Federal statutory rate
State statutory rate
Foreign operations
R&D tax credits
Foreign income inclusion
Non-deductible stock compensation
Other permanent items
Tax true-up
Valuation allowance
Tax reform
Effective tax rate
Years Ended December 31,
2016
2015
2017
34.0 %
4.5 %
0.5 %
2.7 %
(0.1)%
(3.7)%
(0.4)%
(1.7)%
67.3 %
(104.6)%
(1.5)%
34.0 %
6.1 %
0.6 %
6.4 %
(0.7)%
(5.1)%
(1.4)%
21.0 %
(62.2)%
— %
(1.3)%
34.0 %
2.6 %
1.1 %
11.2 %
(2.4)%
(1.9)%
(2.0)%
(1.3)%
(43.4)%
— %
(2.1)%
80
Table of Contents The significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Tax credit carryforwards
Depreciation and amortization
Accruals and reserves
Deferred revenue
Stock-based compensation
Intangible assets
Other
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liability - intangible assets
December 31,
2017
2016
$
$
134,731
43,095
1,892
7,933
7,928
3,100
64
23
198,766
(198,746)
20
—
20
$
$
167,668
36,026
2,538
13,462
12,954
6,159
—
1,124
239,931
(239,238)
693
(157)
536
All deferred tax assets, along with any related valuation allowance, and net of all deferred tax liabilities are classified in the
consolidated balance sheet as long-term.
Management reviews the recognition of deferred tax assets to determine if realization of such assets is more likely than not.
The realization of the Company’s deferred tax assets is dependent upon future earnings. The Company has been in a cumulative
loss position since inception, which represents a significant piece of negative evidence. Using the more likely than not criteria
specified in the applicable accounting guidance, this negative evidence cannot be overcome by positive evidence currently
available to the Company and as a result the Company has established a full valuation allowance against its deferred tax assets
with the exception of certain foreign deferred tax assets. The Company’s valuation allowance decreased by $40.5 million in
2017 and increased by $16.8 million in 2016.
As of December 31, 2017, the Company had U.S. federal and state net operating losses of approximately $604.1 million and
$210.2 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2019
and through 2037 if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 2018 and
through 2037, if not utilized. Additionally, the Company has U.S. federal, California and other U.S. states research and
development credits of approximately $31.0 million, $33.4 million and $3.2 million, respectively, as of December 31, 2017.
The U.S. federal research and development credits will begin to expire in 2020 and through 2036 and the California research
and development credits have no expiration date. The credits related to other various U.S. states will begin to expire in 2018
and through 2032. Based on current activity during 2017, the Company does not anticipate to have further adjustments or
limitations to the Company’s net operating loss carryforwards.
Uncertain Tax Positions
ASC Topic 740, “Income Taxes,” prescribes a recognition threshold and measurement attribute to the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides
guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions.
The standard requires the Company to recognize the financial statement effects of an uncertain tax position when it is more
likely than not that such position will be sustained upon audit. The Company recognizes accrued interest and penalties related
to unrecognized tax benefits as interest expense and income tax expense, respectively, in statements of comprehensive loss.
The following table reconciles the Company’s unrecognized tax benefits (in thousands):
Balance at beginning of year
Additions for tax positions related to prior year
Reductions for tax positions related to prior year
Additions for tax positions related to current year
Balance at end of year
81
Years Ended December 31,
2017
2016
$
$
18,349
—
—
1,940
20,289
$
$
16,597
420
(145)
1,477
18,349
Table of Contents As of December 31, 2017 and 2016, the Company had unrecognized tax benefits of $20.3 million and $18.3 million,
respectively, none of which would affect the Company’s effective tax rate if recognized. There were no accrued interest or
penalties for uncertain income tax as of December 31, 2017.
