Great. Appreciate everyone having a seat. Getting ready to get started here. I'm Ryan Koontz. I cover the networking and communication sectors here at Needham, so our 27th Annual Growth Conference. Really excited to have Clearfield here today. Clearfield's a supplier of fiber optic connectivity, primarily to broadband service providers. We have CEO Cheri Beranek and CFO Dan Herzog with us. Welcome to you both.
Good morning.
Thank you.
Good morning.
Great. So let's just kind of dive into the business a little bit and chat. You know, we've seen a little bit of a roller coaster the last year or so in the industry and, you know, some discussion around improved visibility coming from some of the suppliers of late. We saw Ciena last month have more optimism around CapEx, which is nice to see. Can you kind of relate what you've been relaying to investors over this last quarter about the business and your outlook?
Right. Yeah, I think the business is in a really good inflection point. You know, we were, as providing equipment to, excuse me, Clearfield provides equipment to broadband service providers from typically the Tier 3 community broadband group, as well as to the Tier 2 group, companies like Frontier and Lumen. And what we're seeing really across the board is that the inventory positions that had been accumulated during the pandemic and post-pandemic, you know, are pretty much being absorbed by most accounts. And we're going to be in a position moving forward to really be able to see the work that's been done over the course of the last two years. So from whether it's ACAM, whether it's existing business, whether it's just new opportunities for new providers, we're optimistic that we're going to be able to see some good growth moving forward.
Yeah. Do you feel like the deployment and the supply are coming back into balance finally there?
Right. With the exception of probably the regional MSOs, I think we're in a position where we're closer to a bid, you know, a buy-build environment of one-to-one. Our lead times are about three to four weeks, which means the service provider doesn't have to give us huge visibility, but it also gives us the opportunity to sit down across the table for most of our customers and really talk about what their ongoing opportunities are and how much they're going to need from us. And so as we did our outlook for the year, it's really based on individual provider and the excitement that that provider has to get back into a run rate business that's, you know, all about getting fiber to every location across the country.
Right, and through your last reported quarter, you've talked about kind of a mix a toward connected home. Can you walk investors through that dynamic and what that means?
Right. Yeah. Well, you know, we're known as, you know, as a fiber connectivity company, our first responsibility is to help the service provider pass the home or business. And that has a level of product that we first came out with is predominantly located around our cabinet line, as well as some of the terminals. And so our revenue opportunity is about $50 per home passed, you know, with those types of products. But when we actually then connect the home, and about 40% of homes that are passed actually take the fiber service, our revenue opportunity goes up to about $250.
And so we were first known as a cabinet company and now really are working with our customers to be more of a platform supplier so that if they pass the home with our cabinets, they connect the home with our drop cables and our deployment reels and our home deployment kits, and have really been taking the same type of labor savings that we offered while we passed the home, you know, into that connected platform as well, because that's really where most of the labor is found. So we're working toward achieving a 50/50 split between homes passed and homes connected, and then moving forward, looking to be able to, you know, because eventually a two-to-one opportunity to homes connected to homes passed is possible, and we'll be, you know, striving to make that happen over the course of the next couple of years.
Great. And, Dan, are there different financial implications on margins for the different products?
The margins for those are all pretty standard across. There'll be similar margins for each of those. The difference is the revenue per home that Cheri cited.
Got it. And in terms of kind of your margin trend, can you walk us through, you know, some of the reserves you've taken, kind of what's transpired over the last year?
Yeah. So obviously last year we entered. I think we ended up with $166 million in revenue. We entered the year with about $100 million in inventory. So you can tell there's a little bit of an out of balance there. So we had some excess on there, excess inventory that you have to review and take some charges on that. But it's not dumpsters, it's not thrown out. It is stuff that we just put reserves against. And so that went against our gross margin. I think it was about $9 million in charges last year. That product still is product that we have. And if we sell that, we will sell that at 100% margin because we've taken the reserve and we do get tailwinds from that. So as product moves off, I think we ended up the year with about $67 million in inventory.
