Clearfield Inc (CLFD) 2022 Q2 法說會逐字稿

Good afternoon. Welcome to Clearfield's Fiscal Second Quarter 2022 Earnings Conference Call. My name is Hemant and I will be your operator this afternoon. Joining us for today's presentation are the company's President and CEO, Cheri Beranek; and CFO, Dan Herzog. Following their commentary, we will open the call for questions.

I would now like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website. This call is also being webcasted and accompanied by a PowerPoint presentation called the FieldReport, which is also available in the Investor Relations section of the company's website.

Please note that during this call, management will be making forward-looking statements regarding the future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It's 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 statements contained in today's press release, FieldReport and in this conference call. The Risk Factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provides descriptions of those risks. As a reminder, these slides in this presentation are controlled by you, the listener. Please advance forward through the presentation as the speaker presents their remarks.

With that, I would like to turn the call over to Clearfield's CEO, Cheri Beranek. Thank you, and over to you.

Good afternoon, and thank you, everyone, for joining us today. We hope you are all doing well. It is a pleasure to speak with you this afternoon to share Clearfield's results for the fiscal second quarter of 2022 and to provide an update on the business and market trends. Clearfield continues to execute in an environment in which demand is accelerating.

Bookings led shipments by $34 million for the 3-month period, creating a backlog of $136 million as of March 31, 2022. We continue to maintain a healthy balance sheet with $43 million in cash and investments and no debt. We have filed a shelf registration statement and secured a $40 million line of credit with Bremer Bank to ensure we have the financial flexibility in how we respond to the current and future robust client demand and to invest in strategies that will enhance our growth opportunities in the future.

We believe we are well positioned to capitalize on any new government funds that are dispersed to our market with some of our customers already beginning to place advanced orders in anticipation of those disbursements. For all of those reasons, we are raising our fiscal year 2022 net sales guidance from a range of USD177 million to USD183 million to a range of USD204 million to USD218 million. Our guidance represents growth of 45% to 55% over fiscal year 2021 revenues.

Once again, we'd like to provide a brief overview of who we are and what we do for those of you who may be new to our company and industry. Clearfield is a leader in an expanding fiber broadband industry. We provide fiber protection, fiber management and fiber delivery solutions that enable the rapid and cost-effective fiber-fed deployments throughout the broadband service provider space. We primarily serve service providers in the community broadband market, mainly Tier 2 and Tier 3 communications providers. We also serve providers in the Tier 1 market and multiple system or cable TV operators, also known as MSOs, as well as some international service providers, primarily in Canada, the Caribbean, Central and South America.

By focusing on scalable modular deployment, our thoughtfully developed product portfolio enables our customers to complete their deployments faster and more efficiently. Our products are designed to reduce both the amount of necessary skilled labor needed for installation as well as the level of skills required for the install. This is particularly advantageous in today's labor market where there is significant shortage of trained technicians. The foundation of our scalable and modular fiber management platform is the patented Clearview Cassette shown here as the image on Slide 4.

Our mission at Clearfield is to enable the lifestyle that better broadband provides. People need access to high-speed broadband to be able to work, to attend school and to fully participate in today's modern society. Broadband is changing the way we communicate with each other and fiber is a mean to enable that change. Our company's founding vision was to deliver the products that build a better broadband network. This vision is not something that we implemented recently. It's fundamental to who we are as an organization. We have developed a product portfolio, sales organization and operational infrastructure to service the growth in fiber deployment for every community.

With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the second quarter of 2022.

Thank you, Cheri, and good afternoon, everyone. It's a pleasure to be speaking with you today about our second quarter of our fiscal year '22 results. So looking at our second quarter financial results in more detail. Net sales in the second quarter of fiscal '22 were a record $53 million, an 80% increase from $30 million in the same year-ago period and up 5% from $51 million in our first quarter of 2022. We had 2 10% customers in the period, a distributor at 14%, and a regional broadband service provider who was 13% of sales.

In addition to our revenue increase, sales bookings maintained their strong momentum in the second quarter of fiscal 2022, resulting in a 605% year-over-year increase in our sales order backlog. Order backlog grew to a record $136 million on March 31, 2022, up from $101 million on December 31, 2021, and up from $90 million on March 31, 2021. Our recent investments in our new facility in Mexico has tripled our Mexico manufacturing square footage and our Minnesota warehouse has doubled our Minnesota footprint, which will enhance our capacity and revenue potential in the quarters ahead.

