Clearfield Q3 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Clearfield Fiscal Third Quarter 2024 Conference Call. All participants are in listen only mode. A question and answer session will follow the formal presentation. Please note that this event is being recorded. I would now like to turn the conference over to Greg Magnus, Investor Relations for Clearfield.

Operator

Please go ahead.

Speaker 1

Thank you. Joining me on the call today are Sherry Baranek, 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 today's 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. Thank you for joining us today to discuss Clearfield's results for the fiscal Q3 2024. We also intend to provide an update on our business and current market trends. Please turn to Slide 4. We continue to view 2024 as a transition year and believe that we remain in a gradual recovery as broadband service providers continue to deploy equipment and long term end user demand remains robust.

Speaker 2

In the following slides, I will discuss the latest market data that supports this view. Total net sales for the Q3 of fiscal 2024 were $48,800,000 above the high end of our guidance range. Our outperformance was driven by strong sales in our international customer segment and higher than expected sales from our community broadband customers, including orders from new customers in the utility segment. Specifically, community broadband revenue is comparable to last year, driven by a higher percentage of revenue from homes connected relative to last year. We continue to expect ordering patterns for the remainder of the year to be impacted by the inventory overhang predominantly in our large regional and MSO accounts.

Speaker 2

Dan will discuss our financial results for the quarter in more detail shortly. We are encouraged by the growing interest in our active cabinets for new applications in adjacent markets, including transportation support and traffic monitoring, which will expand our customer base to new categories such as municipalities. We see this as an emerging opportunity for Clearfield starting in fiscal 2025. As labor constraints continue to be an issue for our service provider customers, we are committed to helping them reduce installation time, errors and field issues. To that end, our recently introduced 3 d interactive fiber installation tool on the BILT mobile app is receiving very positive feedback from customers with 1 large regional provider evaluating whether to make the app available to their entire technical team.

Speaker 2

I would now like to provide a brief update on the bead process. We are seeing a significant increase in quoting activity for our bead compliant products from both existing and new customers. As of earlier this week, 26 states and territories have been approved to move into the award process. We continue to expect to recognize initial revenue customer participation in the B program starting late in calendar 2025 with more significant ramp and activity anticipated in fiscal 2026. We recently enhanced the company's manufacturing facilities in Minnesota to accommodate BABA requirements and ensure customers have the products needed to meet their deployment schedules.

Speaker 2

We expect the majority of our portfolio to be BEAT compliant by the end of this current fiscal year. Additionally, we are working with the Fiber Broadband Association to lobby the NTIA and reduce complexity and streamline the BEED award process. While we wait for the ramp in BEED orders, we are currently receiving orders from service providers eligible for the $18,000,000,000 in funds allocated to the enhanced alternative Connect America cost model or ACAM, this program as well as private funding sources. Turning to the overall industry outlook, as illustrated on Slide 5. Industry forecasts from RVA remain unchanged in that they indicate that the next 5 year period will see up to 59,000,000 additional homes passed with fiber, which equates to a 12.5 percent compound annual growth rate.

Speaker 2

Of these 59,000,000 homes, roughly a third are forecast to have access to more than 1 fiber provider. We believe the introduction of 2 fiber competition among providers is a very healthy development and also expands our total addressable market. Turning 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 Q3 2024.

Speaker 3

Thank you, Sherry, and good afternoon, everyone. Please turn to Slide 7 to look at our fiscal Q3 2024 results in more detail. Consolidated net sales in the Q3 of fiscal 2024 were $48,800,000 a 20% decrease from $61,300,000 in the same year ago period, but above our guidance range of $40,000,000 to $44,000,000 Net sales exceeded our expectations driven by an increase in orders during the build season from both existing and new customers. Additionally, we are pleased that Nestor Cables had a strong quarter in our international market, benefiting from a seasonal push. While the industry continues to navigate inventory headwinds, we remain dedicated to reducing costs and enhancing margins across the company.

Speaker 3

In Europe, this continues to involve strategic investments in more efficient manufacturing equipment and the introduction of higher margin plug and play connectivity products. Additionally, we are focused on optimizing labor utilization to improve productivity and gross margins at all our manufacturing locations. Finally, we are also actively working to reduce our inventory levels to enhance cash flow from operations. Order backlog decreased 31 percent to $32,600,000 on June 30, 2024 from $47,200,000 on March 31, 2024. As we transition out of the build season, we anticipated the reduction in backlog as broadband service providers realigned their outstanding purchase orders to current deployment schedules, preparing for winter operations and year end planning.

