PART I. FINANCIAL INFORMATION

 

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See accompanying notes to condensed consolidated financial statements.

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See accompanying notes to condensed consolidated financial statements.

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CALIX, INC.

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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.

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 fiscal 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 expects its assets and liabilities to increase as a result of the adoption of this standard. The Company is currently assessing the potential impact of adopting this new guidance on its consolidated financial statements.

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 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 collectibility, 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.

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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 has not yet determined which transition method it will adopt. Its determination will depend on a number of factors, such as the significance of the impact of the new standard on its financial results, system readiness and its ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary. The standard will be effective for the Company in the first quarter of fiscal 2018, with early adoption permitted for annual reporting period beginning in the first quarter of fiscal 2017. The Company is not planning to early adopt, and accordingly, it will adopt the new standard effective January 1, 2018.

The Company is in the initial stages of its evaluation of the impact of the new standard on its accounting policies, processes, and system requirements. The Company has assigned internal resources in addition to the engagement of third party service providers to assist in its evaluation. Additionally, the Company expects to make investments in new systems or enhancement of existing systems to enable timely and accurate reporting under the new standard. While the Company continues to perform further assessment of all potential impacts under the new standard, the Company expects the timing of revenue recognition to be accelerated for certain performance obligations related to certain revenue arrangements which are currently deferred until customer acceptance. Depending on the outcome of the Company’s final evaluation, the timing of when revenue is recognized could change significantly for those revenue arrangements under the new standard.

As part of its preliminary evaluation, the Company also considered the impact of the guidance in 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 of this new guidance, the Company may need to capitalize additional costs of obtaining a contract, including sales commissions, as the new cost 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. Accordingly, the Company may need to defer certain sales commissions and amortize them over the period that the related revenue is recognized.

While the Company continues to assess all the potential impacts of the new standard, including the areas described above, and anticipates this standard could have a material impact on its consolidated financial statements, the Company is not able to quantify or cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.

Concentration of Customer Risk

The Company had two customers that each accounted for more than 10% of its total revenue for the three months ended April 1, 2017 and March 26, 2016 . These two customers together represented 55% and 29% of the Company’s total revenue for the three months ended April 1, 2017 and March 26, 2016 , respectively. Each of these two customers represented 10% or more of the Company’s accounts receivable as of April 1, 2017 and December 31, 2016 .

3. Cash, Cash Equivalents and Marketable Securities

The Company has invested its excess cash primarily in money market funds and highly liquid marketable securities such as 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 are stated at amounts that approximate fair value based on quoted market prices. Marketable securities are recorded at their fair values.

The Company’s investments have been classified and accounted for as available-for-sale. Such investments are recorded at fair value and unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive income (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 (loss) 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 has evaluated its investments as of April 1, 2017 and has determined that no investments with unrealized losses are other-than-temporarily impaired. No investments have been in a continuous loss position for greater than one year.

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

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

As of April 1, 2017 , the amortized cost and fair value of marketable securities were as follows (in thousands):

As of December 31, 2016 , the amortized cost and fair value of marketable securities were as follows (in thousands):

As of April 1, 2017 , the amortized cost and fair value of marketable securities by contractual maturity were as follows (in thousands):

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.

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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 following table sets forth the Company’s financial assets measured at fair value on a recurring basis as of April 1, 2017 and December 31, 2016 , based on the three-tier fair value hierarchy (in thousands):

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 three months ended April 1, 2017 and March 26, 2016 .

5. Goodwill and Intangible Assets

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. This goodwill is not deductible for tax purposes, and there have been no adjustments to goodwill since the acquisition dates.

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 at the end of the second quarter of each year. Management has determined that the Company operates as a single reporting unit and, therefore, evaluates goodwill impairment at the enterprise level. Management assessed qualitative factors to determine whether it was more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the Company was less than its carrying amount, including goodwill, as of June 25, 2016 . In assessing the qualitative factors, management considered 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. Management concluded that the fair value of the Company was more likely than not greater than its carrying amount as of June 25, 2016 . As such, it was not necessary to perform the two-step goodwill impairment test at the time.

There have been no significant events or changes in circumstances subsequent to the 2016 annual impairment test that would more likely than not indicate that the carrying value of goodwill may have been impaired as of April 1, 2017 . Therefore, there was no impairment to the carrying value of the Company’s goodwill as of April 1, 2017 .