Now on Slide 8, we'll review our net sales by our markets in greater detail. Our core community broadband market comprised 75% of our net sales in the second quarter of fiscal 2022. In Q2, we generated net sales of approximately $40 million in community broadband, up 94% from the same period last year. In addition, for the trailing 12 months ended on March 31, 2022, our community broadband market net sales totaled approximately $133 million, which was up 76% from the comparable 12-month period last year. Our MSO business comprised 14% of our net sales in the second quarter of fiscal 2022.

From a growth perspective, we have maintained the positive momentum established in this market over the last several quarters. In this market, we realized an 82% year-over-year increase in net sales to approximately $7 million in the second quarter of fiscal 2022 and delivered a 95% increase in trailing 12-month net sales to approximately $28 million.

Net sales in our national carrier market for the second quarter of fiscal 2022 were up 76% year-over-year to approximately $4 million. On a trailing 12-month basis, net sales in our national carrier market totaled approximately $15 million, up 20% from the comparable year-ago period. Net sales in our international markets were down 25% year-over-year in the second quarter compared to the same period last year, but up 98% year-over-year for the trailing 12-month period ended March 31, 2022.

Overall, as a company, our net sales over the trailing 12 months is now up 71%, an increase from 63% recorded the previous quarter end. Gross profit in the second quarter of fiscal 2022 increased 79% to approximately $23 million or 43% of net sales from approximately $13 million or 43.6% of net sales in the same year-ago quarter. The slight sequential decline in gross profit margin was expected and due to increased overhead costs associated with our new facilities in Minnesota and Mexico as well as higher freight and transportation costs associated with the global supply chain challenges with higher sales and inventory volumes.

Operating expenses for the second quarter of fiscal 2022 were approximately $11 million, which were up from approximately $9 million in the same year-ago quarter. The increase in operating expenses consisted primarily of higher compensation costs due to increased personnel and higher performance-based compensation as well as increased travel expenses and professional fees. We are happy to say we are able to be in front of customers more now than in the past 2 years, be it through on-site visits or through trade shows, which have recently picked up. As a percentage of net sales, operating expenses for the second quarter of fiscal 2022 was 21%, down from 28% in the same year-ago period. It's important to note that while our operating expenses are up with our sales growth, our OpEx remains near 20% of sales, representing strong operating leverage results.

Net income in the second quarter of fiscal 2022 increased 154% to $9.2 million from $3.6 million in the same year-ago period and slightly down from $10.4 million in the first quarter of fiscal 2022. Net income was lower than last quarter due to the increase in SG&A costs associated with increased travel, professional fees and the introduction of additional overhead associated with the new buildings. As a percentage of net sales, net income for the second quarter of fiscal 2022 was 17.3%, up from 12.3% in the same year-ago period and down from 20.3% in the first quarter of fiscal 2022.

On the balance sheet side, we had $2.7 million in capital expenditures, mainly to support increased capacity and new facility build-outs and increased our inventory $17 million to $61 million in the second quarter as we utilized our cash position to acquire the necessary inventory to meet the high demand for our products as represented in our sales order backlog.

Lastly, as discussed on our first quarter call, the company has reinstated its stock repurchase program, but did not repurchase any of its common stock in this period.

With that, I'll turn it over to Cheri.

Thanks for the financial update, Dan. The Clearfield value proposition is driven by our thoughtfully designed fiber management and fiber connectivity products. We have made it our goal to remove the obstacles that would prevent our customers from adopting fiber-led broadband. Since its founding, Clearfield was built to scale, we were built for the opportunity that lies in front of us. As we mentioned from the beginning, Clearfield has been positioned to deliver fiber products to communities that have historically been underserved or unserved. Clearfield truly is community broadband.

We are often asked how long this elevated demand for high-speed broadband might last and whether it's sustainable? As previously stated, we are in the middle of a historic investment cycle for high-speed broadband and particularly fiber-led broadband. The chart on Slide 14, put together by Jefferies Research, shows the anticipated increase in government funding through 2025 and includes the nearly $65 billion in funding available through the infrastructure investment and Jobs Act passed by Congress and enacted in November of 2021. The scale of this market opportunity is quite simply massive, as RDOF's dollars have moved through FCC review with around 60% of the first round of those funds being approved for distribution. We are now seeing some of our customers anticipating those dollars and beginning to place advanced orders.

Moreover, the Broadband Equity Access and Deployment program, known as BEED, which represents the $42 billion inside of the infrastructure fund, will mostly be distributed sometime in late '23 or possibly into 2024. The FCC recently announced the broadband map, which identified the areas by Census block, where the BEED program's funds are most likely to be allocated, and this will be updated this fall.

