Clearfield, Inc. (CLFD) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon. Welcome to Clearfield's Fiscal Third Quarter 2021 Earnings Conference Call. My name is Victor and I'll be your operator for 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 during 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 and could cause actual results to differ materially from those in the forward-looking statements.
Cheri Beranek: Good afternoon and thank you, everyone for joining us today. I hope you are continuing to stay safe and healthy. It is a pleasure to speak with you this afternoon and to share Clearfield's results for the fiscal third quarter and first nine months of 2021. Our record setting financial performance in the third quarter and first nine months of fiscal 2021 again demonstrates the Clearfield's unique positioning in the broadband market and our ability to capitalize on the robust growth factors. Fiber-fed broadband is being recognized as the answer for future-proofed connectivity to the American home and business. As you can see on Slide 4, the continued demand for fiber-fed broadband is over a 49% increase in net sales year-over-year to a record $38.7 million. Our growth in the period was led by double-digit increases from our community broadband, which was up 64%, as our performance demonstrates that Clearfield continues to strongly execute on our company's brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider requirements. Moreover, the labor-saving practices that are instrumental to Clearfield's architecture are being recognized by service providers throughout the broadband marketplace. Our customers, no matter if they are local exchange carriers, over-builders, cable providers, rural electrical utilities are new to this market, recognize that fiber is the only technology to provide symmetrical up-stream and down-stream performance. Currently, there are multiple government funded programs that are accelerating broadband deployment, such as the Rural Digital Opportunity Fund or RDOF, which will start to be deployed later this summer and fall. In addition, the proposed bi-partisan federal infrastructure framework looks promising toward enhancing the funding available to future-proofed broadband deployment.
Dan Herzog: Thank you, Cheri and good afternoon, everyone. It's great to be speaking with you today. Now looking at our third quarter financial results in more detail. As you can see on Slide 7, our net sales in the third quarter of fiscal 2021 increased 49% to a record $38.7 million from $26 million in the same year ago period and up from $29.7 million in our second quarter of 2021. The increase in net sales was primarily due to higher sales in our community broadband, international and multiple system operators, MSO or cable TV markets, partially offset by decreases in our legacy and national carrier markets.
Cheri Beranek: Thanks, Dan. Now as highlighted on Slide 13. We'd like to share an update to our multiyear strategic plan as we look at our operational initiatives and focus for the balance of fiscal 2021 and beginning of fiscal 2022. Three years ago, Clearfield launched its coming of age plan, which we completed successfully. This past year, our team has been working diligently through the comes of age initiatives we have previously discussed in order to establish market readiness for the expanding market requirements for the fiber-fed broadband and 5G as this fiber build out. Today, we are introducing the next phase of our plan that we call now of age, that advances our ongoing mission to establish Clearfield as a platform of choice for fiber management and connectivity. The multiyear plan is designed to capture the fiber to the home and business market share Clearfield was built to obtain, while delivering the innovation for new and existing markets for the years ahead. The first pillar of the now of age plan is accelerating our operating cadence. This is Clearfield's commitment to respond to the market heightened to post-pandemic demand for fiber-fed broadband. As evidenced by our explosive 45% growth over the first three quarters of fiscal 2021 and the 377% increase of year-over-year growth in order backlog. Clearfield stands ready to serve our service provider customers as they capture and deploy the private and public funding that will soon become available. We will continue our active investment in systems across this development to enable an agile work environment, our speed to delivery has been and will continue to be paramount to our success. The second pillar, amplifying bold and disruptive growth is our commitment to continue delivering market-changing products for current and future market requirements. We are introducing a small form factor FLATdrop FieldShield drop cable solution that reduces the size, weight and environmental impact of a direct fiber solution. As the number of connected homes continues to expand next year and beyond, we believe this product and many others will be instrumental in addressing the craft person's need for flexible and easy to handle fiber solutions.
Operator: Thank you. We will now be taking questions from the companies publishing sell-side analysts. Our first question comes from Jaeson Schmidt with Lake Street. Please proceed with your question.
Jaeson Schmidt: Hey, guys. Thanks for taking my questions. I just want to start with how you're thinking about seasonality going forward. We're just trying to reconcile such strong demand across the community broadband segment and within the backdrop of that normal kind of weather-related seasonality you guys typically see in the winter months.
Cheri Beranek: I think we'll continue to see you know traditional seasonality, there's no reason to expect that we won't. You know, I think there's still the level of traditional budgeting and traditional weather as you related. I think one caveat however to that is due to the just really, you know, network-wide, you know, market-wide demand that is just exploding for all markets. I think we might see more placement of orders in anticipation of getting ready, that we might see orders and potential revenues that will be placed for kind of inventory readiness so that they can maximize and ensure their availability. So as a result, I think we might see a little uptick in the second quarters of next year that we wouldn't have normally seen.
Jaeson Schmidt: Okay, that's really helpful. And then I know you called out some government funded programs, specifically RDOF, but when we look at your fiscal '22 guidance, is that baking in a meaningful contribution from some of these programs?