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Amortization expense was $0.8 million and $3.4 million for the three months ended April 1, 2017 and March 26, 2016 , respectively.

6. Balance Sheet Details

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

Inventory consisted of the following (in thousands):

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

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Accrued liabilities consisted of the following (in thousands):

Advance customer payments as of April 1, 2017 and December 31, 2016 primarily included $21.5 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 network improvement projects for a customer.

Deferred revenue consisted of the following (in thousands):

Deferred cost of revenue consisted of costs incurred for products and services for which revenues have been deferred or not yet earned.

7. Commitments and Contingencies

Commitments

The Company’s principal commitments consist of obligations under operating leases for office space and non-cancelable outstanding purchase obligations. These commitments as of December 31, 2016 are disclosed in the Company’s Annual Report on Form 10-K, and have not changed materially during the three months ended April 1, 2017 .

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, or whether such an estimate cannot 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 the 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.

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

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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 warranty and retrofit reserves in the periods as indicated were as follows (in thousands):

Litigation

From time to time, the Company is involved in various legal proceedings arising from the normal course of business activities.

The Company is not currently a party to any legal 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.

Guarantees

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) procurement or license agreements, under which the Company may be required to indemnify licensors or vendors for certain claims that may be brought against them arising from the Company’s acts or omissions with respect to the supplied products or technology.

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 Condensed Consolidated Balance Sheets.

8. 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):

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 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.

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9. Stockholders’ Equity

Equity Incentive Plans

The Company currently maintains two equity incentive plans, the 2002 Stock Plan and the 2010 Equity Incentive Award Plan (together, the “Plans”). These plans were approved by the stockholders and are described in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2017 . The Company also maintains a Long Term Incentive Program under the 2010 Equity Incentive Award Plan. Under the Long Term Incentive Program, certain key employees of the Company are eligible for equity awards based on the Company’s stock price performance. To date, awards granted under the Plans consist of stock options, restricted stock units (“RSUs”), and performance restricted stock units (“PRSUs”).

Stock Options

During the three months ended April 1, 2017 , no stock options were granted. During the three months ended April 1, 2017 , 2,000 stock options were exercised at a weighted-average exercise price of $6.54 per share. As of April 1, 2017 , unrecognized stock-based compensation expense of $3.2 million related to stock options, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 2.8 years.

Restricted Stock Units

During the three months ended April 1, 2017 , 203,100 RSUs were granted with a weighted-average grant date fair value of $7.00 per share. During the three months ended April 1, 2017 , 52,161 RSUs vested, net of shares withheld at the then-current value equivalent to the employees’ minimum statutory obligation for applicable income and other employment taxes, and were converted to an equivalent number of shares of common stock. Taxes withheld from employees of $0.3 million were remitted to the relevant taxing authorities during the three months ended April 1, 2017 . As of April 1, 2017 , unrecognized stock-based compensation expense of $12.6 million related to RSUs, net of estimated forfeitures, was expected to be recognized over a weighted-average period of 2.4 years.

Performance Restricted Stock Units

In 2012, 2013 and 2014, the Company granted PRSUs to its executives with two -year and three -year performance periods. The performance criterion is based on the relative total shareholder return (“TSR”) of Calix common stock as compared to the TSR of the Company’s peer group and accounted for as a market condition. The TSR is calculated by dividing (a) the average closing trading price for the 90 -day period ending on the last day of the applicable performance period by (b) the average closing trading price for the 90 -day period immediately preceding the first day of the applicable performance period. This TSR is then used to derive the achievement ratio, which is then multiplied by the number of units in the grant to derive the common stock to be issued for each performance period, which may equal from zero percent ( 0% ) to two hundred percent ( 200% ) of the target award.

In 2016, the Company granted PRSUs to its executives with a one -year performance period and a subsequent two -year service period. The performance target for these particular performance-based awards is based on the Company’s revenue 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 PRSU award shall vest with respect to 50% of the PRSUs subject to the award in February 2017, 25% in February 2018 and 25% in February 2019, 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 PRSUs granted under this award shall be immediately forfeited and canceled without vesting of any shares.