Given the administration's stated goal of prioritizing underserved communities for broadband access and our deep knowledge of the community broadband market, this could be another significant growth opportunity for Clearfield. The elevated demand in this market is not a short-term event. Dell'Oro research identifies these specific service providers and has gone on to state that more than 60 million homes will be passed by fiber by 2030. The research was on to state that we are in the third year of an investment cycle that may peak in 2024 with the spending cycle continuing beyond that point as projects get pushed out due to labor and component shortages. We truly believe this once-in-a-generation investment opportunity will change the way people communicate in the future.

As shown on Slide 16, Clearfield's Now of Age plan is our multiyear strategic plan to establish Clearfield as a platform of choice for fiber management and connectivity. As we discussed, the 3 pillars of the Now of Age plan are intended to enhance Clearfield's market position with the aim of capturing the fiber-to-the-home and business market share that the company was built to obtain, while simultaneously powering the innovation for new and existing markets in the years ahead.

Accelerating our operating cadence, this is Clearfield's commitment to address the market's exponential demand for fiber-fed broadband and to ensure our operations can nimbly respond to our customers' demands. Our ability to deliver our products on time to our customers is crucial so that their deployment schedules are maintained and their time to revenue can accelerate. As discussed in our fiscal Q1 call, we have made significant investments in inventory to ensure that we can deliver our products on time to our promised ship dates. This in turn allows our customers to effectively manage their service technicians and the new install technicians who are in high demand given the present labor market shortage.

Customers are now working more closely with us on the mid- to long-term business plans, submitting purchase orders months in advance, providing us with increasing visibility into the particular products that they intend to deploy. As a result, we are better prepared to ship those required products so that our customers' deployment schedules can stay on track. Nevertheless, we cannot overlook the fact that fiber availability continues to be challenged and supply chain issues persist across all industries. We are continuously working on ways to strengthen our relationship with our suppliers going forward. We are also making incremental investments in SG&A to effectively meet this demand. We have added key personnel to the company and are recruiting for a number of different positions throughout the company to help capture future growth.

The second pillar of our Now of Age plan is amplifying bold and disruptive growth. This is Clearfield's commitment to continue delivering market changing products for current and future market requirements. The build programs for fiber-to-the-home and business we see today transform into the integration of wireline and wireless networks and future backhaul opportunities over the next several years.

Our substantial $136 million backlog, up 34% sequentially and over 600% year-over-year reflects the progress we have made towards achieving this pillar's objectives. Response to this, where Clearfield has always excelled has proven to be a significant competitive advantage, enabling us to pick up incremental market share from new and existing customers. We are working transparently with our customers to shorten lead times when we can and to shift to promised delivery dates to facilitate field labor utilization.

Finally, on the product front, in fiscal Q2, we began shipping a 96 port cabinet that targets a specific part of the backlog and is particularly well suited for world deployment. Our engineering team continues to develop new products that would expand our total available market in fiscal 2022. We look forward to providing updates on our product pipeline in the near future, including solutions for future 5G and Edge computing opportunities.

Our third pillar, augmenting capacity for ongoing growth is Clearfield's commitment to scaling its operations to meet the incredible demand for high-speed broadband. Our agility and the ability to adopt to our customers and their changing needs are the key facets of this pillar. In order to meet the significant demand for our products, 2 new facilities came online in fiscal Q2. We added 200 people to our manufacturing centers, expanding our headcount by 50%. We aim to add additional personnel and improve labor utilization in the coming quarters as recruiting and training continues and facility optimization is achieved. Here, you see images of our new distribution center in Minnesota and the manufacturing center in Mexico.

Our supply chain management remains a key priority for sales. Our network of partners can increase our capacity as needed due to higher demand, thereby ensuring we can continue to ship product without delay. This helps us to safeguard our deliveries against any supply chain interruptions. We also continue to utilize our supply chain network to further augment our capacity and grow demand. This includes continued organic growth as well as the right inorganic opportunities that would enable us to keep growing with our customers.

Looking at our financial outlook for fiscal 2022, we remain very optimistic about Clearfield's growth potential. The majority of our record backlog is scheduled to ship in the next 6 months and the demand for high-speed broadband, especially fiber-led broadband remains very strong. With the current visibility into our substantial order backlog as well as the pipeline behind it, we are raising our guidance for net sales from a range of USD176 million to USD183 million to a range of USD204 million to USD218 million in fiscal year 2022, representing growth of 45% to 55% over fiscal year 2021 revenues.