So we've had a good turn on that. And that allowed us also to cash flow from operations of a significant contributor. And we cash flowed, like, I think, $22 million. So we did take some charges of about $9 million, but we expect that that will be a lot of that is behind us now. And so going forward, it'll be more tailwinds from that.
What's your target inventory level to get to, Dan?
We haven't identified a target yet, but we definitely still see it decreasing as we go. So we're going to have more tailwinds from that as that decreases down.
Got it. And maybe shifting to market segment, Cheri, can you walk us through your kind of core community broadband customer base, how you've built that channel and those relationships over time from a history?
Yeah. I mean, it's been just a 20-year level of enjoyment of being able to, when we started the company back in 2008, the, you know, fiber to the home was being provided, you know, to Verizon customers and to AT&T customers. And companies like Corning and CommScope, you know, would provide product to a Tier 3 telco service provider. But they were saying, well, you know, it works for Verizon, it can work for you too. Well, you know, building a company in Minnesota and providing product to companies like Paul Bunyan Telephone, they didn't need the product that, you know, we were using here in Manhattan. They needed an entirely different way to scale their business.
And so we started the company with that thought in mind that we were going to be able to offer products that could scale and allow the service provider to align their capital equipment expenditures alongside their subscriber take rates. So you think about it from the standpoint of when you're on vacation and you're driving through all of those rural environments. Those rural environments need fiber and need internet service probably more than you do here in metropolitan New York. But how we deploy that in order to deploy that effectively had to be done differently. So we started the company with the orientation that we could scale, we could provide modular solutions that could be identified for that environment, and that we would have a different kind of sales force. Our sales force wouldn't be based upon using distribution by which to sell.
We would use distribution to fulfill, and we would have a sales organization that lived in the communities in which fiber was being deployed. And so over the course of, you know, the last, you know, 15 years, we've been in a position where we are the first provider of choice, you know, for the Tier 3 provider, those communities across the country, because they get not only the product they need, but the service and training that they need as well. Today, as we move into what is available for fiber, there are still 29 million homes considered as a rural solution, you know, a rural environment that don't have fiber. About 11 million of those homes are associated with either ACAM or BEAD, and another eight. So if you look at that, 18 million homes are going to be served by natural forces.
There are actually homes that can be met with fiber from a provider that makes business, you know, economic sense without government assistance. That's our space. That's our total available market as we move forward. So I'll do the math for you. You know, you take 29 million homes times $50 for homes, you know, passed and $250 for homes connected. You know, I have a $7 billion total available market just based upon those solutions that we're on, the small areas that we are the primary, you know, are the kind of the lead in regard to kind of the service that we're looking to offer.
So, I'm excited about when I get a chance to really talk about community broadband and why Clearfield is different. I'm excited about being able to leverage what we've already put into play and excited about being able to work with investors to say there's no better time than now to invest in Clearfield. You know, we've demonstrated that we can scale, that we can build a company to $100 million a quarter. We have the capacity by which to do it, and we can make money while we're there. You know, we have a balance sheet that allows us to make those investments when it's necessary. You know, we have the only debt we have is a $2 million loan from the country of Finland to be able to ensure that fiber optic, it's a, they call it a NESA loan.
It's a loan to ensure that, with no interest, we always build fiber in the country of Finland for a defense mechanism. Other than that, we have no debt, so it's an exciting place to be and one that we're looking forward to where it can go.
Yeah. Outstanding. Let's talk about, you touched on ACAM there. Let's kind of unpack the government programs. Maybe starting with ACAM, which I think is the traditional subsidizing mechanism for lots of these smaller telcos. It's been around for decades, right?