During the three months ended April 1, 2017 , 300,000 PRSUs vested and were converted into 180,052 shares of common stock, net of shares withheld at the then-current value equivalent to the employees’ minimum statutory obligation for applicable income and other employment taxes. Taxes withheld from employees of $0.8 million were remitted to the relevant taxing authorities during the three months ended April 1, 2017 . As of April 1, 2017 , unrecognized stock-based compensation expense of $0.7 million related to PRSUs, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 1.4 years.

Employee Stock Purchase Plan

The Company’s Amended and Restated Employee Stock Purchase Plan (“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.

Prior to 2015, the offering periods under the 2010 ESPP were six-month periods commencing on June 1 and December 1 of each year. In January 2015, the Compensation Committee of the Company’s board of directors approved a change in those six-month period commencement dates to November 2 and May 2 of each year, effective November 2, 2015. 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 which commenced on November 2, 2016 will be extended until May 14, 2017 as a result of this change. The price of common stock purchased under the 2010 ESPP is 85 percent of the lower of the fair market value of the common stock on the commencement date and the end date of each six -month offering period. As of April 1, 2017 , there were 119,228 shares available for issuance under the ESPP.

There were no shares purchased under the ESPP during the three months ended April 1, 2017 . As of April 1, 2017 , unrecognized stock-based compensation expense of $0.2 million related to the ESPP is expected to be recognized over a remaining service period of 1.5 months.

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Stock-Based Compensation Expense

Stock-based compensation expense associated with stock options, RSUs, PRSUs, and purchase rights under the 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.

The Company values RSUs at the 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. Compensation expense 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. 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 fiscal 2016.

The fair value of PRSUs with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the TSR of the Company’s stock in relation to the peer group over each performance period. Compensation cost on PRSUs with a market condition is not adjusted for subsequent changes in the Company’s stock performance or the level of ultimate vesting.

Stock Repurchase

On April 26, 2015, the Company’s board of directors approved a program to repurchase up to $40 million of its common stock from time to time. This stock repurchase program commenced in May 2015 and was completed in March 2016.

Under this program, stock was purchasable in open market or private transactions, through block trades, and/or pursuant to any trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and any open market purchases were to be made in accordance with the limitations set out in Rule 10b-18 of the Exchange Act. The decision to consummate any repurchases (including any decision to adopt a 10b5-1 plan for this purpose) were to be made at management’s discretion at prices management considered to be attractive and in the best interests of the Company and its stockholders.

In March 2016, the Company completed the $40 million stock repurchase program and has repurchased a total of 5,329,817 shares of common stock from May 2015 to March 2016 at an average price of $7.50 per share. The Company uses the cost method to account for common stock repurchases held in treasury. The price paid for the stock is charged to the treasury stock account shown separately within stockholders’ equity as a contra-equity account.

10. Accumulated Other Comprehensive Loss

The table below summarizes the changes in accumulated other comprehensive loss by component for the periods indicated (in thousands):

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)” in the accompanying Condensed Consolidated Statements of Comprehensive Loss.

11. Credit Facility

The Company entered into a credit agreement with Bank of America, N.A. on July 29, 2013 (as amended on December 23, 2015, the “Credit Agreement”). The Credit Agreement is structured such that other financial institutions can at a later time become party to the Credit Agreement through an amendment via a syndication process (collectively, together with Bank of America, N.A., the “Lenders”). The Credit Agreement provides 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). In addition, the Credit Agreement includes a $20.0 million sublimit for the issuance of letters of credit and a $10.0 million sublimit for a swingline facility. Subject to customary conditions, up to $25.0 million of the revolving facility may be converted to a term loan facility at any time prior to the maturity of the revolving facility. The revolving facility matures on September 30, 2018 . The credit facility is secured by

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substantially all of the assets of the Company, including its intellectual property. Proceeds of the credit facility may be used for general corporate purposes and permitted acquisitions.

Loans under the credit facility bear interest at an annual rate equal to the base rate plus 0.75% to 1.25% or LIBOR plus 2.00% to 2.50% based on a consolidated leverage ratio of consolidated funded indebtedness to consolidated EBITDA (as defined in the Credit Agreement). Interest on the revolving facility is due quarterly, and any outstanding interest and principal is due on the maturity date of the revolving facility. The Company is required to repay principal on a term loan in twenty equal quarterly payments from the date the Company enters into a term loan, and all outstanding principal and accrued interest is due on the revolving facility maturity date. Swingline loans must be repaid on the earlier of (i) ten business days after a loan is made and (ii) the revolving facility maturity date. The Company is also required to pay commitment fees of 0.25%  per year on any unused portions of this facility.