Speaker 3

As we indicated last quarter, our customers are asking us to align their open orders with their current deployment schedules, which has resulted in some order cancellations in the quarter. This effort will help our customers reduce excess inventory and return to normalized ordering patterns. We do not consider this loss business as we are actively working with these customers to better realign their calendar year 2025 requirements. We are working with these and other key customers to put in place multiyear supply agreements that will provide better mutual visibility going forward. As a reminder, we continue to expect our quarterly backlog balance to become less of an indicator for future sales as most orders will be fulfilled within the quarter they are received.

Speaker 3

Our lead times continue to average 4 weeks across most product lines. Turning to Slide 8, I will now review net sales by our key markets. Sales to our primary market, community broadband, comprised 40% of our net sales in the Q3 of fiscal 2024. In Q3, we generated net sales of 19.6 $1,000,000 in community broadband, up 2% from the prior year Q3. As Sherry mentioned, our community broadband market experienced of 22%, driven by an increase in orders related to normal seasonality as well as from new customers in the utility sectors where we are seeing strong momentum.

Speaker 3

Net sales in our MSO business were $5,800,000 which comprised 12% of our net sales in the 3rd quarter and decreased by approximately 39% in the Q3 of this fiscal year versus the prior year Q3. Net sales for the Q3 in our large regional service provider market were $3,800,000 comprising 8% of our total net sales and declined by approximately 76% in the Q3 of this fiscal year versus the prior year Q3. These customers still hold substantial inventory levels from which they are deploying. We continue to expect future quarters in this segment to be lumpy due to product mix concentrations and potential changes in their deployment schedules and strategies. As mentioned previously, our long term focus remains on collaborating closely with these customers to help them effectively manage their inventory levels and procurement strategies.

Speaker 3

Net sales in our national carrier market for the Q3 were $2,300,000 accounting for 5% of total net sales and were up 17% in the Q3 of this fiscal year versus the prior year Q3. Finally, net sales in our international market were $16,500,000 and comprised 34 16% in the Q3 of fiscal 2024 versus the prior year Q3. On a sequential basis, our international market was up 66% due to a strong seasonal uptick during the build season in Europe. We anticipate that this quarter will represent our international markets peak revenue performance for the year as the build season begins to wind down during our fiscal Q4. Consequently, we expect revenue from our international market to decline sequentially in the Q4.

Speaker 3

As illustrated on Slide 9, gross profit margin in the 3rd quarter was 21.9 percent of net sales, down from 31.1% of net sales in the same year ago quarter and up from 7.7% in the prior quarter. The sequential uptick in gross margin was due to increased production capacity charges, which in the Q3 decreased sequentially by $3,200,000 to about $1,700,000 in the quarter due to better inventory utilization from higher revenue in the quarter. Now please turn to Slide 10. Operating expenses for the Q3 were $13,000,000 down from $13,400,000 in the same year ago quarter due to lower variable costs. We remain committed to strategically investing in the organization while maintaining a prudent and disciplined approach to our cost controls.

Speaker 3

As a percentage of net sales, operating expenses for the Q3 were 26.6%, down from 34.1% in the 2nd quarter and up from 21.9% in the same year ago period. The sequential decrease in operating expenses as a percentage of net sales was due to increased sales volumes. Turning to Slide 11. Net loss in the 3rd quarter was $447,000 compared to net income of $5,200,000 in the same year ago period and net loss of $5,900,000 in the Q2 of fiscal 2024. The sequential decline in net loss was primarily driven by increased revenue, higher productivity levels and lower non cash inventory reserves in the 3rd quarter that I had mentioned earlier.

Speaker 3

As illustrated on Slide 12, our balance sheet remains healthy with $148,000,000 of cash, short term and long term investments and just $2,100,000 of debt. We had $1,200,000 in capital expenditures in the quarter, mainly to support our manufacturing operations and $5,600,000 year to date. Our inventory balance decreased from $84,000,000 at the end of Q2 of fiscal 2024 to $75,000,000 in the Q3 of fiscal 2024. Our cash, short term and long term investments reflect a net reduction of just $1,000,000 from March 31, of which $5,500,000 was associated with of shares in the Q3. We recorded positive cash flow from operations of approximately $3,900,000 in the 3rd quarter and year to date, we have generated $8,500,000 from operations, mainly due to a reduction in inventory of approximately $9,000,000 in the quarter and $23,000,000 year to date.