The Company files tax returns in the United State and various state jurisdictions, the United Kingdom, China and Brazil. The
tax years 1999 through 2016 remain open and subject to examination by the appropriate governmental agencies in the U.S. due
to tax attribute carryforwards.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including but not limited to (1)
reducing the U.S. federal corporate tax rate from 34% to 21%; (2) requiring companies to pay a one-time transition tax on
certain repatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from
foreign subsidiaries; (4) requiring a current inclusion in U.S. federal income of certain earnings of controlled foreign
corporations; (5) creating a new limitation on deductible interest expense; and (6) changing rules related to the uses and
limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on
accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year
from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income taxes. In accordance with
SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC
740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is
able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act
imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. These transitional
impacts resulted in a provisional net income inclusion of $1.1 million for the year ended December 31, 2017. The one-time
transition tax is based on post-1986 earnings and profits that were previously deferred from U.S. income tax. While the
Company has not yet finalized its calculation of the total post-1986 earnings and profits for its foreign corporations or the
impact of foreign tax credits, it has prepared a reasonable estimate and calculated the provision amount. The Company is
continuing to evaluate the calculation and accounting of the transition tax, which may change as the Company's interpretation
of the provisions of the Tax Act evolve, additional information becomes available or interpretive guidance is issued by the U.S.
Treasury. The final determination will be completed no later than one year from the enactment date. Based on current year and
carryover losses and valuation allowance, the Company does not expect an impact to its consolidated financial statements upon
completion of the analysis.
In addition, the reduction of U.S. federal corporate tax rate reduces the corporate tax rate to 21%, effective January 1, 2018.
Consequently, the Company has accounted for the reduction of $84.4 million of deferred tax assets with an offsetting
adjustment to the valuation allowance in the year ended December 31, 2017, which is reflected in the disclosures presented
above.
12. Net Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated (in
thousands, except per share data):
Numerator:
Net loss
Denominator:
Weighted-average common shares outstanding
Basic and diluted net loss per common share
Potentially dilutive shares, weighted-average
Years Ended December 31,
2017
2016
2015
$
$
(83,032)
$
(27,402)
$
(26,333)
50,155
48,730
(1.66)
$
(0.56)
$
3,446
5,890
51,489
(0.51)
6,120
For the year ended December 31, 2017 and for the year ended December 31, 2015, unvested restricted stock awards are
included in the calculation of basic weighted-average shares because such shares are participating securities; however, the
impact was immaterial. There were no unvested restricted stock awards during the year ended December 31, 2016.
Potentially dilutive shares have been excluded from the computation of diluted net loss per common share when their effect is
antidilutive. These antidilutive shares were primarily from stock options, restricted stock units and performance restricted stock
82
Table of Contents units. For each of the periods presented where the Company reported a net loss, the effect of all potentially dilutive securities
would be antidilutive, and as a result diluted net loss per common share is the same as basic net loss per common share.
13. Segment Information
The Company develops, markets and sells communications access systems and software, 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 considered to be in 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.
Geographic Information:
The following is a summary of revenue by geographic region based upon the location of the customers (in thousands):
United States
Caribbean
Canada
Europe
Other
$
$
$
$
Years Ended December 31,
2016
415,629
12,934
9,064
6,334
14,826
458,787
2017
452,956
9,853
13,105
6,575
27,878
510,367
$
$
2015
360,077
13,358
10,198
11,090
12,740
407,463
The Company’s property and equipment, net of accumulated depreciation, are located in the following geographical areas (in
thousands):
United States
China
14. Restructuring Plan
December 31,
2017
2016
$
$
13,109
2,572
15,681
$
$
15,321
2,663
17,984
The Company adopted a restructuring plan in March 2017. This restructuring plan realigns the Company’s business, increasing
its focus towards its investments in software defined access and cloud products, while reducing its expense structure in its
traditional systems business. The Company began to take actions under this plan beginning in March 2017 and recognized $4.2
million of restructuring charges for the year ended December 31, 2017 consisting primarily of severance and other one-time
termination benefits. Restructuring charges are presented separately under operating expenses in the accompanying
Consolidated Statements of Comprehensive Loss.