As discussed, the supply chain for some materials continues to be challenging. Labor requirements and availability at customers may also pose an additional challenge to customer deployments in this year's build season. While we cannot be certain there won't be labor challenges over the season, currently, we have not been notified of any significant issues by our service provider customers. We believe we are in the middle of a long-term investment cycle for broadband deployment. We are experts in community broadband designed for the opportunity in front of us and build to scale. With strong execution of our proven growth strategy, we are confident that we can maintain the market leadership that Clearfield was built to achieve based on our agility, innovation and commitment to customers' needs.

And with that, we're ready to open the call for your questions.

Thank you. At this time, we will be conducting a Question-and-Answer Session from the company's publishing sell-side analysts. (Operator Instructions)

The first question comes from the line of Jaeson Schmidt with Lake Street Capital.

Congrats on the currently impressive results here. You know, Cheri, I just want to start with sort of the March quarter and trying to reconcile the moving pieces. Obviously, the supply chain remains challenging, and you noted lead times continue to extend. But was there any demand in the March quarter that you're unable to fulfill? And if so, could you quantify that?

There absolutely demand unable to fill in that there was -- I mean, our customers are looking to shorten the lead time across the board. And so we know that our responsibility is to continue to expand our capacity and to expand it as quickly as possible. I commented within the materials that our customer working diligently to shorten the lead time, we currently are accepting or promising to our customers, doing the best that we can to ship to the date that we have provided. This is a really unusual market for people. They're learning about planning 3 and 6 months in advance, and we're working to help them deal with some of those challenges right now. I couldn't really quantify specifically how much we could have pulled into this quarter, but there certainly was demand that would have been significant.

Okay. That's helpful. And I know a couple of quarters ago, you noted that the backlog at that time comprised around 200 customers. Just curious how that is today. And if that growth in backlog you're seeing is really being driven by the current customers expanding their orders or if that customer base has broadened out?

Always both. We continue to be really excited about working with new customers. We're seeing utilities and the municipalities coming through and have been very -- I had the opportunity earlier this quarter to spend some time at the Power Intel Annual Conference. We were recognized as their product and vendor of the year. So there -- and they're a great distributor to work with and that they provided the opportunity for us to continue to expand to additional customers. I mean I can tell you that there are more than a dozen customers in our backlog with more than $1 million a piece, and several hundred customers in the backlog that are continuing to put backlog numbers over $100,000.

Yes. And newer ones that were not in there in the prior quarters.

Okay. No, that's nice to hear and very helpful. And then just the last one for me, and I'll jump back in the queue. Just curious if you could help us think about the cadence of the remainder of this year? I know the past 18-plus months or your normal seasonality has already gone out the window. But typically, I mean, the June quarter tends to be a strong one for you. Should we think about that strength continuing here in this current quarter and then maybe a drop off in September or kind of gradual growth through the remainder of this fiscal year?

Yes. I think our seasonality at this point has gone out the door. We're going to see incremental enhancement and incremental improvement on a quarter-to-quarter basis as we continue to work with the backlog and continue to expand the capacity in front of us. As we talked about on the materials, we added 200 people last quarter, and we only moved into that new building in Mexico in the first part of March. So we have a lot of training in front of us, a lot of space utilization to implement. So we're looking forward to enhancing the revenue that goes out the door on an incremental basis each quarter and working with our customers to be able this build season to continue to get product in their hands.

The next question comes from the line of Tim Savageaux with Northland Capital Markets.

Hi, good afternoon, and congrats from me as well on another great quarter. I had a question about the kind of government funding environment. And it's really levering of something, I guess, one of your competitors, Corning commented on earlier in the week with also very strong numbers in optical fiber. But in thinking about the BEED program in particular, and I think what's that, little over $40 billion in infrastructure spending, they commented that they thought that could mean an incremental $1 billion a year for them or about 20% of their current run rate over a 4-year period. I wonder if you guys have given any thought to kind of looking at the opportunity that way, of a certain amount of award funding. I know you have per home metrics, but what sort of opportunity might come Clearfield's way or if you've got any kind of equivalent metrics to think about with regard to what the impact of this upcoming program might be on the company? And then I have a follow-up.

