Earnings Call: Q3 2021

Jul 22, 2021

Good afternoon. Welcome to Clearfield's Fiscal Third Quarter twenty twenty one 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, Sherry Baranek 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 field report, 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. 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, field report, and in this conference call. The risk factors section in ClearPoint's Clearfield's most recent form 10 k filing with the Securities and Exchange Commission and its subsequent filings on forms 10 q provide descriptions of those risks. As a reminder, the slides in this presentation are controlled via the listener. Please advance forward to the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield's CEO, Sherry Baranek. 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 twenty twenty one. Our record setting financial performance in the third quarter and first nine months of fiscal twenty twenty one again demonstrates Clearfield's unique positioning in the broadband market and our ability to capitalize on the robust growth factors. FiberFed broadband is being recognized as the answer for future proofs connectivity to the American home and business. As you can see on Slide four, the continued demand for fiber fed broadband drove a 49% increase in net sales year over year to a record $38,700,000 Our growth in the period was led by double digit increases from our Community Broadband, which was up 64%. As our performance demonstrates, 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, overbuilders, cable providers, rural electrical utilities, or new to this market, recognize that fiber is the only technology to provide symmetrical upstream and downstream performance. Currently, 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 bipartisan federal infrastructure framework looks promising toward enhancing the funding available to future proof broadband deployment. Sales bookings, which accelerated at the end of second quarter, continued their momentum in the third quarter, resulting in a 377% year over year increase in backlog, growing to a record $40,300,000 on 06/30/2021. We expect to ship most of our backlog in our current quarter ending in September. Additionally, we have previously mentioned due to the challenges in the global supply chain resulting in unprecedented lead times, we are working with our customers to place longer lead time purchase orders to ensure the availability of components and materials from our supply chain. Based on current supply chain dynamics, lead time has stretched to eight to ten weeks for certain product categories. Over the next several quarters, we will be working to normalize our lead time to the more historic levels of four to six weeks from receipt of purchase order. Continuing with our financial overview, our strong top line performance and business model leverage helped produce solid gross profit and net income margins in fiscal Q3. Gross margin dollars totaled a record $17,100,000 up 59% from Q3 of last year. As a percentage of net sales, our 44.2% margin was up from 41.5 in Q3 of last year. As we communicated last quarter, our expenses increased modestly year over year resulting in $6,100,000 in net income or $0.44 per diluted share. This was a significant improvement from the $3,000,000 or $0.22 per diluted share in earnings we generated in Q3 of last year. We anticipate our expenses to increase slightly in future quarters as we invest in additional resources within our Community Broadband program, particularly in customer facing roles and as business travel begins to increase. Our robust financial performance in Q3 contributed to a record nine month period for FERPAL. We've generated $95,500,000 in net sales through the first three quarters of fiscal twenty twenty one, which was up 45% from the same period of last year. Our favorable product mix in the period, coupled with our ongoing efficiency measures, helped generate $41,400,000 in gross profit dollars, an improvement of 55% compared to last year. We also delivered 43.4% gross profit margin for the period, which was up compared to 40.6% last year. From a profitability perspective, we've generated $12,900,000 in net income or $0.94 per diluted share, which was a significant improvement compared to 4,200,000.0 and $0.31 per diluted share in the first three quarters of last year. Looking at our market segments by net sales on Slide five, in the third quarter of fiscal twenty twenty one, we generated net sales of $27,400,000 for our core community broadband market, which was up 64% from the same period of last year. For the trailing twelve months ending 06/30/2021, community broadband market net sales totaled $86,100,000 which was up 56% from the comparable period of last year. Our MSO market comprised 11% of our net sales in fiscal Q3. From a growth standpoint, we built on the momentum we've established over the last several quarters realizing a 19% year over year increase in net sales to $4,500,000 in the third quarter of fiscal twenty twenty one, a 38% year over year increase to $15,300,000 for the trailing twelve months ending June 30. Net sales to our national carrier market for the trailing twelve months ending 06/30/2021 were down 22% year over year to $11,600,000 As we've talked about previously, our position in the national carrier market is related to the continuing demand for fiber to the home and fiber to the business application. As COVID constraints have limited deployment