The following table summarizes the activities related to the restructuring charges pursuant to the above restructuring plan (in
thousands):
Balance at December 31, 2016
Restructuring charges for the year
Cash payments
Balance at December 31, 2017
Severance and
Related
Benefits
Facilities
Total
$
$
— $
— $
3,807
(2,832)
975
$
442
—
442
$
—
4,249
(2,832)
1,417
Actions pursuant to this restructuring plan were complete as of December 31, 2017. Any changes to the estimates of executing
the restructuring plan will be reflected in our future results of operations.
15. Subsequent Events
The Company established a new restructuring plan in early 2018 to further realign its business resources based on the
production releases of its platform offerings. The Company expects to incur restructuring charges of approximately $4.0
million, consisting of primarily of severance and other termination related benefits, in the first quarter of 2018.
83
Table of Contents In February 2018, the Company sold its outdoor cabinet product line to Clearfield, Inc. for $10.4 million in cash and the
assumption by Clearfield of the related product warranty liabilities and open purchase order commitments with its contract
manufacturer.
In March 2018, the Company entered into a new office lease agreement for 65,000 square feet in San Jose, California as its
current office lease in San Jose, California expires in August 2018. The lease commences in August 2018 for a term of 87
months. The future minimum lease obligations under the lease are $16.1 million.
16. Quarterly Financial Data—Unaudited
The Company’s fiscal year begins on January 1st and ends on December 31st. Quarterly periods are based on a 4-4-5 fiscal
calendar with the first, second and third fiscal quarters ending on the 13th Saturday of each fiscal period. As a result, the
Company had five more days in the first quarter of 2017 and six fewer days in the fourth quarter of 2017 than in the respective
2016 periods.
The following table presents selected unaudited quarterly financial data of the Company (in thousands, except per share data).
The Company’s quarterly results of operations for these periods are not necessarily indicative of future results of operations.
Revenue
Gross profit
Operating loss
Net loss
Net loss per common share, basic
Net loss per common share, diluted
Revenue
Gross profit
Operating income (loss)
Net income (loss)
Net income (loss) per common share, basic
Net income (loss) per common share, diluted
April 1
Fiscal Year 2017 Quarter Ended
September 30
July 1
December 31
117,518
34,377
(32,816)
(33,325)
(0.67)
(0.67)
$
$
$
126,123
43,323
(18,714)
(18,988)
(0.38)
(0.38)
$
$
$
128,827
44,633
(17,263)
(17,853)
(0.35)
(0.35)
$
$
$
137,899
50,557
(12,763)
(12,866)
(0.25)
(0.25)
March 26
Fiscal Year 2016 Quarter Ended
September 24
June 25
December 31
98,375
45,482
(10,738)
(10,729)
(0.22)
(0.22)
$
$
$
107,425
50,006
(5,881)
(5,826)
(0.12)
(0.12)
$
$
$
121,187
53,544
735
636
0.01
0.01
$
$
$
131,800
52,186
(12,235)
(11,483)
(0.23)
(0.23)
$
$
$
$
$
$
84
Table of Contents ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in nor any disagreements with accountants on accounting principles or practices, financial statement
disclosure, auditing scope or procedures, or other reportable events requiring disclosure pursuant to Item 304(b) of Regulation
S-K.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, which we refer to as the evaluation date, we carried out an evaluation under
the supervision and with the participation of management, including our principle executive officer and principle financial
officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
The purpose of this evaluation was to determine whether as of the evaluation date our disclosure controls and procedures were
effective to provide reasonable assurance that the information we are required to disclose in our filings with the SEC, (i) is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and
(ii) accumulated and communicated to our management, including our principal executive officer and our principal financial
officer, as appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, our principal
executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this report.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017 using the
criteria set forth in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO, (2013 framework). Based on our evaluation, management has concluded that we maintained
effective control over financial reporting as of December 31, 2017 based on the COSO criteria. The effectiveness of our
internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered
public accounting firm, as stated in their report included in this Annual Report on Form 10-K.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our principal executive officer and our principal financial officer reasonable
assurances that our disclosure controls and procedures will achieve their objectives. However, our management, including our
principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures or our
internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of
controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation
of controls can provide complete assurance that all control issues and instances of error, if any, within our company are
detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns
can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the
individual acts of specific persons within the organization. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated objectives under all potential future conditions.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by
Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
Other Information
None.