The Credit Agreement includes affirmative and negative covenants applicable to the Company that are typical for credit facilities of this type. Furthermore, the Credit Agreement requires the Company to maintain certain financial covenants, including a maximum consolidated leverage ratio, and a minimum consolidated liquidity ratio of cash, cash equivalents and accounts receivable to consolidated funded indebtedness. As of April 1, 2017 , the Company was in compliance with these requirements. The Credit Agreement also includes customary events of default, the occurrence and continuation of which would provide the Lenders with the right to demand immediate repayment of any principal and unpaid interest under the credit facility, and to exercise remedies against us and the collateral securing the loans under the credit facility.

As of April 1, 2017 , no revolving loans were drawn under the Credit Agreement and, based on the consolidated leverage ratio requirements that limit available funds under the Credit Agreement, the Company has no funds available for borrowing under the Credit Agreement as of April 1, 2017 .

12. Income Taxes

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

The income tax provision for the three months ended April 1, 2017 and March 26, 2016 consisted primarily of foreign income taxes. The effective tax rate for the three months ended April 1, 2017 and March 26, 2016 was determined using an estimated annual effective tax rate adjusted for discrete items, if any, that occurred during the respective periods. The Company’s effective tax rate for the three months ended April 1, 2017 and March 26, 2016 is impacted by the change in foreign income tax expense.

Deferred tax assets are recognized if realization of such assets is more likely than not. The Company has established and continues to maintain a full valuation allowance against its net deferred tax assets, with the exception of certain foreign deferred tax assets, as the Company does not believe that realization of those assets is more likely than not .

The Company’s effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which it operates, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where it conducts business .

13. Restructuring Charges

The Company adopted a restructuring plan in March 2017. This restructuring plan realigns the Company’s business, increasing its focus towards its investments in innovative software defined access systems and software, while reducing its cost structure in traditional systems business. The Company began to take action under this plan beginning in March 2017 and recognized approximately $0.7 million of restructuring charges for the three months ended April 1, 2017 consisting primarily of severance and other one-time termination benefits, presented separately under operating expenses in the accompanying Condensed Consolidated Statements of Comprehensive Loss.

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The following table summarizes the activities related to the restructuring charges pursuant to the above restructuring plan (in thousands):

The Company currently estimates that this plan will result in pre-tax restructuring charges totaling up to $6.8 million with approximately up to $6.1 million of additional charges expected to be recognized during the rest of fiscal 2017. These charges are primarily cash-based.

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statement of or concerning the following: the plans and objectives of management for future operations, proposed new products or licensing, product development, anticipated customer demand or capital expenditures, future economic and/or market conditions or performance, and assumptions underlying any of the above. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “believes,” “intends,” “plans,” “anticipates,” “estimates,” “projects,” “potential,” or “continue” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including those identified in the Risk Factors discussed in Part II, Item 1A, in the discussion below, as well as in other sections of this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 . All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

Overview

We are a leading global provider of broadband communications access platforms, systems and software for fiber- and copper-based network architectures and a pioneer in software defined access that enable CSPs to transform their networks and enhance how they connect to their residential and business subscribers. We enable 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. We focus solely 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. We develop and sell carrier-class hardware and cloud products that are designed to enhance and transform CSP access networks to meet the changing demands of subscribers rapidly and cost-effectively. We believe that continued innovation and investment in advanced platforms and systems are important elements of our growth strategy. Our most advanced systems operate on AXOS, a network operating system and software platform built for the specific needs of the access network that allows for all software functions in the access network to be developed and run without dependence on underlying hardware and associated silicon chipsets.

We market our access systems and related software to CSPs globally through our direct sales force as well as a growing number of resellers. At the end of the first quarter of 2017 , over 23 million ports of the Calix portfolio have been deployed at a growing number of CSPs worldwide. Our customers include many of the world’s largest CSPs. In addition, we have enabled over 1,300 customers to deploy gigabit passive optical network, Active Ethernet and point-to-point Ethernet fiber access networks.