of five gs solutions into the active part of the network, net sales to our Tier one customers for the third quarter of fiscal twenty twenty one decreased 14% year over year to $3,400,000 We continue to support our sales presence in the Tier one national carrier market for both fiber to the home and business as well as for the five gs initiative. Business uncertainties at one of our Tier customers has resulted in a reduction in their CapEx spend in the consumer market for fiber to the home, resulting in a slower pace of their spend with us. In addition, as we have previously communicated, the global pandemic has stalled the introduction and training of our new technologies into the Tier one market. As pandemic restrictions are lifted, we are optimistic that our Tier one revenues will rebound. Net sales in our international market were up 233% year over year in the third quarter compared to the same period of last year and up 64% year over year for the trailing twelve months ending 06/30/2021. We have seen a strong resurgence in demand for fiber fed broadband in Mexico and Canada and as purchases in the previous year were negatively affected by COVID-nineteen. Net sales in our legacy business were down 8% from Q3 last year and down 32% year over year for the trailing twelve months ending 06/30/2021. As we have mentioned previously, our legacy sales are highly dependent upon two customers in this segment. We believe the business to be fluctuating from normal levels due to the continued impact of COVID. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the third quarter of fiscal twenty twenty one. Thank you, Sherry, 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 seven, our net sales in the third quarter of fiscal twenty twenty one increased 49% to a record $38,700,000 from $26,000,000 in the same year ago period and up from $29,700,000 in our second quarter of twenty twenty one. 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. Turning to slide eight, gross profit for the third quarter of fiscal twenty twenty one increased 59% to $17,100,000 or 44.2 percent of net sales from $10,800,000 or 41.5% of net sales in the same year ago quarter. The increase in gross profit margin was due to a favorable product mix associated with higher net sales in our Community Broadband markets and cost reduction efforts across our product lines, including increased production at its Mexico plants as well as manufacturing efficiencies realized with increased sales volumes. As you can see on slide nine, our operating expenses for the third quarter of fiscal twenty twenty one were $9,400,000 which were up from $7,200,000 in the same year ago quarter. As a percentage of net sales, operating expenses for the third quarter of fiscal twenty twenty one were 24.4%, down from 27.8% in the same year ago period. The increase in operating expenses consisted primarily of higher compensation costs related to performance compensation accruals. Turning to our profitability measures on slide 10, income from operations was $7,700,000 in the third quarter of fiscal twenty twenty one, which compares to $3,600,000 in the same year ago quarter. Income tax expense increased to $1,700,000 in the third quarter of fiscal twenty twenty one with an effective tax rate of 22.1%, up from $763,000 in the third quarter of twenty twenty, which had an effective tax rate of 20.3%. Net income totaled $6,100,000 or $0.44 per diluted share, an improvement of approximately $3,100,000 over the $3,000,000 or $0.22 per diluted share in the same year ago quarter. Before I turn it back over to Sherry, I'd like to provide a brief update on the operational measures we've taken to protect and support our business, our personnel and customers since the COVID-nineteen pandemic took hold and how we are continuing to effectively navigate the current environment, both reflected on slide 11. I am encouraged to report that Clearfield continues to remain fully operational. While the majority of our nonproduction employees are continuing to work remotely, effectively using collaboration tools and video conferencing to stay connected, We are beginning to work toward a hybrid work model that will see most employees returning to the office a few days a week later this quarter. Our production operations in both The US and Mexico are operating at full capacity, and we have been able to increase headcount while adhering to state and federal social distancing guidelines. While the COVID nineteen pandemic has dramatically boosted broadband demand, it has also created supply chain challenges to fulfill that demand. Thankfully, the strong partnerships we have built with our global suppliers have and will continue to be crucial. At the outset of COVID, we made the decision to maximize the availability of all product lines at all three of our plants by ensuring that each location can manufacture across our broad product portfolio. We are optimistic that we will be able to procure the necessary components for our growth ahead. However, the pressure on supply chain by increased demand and global supply chain disruptions have shown how fragile the supply chain can be. In particular, Clearfield's manufacturing requires supplies of raw materials like optical fiber cable and resins necessary for its fiber management product line. That concludes my prepared remarks this quarter. I will now turn the call back over to Sherry. Sherry? Thanks, Dan. Now as highlighted on slide 13, we'd like to share an update to our multi year strategic plan as we look at our operational initiatives and focus for the balance of fiscal twenty twenty one and beginning of fiscal twenty twenty two. 