Clearfield, Inc. (CLFD) on Q3 2024 Results - Earnings Call Transcript
Operator:
Operator: I would now like to turn the conference over to Greg McNiff, Investor Relations for Clearfield. Please go ahead.
Greg McNiff: Thank you. Joining me on the call today are Cheri 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. 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-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. They are also summarized on Slide two of the earnings presentation. With that, I'd like to turn the call over to Clearfield's President and CEO, Cheri Beranek. Cheri?
Cheri Beranek: Good afternoon everyone. Thank you for joining us today to discuss Clearfield's results for the fiscal third quarter 2024. We also intend to provide an update on our business and current market trends. Please turn to slide four. 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. In the following slides, I will discuss the latest market data that supports this view. Total net sales for the third quarter of fiscal 2024 were $48.8 million, 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. 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 3D interactive fiber installation tool on the BILT mobile app is receiving very positive feedback from customers, with one large regional provider evaluating whether to make the app available to their entire technical team. 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 from customer participation in the BEAD program, starting late in calendar 2025, with more significant ramp in 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. We expect the majority of our portfolio to be BEAD-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 BEAD award process. While we wait for the ramp in BEAD orders, we are currently receiving orders from service providers eligible for the $18 billion 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 five, industry forecasts from RVA remain unchanged in that they indicate that the next five-year period will see up to 59 million additional homes passed with Fiber, which equates to a 12.5% compound annual growth rate. Of these 59 million homes, roughly a third are forecast to have access to more than one Fiber provider. We believe the introduction of two-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 third quarter 2024.
Dan Herzog: Thank you, Cheri, and good afternoon, everyone. Please turn to slide seven to look at our fiscal third quarter 2024 results in more detail. Consolidated net sales in the third quarter of fiscal 2024 were $48.8 million, a 20% decrease from $61.3 million in the same year-ago period, but above our guidance range of $40 million to $44 million. 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. 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% to $32.6 million on June 30, 2024 from $47.2 million on March 31, 2024. As we transitioned out of the build season, we anticipated a reduction in backlog as broadband service providers realigned their outstanding purchase orders to current deployment schedules, preparing for winter operations and year-end planning. 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 lost 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 multi-year 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. Our lead times continue to average four weeks across most product lines. Turning to slide eight, 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 third quarter fiscal 2024. In Q3, we generated net sales of $19.6 million in community broadband, up 2% from the prior year third quarter. As Cheri mentioned, our community broadband market experienced a sequential uptick 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. Net sales in our MSO business were $5.8 million, which comprised 12% of our net sales in the third quarter and decreased by approximately 39% in the third quarter of this fiscal year versus the prior year third quarter. Net sales for the third quarter in our large regional service provider market were $3.8 million, comprising 8% of our total net sales and declined by approximately 76% in the third quarter of this fiscal year versus the prior year third quarter. 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. Net sales in our national carrier market for the third quarter were $2.3 million, accounting for 5% of total net sales and were up 17% in the third quarter of this fiscal year versus the prior year third quarter. Finally, net sales in our international market were $16.5 million and comprised 34% of total net sales in the third quarter. Net sales in this market increased by approximately 16% in the third quarter fiscal 2024 versus the prior year third quarter. 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 market's peak revenue performance for the year as the build season begins to wind down during our fiscal fourth quarter. Consequently, we expect revenue from our international market to decline sequentially in the fourth quarter. As illustrated on slide nine, gross profit margin in the third quarter was 21.9% 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 utilization in our manufacturing facilities from higher revenue associated with the build season, as well as lower non-cash excess inventory charges, which in the third quarter decreased sequentially by $3.2 million to about $1.7 million in the quarter due to better inventory utilization from higher revenue in the quarter. Now please turn to slide 10. Operating expenses for the third quarter were $13 million, down from $13.4 million 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. As a percentage of net sales, operating expenses for the third quarter were 26.6%, down from 34.1% in the second 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 third quarter was $447,000, compared to net income of $5.2 million in the same year-ago period and net loss of $5.9 million in the second quarter 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 third quarter that I had mentioned earlier. As illustrated on slide 12, our balance sheet remains healthy with $148 million of cash, short-term and long-term investments, and just $2.1 million of debt. We had $1.2 million in capital expenditures in the quarter, mainly to support our manufacturing operations, and $5.6 million year-to-date. Our inventory balance decreased from $84 million at the end of the second quarter of fiscal 2024 to $75 million in the third quarter of fiscal 2024. Our cash, short-term and long-term investments reflect a net reduction of just $1 million from March 31, of which $5.5 million was associated with the repurchase of shares in the third quarter. We recorded positive cash flow from operations of approximately $3.9 million in the third quarter, and year-to-date we have generated $8.5 million from operations, mainly due to a reduction in inventory of approximately $9 million in the quarter and $23 million year-to-date. 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 fourth quarter fiscal 2024 net sales to be in the range of $40 million to $43 million. 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 third quarter and does not reflect share repurchases that could occur in the fourth quarter. As we mentioned on our last call, we expect our North American revenue in fiscal third and fourth quarters to be consistent with each other. 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 $5.5 million in stock in the third quarter as part of our share buyback program, which represented 184,751 shares at an average price of $29.91. This leaves $24.9 million 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 third quarter 2024. We appreciate the support of our investors as we continue to work to drive shareholder value. I will now turn the call back over to Cheri.