85
Table of Contents ITEM 10.
Directors, Executive Officers and Corporate Governance
PART III
Information required by this Item 10 relating to our directors is incorporated by reference to the information set forth under the
captions “Proposal No. 1—Election of Directors” and “Director Compensation” and in other applicable sections of the Proxy
Statement for the 2018 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Exchange Act, or the Proxy Statement, to be filed within 120 days of the end of the fiscal year covered
by this Report. Information required by this Item 10 relating to our officers is incorporated by reference to the information set
forth under the captions “Executive Officers” and “Executive Compensation” and in other applicable sections of the Proxy
Statement. Information regarding our Section 16 reporting compliance is incorporated by reference to the information set forth
under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Section 16(a) Beneficial
Ownership Reporting Compliance” of the Proxy Statement.
We have adopted a code of ethics, which applies to all employees, officers and directors of Calix. The Code of Business
Conduct and Ethics meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K, and applies to our
Chief Executive Officer, Chief Financial Officer and all other employees, as indicated above. The Code of Business Conduct
and Ethics also meets the requirements of a code of conduct under NYSE listing standards. The Code of Business Conduct and
Ethics is posted on our website at www.calix.com under the links “About Calix—Investor Relations—Corporate Governance—
Code of Conduct.” We intend to disclose any amendments to the Code of Business Conduct and Ethics, as well as any waivers
for executive officers or directors, on our website at www.calix.com.
ITEM 11.
Executive Compensation
Information required by this Item 11 relating to executive compensation and other matters is incorporated by reference to the
information set forth under the caption “Compensation Discussion and Analysis” and in other applicable sections of the Proxy
Statement.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this Item 12 relating to security ownership of certain beneficial owners and management and related
stockholder matters is incorporated by reference to the information set forth under the caption “Security Ownership of Certain
Beneficial Owners and Management” and in other applicable sections of the Proxy Statement. Information regarding securities
authorized for issuance under our equity compensation plans is incorporated by reference to the information set forth under the
caption “Equity Compensation Plan Information” of the Proxy Statement.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
Information required by this Item 13 relating to certain relationships and related transactions and director independence is
incorporated by reference to the information set forth under the caption “Certain Relationships and Related Transactions” and
in other applicable sections of the Proxy Statement.
ITEM 14.
Principal Accountant Fees and Services
Information required by this Item 14 relating to principal account fees and services is incorporated by reference to the
information set forth under the caption “Principal Accountant Fees and Services” of the Proxy Statement.
86
Table of Contents PART IV
ITEM 15.
Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
The consolidated financial statements of Calix and the reports of independent registered public accounting firms thereon are set
forth under Part II, Item 8 of this report.
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets, As of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Loss, Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows, Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
55
57
58
59
60
61
All schedules have been omitted because they are not applicable, not required, not presently in amounts sufficient to require
submission of the schedule, or the information required to be set forth therein is included in the consolidated financial
statements or notes thereto.
3. Exhibits
The following exhibits are filed with or incorporated by reference in this report. Where such filing is made by incorporation by
reference to a previously filed registration statement or report, such registration statement or report is identified in parentheses.
We will furnish any exhibit upon request to: Calix Investor Relations, Thomas J. Dinges at Tom.Dinges@calix.com.
Exhibit
Number
2.1
3.1
3.2
4.1
10.1*
10.2*
10.3
10.4
Description
Agreement and Plan of Merger and Reorganization, dated as of September 16, 2010, by and among Calix, Inc., Ocean Sub
I, Inc., Ocean Sub II, LLC, Occam Networks, Inc. (filed as Exhibit 2.1 to Calix’s Registration Statement on Form S-4
originally filed with the Securities and Exchange Commission on November 2, 2010 (File No. 333-170282), as amended by
Amendment No. 1 filed December 14, 2010, as amended by Post-Effective Amendment No. 1, filed December 14, 2010
and as amended by Post-Effective Amendment No. 2, filed February 7, 2011 and incorporated by reference).
