NASDAQ:CLFD Clearfield Q3 2023 Earnings Report $28.54 +0.46 (+1.64%) As of 04/24/2025 04:00 PM Eastern Earnings HistoryForecast Clearfield EPS ResultsActual EPS$0.33Consensus EPS $0.09Beat/MissBeat by +$0.24One Year Ago EPS$0.92Clearfield Revenue ResultsActual Revenue$61.30 millionExpected Revenue$53.82 millionBeat/MissBeat by +$7.48 millionYoY Revenue Growth-15.20%Clearfield Announcement DetailsQuarterQ3 2023Date8/3/2023TimeAfter Market ClosesConference Call DateThursday, August 3, 2023Conference Call Time5:00PM ETUpcoming EarningsClearfield's Q2 2025 earnings is scheduled for Thursday, May 1, 2025Conference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by Clearfield Q3 2023 Earnings Call TranscriptProvided by QuartrAugust 3, 2023 ShareLink copied to clipboard.There are 8 speakers on the call. Operator00:00:00Good day, and welcome to the Clearfield Fiscal Third Quarter 2023 Conference Call. All participants will be in a listen only mode for the duration of the call. After the speakers' prepared remarks, there will be an opportunity to ask questions. Speaker 100:00:28Please note that this event is being recorded today. And as Operator00:00:31a reminder, the slides in this presentation are controlled by you, Please advance forward through the presentation as the speakers present their remarks. I would now like to turn the conference over to Greg McNiff, Investor Relations for Clearfield. Please go ahead, Speaker 200:00:45sir. Thank you. Joining me on the call today are Sherry Beranek, Clearfield's President and CEO Dan Herzog, Clearfield's CFO and Kevin Morgan, Clearfield's CMO. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Speaker 200:01:12These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward looking statement. It is important to note also that the company undertakes no obligation to update such statements. Except as required by law, the company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward looking contained in today's press release, earnings presentation and on this conference call. The Risk Factors section in Clearfield's most recent Form 10 ks filing With the Securities and Exchange Commission and its subsequent filings on Form 10 Q, provide a description of these risks. With that, I would like to turn the call over to Clearfield's President and CEO, Sherry Baronek. Speaker 200:01:58Sherry? Speaker 300:01:59Good afternoon, everyone, And thank you for joining us today to discuss Clearfield's results for the Q3 of fiscal 2023. We also intend to provide an update on our business and current market trends. Our Q3 of fiscal 2023 Reflects the commentary we provided on our prior two earnings calls. Total net sales for the Q3 were $61,000,000 which includes a record $13,000,000 contributed from Nestor Cables. While visibility remains limited, we are reiterating our revenue guidance and increasing our net income per share guidance for the year ending September 30, 2023 based upon our backlog and current ordering trends. Speaker 300:02:46I want to reiterate that we remain as confident as ever in the long term demand for fiber broadband. Likewise, we believe our market share remains stable. Accordingly, we continue to focus on positioning the company to capture market share once industry ordering patterns return to a more normalized level. I'll discuss these initiatives in more detail shortly. End user demand remains strong and is best reflected And ongoing take rates that our broadband service provider customers are achieving. Speaker 300:03:20A take rate is defined as the percentage of subscribers over total homes passed. Take rates in the 40% range are typical over several years, but can vary depending upon competition and environment. Current industry take rates allow broadband service providers to recognize a strong return on investment, reducing their cost of operation and increasing their revenue per subscriber. To that end, take rates for fiber based services remain extremely strong and continue to improve relative to alternative solutions. As we enter the initial stages First, we have government funding programs, namely the Broadband Equity Access and Deployment Program or LEED. Speaker 300:04:10We are more certain that the industry will return to a more normalized cadence of deployment. However, it's important to understand the relationship between government funding and orders placed with these funds. While our Chief Marketing Officer, Kevin Morgan, will address this topic in more detail In his prepared remarks, I want to highlight a near term impact related to this dynamic. In order to compete for bead funding, Service providers are required to contribute matching funds to each deployment. To ensure that they have the necessary financing and capital available, We expect our community broadband customers to continue to be cautious with respect to near term deployment, particularly given Rising interest rates and labor costs. Speaker 300:04:57We believe that this is a prudent step by our customers to best take advantage of the significant opportunity ahead and not a slowdown in end user demand. Additionally, based on conversations with our service provider customers, We expect the inventory buildup impacting the industry to continue into the first half of fiscal twenty twenty four. Also, as many of you are aware, the industry typically undergoes a slowdown during the winter. And for these reasons, We expect revenues to seasonally soften during this period. Accordingly, we expect the next several quarters' results and the year over year comparisons to be impacted by these dynamics. Speaker 300:05:41While we continue to right size capacity levels to meet current demand, We are maintaining the infrastructure and processes for long term growth and continue to design products to address our customers' most significant pain points and reduce the amount of skilled labor required to install our hardware. To that end, our recently announced SeaChange terminal It's receiving very positive reception from field studies conducted by our customers. These recent deployment studies, which were commissioned by 2 of our MSO customers, Concluded that by eliminating the need for splicing, SeaChange and our other plug and play terminals could increase the number of homes connected from an average of 2.5 to nearly 4 homes per day per laborer. For those of you who have followed Clearfield over the last several years, This level of improvement is consistent with our FieldSmart fiber distribution hubs. We continue to focus on developing reduce the deployment time and the labor required by our customers. Speaker 300:06:45As a reminder, labor makes up approximately 70% of the total build And is the gating factor in deployments. We also continue to improve our product delivery times. During the pandemic, lead times reached a height of 20 weeks due to supply constraints. Lead times now are in our target range of 4 to 6 weeks across most product lines. Any remaining supply constraints are predominantly limited to sub components of our active cabinet. Speaker 300:07:17For some additional insights and what we're seeing in the market and the significant long term opportunity, I would like to welcome our Chief Marketing Officer, Kevin Kevin? Speaker 400:07:28Thank you, Sherry. I want to go into a little more detail on the government funding initiatives and how they will translate into orders over the coming years. As many of you know, the initial disbursements to the states related to the BEED program are underway. This program allocates $42,450,000,000 toward high speed Internet access in unserved and underserved areas as part of the Infrastructure Investment and Jobs Act. The states received their formal notice of allocations on June 30 and have until December 27 to submit proposals to the NTIA for how they will allocate these funds to run their