Speaker 3

We are well positioned to competitively pursue large customer prospects and strategic opportunities to enhance our market position and product portfolio supported by our healthy balance sheet. Our strong cash balance also enables us to manage our business for the long term, including through the ability to repurchase shares, ensuring sustainable reinvestment and growth. Please turn to Slide 13. We anticipate 4th quarter fiscal 2024 net sales to be in the range of $40,000,000 to $43,000,000 We expect to generate a net loss per share in the range of $0.17 to $0.22 This loss per share range is based on the number of shares outstanding at the end of the Q3 and does not reflect share repurchases that could occur in the Q4. As we mentioned on our last call, we expect our North American revenue in fiscal 3rd and 4th quarters to be consistent with each other.

Speaker 3

Our visibility remains limited beyond this quarter as the industry is working through remaining inventory related challenges. As I indicated earlier, we repurchased an additional $5,500,000 in stock in the 3rd quarter as part of our share buyback program, which represented 184,751 shares at an average price of $29.91 This leaves $24,900,000 remaining for future repurchases as of June 30, 2024. Our ongoing share repurchases underscore our confidence in the value of our company and the market opportunity ahead. That concludes my prepared remarks for our fiscal Q3 2024. We appreciate the support of our investors as we continue to work to drive shareholder value.

Speaker 3

Will now turn the call back over to Sherry.

Speaker 2

Thanks for the financial update, Dan. Turning to Slide 15, I would now like to provide a brief update on our strategy. A core aspect of the value Clearfield brings to the market is our decades long commitment to supporting the homes and businesses in rural and small town communities. We focus on providing solutions which are scalable to reduce the cost of deployment by lowering the level of skilled labor required. We've recently announced a new addition to our portfolio of products, which reflects these qualities.

Speaker 2

The craft friendly, craft smart deploy reel tap box features an all in one flexibility that enables the technician to deploy the exact amount of cable from the curb as well as into the home, with the remainder stored safely on the reel for future use, quickly and efficiently. These benefits documented in a recent Clearfield customer deployment study, which surveyed over 150 installations utilizing the Fast Pass method resulted in time savings between 35% 38% versus the baseline method for outside and inside work performed. 2nd, we continue to invest in our European operations, including our lower cost manufacturing facility in Estonia and a high speed fiber line for Finland. These investments will expand the skill set within our operations, including introducing the FieldShield pushable MPO assembly to that market. Finally, as the future bead market will require an expanded utilization of our U.

Speaker 2

S. Manufacturing footprint, we continue to rationalize and streamline our product portfolio to ensure we have the optimal product mix to drive growth and margin expansion. As we expressed last quarter, we remain confident that the long term demand for fiber is as strong as ever and Clearfield is well positioned to help service providers meet that demand. And with that, we will open the call to your questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer Our first question comes from Ryan Coons of Needham and Company. Please go ahead.

Speaker 4

Thanks for the questions. If you start out with on the timing of Embiid, it sounds like a little more push out there. Not super surprising given kind of the pace of Louisiana and some of the early guys moving through the process. But it sounds like there is some optimism in the industry about projects beginning mid-twenty 25. Does that still align with your expectations?

Speaker 4

Or is there something specific with your commentary about late-twenty 25 in your prepared remarks?

Speaker 2

Yes. Hi, Ryan. I think it's just being realistic. I think everybody is hoping for summer. But everyone that we talk through, if we really look through a Gantt chart of deliverables as to what has to happen in order for that to succeed.

Speaker 2

It's more likely than not that we're looking at quite late in the year. And one of our challenges for our fiscal year, in fact, is that since we close in September, it will be difficult for us to see revenue next year within the fiscal year. So we're hopeful, but realistically, probably not.

Speaker 4

Got it. And on the international front, any specific geographies or products you might call out as strength from, Nestor there?

Speaker 2

Well, of course, Finland, which is always our core and our home base. But also moving in to the German market, which is certainly an opportunity in that Germany is underway with their build. They're late to the build process because of how they originally were able to maximize their copper infrastructure, but now are strongly investing in that space. And our success there is more in the alternative carriers. Early success is with MicroDuct and the ability to provide a high quality solution there to as a make ready solution and then look forward to leverage that in future quarters and years for the actual build out process.

Speaker 4

Great. And on the community broadband, I see that bounce back nicely. I heard your comments about product mix, a little more around homes connected. Do you think that this can you give us an idea of the magnitude of the kind of mix shift year over year at a high level? And then how should we think about that mix going forward the next several quarters?

Speaker 2

Right. I think there's been a bit of a I mean, it's a pretty concentrated sway toward Connected Homes in that overall due to the concentration of homes passed for all of our customers. And so I would say our cabinet business has definitely been is more down whereas our connected business sales is definitely up. Within community broadband itself, it's closer probably to a fifty-fifty mix, which I think is really healthy. That's exactly where you'd kind of like it to see because you're going to pass the home and then you're going to connect a series of homes along that line over the next 2 to 3 years.

