Clearfield, Inc. (CLFD) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon. Welcome to Clearfield's Fiscal Second Quarter 2021 Earnings Conference Call. My name is Paul 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 the course of this call, management will be making forward-looking statements regarding 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 is important to note also that the company undertakes no obligation to update such statements, except as required by law.
Cheri Beranek: Good afternoon. And thank you everyone for joining us today. I hope you all are continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon. And to share Clearfield's results for the fiscal second quarter and first six months of 2021. During the second quarter, we saw demand for fiber-fed broadband networks expand across the Community Broadband market. As you can see on slide four, this robust demand help drive a 45% increase in net sales to a record $29.7 million. Our growth in the period was again led by double digit increases from our Community Broadband and MSO markets, which were up 68% and 60% respectively. As our performance demonstrates, Clearfield is strongly executing on its brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider requirements. Sales bookings started strong in January and accelerated throughout the quarter end, resulting in a 115% increase in backlog growing to $19.2 million on March 31 2021 versus $9.3 million on March 31 2020. We expect to ship the majority of our backlog during fiscal quarter three and have begun to receive longer scheduled orders as service providers establish a longer term deployment plan. Our strong top line performance and business model leverage helps to produce solid gross profit and net income margins in fiscal quarter two. Gross margin dollars totaled a record $12.9 million up 59% from quarter two last year. As a percentage of that sales our 43.6% margin was up from 39.9% in quarter two of last year. Moving down to P&L, as expected, our expenses increased modestly year-over-year, resulting in $3.6 million in net income or $0.27 per diluted share. This was a significant improvement from the $750,000 or $0.5 per diluted share in earnings we generated in Q2 of last year. We anticipate expenses to increase slightly in future quarters as we invest an additional resources within our Community Broadband programs and as business travel limitations start to decrease.
Daniel Herzog: Thank you, Cheri. And good afternoon, everyone. It's great to be speaking with you today. Now looking at our second quarter financial results in more detail. As you can see on slide seven, our net sales in the second quarter of fiscal 2021 increased 45% to a record $29.7 million from $20.4 million in the same year ago period. The increase in net sales was primarily due to higher sales in our Community Broadband, MSO and International markets partially offset by decreases in our National Carrier markets. Turning to slide eight, gross profit for the second quarter of fiscal 2021 increased 59% to $12.9 million, or 43.6% of net sales from $8.2 million or 39.9% of net sales in the same year ago quarter. The increase in gross profit dollars was due to higher sales volume. The increase in gross profit margin was due to a favorable product mix associated with the increased net sales in our community broadband markets and cost reduction efforts across our product lines including increased production at our Mexico plants as well as manufacturing efficiencies realized from higher sales volumes. As you can see on slide nine, our operating expenses for the second quarter of fiscal 2021 were $8.5 million, which were up from $7.4 million in the same year ago quarter. As a percentage of net sales, operating expenses for the second quarter of fiscal 2021 were 28.6%, down from 36.4% in the same year ago period. The increase in operating expenses on a dollar basis was primarily due to additional headcount and higher compensation costs related to compensation accruals and increased stock compensation expense offset by lower travel and entertainment costs. Turning to our profitability measures on slide 10. Income from operations was $4.5 million in the second quarter of fiscal 2021, which compares to $720,000 in the same year ago quarter. Income tax expense increased to $935,000 in the second quarter fiscal 2021, with an effective tax rate of 20.4%, up from $190,000 in the second quarter of 2020, which had an effective tax rate of 20.3%.
Cheri Beranek: Thanks, Dan. Now looking at our operational initiatives and focus in fiscal 2021 highlighted on slide 13. Our strategic plan for this multiyear initiative to enable Clearfield to come of edge. Our organization has specific and measurable objectives designed to increase our top line, reduce our costs, and expand our reach. Key to our success really is our loyalty to the providers that have grown alongside us while leveraging new innovations for the integration of wire line and wireless networks as we move into new markets.
Operator: Our first question comes from Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.
Jaeson Schmidt: Hey, guys, thanks for taking my questions. And congrats on early impressive results. Want to start with the outlook, which was also really strong. Obviously expecting some nice growth here in Q3 and Q4. Does this assume any meaningful pickup in the National Carrier business? Or is this largely just continued momentum in the Community Broadband segment?
Cheri Beranek: It's absolutely based upon Community Broadband and the strength that we've seen today within Community Broadband and the MSO world. The mature one markets, I would say, we've yet to establish true momentum in that area. So that is not part of the growth initiative or growth outlook.
Jaeson Schmidt: Okay. And then just looking at fiscal 2021, some really nice growth looks back did. I mean, when you sit here today, are you at all concerned that there has been some pull forward in demand?
Cheri Beranek: Jaeson, I would say there might be a little bit of a pull forward maybe a little bit of what I'd call panic buying to get some stuff, get people in place for their orders, because there certainly have been the supply chain initiatives and general availability concerns. But in general, I wouldn't say this is -- I have no concern about it being ongoing or continually viable. This is absolutely a trend and ongoing momentum. It's not, our perception is not a spike.
Jaeson Schmidt: Okay, that's helpful. And then just the last one for me, and I'll jump back into queue, just want to clarify some of your comments on the supply chain. Were you at all impacted by constraints in the quarter?