grant programs. Speaker 400:08:12As illustrated on Slide 4, these government funding initiatives will peak next year and will continue at significant levels for the next Several years. However, due to the processes and requirements in place to distribute these funds to specific service providers, We estimate there will be a lag of 6 to 12 months from when a state receives its funds to when a service provider places orders For specific builds, adjusting for this timing lag, 3rd party industry analysts expect the industry to grow at 13% to 15 For the next several years, driven substantially by these funding initiatives. The message is very clear. We anticipate significant demand in our core demographic starting late next year and continuing for the next several years. In terms of total addressable market, we estimate our opportunity to be slightly less than $10,000,000,000 over the same time period. Speaker 400:09:14Coming back to Clearfield's fiscal Q3 performance, I'd now like to pass the call over to our Chief Financial Officer, Dan Herzog, He will walk us through our financial results for the fiscal Q3 of 2023. Speaker 500:09:28Thank you, Kevin, and good afternoon, everyone. Please turn to Slide 6 to look at our fiscal Q3 2023 results in more detail. Consolidated net sales in the Q3 of fiscal 2023 were $61,000,000 a 14% decrease From $71,000,000 in the same year ago period. This figure includes $48,000,000 of organic net sales from Clearfield and a $13,000,000 contribution from Nestor Cables, reflecting an 18% increase from Nestor Cables over the previous quarter. We continue to invest in capital equipment with faster processing capability to reduce costs and improve margins at Nestor. Speaker 500:10:15Furthermore, we are continuing the discovery process regarding how to best introduce higher margin connectivity solutions into the European market. The year over year decrease in net sales was due to lower sales across our core end markets, particularly in our community broadband and MSO markets. As Sherry noted, we are seeing service providers in these markets Prepare for the upcoming BID programs by setting aside financial support that will be necessary to match the BID appropriations. In comparison to last year, where service providers were utilizing a just in case approach to inventory accumulation, This year's wait and see approach will have a negative near term impact on year over year comparisons. Order backlog declined 52 percent to $75,000,000 on June 30, 2023, Down from $157,000,000 on June 30, 2022 $108,000,000 on March 31, 2023. Speaker 500:11:20We are collaborating with our service provider customers to align their open orders with their deployment schedules, which resulted in some order cancellations this period. As Sherry noted, our lead times are now in our target range of 4 to 6 weeks Across most product lines. Turning to Slide 7, I will now review net sales by our key markets. Sales to our primary market, community broadband, comprised 32% of our net sales in the Q3 of fiscal 2023. In Q3, we generated net sales of approximately $19,000,000 in community broadband, down 49% from the same period last year. Speaker 500:12:03For the trailing 12 months ended on June 30, 2023, our community broadband market net sales Totaled approximately $133,000,000 which was up 26% from the comparable periods last year. As we did last quarter, we are breaking out revenue contribution from our large regional service provider customers, which was previously included in the community broadband and national carrier markets. We believe this customer breakout allows investors to better understand the near term industry dynamics we referenced on the last earnings call. Specifically, we have broken apart our community broadband customer market to Disclose revenue from the traditional smaller providers and from ILEX with footprints of 500,000 subscribers and above, which we refer to as large regional service providers. Net sales for the Q3 in our large regional service Providers market declined by approximately 4% year over year. Speaker 500:13:04Net sales were up 2% over the trailing 12 month period. Please refer to the slide at the end of this presentation to view the historical revenue contribution from this customer group. Our MSO business comprised 15% of our net sales in the 3rd quarter. Net sales declined 9% year over year and are up 83% for the trailing 12 month period. Net sales in our national carrier market for the 3rd quarter decreased by 43% year over year. Speaker 500:13:37On a trailing 12 month basis, net sales in our national carrier market were down 7% from the year ago period. Finally, net sales in the international market increased 4 64% year over year in the Q3 compared to the same period last year And are up 3 93% year over year on a trailing 12 month basis due to the acquisition of Nestor Cables, which contributed $13,000,000 toward this segment In the 3rd fiscal quarter. As detailed on Slide 8, Gross profit margin in the 3rd quarter declined to 31.1 percent of net sales from 41.1 percent of net sales in the same year ago quarter. Our gross margin was impacted by unused capacity in our Mexico facility due to the lower levels of demand as well as Nestor's inclusion in this quarter's revenue. As a reminder, Nestor was acquired in July of last year. Speaker 500:14:36The company continues to strategically realign capacity to current market conditions. While Clearfield does not compete on price, we have been prudent in how we pass along rising costs to our customers in the interest of maintaining our long term relationships. We will continue to be thoughtful in addressing these costs with our customers going forward. Now please turn to Slide 9. Operating expenses for the Q3 were $13,400,000 which were up slightly from $12,700,000 in the same year ago quarter. Speaker 500:15:11This increase is primarily the result of the addition of operating expenses of the Nestor Cables business. As a percentage of net sales, operating expenses for the Q3 were 22%, up from 18% in the same year ago period. Turning to Slide 10. Net income in the 3rd quarter decreased 59% to $5,200,000 from $12,700,000 in the same year ago period and was down from $10,400,000 in the Q2 of fiscal 2023. As a percentage of net sales, net income for the Q3 was 9%, down from 18% in the same year ago period and down from 14% in the Q2 of fiscal 2023. Speaker 500:15:58As illustrated on Slide 11, our balance sheet remains Strong with $169,000,000 of cash, short term and long term investments and $2,000,000 of debt. We had $1,600,000 in capital expenditures in the quarter, mainly to support our manufacturing operations. Our inventory balance increased from $101,000,000 March to $105,000,000 in the 3rd quarter, driven by the industry dynamics we have discussed. While we expect inventory levels to increase slightly next Quarter, we do not expect them to do so at the same levels as we experienced in fiscal year 2022, resulting in improved free cash flow in the fiscal year ahead. We are reiterating our fiscal 2023 revenue guidance. Speaker 500:16:48We expect full year fiscal 2023 net sales to be within the range of $260,000,000 to $275,000,000 and are increasing our net income per share guidance to be in the range of $2.05 to $2.15 per share, up from $1.80 to $2.10 per share previously. The increase in our net income per share guidance is due to better than expected product margin as well as cost saving initiatives. With the capital raise we undertook last year, we plan to continue investing in our infrastructure and other necessary strategic areas. Additionally, our strong balance sheet ensures that we are well positioned to effectively compete for larger customer opportunities and to pursue strategic opportunities That concludes my prepared remarks for our Q3 fiscal 2023. We appreciate the