Speaker 4

That's great. And would you call out any share gains you're seeing there? Or is it really more just about spend still at this point in terms of connected?

Speaker 2

I think it's a standpoint of I wouldn't go so far as share gain yet. I would say it's a standpoint of being able to get a share of Packard book at this point. We're monitoring the share gain process as we look to see since most of these customers were not customers that we had worked you assume share gain, but since they didn't buy from us for Connected Home, but we also want or previously, but we want to be careful to quantify those who were kind of connecting their first homes, especially those through distribution, so that we can accurately provide that information to the market.

Speaker 4

Great. And nice improvement in gross margin there sequentially. Did I just a clarification here, did I hear that the E and O write off was maybe a little lower than expected in the quarter?

Speaker 3

Yes, yes, definitely was. I think we had forecasted something up like towards $3,000,000 and we were closer to about a $1,700,000 So much better utilization. That's what happens when you have higher demand. And so we're happy about that.

Speaker 4

Got it. And then maybe a couple of quick product questions. On the fiber front from Nestor, are you seeing much of an opportunity in data centers? I'm sure you saw the Corning results earlier in the week and the strong attach rate, the new share gains are seeing in these AI clusters. Is that something you're evaluating?

Speaker 2

The product would definitely fit into those spaces. To date, we don't have a channel into the data center world. So I would say, yes, we're evaluating, but not something that I think shareholders should take into consideration as being a near term opportunity.

Speaker 4

Fair. All right, great. Thanks for the questions.

Speaker 2

Thank you.

Operator

The next question comes from Jaeson Schmidt of Lake Street Capital. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking my questions. Obviously, a really strong June quarter here, and I know you highlighted sort of the drivers there. But do you think in your revenue was pulled into June?

Speaker 2

Only in the international market So it's a couple of $1,000,000 that we had a customer in the European space who asked to take some products that was in backlog early for to maximize their build season period. And that's why we are forecasting the Q4 to be a little less than Q3 in the European markets, but consistent in the U. S. Markets, the North American markets in 3rd Q4.

Speaker 5

Okay. That's helpful. And looking at the Nestor Cable's business, is the gross margin for that business where it where you guys originally thought it could be once this business was fully ramped? Or is there still potential upside on the gross margin line within Nestor?

Speaker 2

Oh, there's significantly more upside. And no, it's not where we want it to be. That's why we're investing in the Estonia plant, why we're investing in the low cost, the high speed fiber line. Those things, there's some things we could do certainly with capacity, but mostly it's about being able to continue to lower the cost of manufacturing in that environment.

Speaker 5

Okay. That's helpful. And then just the last one for me and I'll jump back in the queue. On your inventory, Dan, should we look for levels to continue to decline here in September?

Speaker 3

Yes. I think I feel good about us declining a little bit more, maybe not at the rate that we just did in this quarter here. But obviously, we had some good utilization, including at Nestor. So I would decline it by a lesser factor than what you saw, but yes, on that ramp.

Speaker 5

Okay. That's helpful. Thanks a lot guys.

Operator

Thank Our next question comes from Scott Foehl of ROTH Capital Partners. Please go ahead.

Speaker 6

Good afternoon. Thanks for taking my questions. Nice to see the business bottoming and starting to recover. I apologize, I got a little bit late on the call. But Dan, I was wondering if you could just I'm not sure if I heard a number in terms of Nestor sales within international.

Speaker 6

And was there a gross margin number that you provided for the September quarter? Then I had several follow ups.

Speaker 3

For the September quarter, so Nestor, we had about $15,000,000 in the of our international pool.

Speaker 6

Got

Speaker 3

you. And you were looking at the for our guide on our gross margin or?

Speaker 6

Correct. Yes.

Speaker 3

Our guide at mid was, I think it's around 21.3%.

Speaker 6

Okay, perfect.

Speaker 2

At midpoint.

Speaker 6

Got you. And then, Sherry, diving in a little bit on the bead front, coming out of Fiber Connect this week, I'm wondering initially when we started to talk about being probably going back 12 or 18 months ago, there started to be momentum swinging towards the Tier 1s. Now it feels like that there has been a shift back just in terms of the states are getting to allocate the funding. How are you seeing this ultimately play out in terms of the impact in the market share that it has into the community broadband provider? So the Tier 3s, Tier 2s that benefit more so.

Speaker 6

Are you seeing a share shift there versus early expectations? And how are you thinking about that?