Right. Yeah. The ACAM program is really one in which, you know, it's not the world of BEAD, kind of separate the two. ACAM is about $18 billion. It's targeted to 250 or so service providers across the country who have previously used government funding to provide what's called service levels at 25 Mb down, 3 Mb up. Unfortunately, that's not where we need to be, and that was traditionally software upgrades to really get to full 100 Mb service, which is just a stepping stone, you know, to the gigabit true needs. But to get to 100 Mb service, we need to do a fiber infrastructure upgrade, and so there's $18 billion driven to that ACAM program that is going to be starting now in the build season of 2025. We're seeing quoting for that activity, you know, today.
We're seeing, you know, new projects that are going to be started, and it's a three-year build that, you know, hopefully all gets done in three years. It seems every program goes long, but over the next three, maybe four years that those, you know, those communities can get that money.
So that's almost business as usual for you, you'd call that.
Right. Right. It's additional, you know, additional opportunity that we didn't have in the past, but it's one of the reasons why not only do we see inventory reserves going away, but we have a new market funding program that will help us as well.
Great. Well, let's talk about the BEAD program. That's where a lot of the hype is. And obviously we've seen a lot of to-ing and fro-ing, a lot of criticism from the government. Walk us through your perspective on where we are in that program now and how investors should think about it coming into your business.
Right. The BEAD was a program that was approved by the Infrastructure Act of 2021, right? So it's been around a little bit, but it's $42 billion, of which 25% needs to be matched by the service provider. So it's really a $60 billion program. Excuse me. That program started to provide product that was for either unserved or underserved communities, and they spent the first almost two years mapping the entire country and then allowing service providers across the country to challenge those maps because the program said every one of the locations, the addresses, and it really went down to the address level, you know, you know, had to be identified as being an unserved market. That, you know, there were a million challenges literally that they went through and then they finally approved the maps. From the maps, then it went out to every state.
What I really like about this program is that it is state-run. So all the money is allocated by state and then it was being awarded to the state for the state distribution, which if you're a provider like us where we are in those communities, you want the communities to be able to make those decisions. The bad part about that is the more people that are involved, the longer it takes. And so we can see that now that we are in a position that it's been three years and the criticism, you know, during the election was, you know, where's the money? We've never seen, you know, a single home being provided with service under the initiative. We're finally there. So nearly all of the 57 states and territories have an established program.
The three territories have actually awarded, or three states, excuse me, have actually awarded their money. That's Louisiana, Delaware, and Nevada. And yesterday, an exciting step, the final step, which is that the NTIA approved the Louisiana initiative. So the final level of federal involvement. So now we can start distributing money.
Allows money to flow.
So finally, so hopefully we don't get a level of interference that slows us down.
From the new administration.
From the new administration, which of course is being.
The NTIA.
So of course it's going to slow down. You know, by definition, we'll have all new NTIA administrators, but the worker bees are going to stay, right? You know, the traditional people who actually make the jobs happen. You know, there's been a lot of talk about Low Earth Orbit satellites, the LEOs. And there's a place for LEOs. For those of you who may not be familiar with the acronym, you know, a LEO is a low-e arth orbiting satellite. It's what the Musk program, you know, it was all about. Those initiatives, we need them. You know, there are parts of this country that cannot be economically met with fiber. So it was never designed, you know, BEAD was never going to be 100% fiber. It was meant to be able to pass every single one of those homes.
And that was part of the way the program was written, is every location had to be served. So LEO will be part of that initiative to ensure that those locations are met. And there'll be some environments like Wyoming or Montana that will be a lot more LEO than what we have seen. But in Nevada, 80% went to fiber. And Nevada's a, you know, a desert, mountainous territory, but still was able to, you know, fiber was an economic option.
Louisiana was even higher.
Louisiana was 95%. Yeah. And predominantly Tier 3 in who was awarded that money.
Yeah. That's the real exciting thing.
Right. It's our space.
It's not going to AT&T and Comcast so much. It's going to the little guys. They already operate in the rural areas.