support of our investors as we continue to work to drive shareholder value. Speaker 500:17:47I will now turn the call back over to Sherry. Speaker 300:17:50Thanks for the financial update, Dan. Turning to Slide 14, I would now like to provide an update on our multi year strategic plan LEAP, which is our roadmap for how we intend to capitalize on the significant opportunities ahead. The leap Is to jump higher, longer and with great force. For those organizations such as Clearfield And we're able to meet the overwhelming demand for broadband access in 2022. The service provider inventory digestion challenge is a new hurdle to overcome. Speaker 300:18:24LEAP contains strategic directions for how we navigate this near term pause in demand with the need to invest in our infrastructure in order to meet the significant long term demand Kevin highlighted. We have always prided ourselves on listening to our customers in order to provide them with the best products and service. We demonstrated this capacity throughout the last several years with record growth, while continuing to make significant investments in capacity. Today, these same customers are telling us that they need some time to do a little rightsizing after several years of record industry growth. Rather than cutting costs or lowering prices to offset this slowdown, we are taking a thoughtful and strategic approach By using this time to position the company to meet the significant demand ahead, I'd like to discuss some of the investments we're making to scale the organization when the marketplace returns to a more normalized level of orders. Speaker 300:19:24First, we continue to invest in Clearfield College To address the skilled labor shortage, Clearfield College is both an internal and an external training curriculum. Our people, both on the manufacturing floor and within our SG and A functions, will be able to leap higher and stronger because of the know how we are building. This progress is difficult to measure, but while our competitors are announcing significant layoffs And cost reductions, we continue to invest in the people that will make the difference. 2nd, we are modernizing our ERP and other internal These system updates will enable us to better manage and fulfill orders, thereby improving customer satisfaction while reducing lead times. Further, we are actively recruiting to add expertise in new markets, especially in Europe where we intend to build on our Nestor platform. Speaker 300:20:22Specifically, we're expanding our Estonia facility for micro duct and Connectivity Manufacturing and intend to create a Clearfield operational umbrella that initially integrates our procurement programs and will follow with product management and sales initiatives. In summary, while our Q3 financial results and guidance To reflect the near term uncertainty and lack of visibility we've discussed previously, we remain focused on building a strong foundation from which to address The long term demand for high speed broadband across our markets. To that end, we are rightsizing capacity levels to meet current demand. We are maintaining the infrastructure and processes for long term growth and continue to design products to address our customers' most significant pain points. We believe this is the right approach to drive significant shareholder value over the long term. Speaker 300:21:18And with that, we will open the call to your questions. Operator00:21:26We will now begin the question and answer session. At this time, we will take our first question, Speaker 100:21:43which will come from Ryan Koonce with Needham. Please go ahead. Speaker 600:21:49Thanks for the question. Sharon, I wanted to ask about seasonality. Of course, nothing has, of course, been normal about seasonality For the last several years, but as we look at this year and your strength here in the June quarter And your guide to be down sequentially, can you talk about some of the demand dynamics? And it seems like maybe there was some strength in a couple of segments So maybe you weren't anticipating, but maybe just kind of fill us in on what some of the puts and takes were on the strength you have in June and maybe what might step down in September. Thank you. Speaker 300:22:26Absolutely. We have some really nice opportunities to work Inside with the large regional providers and really helping them be able to establish providing products because they had access to labor. And it's always difficult to know where the labor is going to come from and if they're going to be able to make it happen. But we did have some sell through in that Large regional service provider area that was originally unanticipated. The community broadband, as I talked about, It's a really strong market and we are having a great time understanding where our customers are and where they're going. Speaker 300:23:05But our seasonality, which is traditional, is still going to be there and now it's finally going to show up in that There just is going to be less labor done because of the weather, but it's going to be compounded by this financial structure that is Coming up and facing the community or all providers, but especially the smaller providers. And we alluded to that Within the materials in that as the B program was fully defined and now released, the financial obligations of a service provider that's going to Apply for those funds are quite significant. As an example, they need to be able to provide a letter of credit equal to 20 5% of their grant submission, which really puts a lot of capital sitting frozen waiting for allocation. So we think it's really prudent That these customers are looking at their balance sheets, that they're aggressively identifying opportunities. And we're really it makes us very optimistic of our position for ongoing business next year as those materials get released. Speaker 300:24:15But I think it could force our winter months into a little more seasonality than we may have expected. Speaker 600:24:22Right. That makes sense. So are these mostly incumbent providers you're referring to then that they are Saving CapEx, so to speak, in the near term for anticipation of getting award for matching funds? Speaker 300:24:38Exactly. So the incumbent providers, the ones who've had traditional balance sheets, in place, but who are stretched, And those have been our traditional customers and will continue to be so. As we look forward, we think there's some additional opportunity With the alternative providers, the rural utilities, some of the municipalities that haven't built previously, that's not showing up in our current Seasonality, but it also is new revenue that will show up next year. So you're right on target. And it's one of the reasons That we did separate some of the large regional providers to isolate Our market categories more tightly so that people understood the puts and takes of when things work well and when things create a level of And some of the challenges that we're working to manage. Speaker 600:25:33Got it. And just one follow-up, if I could, on the guidance for earnings. Looks like you're anticipating a step down in gross margins and from a pretty strong number Relative to expectations this quarter in June, is that purely a factor Of fixed costs and lower volume or are there other mix issues at play in the gross the implied gross margin guide down? Speaker 300:26:02Yes. No, it's absolutely volume based. There we've done I've been extremely pleased with the work that we've been able to do to We've chosen not to cut to the bone so that we could do a lot of training, a lot of investment And quality systems and different protocol, I'm not looking to cut any further in ad space So that we can come out strong over the winter. We have been able to hold our product margins right now Quite well, but it really is a space allocation