Calix (NYSE: CALX) saw its shares plunge 12.7% in after-hours trading on Monday, settling at $33.50, after the broadband platform provider issued a third-quarter margin forecast that fell short of expectations. The stock had already declined 2.0% during the regular session, closing at $38.35.
The company reported second-quarter adjusted earnings of $0.47 per share, surpassing the consensus estimate of $0.40, while revenue reached $293.3 million, also ahead of forecasts. This marked an all-time high for quarterly revenue. However, investor enthusiasm was dampened by the outlook for the current quarter.
Calix projects an adjusted gross margin for the third quarter in the range of 50.5% to 53.5%, with a midpoint of 52.0%. This represents a sequential decline of 280 basis points from the second-quarter result of 54.8%. The weaker margin guidance overshadowed the solid second-quarter performance, leading to the sharp after-hours sell-off.
The margin pressure stems primarily from a surge in memory component costs, which management attributed to increased demand from artificial intelligence data centers. Calix's appliance segment, which accounted for $242.8 million or 82.8% of total revenue in the second quarter, saw its adjusted margin fall by 460 basis points sequentially to 52.9% due to these higher memory prices.
In response, Calix has implemented memory surcharge programs designed to recover costs rather than generate profit, as stated by CEO Michael Weening and CFO Cory Sindelar. New orders will face higher surcharge rates that reset monthly, while lower second-quarter rates apply to the existing third-quarter backlog, delaying cost recovery.
On a positive note, Calix's software and services segment continued to perform strongly. Revenue from this unit climbed to an all-time high of $50.5 million, up 16% year-over-year, and represented 17.2% of total sales. The adjusted margin for software and services improved by 810 basis points sequentially to 63.8%, and the company anticipates another record margin in the third quarter.
Looking ahead, Calix expects full-year revenue to approach the high end of its 15% to 20% growth range. The third-quarter revenue forecast of $301 million to $307 million suggests steady demand. The company also reported solid contracted demand, with remaining performance obligations increasing 11% to $386.4 million and current obligations up 21%.
Despite the near-term margin headwinds, Calix maintains its long-term targets of 15% annual growth and a 20% operating margin. The company reduced adjusted operating expenses to 42% of revenue, down from 45%, and generated $11.9 million in free cash flow during the quarter. It also repurchased $69.4 million in shares, leaving $94.1 million available under its buyback authorization. Cash and investments decreased to $194.3 million from $243.3 million in the prior quarter.
Management is scheduled to discuss the results in greater detail during an earnings call on Tuesday at 8:30 a.m. EDT. Investors will be closely watching for confirmation that operating margins can recover in line with sales growth. Key risks include further memory price increases, customer pushback against surcharge fees, and reliance on a concentrated customer base, with one client accounting for 12% of second-quarter revenue.