We're really trying to get our hands around that because I mean historically, of course, Corning was the big dog in the market, and they were the big dog because of AT&T and Verizon being the predominant deployer. Today, in this market, those organizations still being very strong delivery agents of fiber-to-the-home, there's so many more, and there's so many parts of our world about where community broadband is in place. Corning talked about 20% incremental growth and they had a 20% growth rate this year over last year. So what we're trying to get our hands around with is that growing at 80% over last year, we know that we're taking share, and we need to be able to identify how we're taking that share, keeping that share sticky, establishing the organizational capacity by which to grow with that. So those are figures that we hope to be able to put together and perhaps provide at a later call. But at this point, it's more of our research and mostly importantly, just working to make sure we can continue to build capacity back fast.

Got it. And while we're on Corning, what are you seeing out of your kind of traditional larger competitors in the community broadband market these days, Corning and likely CommScope as well. Any change that's notable in their behavior? Are they kind of tied up with the big Tier 1s or what have you?

Yes. Certainly, Corning is a very well-run company and has serviced their large customers in a very well strong way. The CommScope's, the market is watched is -- was figuring out how to best be able to solve some of their own financial challenges. We think there's an opportunity for us there of taking share within some of those customers as that organization perhaps bundles the ball a little bit.

Okay. And then last question for me. You mentioned that given a fair bit of the funding from RDOF had been dispersed or at least earmarked or more than half of it, that you were starting to see some activity either with customers who have received funds or are about to receive funds shortly ordering ahead. Any way you can give us some sense of the quantitative impact of that? Is that after, I guess, several quarters of maybe not being material, can we say that RDOF is beginning to have a material impact on your business kind of this quarter and heading forward?

Yes. For the quarter ending in March, now it is not material. It will begin to become material moving forward in that those orders are now in backlog. It's material is identified as being more than 10%.

Right. Yes, that's what I was thinking. Great. I'll pass it on, thanks very much.

The next question comes from the line of Ryan Koontz with Needham.

On the quarter seen there -- do you have any commentary on product mix in terms of passings versus connections? Or are you still seeing a more heavy passings business? Or because this past quarter was an intense weather quarter that becomes more of a connections mix in the product? And I have a follow-up, please.

Actually, as the weather gets nicer, connections improve. So we're still in the quarter ending in March, very, very heavy in passings and very certainly disproportionate amount of business in the past in cabinets and the products that are necessary to be able to pass homes. In fact, we introduced this last month a program that we call FastPass. And it's really helping our customers identify how they can pass twice as many homes as they would with a competitive technology. And so FastPass has proven to get a lot of traction at trade shows and at seminars. And so we think we're going to actually see a continued high concentration of passings moving forward because of the make-ready work that has to happen, and we'll see the connections start to pick up probably late in the summer, and mostly the connections will be a fiscal year '23 opportunity and then that will augment the work that we're already doing.

Got it. And is the connections the same exact competitor set generally that you deal with on the passings products?

Yes. Yes, absolutely.

Got it. And your commentary on RDOF was really interesting. You're seeing some nice order flow there. Any commentary around the ARPA funds? Is that kind of timing similar to RDOF? Or what's your current visibility on ARPA?

Yes. The BEED program is going to be a while in that they're still working through how to do that through the NTIA. We've seen the NTIA administration getting out into the community, talking to community providers on how to be able to apply for it. But that's really a calendar year '23 and '24 impact on the organization.

Okay. Helpful. And then on the MSO business being down, is that more of just kind of a typical seasonality to the cable CapEx we've seen in the past that you might be seeing there, being down sequentially?

The MSO business is actually up quite substantially for year-over-year, 82% over year. It's lumpy like any other project business. But no, we actually see the cable business as a strong growth market for us.

Visibility is pretty good there for you as well? It is.

Thank you. At this time, this concludes the company's Question-and-Answer Session. If your question was not taken, you may contact Clearfield's Investor Relations team at clfd@gatewayir.com. I would now like to turn the call back to Ms. Beranek for closing remarks. Please go ahead.

Thank you. It has been absolutely a pleasure to talk about and maybe to brag a little bit about Clearfield because we're still thrilled with what my team is doing and how we are working with our customers. I also want to thank our customers because we need to continue to improve our performance to the level that they are expecting. And so for those customers who are also investors in our organization, please know that we do not take your business for granted, and we'll be continuing to improve our performance in that area. And finally, I'm excited to let everyone know that we are back to Clearfield. And while we are working in a hybrid environment, it is so nice to not have to wear masks. Have a safe and healthy summer.

Thank you for joining us today for Clearfield's fiscal second quarter 2022 earnings conference call. You may now disconnect.