Amended and Restated Certificate of Incorporation of Calix, Inc. (filed as Exhibit 3.3 to Amendment No. 7 to Calix’s
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No.
333-163252) and incorporated by reference).
Amended and Restated Bylaws of Calix, Inc. (filed as Exhibit 3.5 to Amendment No. 7 to Calix’s Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No. 333-163252) and incorporated
by reference).
Form of Calix, Inc.’s Common Stock Certificate (filed as Exhibit 4.1 to Amendment No. 7 to Calix’s Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on March 23, 2010 (File No. 333-163252) and
incorporated by reference).
Calix Networks, Inc. Amended and Restated 2002 Stock Plan and related documents (filed as Exhibit 10.2 to Amendment
No. 6 to Calix’s Registration Statement on Form S-1 filed with the SEC on March 8, 2010 (File No. 333-163252) and
incorporated by reference).
Calix, Inc. 2010 Equity Incentive Award Plan and related documents (filed as Exhibit 10.4 to Amendment No. 6 to Calix’s
Registration Statement on Form S-1 filed with the SEC on March 8, 2010 (File No. 333-163252) and incorporated by
reference).
Form of Indemnification Agreement made by and between Calix, Inc. and each of its directors, executive officers and some
employees (filed as Exhibit 10.5 to Amendment No. 6 to Calix’s Registration Statement on Form S-1 filed with the SEC on
March 8, 2010 (File No. 333-163252) and incorporated by reference).
Lease between RNM Lakeville, LLC and Calix, Inc. dated February 13, 2009 (filed as Exhibit 10.6 to Calix’s Registration
Statement on Form S-1 filed with the SEC on November 20, 2009 (File No. 333-163252) and incorporated by reference).
87
Table of Contents Exhibit
Number
10.5
10.6
10.7
10.8*
10.9*
10.10†
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23†
Description
First Amendment to Lease by and between 1031, 1035, 1039 North McDowell, LLC and Calix, Inc. effective January 28,
2013 (filed as Exhibit 10.25 to Calix’s Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and
incorporated by reference).
Credit Agreement among Calix, Inc., certain of its subsidiaries, Bank of America, N.A. and the other lenders party thereto
dated July 29, 2013 (filed as Exhibit 10.1 to Calix’s Form 10-Q filed with the SEC on August 6, 2013 (File No. 001-34674)
and incorporated by reference).
First Amendment to Credit Agreement dated as of December 23, 2015 by and among Calix, Inc. and Bank of America, N.A.
as administrative agent and lender (filed as Exhibit 10.1 to Calix’s Form 8-K filed with the SEC on December 28, 2015
(File No. 001-34674) and incorporated by reference).
Offer Letter between Calix, Inc. and Carl Russo dated November 1, 2006 (filed as Exhibit 10.8 to Amendment No. 1 to
Calix’s Registration Statement on Form S-1 filed with the SEC on December 31, 2009 (File No. 333-163252) and
incorporated by reference).
Offer Letter between Calix, Inc. and William Atkins dated December 21, 2013 (filed as Exhibit 10.15 to Calix’s Form 10-K
filed with the SEC on February 20, 2014 (File No. 001-34674) and incorporated by reference).
Asset Purchase Agreement between Ericsson Inc. and Calix, Inc. dated August 20, 2012 (filed as Exhibit 10.1 to Calix’s
Form 10-Q/A filed with the SEC on December 18, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Restricted Stock Unit Deferred Compensation Plan, effective January 1, 2013 (filed as
Exhibit 10.22 to Calix’s Form 10-K filed with the SEC on February 22, 2013 (File No. 001-34674) and incorporated by
reference).
Calix, Inc. Management Bonus Program Under the 2010 Equity Incentive Award Plan (filed as Exhibit 10.1 to Calix’s Form
8-K filed with the SEC on February 28, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Long Term Incentive Program Under the 2010 Equity Incentive Award Plan (filed as Exhibit 10.2 to Calix’s
Form 8-K filed with the SEC on February 28, 2012 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Equity Compensation Policy, as amended October 18, 2011, July 25, 2012, April 22,
2014 and April 26, 2016 (filed as Exhibit 10.18 to Calix's Form 10-K filed with the SEC on February 28, 2017 (File No.
