Clearfield Q1 2024 Earnings Call Transcript

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February 1, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to Clearfield's Fiscal First Quarter 20 24 All participants will be in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Greg McNiff, Investor Relations for Clearfield. Please go ahead.

Speaker 1

Thank you. Joining me on the call today are Sherry Beranek, Clearfield's President and CEO and Dan Herzog, Clearfield's CFO. As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward through the presentation as the speaker presents their remarks. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company.

Speaker 1

These remarks constitute forward looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements. It is important to also note 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 statements 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.

Speaker 1

They are also summarized on Slide 2 of the earnings presentation. With that, I would like to turn the call over to Clearfield's President and CEO, Sherry Beranek. Sherry?

Speaker 2

Good afternoon, everyone, and thank you for joining us today to discuss Clearfield's results for the fiscal Q1 2024. We also intend to provide an update on our business and current market trends. Please turn to Slide 4. I noted last quarter that while the industry is facing several near term macroeconomic and seasonal headwinds, Broadband service providers continue to deploy equipment and long term demand remains as strong as ever. In the following slides, I will preview recently released market data that demonstrates this case as well as the basis for our optimism regarding the long term outlook.

Speaker 2

Consistent with our optimism, Clearfield repurchased 436,000 of its shares for approximately $12,000,000 in the Q1 ended December 31, 2023. Total net sales for the Q1 of fiscal 2024 were $34,200,000 above the high end of our guidance range, driven by higher than expected sales from our large regional service provider customers due to their ordering of complementary products to support their inventory mix needed for current deployment. Dan will discuss our financial results for the quarter in more detail shortly. While we continue to expect the next few quarters to remain challenging due to the inventory overhang across the industry, We remain focused on positioning Clearfield to take share when ordering patterns return to a more normalized cadence. To that end, We are expanding and enhancing our product portfolio in order to reduce the overall cost of fiber deployment by making the process as efficient as possible.

Speaker 2

We recently announced the addition of an innovative vault to our current product portfolio, which is designed to reduce the cost of shipping and storage by approximately 67%. Feedback from our recently introduced Craft Smart Fiber First Pedestal and also the Field Smart Fiber Flex Active Cabinet designed to be installed in rural areas has been exceptionally positive. Both products are now shipping and reflect another step toward our goal of providing our customers with alternative choices that continue to streamline cyber deployment. In addition, we are working to ensure these products and all other peripheral product offerings will be compliant with Buy America, Build America, known as BABA, as the bead awards are expected to translate to initial deployments near the end of this calendar year. As shown on Slide 5, recently published data from RBA, an independent research firm analyzing data in the North American fiber broadband industry, recently reported that the industry passed 9,000,000 households in 2023, nearly a1000000 more than the year before.

Speaker 2

Furthermore, this total included 3,000,000 households, which already had access to 1 fiber service provider. The fact that approximately 35% of the households passed in 2023 already had access to 1 fiber provider confirms our view that the competitive landscape for broadband service is healthy and that our total addressable market is larger than a single fiber connection for each U. S. Household. As many of you know, the $42,500,000,000 BEED program is now underway with the maps released and the value of the monetary award divided per state.

Speaker 2

Slide 6 illustrates the relationship between the government disbursement and service provider deployment. As you can see, the year is projected to be the largest disbursement year of government funding. However, we expect these funds to translate into deployments and revenue over the next several years. As illustrated on Slide 7, industry forecasts from RBA indicate that the next 5 year period will see up to 12,000,000 additional homes passed with fiber because of the federal funding initiatives. These programs will bring high speed Internet access to unserved and underserved areas that will boost the forecasted total homes passed in the next 5 years in the U.

Speaker 2

S. Market to over 57,000,000 homes. Coming back to Clearfield's performance, I'd now like to pass the call over to our CFO, Dan Herzog, who will walk us through our financial results for the fiscal Q1 of 2024.

Speaker 3

Thank you, Sherry, and good afternoon, everyone. Please turn to Slide 9 to look at our fiscal Q1 2024 results in more detail. Consolidated net sales in the Q1 of fiscal 2024 were $34,200,000 a 60% decrease from $85,900,000 in the same year ago period. The year over year decrease in total net sales due to the ongoing industry dynamics that we commented on throughout the past year and that our peers in the marketplace have reported over the last several quarters. We remain focused on reducing costs and improving margins at Nestor by investing in more efficient manufacturing equipment and introducing higher margin plug and play connectivity products.