Yeah. Because you've got, and so we're excited about what that will look like. Remember, ACAM is a build program starting in 2025 through 2027. BEAD predominantly, we'll see some money for Louisiana in 2025, but it'll predominantly be a program starting in 2026, running through maybe 2028 or 2029. It's really the next five-year build as to how we're going to pass these homes and businesses and then provide that level of connectivity.
Even on top of BEAD, I think there's still an additional program, right? CPF and what they're doing with the reallocation of pandemic funds. There were some pandemic funds I think they're picking up.
Correct. You know, so it's a means in which there's money to get. Service providers know how to do that. They've been doing it for a long time. And I'm excited, like I said earlier, about the new providers, anyone who is right away looking to be able to make sure their community isn't left behind.
Yep. Great. Maybe shifting gears, talking about your manufacturing strategy, where you are, you know, the Build America requirements, you know, where you've invested so far, your capacity to scale. Can you kind of walk us through kind of soup to nuts on the manufacturing front?
Sure. Right. We have locations in Mexico and Minnesota. Both do manufacturing. So when the BEAD program requires Made in America, we have the capabilities to do that, so we have to be positioned in both places to do that. We have a deep network of partners that also do some sort of subcontracting for us around the globe. And we have our Finland operations as well, Finland and Estonia that serve Europe. So all of those are working together to produce where's the best source for us to produce the product, navigate things like tariff type things, and optimize our margins, so again, capacity to do, you know, $400 million on hand.
We were one of the first three manufacturers to be self-certified to be fully BABA compliant. It's been, you know, we have a disproportionately high investment in resources for tariff administration for import-export fees and really being on top of where, you know, all of that kind of comes together for optimization of our cost structure. The, you know, we were Minnesota-based first and really believed in local manufacturing. During the pandemic, I think it's important to note that when we tripled our manufacturing operation in Mexico, we also doubled our manufacturing opportunities in Minnesota. When we bought the Finnish operation, the Nestor Group, so that we were able to do our own cable manufacturing as well, we started with manufacturing capabilities in our Mexican plant.
And now I've replicated all of that and in fact have a bigger capacity in our Minnesota location than we do in the Mexican facility. So we no longer have any single source of anything that we provide. So it's a much more comfortable position to be in than some of those days when we were flying to $95 million during the pandemic when we didn't have the stability of the supply chain that we have today.
Yeah. Fantastic. Maybe shifting gears now, talking about innovation and what you're doing on the R&D front, new products. Can you kind of walk us through, you know, your current portfolio and where you've been investing R&D dollars to bring new products to market?
You know, the last, you know, really two to three years, we've been very focused on that connecting in the home and bringing out solutions that reduce the labor involved in connecting the home. So you'll see, you know, a full home deployment kit that allows the service provider to have everything they need in one spot. You know, they're mechanical in orientation, so they're not necessarily sexy, you know, but when you think about the standpoint of, like, I got fiber to the home finally after years of not having it, and so unfortunately, it wasn't my stuff, but I got to see everything that's wrong with all the other stuff, right, so when they brought my fiber in, they laid it on top of the ground, well, first they came in and they cut my cable line, so I had nothing, right?
And so, you know, then they came in and they laid the fiber on top of the ground. Then another guy came in and put the stuff in the ground. Then a third guy came in and actually connected it to the home. But they connected it to the home. They put it in the wrong place. And so then they aligned it, you know, underneath. So all this labor is happening over and over and over again. And in fact, six weeks later when my neighbor got fiber, they cut my fiber line again. And so it has not been a happy time for me.
But what I've watched with our product line is, you know, rather than having the fiber being brought from the terminal to the house and having to deal with all the slack storage at the house, our solution has the product. The fiber is wrapped around a reel that comes in the home deployment kit and you put it onto the house and then you bring it back to the terminal so everything is all pre-connectorized. There's no slack, there's no need for a second person, everything's done at once. Our challenge is, you know, we were served, my house is served by a Tier 1 because we're in a metropolitan community. We haven't yet broken through to the Tier 1 markets, but we can definitely succeed in the Tier 2 initiatives.