Cheri Beranek: No, it isn't. You know, as you indicated, as I indicated earlier that you know, we really have a limited vision of that, you know, as you're walk - watching the marketplace, the - and there's a lot of conversation going on right now between a couple of senators, with the FCC and their frustration that, you know, seven to eight months after the initial RDOF release being appropriated, that no monies have been distributed. And we've seen some business that people you know moving forward, you know, using kind of their own bank role and using some subsidiary financing, but until we get some real broad knowledge of where that's going to go, we don't - there's not a significant level of RDOF dollars in our forecast.
Jaeson Schmidt: Okay, that makes sense. And then just the last one for me and I'll jump back into queue. Just as it relates to inflationary pressures, just curious if you're seeing anything there, and if so, are you passing along these increased cost to your customers?
Cheri Beranek: The biggest cost pressures we're seeing are in resins, of plastics. And so when you have a product line that is extensively plastics, such as vaults or pedestals, those costs are exorbitant. And we've seen 40% and 50% and more percent increases on that vault and we do provide vaults to our customers, while we don't manufacture them, we do customize them for particular pin outs and particular setting patterns. And so our customers recognize the supply chain dynamics and while they're not happy about it, they do understand the necessity for us to pass those cost increases on. As it relates to our overall total revenues, you know, those are relatively insignificant. I mean, they're - and they're less than probably 3% of our total revenue base. But they are a product requirement in order to setting the cabinets that we produce. Otherwise, you know, we've seen some price pressures in sheet metals, some price pressures in labor. At this point, we've been able to absorb those and pass just things on and only when it's a significant amount. I think that's an ongoing challenge that we're going to have to deal with. I think we've been extremely fortunate at this point, you know we've worked very hard to achieve our 44% gross profit level. But I think we're going to need to continue to work as we have been in order to keep that there, I don't see a huge - I don't see the trend pattern of our accelerating gross profit dollars - excuse me, gross profit percentage increasing, but I do think gross profit dollars will increase as their revenue define that.
Jaeson Schmidt: Okay. Thanks a lot, guys.
Cheri Beranek: Thank you.
Operator: Thank you. Our next question comes from Tim Savageaux with Northland Capital Markets. Please proceed with your question.
Tim Savageaux: Hi. Good afternoon and congratulations on some spectacular results here. And my first question is on, you know, the drivers of those results in the quarter and maybe in your going forward guidance for fiscal '22 as well. Yeah, to what extent and you've been talking about this a little more recently, our you know increased fiber builds among you know slightly larger called them tier two carriers getting to be, you know, a meaningful driver either short-term or anticipated into next year, and I'll follow-up from there.
Cheri Beranek: Yeah. We've been very pleased with the recognition by the tier two providers, the value proposition that Clearfield offers. In that and most of the tier two providers did not have an extensive fiber network previously, these were organizations that had the opportunity to really look from the beginning at craft-friendly time-saving product line. And their engineers have recognized the value that Clearfield and our product line can offer. You'll find when the queue comes out that we don't have a single customer this quarter that represents more than 10% of our income - excuse me, 10% of our revenue. But you know, they are definitely a growth trend for the organization and we're very pleased and proud to be working with them.
Tim Savageaux: Okay. Well just to follow-up on that. Could we speculate that perhaps as a group that tier two carriers are approaching or exceeding the 10% of revenue? Or can you give us any sense of -
Cheri Beranek: They're definitely -
Tim Savageaux: To reality?
Cheri Beranek: Yeah, I think they're definitely approaching and I think they'll be called out in future quarters.
Tim Savageaux: Great. And you kind of hinted at this in your or made reference to it in some of your comments. But, you know, we've seen a number of kind of state level broadband initiatives, some employing federal funding announced fairly recently. And, you know, are you starting to see opportunities kind of derive from those efforts, maybe, you know, separate from whatever you might expect with RDOF and could we you know say a similar thing you know with regard to expectations built into your guidance for next year? You characterized them as fairly modest for RDOF if you look at, and obviously, probably nothing for whatever's working through. Congress right now. But if you look at those state level initiatives, are those becoming more important for you as a growth driver?
Cheri Beranek: Yeah, I mean, most of the state initiatives are - have somewhat started and then we saw some revenues in our existing state or that's the wrong way to put it. I mean, we do business across the country in almost I think, 48 of the 50 states. But, you know, there's certainly been more prevalence in some of the core markets like Iowa that has had a higher level of state funding and that we're already seeing. You know moving forward, you know, some of the new programs in the south and the Northeast you know the program that was announced that are approved in California, you know, this week. Those are still very early and they're not included in our guidance.
Tim Savageaux: Great, thanks very much. I'll pass it on.
Cheri Beranek: You're welcome.
Operator: Thank you. All right, ladies and gentlemen, 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 remarks.
Cheri Beranek: Thank you very much. You know as our operator has indicated to you, I will be happy to take any questions from investors. However, I do like to do that on a time-sensitive basis. So please send those questions to the gateway and we'll be able to follow-up at another time. But I thank all of you for joining us today. We absolutely look forward to updating you again soon in our progress.
Operator: Thank you for joining us today for Clearfield's fiscal third quarter 2021 earnings conference call. You may now disconnect.