Cheri Beranek: 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 and reduce the cost of deployment by lowering the level of skilled labor required. We recently announced a new addition to our portfolio of products which reflects these qualities. The craft-friendly CraftSmart 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% and 38% versus the baseline method for outside and inside work performed. Second, 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.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:
Operator:
Ryan Koontz: Thanks for the questions. A few to start out with on the timing of the BEAD, it sounds like a little more push out there. Not super surprising given 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 '25. Does that still align with your expectations or is there something specific with your commentary about late '25 in your prepared remarks?
Cheri Beranek: Yes. Hi, Ryan. I think it's just being realistic. I think everybody is hoping for summer. But everyone that we talk to, if we really look through a chart of deliverables as to what has to happen in order for that to succeed, 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 closed, 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.
Ryan Koontz: Got it. And on the international front, any specific geographies or products you might call out as strength from Nestor there?
Cheri Beranek: Well, of course, Finland, which is always our core and our home base. But also moving into 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 as a make-ready solution, and then look forward to leverage that in future quarters and years for the actual build-out process.
Ryan Koontz: Great. And on the community broadband, I see that bounce back nicely. I heard your comment 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?
Cheri Beranek: 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 close to probably to a 50-50 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 a home and then you're going to connect a series of homes along that line over the next two to three years.
Ryan Koontz: 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?
Cheri Beranek: I think it's a standpoint, but 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 pocketbook 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 would assume share gain, because 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.
Ryan Koontz: Great. And nice improvement in gross margin there sequentially. Did I – just a clarification here. Did I hear that the E&O write-off was maybe a little lower than expected in the quarter?
Dan Herzog: Yes, it definitely was. I think we had forecasted something up like towards $3 million, and we were closer to about a 1.7. So, much better utilization. That's what happens when you have higher demand, and so we're happy about that.
Ryan Koontz: Got it. And then maybe a couple 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 quoting results earlier in the week, and the strong attach rate, the new share gains are seen in these AI clusters. Is that something you're evaluating?
Cheri Beranek: 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.
Ryan Koontz: All right. Great. Thanks for the questions.
Cheri Beranek: Thank you.
Operator: The next question comes from Jaeson Schmidt of Lake Street Capital. Please go ahead.
Jaeson Schmidt: 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 any revenue was pulled into June?
Cheri Beranek: Only in the international markets, there was couple of million dollars that we had a customer in the European space who asked to take some product that was in backlog early to maximize their build season period. And that's why we are forecasting the fourth quarter to be a little less than third quarter in the European markets, but consistent in the U.S. markets, the North American markets in third and fourth quarter.
Jaeson Schmidt: Okay. That's helpful. And looking at the Nestor Cables business, is the gross margin for that business 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?
Cheri Beranek: 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 high-speed fiber line. 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.
Jaeson Schmidt: Okay. That's helpful. And then just the last one for me, and I'll jump back into queue. On your inventory, Dan, should we look for levels to continue to decline here in September?
Dan Herzog: 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.
Jaeson Schmidt: Okay. That's helpful. Thanks a lot, guys.
Operator: Thank you. [Operator Instructions] Our next question comes from Scott Searle of ROTH Capital Partners. Please go ahead.
Scott Searle: 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 with international. And was there a gross margin number that you provided for the September quarter? And then I had several follow-ups.
Dan Herzog: For the September quarter. So, Nestor, we had about $15 million of our international pool.
Scott Searle: Got you.
Dan Herzog: And you were looking for our guide on our gross margin or?
Scott Searle: Correct. Yes.
Dan Herzog: Our guide at mid was, I think it's around 21.3.
Scott Searle: Okay, perfect.
Dan Herzog: At midpoint.
Scott Searle: Got you. And then, Cheri, 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 BEAD, probably going back 12 or 18 months ago, there started to be momentum swinging towards the Tier 1s. Now it feels like that there's 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 and the market share that it has into the community broadband providers, so the Tier 3s and Tier 2s that benefit more so. Are you seeing a share shift there versus early expectations? And how are you thinking about that?
Cheri Beranek: I think the qualification process continues to change. I think the NTA 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. Now through our efforts at the FBA and many others, as 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 an 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. 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 two middle mile lines that are really been established, that makes perfect sense for them to go after and zero sense for a large provider. On the concourse, on that 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. 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 or ability to provide products that fit that footprint, I think will be to our advantage.
Scott Searle: 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've 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?
Cheri Beranek: Like you highlighted, community broadband, I think is very close, is 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. So I think we have a period of time yet in the 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 first quarter of our next fiscal year.
Scott Searle: Great. Very helpful. And last, 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 opportunities? Thanks.
Cheri Beranek: Go ahead, Dan.
Dan Herzog: I was going to 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 watch that. But absolutely putting a little bit more focus on the inorganic as well as something that is always in our playbook.
Cheri Beranek: 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 where it's foreign to us. The best acquisitions are ones in you have a base that you can build upon. 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 we've always used our active cabinets in backhaul. So there's 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.
Scott Searle: 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?
Scott Searle: 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 Cheri Beranek for closing remarks.
Cheri Beranek: 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. Goodbye for now.
Operator: Thank you. That concludes today's event. Thank you for attending and you may now disconnect your lines.