The other thing we're doing in regard to new opportunities is really filling in our solutions in some parts of the product line that we don't, you know, have solutions previously, and so.
You source them.
We used to source them and now we're filling them in ourselves. We have our own vault and our vault is done in a unique way. I mean, you think, you know, what can you do about something that's buried in the ground? You know, our vault, rather than coming in as a pre-container, you know, a vault is usually about, you know, 24 x 36 or 24 x 48. It sits underneath the cabinet, and you hide it, right? The biggest issue with vaults is shipping because they're shipping dim weight because it's empty. What we did with the vaults to be from a level of innovation is our vault is done in four pieces. It ships flat. Then so there's, you know, reduces the shipping costs, you know, exorbitantly and in a positive way.
Then it can be put together in five minutes when it's in the field. You have all of those shipping costs being taken out of the equation. The innovation is not just in the product, but in the way the product is put together. You'll see the same thing. We fill the product line holes with a series of pedestals that we used to source. You know, we saw that the pedestals were not being provided at an economic price point. We wanted a pedestal that wasn't designed for copper being used for fiber, but instead it was a pedestal designed for fiber from the beginning.
What we see with our customer bases is that it reduces the amount of labor in the field because the hooks and things that are inside of the pedestal itself, you know, allow for an easy deployment. It's exciting to see all this stuff kind of come into play.
Where are we on adoption of these new products in terms of their phase into manufacturing and customer orders?
Right. So vaults are in full deployment. The pedestal line is not quite complete. We have a couple of sizes, yes, to be able to kind of come into play. We've, you know, worked to keep that local. All the vaults and pedestals are actually plastic extruded in Minnesota. So we are excited about being able to be close at hand, you know, with that. Moving forward, we'll see additional things from us in different places. We're extremely excited about where we see powered cabinets going, you know, in the market. You know, predominantly we have been involved with what is called a passive infrastructure. So as a passive infrastructure, you have no power in the equation. Everything is just simply handed off to the fiber, goes from one point to the next, you know, without any electrical sourcing.
But if you're going to have electronics in the field, you've got to be able to put power. And the more we have seen compute power being driven toward the consumer, we see electronics like Adtran and Calix and Nokia all coming into the field, coming into cabinets. And so you'll see a series of new cabinet designs coming from us to be able to extend our universal platform because you'll see a lot of cabinets out there that have been produced again for copper, produced predominantly for it to be done for a particular manufacturer of the electronics. Our solutions were designed for fiber. They're designed for the density of fiber and then to house any electronic platform, making it a universal choice.
Great. Excellent. How about the competitive landscape? What's that been like for you over the last 12 months or so?
You know, Corning and CommScope have, you know, have focused on the Tier 1s. They have kind of come down into our space as the Tier 1s weren't spending. But, you know, kind of see them retrenching back into, you know, to their strongholds a little bit. So we're excited to see them go back to, you know, their sweet spot.
They tend to have some aggressive moves.
They do. And, you know, Corning's designed a lot of solutions for them and also for Lumen for their data center builds. And so I think from the big guys, the landscape is a little bit clearing. You know, don't know yet what CommScope's refinancing is going to do there. They've been doing some crazy things.
Just sold out the wireless.
Right. And so, you know, what we've seen is that our customers have not seen service reps, parallel training reps, or sales reps from the big competitors in over a year typically. They're asking the distributors to do that for them. That's some of the cost savings that they've done while the inventory was being consumed. You know, we have seen some smaller players come in, some Asian sourcing suppliers that are coming in with some real low cost points. You know, our orientation is if you're going to buy for cost for a cheap product, you're not probably going to operate your network, you're going to flip it. Those typically aren't our best customers. And so we look at finding customers that understand the value of operating their business long term.