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 initiative we have previously discussed in order to establish market readiness for the expanding market requirements for the fiber fed broadband and five g access fiber build out. Today, we are introducing the next phase of our plan that we call Now with Age that advances our ongoing mission to establish ClearSilver as a platform of choice for fiber management and connectivity. The multi year plan is designed to capture the fiber to the home and business market share ClearSilver 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's heightened post pandemic demand for fiber fed broadband. As evidenced by our explosive 45% growth over the first three quarters of fiscal twenty twenty one 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 and process development to enable an agile work environment as speed of 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, flat drop field shield drop table 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 solution. Our third pillar, augmenting capacity for ongoing growth, is our commitment to scaling Clearfield's operations to meet this burgeoning demand. To that end, we are currently expanding our manufacturing network of contract manufacturing partners. We are also broadening our global network of supply chain partners for all source components to ensure we can meet customer demand. We look forward to announcing future developments regarding Clearfield's own manufacturing footprint in the coming quarters. In 2020, the world changed fundamentally, and so did the data requirements that makes the world go round. As COVID-nineteen swept the globe, nearly every aspect of life from work to working out moved online, and people depended more and more on apps and the Internet to socialize for education and to entertain themselves. Before quarantine, just fifteen percent of Americans worked from home. Now over fifty percent do and this trend shows no sign of staffing. State and federal programs have responded to enable all Americans to have effective high speed broadband and we've been thrilled to see the preference that fiber has earned in these deployments. This chart was prepared principally by Jefferies Research, and it illustrates the level of funding that is expected over the next four years. The chart does not include the infrastructure bills currently in Congress that are reported to add an additional $65,000,000,000 in investment to our market, effectively doubling the value of subsidies that are shown here. Clearfield is poised to benefit from this incremental funding as it represents government dollars that will both enable environments that were previously not economically viable for fiber investment to come online as well as encouraging the broadband service provider to accelerate their rate of deployment in their existing footprint. We are very optimistic about growth potential. The market presence we have established over the last ten years along with our recent strategic investments will enable us to respond to market demand and to grow with our customers. While the supply chain remains volatile and may pose challenges in the future, our strong financial performance and $40,300,000 backlog gives us confidence to increase our net sales guidance for fiscal twenty twenty one to one hundred and thirty million dollars to $135,000,000 which represents year over year growth of more than 40%. We anticipate our selling, general and administrative costs will grow moderately as increased travel resumes and we add additional customer facing position. We anticipate net income as a percentage of total net sales to be consistent with year to date levels. While very early in our Now of Age plan, we believe with current demand, new government initiatives and overall market strength, our current market forecast will translate to projected annual net sales of $150,000,000 to $160,000,000 in fiscal year twenty twenty two, representing growth of 15% to 20% over our projected fiscal year twenty twenty one revenues. We will be able to provide more clarity to this guidance in coming quarters as we work to minimize supply chain and capacity challenges and as the timing of some of these government funding programs becomes more clear. In summary, our record setting financial performance for fiscal Q3, which extends our track record of consistent profitability and positive cash flows over the last decade reflects the strength of our business in a range of environment. Clearfield continues to benefit from and take advantage of robust industry tailwinds and our established and expanding presence within our key growth market. We remain confident the demand for fiber fed broadband will persist through fiscal twenty twenty one and into fiscal twenty twenty two. Our recently launched Now of Age plan in which we offer the maturity and capacity to scale the expanding marketplace of fiber fed broadband and five gs access fiber positions us for continued success for Clearfield in the years ahead. And with that, we're ready to open the call for your questions. Operator? Thank you. We will now be taking questions from the company's publishing sell side analysts. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may also press star two if you would like to remove your question from the queue. Our first question comes from Jason Schmidt with Lake Street. Please proceed with your question. 