Speaker 3

We continue to be focused on labor utilization as well as driving efficiencies for enhanced in order to improve gross margins at all our manufacturing locations. Order backlog declined 68 to $43,500,000 on December 31, 2023 from $57,300,000 on September 30, 2023 and $136,300,000 on December 31, 2022. As our visibility remains limited, We continue to collaborate with our customers to align their open orders with their deployment schedules. As a reminder, the winter season is our lower order booking and revenue quarters. Our lead times are now less than 4 weeks across most product lines.

Speaker 3

We continue to expect backlog to become less of an indicator for future sales as most orders will be fulfilled within the quarter they are received. Turning to Slide 10, I will now review net sales by our key markets. Sales to our primary market, community broadband, comprised 36% of our net sales in the Q1 of fiscal 2024. In Q1, we generated net sales of approximately $12,300,000 in community broadband, down 67% from the same period last year. Net sales for the Q1 in our large regional service providers market were $7,900,000 comprising 23% of our total net sales and declined by approximately 47% in the Q1 of this fiscal year versus the prior year Q1.

Speaker 3

Net sales in our MSO business were $5,200,000 and comprised 15% of our net sales in the 1st quarter. Net sales declined by approximately 75% in the Q1 of this fiscal year versus the prior year Q1. Net sales in our national carrier market for the Q1 decreased to $1,300,000 accounting for 4% of total net sales and declined by approximately 48% in the Q1 of this fiscal year versus the prior year Q1. Finally, net sales in our international market were $6,700,000 and comprised 19% of total net sales in the 1st quarter. Net sales in this market decreased by approximately 35% in the Q1 of fiscal 2024 versus the prior year Q1.

Speaker 3

As detailed on Slide 11, gross profit margin in the Q1 declined to 13.7% of net sales from 35.7% of net sales in the same year ago quarter. Our gross margin continues to be impacted by unabsorbed overhead our manufacturing facilities due to lower levels of demand and winter seasonality. The company continues to adjust its production capacity to align to current demand and market conditions. In addition, gross margin was negatively impacted by an increase in reserves for excess inventory primarily resulting from the low end demand. We continue to expect revenue and gross margins in the first half of fiscal twenty twenty four be impacted by the continued inventory digestion at our customers as well as normal seasonality.

Speaker 3

As we enter the build season in the second half 2024, we anticipate an uptick in demand, which should lead to an increase in capacity utilization that should result in an improvement in gross margins. We continue to work to uphold price discipline as well, while also ensuring the preservation of our long term customer relationships. Moving forward, we will remain thoughtful in how we address pricing with our customers. Now please turn to Slide 12. Operating expenses for the Q1 were $12,900,000 which were consistent with $12,800,000 in the same year ago quarter.

Speaker 3

The company remains committed to servicing its customer base and enhancing its long term market as seen by the consistency in year over year expense, which reflects our continued investment in our operations. As a percentage of net sales, operating expenses for the Q1 were 37.6%, up from 14.8% in in the same year ago period due to lower sales volumes. Turning to Slide 13, loss in the Q1 was $5,300,000 compared to net income of $14,300,000 in the same year ago period and net income of $2,700,000 in the 4th of fiscal 2023. Our net income is heavily affected by our reduced volume levels, which in turn results in lower gross profit percentage. As illustrated on Slide 14, our balance sheet remains strong with $169,000,000 of cash, short term and long term investments and just $2,000,000 of debt.

Speaker 3

We had $2,400,000 in capital expenditures in the quarter, mainly to our manufacturing operations. Our inventory balance decreased from $98,100,000 at fiscal 2023 year end to $94,600,000 in the Q1 of fiscal 2024. Our cash, short term and long term investments a reduction of just $5,000,000 from September 30, even though $12,000,000 was used for the repurchase of shares in the Q1. We recorded a cash flow from operations of positive $7,800,000 in the quarter. Our strong balance sheet ensures that we are well positioned to effectively compete larger customer opportunities and to pursue strategic opportunities to enhance our market and product portfolio.

Speaker 3

Likewise, our strong cash balance positions us to manage the business for the long term and through our share repurchase program, reinvest for the long term. Please turn to Slide 15. Due to limited visibility related to the reasons we've discussed over the last several quarters, We will continue to provide quarterly guidance. We anticipate the Q2 of fiscal 2024 net sales to be in the range of $29,000,000 to 33,000,000 We expect to generate a net loss per share in the range of $0.49 to $0.55 This increased loss over the prior quarter is due to increased inventory reserves for excess inventory, primarily resulting from the low in demand. This loss per share range is based on the number of shares outstanding at the end of the Q1 and does not reflect share repurchases in the 2nd quarter.