Great. How about your strategy around international? Any thoughts there in terms of where you're going to take the business internationally?
Yeah, we know we bought the Nestor orientation in Europe for the purpose of bringing and controlling FieldShield. You know, as we started our conversation, our goal was to ensure that we had a platform product that we could connect every home that we were passing. And we really couldn't do that cost effectively because we were sourcing, even though we designed FieldShield, we were sourcing it from Nestor. And so being able to bring our product back into our own manufacturing environments and not to have to deal with the shipping cost of bringing it from Europe really was the reason for buying that organization. After that was, you know, completed, we had an opportunity to look at that base of $40 million-$50 million worth of business in Europe and see how do we use that platform.
You know, I think it's been difficult to enter into the connectivity regions of Europe right now in that there hasn't been a lot of investment in the last 18 months. It's been a difficult market by which to grow into, and so we have not been as effective as we would have liked. We continue to monitor at this point the best point for our point of entry, and we wanted to make sure that we supported and protected the asset that we had, but also looked at the best way to enter, so I'm actually on a plane tonight on my way to Estonia so we can have the groundbreaking or the open house for our new facility in Estonia, which is a connectivity center so that we have a low cost manufacturing source for connectivity as well as for micro duct deployment.
So we have made some, you know, and you know, it's not a big amount of money. It's $1 million over the course of the last year. We put another $1 million into a high-speed loose tube manufacturing line, different areas to make us cost competitive there so that when the market does come back, we're in a good position. And I think that's the underlying tenet of how you look at Clearfield is we appear conservative and we are, but I think we also have a standpoint of patient tenacity in that you can throw money into a region, but if that region isn't buying, isn't growing, it's not the right time. And so our lack of penetration into Europe, I think is more of a standpoint of discipline than it is in regard to it not being the success.
Outside of Europe, we continue to do business in Canada, Latin America, and moving into some parts of Central America. Some interesting opportunities there. And what we see there is not as much community broadband, but larger suppliers. And so you're either successful or you're not. So we're bidding on some things right now. And so potential upside if it comes together.
Neat. Exciting. We have a few extra minutes. Any audience wants to volunteer a question? Anybody have any? Yes, sir.
Cheri, can you just maybe clarify on the BEAD expectations? I think in the past it was second half of 2025 and now you're saying 2026 to 2029. Are you shifting your paradigm again by another six months?
Yeah. You know, we said already, you know, last year that we did not see revenue expectations in our fiscal year 2025. So we led the market of saying that we didn't anticipate 2025 revenue. We thought it was going to be in our fiscal year 2026. One of our issues as Clearfield is that our fiscal year ends in September, whereas others, when they talk about 2025, you know, we'll be continuing into the October, November, December program. You know, I think it's going to take, you know, six months for Louisiana to get everything engineered so that we would be in a position where we could anticipate orders, which is, I think, consistent with what I said initially.
So, I think the, you know, it's difficult to, I think, anticipate, but at the same time, I don't think it's really shifted that much back from what we said six months ago.
Anything else from the audience? Well, great. Anything you want to say in wrapping up, Cheri?
I mean, I think this has been an exciting and frustrating time for us as an organization. We spent, you know, 15 years building this company and, you know, we started with a share price of $0.97 and $2 million in the bank, but we always made money. So fiscal year 2024 not making money was a very different world for us because we were always conservative in the way that we put into play. But the pandemic forced us into a different situation. But at the same time, even though we weren't making money, we were cash flowing. We have a significant amount of using our inventory for cash flow maintenance. We're buying back shares. We're putting ourselves in a position that as this market comes into play, there is not a better, in my mind, not a better investment in fiber available to you.
So if you believe in broadband, if you believe in fiber, we demonstrated we can do this and we have every intention to repeat our performance.
The market hasn't gone away and we're in a, you know, we have a great balance sheet for the future. And so we are excited about our future.
As am I.
Great.
Thanks so much.
Thank you.
Thanks.