that there's just only so much you can do with overhead. Speaker 600:26:44Okay, sure. Thanks so much. I'll get back in the queue. Speaker 100:26:47You're welcome. Operator00:26:51And our next question will come from Scott Searle with ROTH MKM. Please go ahead. Speaker 700:26:56Hey, good afternoon. Thanks for taking my questions. Really nice job on the gross margins this quarter. I know it's difficult operating environment. Maybe to quickly follow-up on Ryan's question, Looking to the September quarter implies a range of $41,000,000 to $56,000,000 I'm wondering if you could give us Directionally in terms of some of the bigger categories, particularly community broadband, where do you expect to see most of that Sequential progression from a revenue standpoint, is it 1 or 2 areas? Speaker 700:27:24And at the lower end of the range, do you have pretty good visibility To that at the current time or do you need turns to get there? And then I had a couple of follow ups. Speaker 300:27:35The most fluctuation is in the large regional Riders based upon sell through and project fulfillment. We expect we'll be probably in the middle of that space. But we've got the low end of the space we pretty much have in backlog and we're working through on that. But now with the 4 to 6 week Lead time, our customers don't need to have their inventory stage. So it's a little bit more hand to mouth, not in a bad way. Speaker 300:28:09The swings of the pendulum that have gone through in regard to inventory digestion, so It is an implication for the quarter that everything goes in the right direction and we'll be at the high side. I don't I'm not expecting to be at the low side, but based upon the fact that I don't have those orders in hand and the marketplace is so unpredictable, We needed to be as transparent as we could to our shareholder base. Speaker 700:28:37Got you. Very helpful. And sure, if I could to follow-up, talking about And continuing for another couple of quarters, and injecting a little bit more seasonality into the mix. The results or the anticipated results in September, is that We should expect into December March or is there a little bit more variability in terms of what you're seeing? And lastly, I know you've been looking for other ways to Differentiate your entry from a product standpoint into the European marketplace. Speaker 700:29:06I'm wondering if you could give us some updated thoughts on that front. Thanks. Speaker 300:29:11So our looking into 1st and second quarter throughout the winter, it will be Mid of that range, maybe a little bit lower because of the standpoint associated with Europe and that today, Our sales are very strong in Finland and breaking into some European, Continental and Central European opportunities. And so the seasonality of Finland is much worse than the United States unfortunately. So they will be seasonally down next quarter and into the winter months. They tend to see a stronger quarter ending in March because of the They have such a short build season that they do tend to place orders early and to put things into place and have them Excuse me, ready to go. From a product orientation as to what we're doing in Europe is, We're really pleased with the work that's been done on a MicroDuct level. Speaker 300:30:19That MicroDuct work helps us to prepare for field shield And some of the works that we have done in pushable fiber and the means to be able to provide plug and play solutions into the European marketplace that Historically, we've not seen plug and play. We are evaluating how to use Aeropone fiber and how to use Aeropone fiber within the cassette, and how we can utilize the traditional deployment methods that being Aeropone fiber with more the modularity that Clearfield has brought to market over the last 10 years. So we'll be displaying some of those technologies We are at a British trade show in late September and are anxious to be able to see the response Speaker 700:31:15Thank you. Operator00:31:25Our next question here will come from Greg Meznyaz with Westpark Capital. Please go ahead. Speaker 100:31:30Yes. Thank you for taking my question. Can you talk A little bit about how the recent inventory buildup issues at customers has been impacting the pricing environment, if at all? Good to get some color. Thanks. Speaker 300:31:49I think the inventory buildup position is such that It's affecting their future purchases, but not necessarily affecting Future pricing or price decisions. It's more of a frame of reference that customers are looking at Already next year's build season and looking to try to be able to identify how costs have changed. One of the challenges that any Company needs to go through is being able to normalize the current valuation of their inventory against and what they may have paid for it. And I think you'll see that service providers are not writing down their inventory as being worth any less And what it was when they purchased it. In fact, if it's anything, it's going the other direction because of the general Speaker 100:32:45Sure. Thank you for that. And then just a quick follow-up. Has there been any change in the competitive landscape that you're seeing recently? In other words, have any other larger competitors moved Into the smaller carrier market? Speaker 300:33:08Yes. In the true small carrier world, the general community broadband, I mean Corning and CommScope have always been there, but they we've taken share from them over the period of the last 10 years due to our dedicated efforts. Our nimble sales team and the product mix that's designed for those environments. So I wouldn't say that they are new to the market, But I would say that they have been focused on the larger providers, the larger regionals probably, and certainly the national carriers. Speaker 100:33:44Great. Thank you for that. Operator00:33:49And with that, we will conclude the question and answer session. I'd like to turn the conference back over to Sherry Beranek for any closing remarks. Speaker 300:33:58Thanks very much. These are very difficult times for us in this industry. I think across the board, you'll see My competitors being struggling with being able to find the right product at the right time, I'm very proud of my team on how we have been able to continue to serve shareholder value and be able to provide Net income at 9% this quarter in times where others have struggled to make a profit. So we are pleased to be able to be prudent. I hope you believe that we are well managed. Speaker 300:34:35I certainly think my management team is top notch And we look forward to serving you next year and moving forward. Operator00:34:48The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallClearfield Q3 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) Clearfield Earnings HeadlinesClearfield Sets Fiscal Second Quarter 2025 Earnings Call for Thursday, May 8, 2025April 24 at 5:00 PM | globenewswire.comClearfield County amusement center prepares for annual Easter egg huntApril 20, 2025 | msn.comNew “Trump” currency proposed in DCAccording to one of the most connected men in Washington… A surprising new bill was just introduced in Washington. Its purpose: to put Donald Trump’s face on the $100 note. All to celebrate a new “golden age” for America. April 25, 2025 | Paradigm Press (Ad)Clearfield County poll workers begin training to prepare for upcoming municipal electionsApril 18, 2025 | msn.comClearfield residents divided over proposed whitewater park projectApril 11, 2025 | msn.comDA: Clearfield man gets decades in prison for strangling mother for her insurance moneyApril 9, 2025 | msn.comSee More Clearfield Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Clearfield? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Clearfield and other key companies, straight to your email. Email Address About ClearfieldClearfield (NASDAQ:CLFD) manufactures and sells various fiber connectivity products in the United States and internationally. The company offers FieldSmart, a series of panels, cabinets, wall boxes, and other enclosures; WaveSmart, an optical components integrated for signal coupling, splitting, termination, multiplexing, demultiplexing, and attenuation for integration within its fiber management platform; and active cabinet products. It also provides CraftSmart FiberFirst pedestals, an access terminal that offers a cable management and mounting bracket kit to support the deployment of access terminals; YOURx, an access terminal that provides flexibility with cable mid-span and internal splicing options; and FieldShield, a fiber pathway and protection method for reducing the cost of broadband deployment. In addition, the company offers fiber assemblies; fiber optic and copper cables, microducts, microduct accessories, and tools; and installation and connection accessories for fiber optic networks. It serves community broadband customers, multiple system operators, large regional service providers, and wireline/wireless national telco carriers. The company was formerly known as APA Enterprises, Inc. and changed its name to Clearfield, Inc. in January 2008. Clearfield, Inc. was incorpoarted in 1979 and is headquartered in Minneapolis, Minnesota.View Clearfield ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Seismic Shift at Intel: Massive Layoffs Precede Crucial EarningsRocket Lab Lands New Contract, Builds Momentum Ahead of EarningsAmazon's Earnings Could Fuel a Rapid Breakout Tesla Earnings Miss, But Musk Refocuses and Bulls ReactQualcomm’s Range Narrows Ahead of Earnings as Bulls Step InWhy It May Be Time to Buy CrowdStrike Stock Heading Into EarningsCan IBM’s Q1 Earnings Spark a Breakout for the Stock? 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There are 8 speakers on the call. Operator00:00:00Good day, and welcome to the Clearfield Fiscal Third Quarter 2023 Conference Call. All participants will be in a listen only mode for the duration of the call. After the speakers' prepared remarks, there will be an opportunity to ask questions. Speaker 100:00:28Please note that this event is being recorded today. And as Operator00:00:31a reminder, the slides in this presentation are controlled by you, Please advance forward through the presentation as the speakers present their remarks. I would now like to turn the conference over to Greg McNiff, Investor Relations for Clearfield. Please go ahead, Speaker 200:00:45sir. Thank you. Joining me on the call today are Sherry Beranek, Clearfield's President and CEO Dan Herzog, Clearfield's CFO and Kevin Morgan, Clearfield's CMO. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act. Speaker 200:01:12These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward looking statement. It is important to note also that the company undertakes no obligation to update such statements. Except as required by law, the company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward looking contained in today's press release, earnings presentation and on this conference call. The Risk Factors section in Clearfield's most recent Form 10 ks filing With the Securities and Exchange Commission and its subsequent filings on Form 10 Q, provide a description of these risks. With that, I would like to turn the call over to Clearfield's President and CEO, Sherry Baronek. Speaker 200:01:58Sherry? Speaker 300:01:59Good afternoon, everyone, And thank you for joining us today to discuss Clearfield's results for the Q3 of fiscal 2023. We also intend to provide an update on our business and current market trends. Our Q3 of fiscal 2023 Reflects the commentary we provided on our prior two earnings calls. Total net sales for the Q3 were $61,000,000 which includes a record $13,000,000 contributed from Nestor Cables. While visibility remains limited, we are reiterating our revenue guidance and increasing our net income per share guidance for the year ending September 30, 2023 based upon our backlog and current ordering trends. Speaker 300:02:46I want to reiterate that we remain as confident as ever in the long term demand for fiber broadband. Likewise, we believe our market share remains stable. Accordingly, we continue to focus on positioning the company to capture market share once industry ordering patterns return to a more normalized level. I'll discuss these initiatives in more detail shortly. End user demand remains strong and is best reflected And ongoing take rates that our broadband service provider customers are achieving. Speaker 300:03:20A take rate is defined as the percentage of subscribers over total homes passed. Take rates in the 40% range are typical over several years, but can vary depending upon competition and environment. Current industry take rates allow broadband service providers to recognize a strong return on investment, reducing their cost of operation and increasing their revenue per subscriber. To that end, take rates for fiber based services remain extremely strong and continue to improve relative to alternative solutions. As we enter the initial stages First, we have government funding programs, namely the Broadband Equity Access and Deployment Program or LEED. Speaker 300:04:10We are more certain that the industry will return to a more normalized cadence of deployment. However, it's important to understand the relationship between government funding and orders placed with these funds. While our Chief Marketing Officer, Kevin Morgan, will address this topic in more detail In his prepared remarks, I want to highlight a near term impact related to this dynamic. In order to compete for bead funding, Service providers are required to contribute matching funds to each deployment. To ensure that they have the necessary financing and capital available, We expect our community broadband customers to continue to be cautious with respect to near term deployment, particularly given Rising interest rates and labor costs. Speaker 300:04:57We believe that this is a prudent step by our customers to best take advantage of the significant opportunity ahead and not a slowdown in end user demand. Additionally, based on conversations with our service provider customers, We expect the inventory buildup impacting the industry to continue into the first half of fiscal twenty twenty four. Also, as many of you are aware, the industry typically undergoes a slowdown during the winter. And for these reasons, We expect revenues to seasonally soften during this period. Accordingly, we expect the next several quarters' results and the year over year comparisons to be impacted by these dynamics. Speaker 300:05:41While we continue to right size capacity levels to meet current demand, We are maintaining the infrastructure and processes for long term growth and continue to design products to address our customers' most significant pain points and reduce the amount of skilled labor required to install our hardware. To that end, our recently announced SeaChange terminal It's receiving very positive reception from field studies conducted by our customers. These recent deployment studies, which were commissioned by 2 of our MSO customers, Concluded that by eliminating the need for splicing, SeaChange and our other plug and play terminals could increase the number of homes connected from an average of 2.5 to nearly 4 homes per day per laborer. For those of you who have followed Clearfield over the last several years, This level of improvement is consistent with our FieldSmart fiber distribution hubs. We continue to focus on developing reduce the deployment time and the labor required by our customers. Speaker 300:06:45As a reminder, labor makes up approximately 70% of the total build And is the gating factor in deployments. We also