Cheri Beranek: Not at this point, our group or procurement group has been doing an amazing job. I would call it spinning plates, as we kind of walk through issues between bringing in product. And I think it's just to me think about the standpoint that we've got, your products coming in on boat with their products coming in on airs, then you’ve get boats sitting in waiting to unload. Just trying to be able to put that all together has been a little bit of a challenge. But it did not impact our ability to provide products. If you're alluding to the backlog, that backlog came in when we were we were on our call last in January, we talked about that January had started strong. And it just continued to escalate from there and extremely strong March and in providing the same level of a general viability as we would ongoing basis. And as I indicated in the call, the preliminary notes, we anticipate to be having majority of the backlog that we have in place shipping in quarter three.
Jaeson Schmidt: Okay. Thanks a lot, guys.
Cheri Beranek: You're welcome. Thanks again, Jaeson.
Operator: Our next question comes from Tim Savageaux with Northland Capital Markets. Please proceed with your question.
Tim Savageaux: Hi, good afternoon, and my congratulations as well on the results. I wanted to focus on your commentary about at least the beginnings of some visibility extending beyond what's normally a pretty short cycle business for you guys. And some orders scheduled farther out into the future. I wonder if you could give us a little more color perhaps on how far that visibility might extend. And maybe relative to the backlog that you saw in the quarter significant increase, how meaningful that longer dated demand is, and whether that's also coming from Community Broadband.
Cheri Beranek: Tim, what we see happening in this space is, is people from a legacy standpoint, over the course of, I'd say, the last five years, many of our customers would look at this, and would identify for us, this is what we're anticipating this year. What we're seeing now is a commitment to build out their entire networks, and having multi-year initiatives that they're committed to building out and passing the majority of their homes, working through projected take rates, because in the past it was more of an orientation of a kind of a build strategy that was success based. Whereas today, I think the success is ensured, because broadband tick rates are so high. And so there's a longer term commitment to those bills. As it relates to our backlog, a little of that is staged deployment. And that's for bills that were orders that we were getting in March, some from some larger suppliers that were looking at helping us stage our bills and giving us orders that were not long, long-term, but saying I want X to in March, Y in April, Z in June, so that they could get into the production schedule. And we're working to ensure that all of our customers can get the products that they need, and not put ourselves in a position or our customers in a position where customers might see stockpiling equipment and coming at the expense of others. So we're really trying to work collaboratively with all of our customers, so that we can really help ensure they get the products that they need.
Tim Savageaux: Okay, thanks. And you mentioned kind of RDOF being in the planning stages, obviously awards have been made. From your perspective is there any dynamic or potential dynamic around kind of spending or planning occurring now, kind of in perhaps in advance of actual receipt of funds, or a lot of these projects are separate and distinct from what you might see in your kind of current or core community Broadband customer base.
Cheri Beranek: Yes, I mean, revenue to-date has very isolated. There's some pockets of our loss related business, but principally. This is -- we do not see RDOF funds in our current revenues or in our backlog. What we see on the RDOF world is people now getting their plans together, putting out their engineering drawings, really going into markets where they haven't been involved in before. So we believe we're going to start to see that revenue in the very tail end of quarter three, and then in a more meaningful basis in quarter four. But basically, that's a calendar year 2022 opportunities starting and what the feds have asked for and hoping for is that we can see 40% of those funds that have been allocated to happen in the first three years. So I really think that shows significant opportunity for 2022 and 2023, as well.
Tim Savageaux: Great. Thanks for that. Over on the Tier one side of the business, we have seen some dynamics with various of the Tier one carriers getting a pretty early and fast start to the year. Now, understanding that your Tier 1 customer base doesn't always match up with some of the kind of near term strength we've seen at least high level spending numbers from guys like AT&T and Horizon. But maybe you can give us a little more color on the dynamics around your Tier one business and what might be driving that to the extent it's not just some of the C-band stuff or fiber to the home deployments, larger carriers that you’re doing?
Cheri Beranek: There's a lot of money being spent by the wireless carriers, especially as it relates to C-band, the C-band work where they spent a fortune on spectrum. And that C-band work for deployment is principally going to be based at the tower, it's not going to be based at the small cell. So that's good for the incumbent provider that has those towers and its good for the consumer because it means that they'll get a you get 5G service on their cell phones faster. It means that our opportunity for 5G, which is going to be small cell based has been delayed into the year and potentially into next year. The challenge is, I think that if not, that doesn't mean that that revenue isn't going to be there. It means that true 5G performance that we want to see in regard to true low latency and the high speed as well as is still coming. But it has been the reason that we have seen a lack of the same kind of growth has not shown up in the Tier one base because of it.
Tim Savageaux: Got it. Thanks very much. I'll pass it on and congrats once again.
Cheri Beranek: You're welcome. Thank you.
Operator: 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'd now like to turn the call back over to Ms. Beranek for closing comments.
Cheri Beranek: Thank you, Paul. And thank you, all of you for joining us today. We look forward to updating you again soon on our progress. Happy spring and talk to you soon.
Operator: Thank you for joining us today for Clearfield's fiscal second quarter 2021 earnings conference call. You may now disconnect.