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? 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 of regular of traditional budgeting and traditional weather as you relate it. I think one caveat, however, to that is due to the just, you know, really, you know, 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 I think we might see a little uptick in the in the second quarters of next year that we wouldn't have normally seen. 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 'twenty two guidance, is that baking in a meaningful contribution from some of these programs? No. It isn't. You know, as you indicate as I indicated earlier, the you know, we really have a limited vision of that. You know, as you walk watching the marketplace, the, you know, there's a lot of conversation going on right now between a couple of senators with the FCC and and their frustration that, you know, seven to eight months after the initial RDOF release, being, appropriated that no monies have been distributed. Now we've seen some business of people, you know, moving forward, you using kind of their own bankroll and using some subsidiary financing. But until we get some real broad knowledge of where that's gonna go, we don't there's not a significant level of RDOF dollars in our forecast. 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 costs to your customers? The biggest cost pressures we're seeing are in resins of plastics. And so when you have a a product line that is extensively plastic such as vaults or pedestals, those costs are exorbitant, and we've seen forty and fifty and and more percent increases, see, on that world. And we do provide pet to our customers. While we don't manufacture them, we do customize them for particular pinouts 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, I mean, they're less than probably 3% of our total revenue base, but they are a product requirement in order to study the cabinets that we produce. Otherwise, you know, we've seen some price pressures in sheet metal, some price pressures in labor. At this point, we've been able to absorb those and and pass these things on on a only when it's a significant amount. I think that's a an ongoing challenge that we're gonna have to deal with. I think we've been extremely fortunate at this point. I mean, 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 or graphic excuse me, gross profit percentage increasing, but I do think gross profit dollars will increase as our revenue decline does. Okay. Thanks a lot, guys. Good. Thank you. Thank you. Our next question comes from Tim Savageaux with Northland Capital Markets. Congratulations on some spectacular results here. And my first question is on the drivers of those results in the quarter and maybe in your going forward guidance for fiscal 'twenty two as well. To what extent, and you've been talking about this a little more recently, are increased fiber builds among slightly larger, call them tier two carriers getting to be a meaningful driver either short term or anticipated into next year? And I'll follow-up from there. Yeah. We've been very pleased with the recognition by the tier two providers of the value proposition that Clearfield offers. In that, you know, in that, you know, 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 a craft friendly time saving product line, and their engineers have recognized the value that that Clearfield and our product line can offer. The 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. Okay. Well, just to follow-up on that, could we speculate that perhaps as a group, the tier two carriers are approaching or exceeding the 10% of revenue? Or or can you give us any sense of They're they're definitely not. To reality? I think they're definitely approaching it, I think they'll be called out in future quarters. Great. You kind of hinted at this in your or made reference to it in some of your comments, but 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 from those efforts maybe, separate from whatever you might expect with RDOF? And could we say a similar thing with regard to expectations built into your guidance for next year? You you characterize 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? Yeah. I mean, most of the state initiatives are are are have somewhat started. I mean, we saw some revenues in our existing state or or not. That's the wrong way to put it. I mean, we do business across the country in 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 have had a higher level of state funding and that we're already seeing. And then Moving forward, you know, some of the new programs in the South and the Northeast, you know, the program that was announced or approved in California, you know, this week, you know, those are still very early, and they're not included in our guidance. Great. Thanks very much. I'll pass it on. You're welcome. Thank you. As a reminder to our audience, if you would like to ask a question, please press star one on your telephone keypad. Alright, 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 at Gateway IR dot com. I'd now like to turn the call back over to Ms. Baranek for closing remarks. Thank you very much. You know, as our operator has indicated, 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 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. Thank you for joining us today for Clearfield's fiscal third quarter twenty twenty one earnings conference call. You may now disconnect.