continue to improve our product delivery times. During the pandemic, lead times reached a height of 20 weeks due to supply constraints. Lead times now are in our target range of 4 to 6 weeks across most product lines. Any remaining supply constraints are predominantly limited to sub components of our active cabinet. Speaker 300:07:17For some additional insights and what we're seeing in the market and the significant long term opportunity, I would like to welcome our Chief Marketing Officer, Kevin Kevin? Speaker 400:07:28Thank you, Sherry. I want to go into a little more detail on the government funding initiatives and how they will translate into orders over the coming years. As many of you know, the initial disbursements to the states related to the BEED program are underway. This program allocates $42,450,000,000 toward high speed Internet access in unserved and underserved areas as part of the Infrastructure Investment and Jobs Act. The states received their formal notice of allocations on June 30 and have until December 27 to submit proposals to the NTIA for how they will allocate these funds to run their grant programs. Speaker 400:08:12As illustrated on Slide 4, these government funding initiatives will peak next year and will continue at significant levels for the next Several years. However, due to the processes and requirements in place to distribute these funds to specific service providers, We estimate there will be a lag of 6 to 12 months from when a state receives its funds to when a service provider places orders For specific builds, adjusting for this timing lag, 3rd party industry analysts expect the industry to grow at 13% to 15 For the next several years, driven substantially by these funding initiatives. The message is very clear. We anticipate significant demand in our core demographic starting late next year and continuing for the next several years. In terms of total addressable market, we estimate our opportunity to be slightly less than $10,000,000,000 over the same time period. Speaker 400:09:14Coming back to Clearfield's fiscal Q3 performance, I'd now like to pass the call over to our Chief Financial Officer, Dan Herzog, He will walk us through our financial results for the fiscal Q3 of 2023. Speaker 500:09:28Thank you, Kevin, and good afternoon, everyone. Please turn to Slide 6 to look at our fiscal Q3 2023 results in more detail. Consolidated net sales in the Q3 of fiscal 2023 were $61,000,000 a 14% decrease From $71,000,000 in the same year ago period. This figure includes $48,000,000 of organic net sales from Clearfield and a $13,000,000 contribution from Nestor Cables, reflecting an 18% increase from Nestor Cables over the previous quarter. We continue to invest in capital equipment with faster processing capability to reduce costs and improve margins at Nestor. Speaker 500:10:15Furthermore, we are continuing the discovery process regarding how to best introduce higher margin connectivity solutions into the European market. The year over year decrease in net sales was due to lower sales across our core end markets, particularly in our community broadband and MSO markets. As Sherry noted, we are seeing service providers in these markets Prepare for the upcoming BID programs by setting aside financial support that will be necessary to match the BID appropriations. In comparison to last year, where service providers were utilizing a just in case approach to inventory accumulation, This year's wait and see approach will have a negative near term impact on year over year comparisons. Order backlog declined 52 percent to $75,000,000 on June 30, 2023, Down from $157,000,000 on June 30, 2022 $108,000,000 on March 31, 2023. Speaker 500:11:20We are collaborating with our service provider customers to align their open orders with their deployment schedules, which resulted in some order cancellations this period. As Sherry noted, our lead times are now in our target range of 4 to 6 weeks Across most product lines. Turning to Slide 7, I will now review net sales by our key markets. Sales to our primary market, community broadband, comprised 32% of our net sales in the Q3 of fiscal 2023. In Q3, we generated net sales of approximately $19,000,000 in community broadband, down 49% from the same period last year. Speaker 500:12:03For the trailing 12 months ended on June 30, 2023, our community broadband market net sales Totaled approximately $133,000,000 which was up 26% from the comparable periods last year. As we did last quarter, we are breaking out revenue contribution from our large regional service provider customers, which was previously included in the community broadband and national carrier markets. We believe this customer breakout allows investors to better understand the near term industry dynamics we referenced on the last earnings call. Specifically, we have broken apart our community broadband customer market to Disclose revenue from the traditional smaller providers and from ILEX with footprints of 500,000 subscribers and above, which we refer to as large regional service providers. Net sales for the Q3 in our large regional service Providers market declined by approximately 4% year over year. Speaker 500:13:04Net sales were up 2% over the trailing 12 month period. Please refer to the slide at the end of this presentation to view the historical revenue contribution from this customer group. Our MSO business comprised 15% of our net sales in the 3rd quarter. Net sales declined 9% year over year and are up 83% for the trailing 12 month period. Net sales in our national carrier market for the 3rd quarter decreased by 43% year over year. Speaker 500:13:37On a trailing 12 month basis, net sales in our national carrier market were down 7% from the year ago period. Finally, net sales in the international market increased 4 64% year over year in the Q3 compared to the same period last year And are up 3 93% year over year on a trailing 12 month basis due to the acquisition of Nestor Cables, which contributed $13,000,000 toward this segment In the 3rd fiscal quarter. As detailed on Slide 8, Gross profit margin in the 3rd quarter declined to 31.1 percent of net sales from 41.1 percent of net sales in the same year ago quarter. Our gross margin was impacted by unused capacity in our Mexico facility due to the lower levels of demand as well as Nestor's inclusion in this quarter's revenue. As a reminder, Nestor was acquired in July of last year. Speaker 500:14:36The company continues to strategically realign capacity to current market conditions. While Clearfield does not compete on price, we have been prudent in how we pass along rising costs to our customers in the interest of maintaining our long term relationships. We will continue to be thoughtful in addressing these costs with our customers going forward. Now please turn to Slide 9. Operating expenses for the Q3 were $13,400,000 which were up slightly from $12,700,000 in the same year ago quarter. Speaker 500:15:11This increase is primarily the result of the addition of operating expenses of the Nestor Cables business. As a percentage of net sales, operating expenses for the Q3 were 22%, up from 18% in the same year ago period. Turning to Slide 10. Net income in the 3rd quarter decreased 59% to $5,200,000 from $12,700,000 in the same year ago period and was down from $10,400,000 in the Q2 of fiscal 2023. As a percentage of net sales, net income for the Q3 was 9%, down from 18% in the same year ago period and down from 14% in the Q2 of fiscal 2023. Speaker 500:15:58As illustrated on Slide 11, our balance sheet remains Strong with $169,000,000 of cash, short term and long term investments and $2,000,000 of debt. We had $1,600,000 in capital expenditures in the quarter, mainly to support our manufacturing operations. Our inventory balance increased from $101,000,000 March to $105,000,000 in the 3rd quarter, driven by the industry dynamics we have discussed. While we expect inventory levels to increase slightly next Quarter, we do not expect them to do so at the same levels as we experienced in fiscal year 2022, resulting in improved free cash flow in the fiscal year ahead. We are reiterating our fiscal 2023 revenue guidance. Speaker 500:16:48We expect full year fiscal 2023 net sales to be within the range of $260,000,000 to $275,000,000 and are increasing our net income per share guidance to be in the range of $2.05 to $2.15 per share, up from $1.80 to $2.10 per share previously. The increase in our net income per share guidance is due to better than expected product margin as well as cost saving initiatives. With the capital raise we undertook last year, we plan to continue investing in our infrastructure and other necessary strategic areas. Additionally, our strong balance sheet ensures that we are well positioned to effectively compete for larger customer opportunities and to pursue strategic opportunities That concludes my prepared remarks for our Q3 fiscal 2023. We appreciate the support of our investors as we continue to work to drive shareholder value. Speaker 500:17:47I will now turn the call back over to Sherry. Speaker 300:17:50Thanks for the financial update, Dan. Turning to Slide 14, I would now like to provide an update on our multi year strategic plan LEAP, which is our roadmap for how we intend to capitalize on the significant opportunities ahead. The leap Is to jump higher, longer and with great force. For those organizations such as Clearfield And we're able to meet the overwhelming demand for broadband access in 2022. The service provider inventory digestion challenge is a new hurdle to overcome. Speaker 300:18:24LEAP contains strategic directions for how we navigate this near term pause in demand with the need to invest in our infrastructure in order to meet the significant long term demand Kevin highlighted. We have always prided ourselves on listening to our customers in order to provide them with the best products and service. We demonstrated this capacity throughout the last several years with record growth, while continuing to make significant investments in capacity. Today, these same customers are telling us that they need some time to do a little rightsizing after several years of record industry growth. Rather than cutting costs or lowering prices to offset this slowdown, we are taking a thoughtful and strategic approach By using this time to position the company to meet the significant demand ahead, I'd like to discuss some of the investments we're making to scale the organization when the marketplace returns to a more normalized level of orders. Speaker 300:19:24First, we continue to invest in Clearfield College To address the skilled labor shortage, Clearfield College is both an internal and an external training curriculum. Our people, both on the manufacturing floor and within our SG and A functions, will be able to leap higher and stronger because of the know how we are building. This progress is difficult to measure, but while our competitors are announcing significant layoffs And cost reductions, we continue to invest in the people that will make the difference. 2nd, we are modernizing our ERP and other internal These system updates will enable us to better manage and fulfill orders, thereby improving customer satisfaction while reducing lead times. Further, we are actively recruiting to add expertise in new markets, especially in Europe where we intend to build on our Nestor platform. Speaker 300:20:22Specifically, we're expanding our Estonia facility for micro duct and Connectivity Manufacturing and intend to create a Clearfield operational umbrella that initially integrates our procurement programs and will follow with product management and sales initiatives. In summary, while our Q3 financial results and guidance To reflect the near term uncertainty and lack of visibility we've discussed previously, we remain focused on building a strong foundation from which to address The long term demand for high speed broadband across our markets. To that end, we are rightsizing capacity levels to meet current demand. We are maintaining the infrastructure and processes for long term growth and continue to design products to address our customers' most significant pain points. We believe this is the right approach to drive significant shareholder value over the long term. Speaker 300:21:18And with that, we will open the call to your questions. Operator00:21:26We will now begin the question and answer session. At this time, we will take our first question, Speaker 100:21:43which will come from Ryan Koonce with Needham. Please go ahead. Speaker 600:21:49Thanks for the question. Sharon, I wanted to ask about seasonality. Of course, nothing has, of course, been normal about seasonality For the last several years, but as we look at this year and your strength here in the June quarter And your guide to be down sequentially, can you talk about some of the demand dynamics? And it seems like maybe there was some strength in a couple of segments So maybe you weren't anticipating, but maybe just kind of fill us in on what some of the puts and takes were on the strength you have in June and maybe what might step down in September. Thank you. Speaker 300:22:26Absolutely. We have some really nice opportunities to work Inside with the large regional providers and really helping them be able to establish providing products because they had access to labor. And it's always difficult to know where the labor is going to come from and if they're going to be able to make it happen. But we did have some sell through in that Large regional service provider area that was originally unanticipated. The community broadband, as I talked about, It's a really strong market and we are having a great time understanding where our customers are and where they're going. Speaker 300:23:05But our seasonality, which is traditional, is still going to be there and now it's finally going to show up in that There just is going to be less labor done because of the weather, but it's going to be compounded by this financial structure that is Coming up and facing the community or all providers, but especially the smaller providers. And we alluded to that Within the materials in that as the B program was fully defined and now released, the financial obligations of a service provider that's going to Apply for those funds are quite significant. As an example, they need to be able to provide a letter of credit equal to 20 5% of their grant submission, which really puts a lot of capital sitting frozen waiting for allocation. So we think it's really prudent That these customers are looking at their balance sheets, that they're aggressively identifying opportunities. And we're really it makes us very optimistic of our position for ongoing business next year as those materials get released. Speaker 300:24:15But I think it could force our winter months into a little more seasonality than we may have expected. Speaker 600:24:22Right. That makes sense. So are these mostly incumbent providers you're referring to then that they are Saving CapEx, so to speak, in the near term for anticipation of getting award for matching funds? Speaker 300:24:38Exactly. So the incumbent providers, the ones who've had traditional balance sheets, in place, but who are stretched, And those have been our traditional customers and will continue to be so. As we look forward, we think there's some additional opportunity With the alternative providers, the rural utilities, some of the municipalities that haven't built previously, that's not showing up in our current Seasonality, but it also is new revenue that will show up next year. So you're right on target. And it's one of the