Speaker 3

As I indicated earlier, we repurchased $12,000,000 in stock as part of our share buyback program in the Q1, which represented 436,000 shares at an average price of $27.69 leaving approximately 21,000,000 dollars available for additional repurchases. The significance of our buyback underscores our clear and proactive commitment as we believe in the enduring strength potential of our company and this market. In the coming quarters, we will continue to make thoughtful and strategic decisions regarding share repurchases, driven by our strong conviction that our current share price is not reflective of our long term opportunity. That concludes my prepared remarks for our fiscal Q1 2024. We appreciate the support of our investors as we continue to work to drive shareholder value.

Speaker 3

I will now turn the call back over to Sherry.

Speaker 2

Thanks for the financial update, Dan. Turning to Slide 17, I would now like to provide a brief update on our multi year strategic plan, which we have labeled LEAP. LEAP is our roadmap for how we intend to capitalize on the significant opportunities ahead when industry demand returns to a more normalized cadence. Over the last 12 months, Clearfield's performance has been negatively affected by a misalignment between our capacity and market needs. We view this mismatch between supply and demand as a temporary challenge that we have addressed through reductions in variable costs, yet we must and will continue to execute at the highest level.

Speaker 2

Rural broadband is in our DNA and the reason we are the leading provider to this customer segment. As I highlighted earlier, we're not sitting still, Rather, we continue to develop new labor saving products and align our sales and support staff to the markets where fiber is being deployed. Expect more product announcements to come highlighting these attributes. Listening to our customers and then delivering to their needs is the foundation on which our North American business was built. Recently, we hired an executive with significant connectivity experience For our European operations, we will work alongside our existing European team to lead our initiatives to cross sell extension of Clearfield's connectivity products.

Speaker 2

We have also recently hired a senior level operations executive to lead our North American manufacturing and program as part of our ongoing operational initiatives to drive cost reduction, align capacity to near term demand and to convert inventory to cash. In addition of this bench strength to Clearfield's management team, It's an investment that will accelerate our ability to deliver strong earnings as market dynamics return to a more normalized pattern. While the near term industry dynamics remain challenging, we also remain confident that the future growth in fiber is absolute The value proposition that Clearfield brings to the market is as strong as ever. And with that, we will open the call to your questions.

Operator

Our first question comes from the line of Scott Searle with ROTH.

Speaker 4

Good afternoon. Thanks for taking my questions. Sherry, maybe just to dive in, in terms of some of the government funding earlier in the week. Calix was indicating that there had been some delays in deployments as customers were evaluating the B programs. I'm wondering if you could comment on that if you're seeing a similar type of slowdown with your customers.

Speaker 4

And then also more specifically in some of the bead programs funding and award themselves. I appreciate the detail in the slides, but when do you expect to see awards to start to happen? And when would you expect those to materialize in orders benefiting Clearfield? Is that still on track for the 1st calendar quarter of 2025 Or is there the potential for some of this to slip?

Speaker 2

Yes. Hi, Scott. Listening to the Calix world, I mean, that's really consistent with our world and really probably consistent with what we've been saying for a couple of quarters now that As people put together their plans and their engineering directives and how it relates to what's coming with There needs to be a choice. And so there has been less revenue, less activity than one might expect. There are only so many engineering companies to go around.

Speaker 2

And so they're engineering for potential bead awards and not necessarily for deployments this year. We've also talked about that the balance sheet needs to be in a good place for when they go after the bead funding because they're competing with others. And there is a level of financial match that's necessary as well. It really doesn't change Our outlook that the BEAT initiatives will start to see being rolled out now in late 2024 And consistent with what we've said in the past and what Calix has said is that's meaningful in 2025 and for the next 3 to 5 years as those programs are The one thing that I want to make sure that we talk through though as well is when we look at one of the slides Earlier in the presentation, is that the number of homes passed in the next 5 years, even without BEED, is going to be close to 35 higher than it was in the previous 5 years. It's just really a timing of the quarters and how we can put this all together.

Speaker 2

So I'm not anticipating that bead is going to slip, as much as I think it is a disciplined manner of getting Everyone's kind of back together.

Speaker 4

Okay. Very helpful. And if I could for a follow-up, looking into your guidance into the March quarter, A couple of items. I'm wondering if you could quantify the inventory charge. It looks like it's probably somewhere in the $2,000,000 plus range.

Speaker 4

Just wanted to get a handle on that. And In terms of March sales outlook, are you comfortable that this is marking the bottom and we should see sequential improvement through the course of this year? And I know it's a little bit early, But I'm wondering, what's the timeline that you would expect kind of normalization of your revenue stream where demand is your shipments are more in line with end market demand? Thanks.