Speaker 2

Well, I think the qualification process continues to change, right? I mean, early and I think the NTIA has done a phenomenal job of listening and trying to adapt, to try to meet the original intention of the program. So early on, the thought was that we would see small providers close to the customer being the heavy user. Then because of the complexity of the application process and the length of the requirement as well as the original letter of credit that was required. That was shifting away from the small provider and back to the Tier 1s and the large provider.

Speaker 2

Now through our efforts at the SBA and many others is just well as, like I said, the reasonableness of the environment, they've taken a lot of that complexity away and they continue to try to be able to streamline the process. And so as a result, I think it's more of a equal playing ground than it was ever before. So I think it's going to be a very heterogeneous award. You're going to see things very different from state to state. I think that's going to be the biggest challenge for the large providers is that the application process is going to be done census map by census map.

Speaker 2

And so a large provider really doesn't necessarily have a huge administration advantage because of the fact they got to do it 56 times. And whereas a small provider is going to hone in on the areas that make the most sense for them. One of the things that we have been talking to customers about is how bead is complex, but it may be strategic if they have an island of unserved customers that is bracketed by 2 middle mile lines that are already been established, that makes perfect sense for them to go after and 0 sense for a large provider. On the concourse, on the contrary, if you've got a serving area that might be 500 square miles, I mean, that's going to be a different scenario and you're probably going to see the big guys come in. So, we're anxious to work with all of them.

Speaker 2

We don't think we're cut out of even a Tier 1, because they still have to be deployed in a rural way. And our understanding of the rural markets, our ability to provide products that fit that footprint, I think will be to our advantage.

Speaker 6

Okay. Very helpful. And if I could follow-up, just in terms of some of the inventory levels with your customers, the community broadband guys seems like at least they bottomed and started to recover a little bit. But I think you had some comments specifically that inventories remain elevated to large service providers and MSOs. I'm wondering what your early thoughts are in terms of when you think that inventory clears and we start to get back to equilibrium in terms of end market demand and shipments in?

Speaker 2

Yes. Like you highlighted, community broadband, I think is very close, it's not there, by the end of this build season. Unfortunately, I would say the large regionals and the MSOs have a way to go. They had big pocketbooks when we started. The MSOs have traditionally been at least the small regionals have been cash rich and so they use that to their advantage.

Speaker 2

So I think we have a period of time yet in MSO market. I think the large regionals are getting close. And by the end of this build season, I am anticipating that we would potentially see a new range of orders by Q1 of our next fiscal year.

Speaker 6

Great. Very helpful. And lastly, if I could, just in terms of cash utilization, kind of how you're thinking about things in terms of buyback. We're starting to look elsewhere as the market is normalized now and you found the bottom, are you starting to think about inorganic

Speaker 3

say we always are going to be evaluating inorganic opportunities as well. We're really happy with the share buyback actions that we've taken and continue to we'll watch that. But absolutely, putting a little bit more focus on the inorganic as well as something that is always in our playbook.

Speaker 2

Yes. I would just augment that by saying that we continue to evaluate adjacent markets and the adjacent markets being areas of non telco environment where we already have pockets of success. What we wouldn't want to do is to be able to go into an entirely new space it's foreign to us. The best acquisitions are ones in which you have a base that which you can build upon. And so you see some of the things that we're doing with the active cabinets and our use of the active cabinets in transportation as we highlighted in traffic monitoring, perhaps some more we've always used our active cabinets and backhaul.

Speaker 2

So there is a variety of options. I would say that's not a commitment for an inorganic opportunity, but rather a standpoint that is, as any prudent public company, we're evaluating those adjacent markets and looking for the best match.

Speaker 6

Great. Thanks so much. I'll get back in the queue.

Operator

Ladies and gentlemen, it appears we have no further questions in the question queue. Scott, would you like to go ahead with the next question if you have one?

Speaker 6

No, I'm good. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes today's question and answer session. I will now hand over to Sherry Bonek for closing remarks.

Speaker 2

Well, thank you all for joining us. We absolutely treasure the investment and the trust that you have placed in us as investors in Clearfield. We're reaching an opportunity here in front of us. We talk about this as being a generational build, but having just come home from the Fiber Broadband Association meetings in Nashville, I couldn't be more excited about the opportunities in front of us. So, pleased to meet you again in this year to meet you over the airwaves and look forward to meeting you in person in the near future.

Speaker 2

Goodbye for now. Thank

Operator

you. That concludes today's event. Thank you for attending and you may now disconnect your lines.

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Earnings Conference Call
Clearfield Q3 2024
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