Our revenue was $117.5 million for the three months ended April 1, 2017 , compared to $98.4 million for the three months ended March 26, 2016 . Our revenue levels and continued revenue growth will depend on our ability to continue to sell our access systems and software to existing customers and to attract new customers, particularly larger CSPs, globally. Since 2015, we have seen increased market demand for turnkey solutions that include professional services together with the supply of equipment and materials, including a project we commenced in 2015 with one of our existing customers and substantially completed during the first quarter of 2017. We continue to ramp our professional services business to meet this demand because we believe that these services enable us to offer broader solutions to meet customer needs as well as support our long-term growth initiatives. Revenue for such projects is generally recognized only when 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, large customer purchase agreements with delayed revenue recognition, 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 budgets, and in certain regions, customers are also challenged by winter weather conditions that inhibit fiber deployment in outside plants. Our revenue levels are also

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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. As of April 1, 2017 , we had approximately $29.6 million in deferred revenue related to ongoing work in turnkey network improvement projects that will be recognized only upon acceptance by customers. 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 from all of the above factors that could impact revenue. Factors that impacted our cost of revenue for the first quarter of 2017 , and that may impact cost of revenue in future periods, also include: changes in the mix of products delivered, increases in services as a mix of total revenue as well as timing of completion of professional services project requirements, higher than anticipated costs associated with delivery of services for which project pricing is typically set at the outset of the project, charges related to cost overruns on services projects, 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 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 margins. During the first quarter of 2017 , our gross profit and gross margin continue to be negatively impacted by an increase in our services revenue, which carries lower gross margin, as a mix of total revenue. We have continued to incur higher costs related to developing and growing our professional services business for turnkey network improvement projects. We also incurred higher costs and cost overruns associated with delivery of services due to project delays and rework needed to complete services projects, as well as an increased pace of services activities to complete project requirements during the first quarter of 2017 . In addition, our gross profit and gross margin fluctuate based on timing of factors such as new product introduction 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), increase in mix of revenue towards professional services, increase 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. The timing of our recognition of deferred revenue and related deferred costs related to turnkey professional services projects could also result in lower gross profit and gross margin in the periods such revenue is recognized, and the relative size of these arrangements could cause large fluctuations in our gross profit from period to period. Moreover, to the extent that deferred cost of revenue relating to the professional services portion of turnkey projects is determined to be unrecoverable, we incur a charge to cost of revenue in the period such cost is determined to be unrecoverable.

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 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 legal fees and other expenses incurred in connection with the Occam litigation. During the first quarter of 2017 , our total operating expense increased due to increases in headcount and outside contractors, primarily for research and development and, to a lesser extent, as a result of increased severance-related expenses incurred in the first quarter of 2017 . In March 2017, we adopted a restructuring plan to realign our business to increase focus towards investments in software defined access systems and software and to reduce costs in our traditional systems business, which we estimate will result in pre-tax restructuring charges totaling up to $6.8 million for fiscal year 2017, $0.7 million of which we incurred during the first quarter of 2017. We anticipate that our operating expenses will increase in absolute dollar amounts but will decline as a percentage of revenue over time.

During the first quarter of 2017, our costs, operating expenses and working capital needs increased primarily due to the continued growth of our professional services operations to meet customer and market demand for turnkey network improvement projects and higher research and development expenditures in strategic investments in our platform, systems and software. We focus our research and development efforts on innovative technologies that we believe will grow our customer base, including the pursuit of larger customer opportunities. We expect to continue to incur higher capital and operating expenditures, and higher levels of cash use, related to our investments in these initiatives as we seek to grow our market share.

Our net loss was $33.3 million for the three months ended April 1, 2017 , compared to a net loss of $10.7 million for the three months ended March 26, 2016 . Since our inception we have incurred significant losses and, as of April 1, 2017 , we had an accumulated deficit of $617.7 million . Further, as a result of the fluctuations described above and a number of other factors, many of which are outside our control, our quarterly operating results fluctuate from period to period. Comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance.

Critical Accounting Policies and Estimates

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

Our critical accounting policies and estimates are described under “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016 . During the three months ended April 1, 2017 , there have been no significant changes in our critical accounting policies and estimates.

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Recent Accounting Pronouncements

See Note 2 to the unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

Results of Operations

Comparison of the Three Months Ended April 1, 2017 and March 26, 2016

Revenue

Our revenue is comprised of the following:

The following table sets forth our revenue (in thousands, except percentages):