001-34674) and incorporated by reference).
Offer Letter by and between Calix, Inc. and Michael Weening dated May 20, 2016 (filed as Exhibit 10.1 to Calix’s Form
10-Q filed with the SEC on August 3, 2016 (File No. 001-34674) and incorporated by reference).
Offer Letter by and between Calix, Inc. and Greg Billings dated December 8, 2016 (filed as Exhibit 10.24 to Calix's Form
10-K filed with the SEC on February 28, 2016 (File No. 001-34674) and incorporated by reference).
Amendment to Offer Letter by and between Calix, Inc. and Greg Billings dated August 1, 2017.
Separation Agreement and General Release of All Claims by and between Calix, Inc. and William Atkins dated March 31,
2017 (filed as Exhibit 10.1 to Calix’s Form 10-Q filed with the SEC on May 10, 2017 (File No. 001-34674) and
incorporated by reference).
Consulting Agreement by and between Calix, Inc. and Cory Sindelar dated May 31, 2017 (filed as Exhibit 10.1 to Calix’s
Form 10-Q filed with the SEC on August 10, 2017 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Non-Employee Director Cash Compensation Policy, as amended June 1, 2017 (filed as Exhibit 10.2 to Calix’s
Form 10-Q filed with the SEC on August 10, 2017 (File No. 001-34674) and incorporated by reference).
Calix, Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Appendix A to the
Registrant's definitive proxy statement on Schedule 14A, filed with the SEC on April 4, 2017 (File No. 001-34674)).
Calix, Inc. 2017 Nonqualified Employee Stock Purchase Plan (incorporated by reference to Appendix B to the Registrant's
definitive proxy statement on Schedule 14A, filed with the SEC on April 4, 2017 (File No. 001-34674)).
Loan and Security Agreement dated August 7, 2017 between Silicon Valley Bank and Calix, Inc. (filed as Exhibit 10.1 to
Calix’s Form 10-Q filed with the SEC on August 11, 2017 (File No. 001-34674) and incorporated by reference).
10.24††
First Amendment to Loan and Security Agreement dated February 13, 2018 between Silicon Valley Bank and Calix, Inc.
10.25*
10.26*
10.27*
10.28*
Offer Letter between Calix, Inc. and Cory Sindelar dated September 28, 2017 (filed as Exhibit 10.2 to Calix’s Form 10-Q
filed with the SEC on August 11, 2017 (File No. 001-34674) and incorporated by reference).
Nonstatutory Inducement Stock Option Grant Notice between Calix, Inc. and Cory Sindelar dated October 1, 2017 (filed as
Exhibit 10.3 to Calix’s Form 10-Q filed with the SEC on August 11, 2017 (File No. 001-34674) and incorporated by
reference).
Amended and Restated Executive Change in Control and Severance Plan effective September 6, 2017 (filed as Exhibit 10.1
to Calix’s Form 8-K filed with the SEC on September 11, 2017 (File No. 001-34674) and incorporated by reference).
Amendment to Amended and Restated Executive Change in Control and Severance Plan effective October 1, 2017 (filed as
Exhibit 10.5 to Calix’s Form 10-Q filed with the SEC on August 11, 2017 (File No. 001-34674) and incorporated by
reference).
88
Table of Contents Exhibit
Number
21.1
23.1
23.2
24.1
31.1
31.2
32.1
Description
Subsidiaries of the Registrant.
Consent of KPMG LLP, independent registered public accounting firm.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Power of Attorney (included on signature page to this Annual Report on Form 10-K).
Certification of Principal Executive Officer of Calix, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
Certification of Principal Financial Officer of Calix, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
Certification of Principal Executive Officer and Principle Financial Officer of Calix, Inc. Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
*
†
††
Indicates management contract or compensatory plan or arrangement.
Confidential treatment has been granted as to certain portions of this agreement.
Confidential treatment has been requested as to certain portions of this agreement.