Speaker 2

Right. I'll take the second half and I'll have Dan talks to the inventory reserves. As we look at the quarter in March, that's It's still the winter seasonality. And so beyond the B program and beyond the issues associated With inventory overhang, we are going through winter issues, although it doesn't look Like it, here in Minnesota, it's 50 degrees today and not any snow. So we're actually hopeful that we might get a with so much warm weather across country that we might get an early spring and an early build.

Speaker 2

And that I think is one of the factors that, I think we're going to see, the March quarter would be my expectation that it will be part of that it will become the bottom of our U. I've talked previously about a U shaped recovery And I think we're going to start to see more of a normalized world and a normalized pattern closer to this We're still in this winter and pulling down the backlog right now, but we'll see closer to that one to one book to bill ratio that we kind of We're famous for as we get into the summer months and we expect our revenues to increase. We just don't have a forecast at this point, to what level. Dan, do you want to address inventory?

Speaker 3

Right. So, yes, Scott. Hi. So we've tried to conservatively estimate and it's somewhere in the area of like about $5,500,000 for the upcoming quarter. Those are hard to estimate.

Speaker 3

You kind of got to get through the quarter and see what relieves in the quarter. So that's an estimation right now. Clearly, those things are going to be prevalent in the market. You'll probably hear more people talking about that. But As people are stocked up for longer term demand, but we have to get through this pause and everybody else reducing their inventories, you're going to probably see this more.

Speaker 3

So It's when you can look at people's inventory to their revenue numbers, you can kind of anticipate those things are going to happen. So it's important to note that these aren't things that were obsolete. These are not things that we're putting in the dumpster. The words that we're using around that's reserves and it's on inventory, meaning we just have too much of what we make. We don't stock up a lot on finished goods.

Speaker 3

We're pretty much doing components or sub assemblies that will eventually go to those finished goods, but we are not this to us looks it's kind of like a non cash charge that we expect that when Markets return and demand returns will be used and at that point in time, you get recoveries back on those and it actually helps improve the reserve. So looking at this as a timing thing.

Speaker 4

Great. Thanks. I'll get back in the queue and Sherry, please send that warm weather east. Thanks.

Speaker 5

No.

Operator

Our next question comes from the line of Ryan Kountze with Needham and Company. Please proceed with your question.

Speaker 6

Thanks for the question. On your customer segments Here with the step down in community broadband, it's definitely the multi year low pre pandemic. And I wonder if you thought about if you parsed out The results you had in December and thought forward at least into March, what the impact, what the headwind is there specifically in community broadband? Is it dominantly inventory? Is it dominantly conservation of capital and resources to plan for bead?

Speaker 6

If you can help us there, that'd be really helpful. Thank you.

Speaker 2

Yes. I think it's a combination of all of the above. I mean, Mostly community broadband did not have a strong inventory position. The higher level of inventory being held is that the large regional providers. And so with those regional providers now starting to kind of work through their mix, That's actually a really positive sign for us.

Speaker 2

I think the community broadband numbers are very relative to what others in As Scott said from Ross, the Calix announcements earlier this week, It's very consistent. Community broadband is holding back, evaluating what they're going to do, making they have the right funding and they're going to be able to have their engineers in the right place for where they get their funding and where they don't. So I mean those of us who have been in this market for a long I know that government funding is fabulous, but it also is frustrating because back in 2,008 when we probably got the previous time that we got a chunk of money into this market. It put a low in our business for probably close to 9 months. And so this is no different.

Speaker 2

So we're confident it will come back. It is just a reflection of people evaluating their options.

Speaker 6

Great. And it sounds like from your comment there, the regionals, you're seeing some improvement in the inventory situation at your regionals and a little more pull,

Speaker 2

Right. I think it's the standpoint of the analogy I've used. I think it's very descriptive of forks and knives. They've got all the forks they need, but they now they're finding out they need more knives. And so that's a really good sign that it's starting to kind of work itself out and that they made estimates upon what they're going to need and they made estimates in regards to the mix of what they're going to need.

Speaker 2

So it is definitely starting to improve. And I think it's important to note that we did have a record high A record high in the number of homes passed last year. And so this disconnect between the number of homes actually connected And the number of the dollar signs being shown by the manufacturers is a mismatch at the moment. I think that's really what the best reflection of or answer to your question.

Operator

Okay, great. That's all I have. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Speaker 5

Hi, good afternoon. I think you might have touched on this a little bit, but I did note a little uptick at least sequentially amongst the larger regional players. And I guess as you look forward here for your and I don't know Your guide for fiscal Q2 or even farther out, what do you guess, what do you expect to see from that cohort? And is there any reason that, that would diverge from what you're seeing from your broader community broadband market? And I'll follow-up from there.