reasons That we did separate some of the large regional providers to isolate Our market categories more tightly so that people understood the puts and takes of when things work well and when things create a level of And some of the challenges that we're working to manage. Speaker 600:25:33Got it. And just one follow-up, if I could, on the guidance for earnings. Looks like you're anticipating a step down in gross margins and from a pretty strong number Relative to expectations this quarter in June, is that purely a factor Of fixed costs and lower volume or are there other mix issues at play in the gross the implied gross margin guide down? Speaker 300:26:02Yes. No, it's absolutely volume based. There we've done I've been extremely pleased with the work that we've been able to do to We've chosen not to cut to the bone so that we could do a lot of training, a lot of investment And quality systems and different protocol, I'm not looking to cut any further in ad space So that we can come out strong over the winter. We have been able to hold our product margins right now Quite well, but it really is a space allocation that there's just only so much you can do with overhead. Speaker 600:26:44Okay, sure. Thanks so much. I'll get back in the queue. Speaker 100:26:47You're welcome. Operator00:26:51And our next question will come from Scott Searle with ROTH MKM. Please go ahead. Speaker 700:26:56Hey, good afternoon. Thanks for taking my questions. Really nice job on the gross margins this quarter. I know it's difficult operating environment. Maybe to quickly follow-up on Ryan's question, Looking to the September quarter implies a range of $41,000,000 to $56,000,000 I'm wondering if you could give us Directionally in terms of some of the bigger categories, particularly community broadband, where do you expect to see most of that Sequential progression from a revenue standpoint, is it 1 or 2 areas? Speaker 700:27:24And at the lower end of the range, do you have pretty good visibility To that at the current time or do you need turns to get there? And then I had a couple of follow ups. Speaker 300:27:35The most fluctuation is in the large regional Riders based upon sell through and project fulfillment. We expect we'll be probably in the middle of that space. But we've got the low end of the space we pretty much have in backlog and we're working through on that. But now with the 4 to 6 week Lead time, our customers don't need to have their inventory stage. So it's a little bit more hand to mouth, not in a bad way. Speaker 300:28:09The swings of the pendulum that have gone through in regard to inventory digestion, so It is an implication for the quarter that everything goes in the right direction and we'll be at the high side. I don't I'm not expecting to be at the low side, but based upon the fact that I don't have those orders in hand and the marketplace is so unpredictable, We needed to be as transparent as we could to our shareholder base. Speaker 700:28:37Got you. Very helpful. And sure, if I could to follow-up, talking about And continuing for another couple of quarters, and injecting a little bit more seasonality into the mix. The results or the anticipated results in September, is that We should expect into December March or is there a little bit more variability in terms of what you're seeing? And lastly, I know you've been looking for other ways to Differentiate your entry from a product standpoint into the European marketplace. Speaker 700:29:06I'm wondering if you could give us some updated thoughts on that front. Thanks. Speaker 300:29:11So our looking into 1st and second quarter throughout the winter, it will be Mid of that range, maybe a little bit lower because of the standpoint associated with Europe and that today, Our sales are very strong in Finland and breaking into some European, Continental and Central European opportunities. And so the seasonality of Finland is much worse than the United States unfortunately. So they will be seasonally down next quarter and into the winter months. They tend to see a stronger quarter ending in March because of the They have such a short build season that they do tend to place orders early and to put things into place and have them Excuse me, ready to go. From a product orientation as to what we're doing in Europe is, We're really pleased with the work that's been done on a MicroDuct level. Speaker 300:30:19That MicroDuct work helps us to prepare for field shield And some of the works that we have done in pushable fiber and the means to be able to provide plug and play solutions into the European marketplace that Historically, we've not seen plug and play. We are evaluating how to use Aeropone fiber and how to use Aeropone fiber within the cassette, and how we can utilize the traditional deployment methods that being Aeropone fiber with more the modularity that Clearfield has brought to market over the last 10 years. So we'll be displaying some of those technologies We are at a British trade show in late September and are anxious to be able to see the response Speaker 700:31:15Thank you. Operator00:31:25Our next question here will come from Greg Meznyaz with Westpark Capital. Please go ahead. Speaker 100:31:30Yes. Thank you for taking my question. Can you talk A little bit about how the recent inventory buildup issues at customers has been impacting the pricing environment, if at all? Good to get some color. Thanks. Speaker 300:31:49I think the inventory buildup position is such that It's affecting their future purchases, but not necessarily affecting Future pricing or price decisions. It's more of a frame of reference that customers are looking at Already next year's build season and looking to try to be able to identify how costs have changed. One of the challenges that any Company needs to go through is being able to normalize the current valuation of their inventory against and what they may have paid for it. And I think you'll see that service providers are not writing down their inventory as being worth any less And what it was when they purchased it. In fact, if it's anything, it's going the other direction because of the general Speaker 100:32:45Sure. Thank you for that. And then just a quick follow-up. Has there been any change in the competitive landscape that you're seeing recently? In other words, have any other larger competitors moved Into the smaller carrier market? Speaker 300:33:08Yes. In the true small carrier world, the general community broadband, I mean Corning and CommScope have always been there, but they we've taken share from them over the period of the last 10 years due to our dedicated efforts. Our nimble sales team and the product mix that's designed for those environments. So I wouldn't say that they are new to the market, But I would say that they have been focused on the larger providers, the larger regionals probably, and certainly the national carriers. Speaker 100:33:44Great. Thank you for that. Operator00:33:49And with that, we will conclude the question and answer session. I'd like to turn the conference back over to Sherry Beranek for any closing remarks. Speaker 300:33:58Thanks very much. These are very difficult times for us in this industry. I think across the board, you'll see My competitors being struggling with being able to find the right product at the right time, I'm very proud of my team on how we have been able to continue to serve shareholder value and be able to provide Net income at 9% this quarter in times where others have struggled to make a profit. So we are pleased to be able to be prudent. I hope you believe that we are well managed. Speaker 300:34:35I certainly think my management team is top notch And we look forward to serving you next year and moving forward. Operator00:34:48The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.Read morePowered by