ITEM 16.
Form 10-K Summary
None.
89
Table of Contents Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SIGNATURES
Dated: March 13, 2018
Dated: March 13, 2018
Dated: March 13, 2018
CALIX, INC.
(Registrant)
By:
/s/ Carl Russo
Carl Russo
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Cory Sindelar
Cory Sindelar
Chief Financial Officer
(Principal Financial Officer)
By:
/s/ Sheila Cheung
Sheila Cheung
Vice President, Finance and Accounting
(Principal Accounting Officer)
90
Table of Contents POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Carl Russo, Cory Sindelar and Sheila Cheung, and
each of them, with full power of substitution and re-substitution and full power to act without the other, as his true and lawful attorney-in-fact
and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated
below, and to file any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 13, 2018.
Signature
Title
/s/ Carl Russo
Carl Russo
/s/ Cory Sindelar
Cory Sindelar
/s/ Sheila Cheung
Sheila Cheung
/s/ Don Listwin
Don Listwin
/s/ Christopher Bowick
Christopher Bowick
/s/ Kathy Crusco
Kathy Crusco
/s/ Kevin DeNuccio
Kevin DeNuccio
/s/ Michael Everett
Michael Everett
/s/ Michael Flynn
Michael Flynn
/s/ Kira Makagon
Kira Makagon
/s/ Michael Matthews
Michael Matthews
/s/ Kevin Peters
Kevin Peters
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Vice President, Finance and Accounting
(Principal Accounting Officer)
Date
March 13, 2018
March 13, 2018
March 13, 2018
Chairman of the Board of Directors
March 13, 2018
Director
Director
Director
Director
Director
Director
Director
Director
91
March 13, 2018
March 13, 2018
March 13, 2018
March 13, 2018
March 13, 2018
March 13, 2018
March 13, 2018
March 13, 2018
Table of Contents SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
Entity Name
Calix Networks Canada, Inc.
Calix Network Technology Development (Nanjing) Co. Ltd.
Calix Networks UK, Ltd
Calix Brasil Servicos Ltda
Jurisdiction
Canada
China
England, UK
Brazil
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Calix, Inc.:
We consent to the use of our report dated March 13, 2018, with respect to the consolidated balance sheet of Calix, Inc. and
subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive loss, stockholders’
equity, and cash flows for each of the years in two-year ended December 31, 2017, and the related notes, and the effectiveness
of internal control over financial reporting as of December 31, 2017, incorporated herein by reference.
San Francisco, California
March 13, 2018
/s/ KPMG LLP
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-218066, 333-216323,
333-209732, 333-202496, 333-194054, 333-185025, 333-172379 and 333-166245) of Calix, Inc., of our report dated February
25, 2016 (except Note 2, as to which the date is March 13, 2018), with respect to the consolidated financial statements of Calix,
Inc. for the year ended December 31, 2015, included in this Annual Report (Form 10-K) for the year ended December 31, 2017.
/s/ Ernst & Young LLP
San Jose, California
March 13, 2018
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Carl Russo, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Calix, Inc. for the year ended December 31, 2017;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 13, 2018
/s/ Carl Russo
Carl Russo
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPLE FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Cory Sindelar, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Calix, Inc. for the year ended December 31, 2017;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 13, 2018
/s/ Cory Sindelar
Cory Sindelar
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Carl Russo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of Calix, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2017 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form
10-K fairly presents in all material respects the financial condition and results of operations of the Company.
Exhibit 32.1
Date: March 13, 2018
/s/ Carl Russo
Carl Russo
Chief Executive Officer
(Principal Executive Officer)
I, Cory Sindelar, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of Calix, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2017 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form
10-K fairly presents in all material respects the financial condition and results of operations of the Company.
Date: March 13, 2018
/s/ Cory Sindelar
Cory Sindelar
Chief Financial Officer
(Principal Financial Officer)
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission
and is not to be incorporated by reference into any filing of Calix, Inc. under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation
language contained in such filing.
[This page intentionally left blank]
BR13100M-0418-COMBO