Speaker 2

I wouldn't call it diverge. I mean, I think what we're seeing is Clearfield has been strong, for a decade in community broadband, but is emerging as a presence and the large regional providers. And that we took share during the pandemic period. We're working very hard During that time and now to ensure the stickiness of that relationship, the partnering that we're doing to help them manage their inventory, to help them reduce the cost of their deployment by taking out labor. So I think it will be an increasing part of our business, but it could be lumpy because you get an order from a large regional provider that can dwarf some of the other business and maybe put it out of perspective.

Speaker 2

So I wouldn't read into a single quarter at this point in time, but I think it's good for you for all of us to see the level of activity underway and the pull through that we're starting to see.

Speaker 5

Okay, great. And obviously, I think You saw a seasonal downturn on the international side. I imagine that will do you expect that to continue to decline Into Q2 or I'm stabilizing

Speaker 2

Yes. No, I apologize for interrupting, Kim. Very seasonal, and it's very cold in Northern Europe, Even colder than a normal year, so lots of and it started and the winter started very early as well. So No, the Q1 down in international sales is very seasonal and I fully expect that to be a better number next quarter.

Speaker 5

Okay. And last one for me and you may have touched on this, apologies if you did, but given the bottom line guide, I'm assuming you're looking for a little more pressure on the gross margin front In Q2, but if you have any specifics you want to share there, that would be great. Thanks.

Speaker 3

Yes, kind of consistent with where we finished our Q1 in revenue. So we're not forecasting going up on that. So you'd see you're kind of seeing it slightly lower, the range that we provided. So that's there. And It's predominantly related to the non cash inventory reserves that we'd be taking.

Speaker 3

So like I mentioned to Scott, like 5.5 on that. So that puts pressure on us. Obviously, the lower volume is there. That's just going to be a given anytime that we're, Let's say, below our higher revenue quarters. So that's a given.

Speaker 3

But the big change is related to the excess inventory reserves and that's what pushes the margin down.

Speaker 5

Got it. Thanks very much.

Operator

Our next question comes from the line of Jaeson Schmidt with Lake Street. Please proceed with your question.

Speaker 6

Hey guys, thanks for Just a few questions on Nestor. I think previously there was the expectation for the Nestor business to be able to ramp to that $15,000,000 range in the summer months. Is that still possible?

Speaker 2

We're not providing guidance that far out. And so there I'd say there is an opportunity and that we're building a company to be able to address that, and we're building capacity to address that. 1 of the Enhancements that we've made over the course of the last year is the expansion of the amount of micro duct that we're able to provide. And what's exciting about MicroDx, not only that it increases the revenue and increases the margin, but it also is precursor to future connectivity sales. So it gives you an early indicator.

Speaker 2

So the and the Addition of resources there for connectivity, someone who has a strong background in connectivity and understands differences and nuances of the types of connectivity solutions that are necessary certainly will help us pull that through. I'd say don't get, again, it's more of a trend line there, I think, for us rather than a specific target for the summer months. And because of the fact that the rockiness or the lumpiness of their seasonality, $15,000,000 is possible, but not a forecast from us.

Speaker 6

Okay. That's fair. And then can you update us on the timeline on where you're at from being able to manufacture the Nestor product line in the Mexico facility?

Speaker 2

We're already doing that. So the only issue we have is the availability of PVDF materials. And so we are fully manufacturing in Mexico with the Nester product types, mostly what we're what I think is important though there is that we're not intending to manufacture High count fiber for the U. S. Market that tends to be a commodity level product line and so we aren't going to make the capital equipment investment for that.

Speaker 2

But certainly all of the products that Nestor made for Clearfield we're able to do in the Mexico facility and we'll be able to do with the expansion of our manufacturing lines and the new cable lines that we're putting into one of our Brooklyn Park facilities, we'll be able to do all of the previously Nesters equipment in Minnesota as well.

Speaker 6

Okay, perfect. Thanks a lot guys.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 2

Thanks for the opportunity to spend some time with you all at this period of time And to really help to provide, I think, some insight behind a long term investment opportunity. We are At an amazing time right now in the U. S. Market and on the brink of really becoming a fiber rich country and the opportunities that that presents for us and the economy that it will build is certainly a strong one. The Clearfield's opportunity here remains the same.

Speaker 2

It was a very our value proposition is exactly built for this time. And I welcome the opportunity for you to join me in recognizing some of the benefit that fiber is going to

Operator

Ladies and gentlemen, this does conclude today's teleconference.

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Clearfield Q1 2024
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