Earnings Call: Q2 2021

Apr 22, 2021

Good afternoon. Welcome to Clearfield's Fiscal Second Quarter twenty twenty one Earnings Conference Call. My name is Paul, and I will be your operator for this afternoon. Joining us for today's presentation are the company's President and CEO, Sherry Boranik 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 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 that 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 that 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 Clearfield's most recent Form 10 k filings with the Securities and Exchange Commission and its subsequent filings on Form 10 Q provides descriptions of those risks. As a reminder, the slides in this presentation are controlled you, the listener. Please advance forward through the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield's CEO, Sherry Buranick. Please proceed. Good afternoon, and thank you, everyone, for joining us today. I hope you all are continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon and to share Clearfield's results for the fiscal second quarter and first six months of twenty twenty one. During the second quarter, we saw demand for fiber fed broadband networks expand across the community broadband market. As you can see in Slide four, this robust demand helped drive a 45% increase in net sales to a record $29,700,000 Our growth in the period was again led by double digit increases from our community broadband and MSO markets, which were up 6860%, respectively. As our performance demonstrates, Clearfield is strongly executing on its brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider requirements. Sales bookings started strong in January and accelerated throughout the quarter end, resulting in a 115% increase in backlog growing to $19,200,000 on 03/31/2021 versus $9,300,000 on 03/31/2020. We expect to shift the majority of our backlog during fiscal quarter three and have begun to receive longer scheduled orders as service providers establish longer term deployment plans. Our strong top line performance and business model leverage helped to produce solid gross profit and net income margins in fiscal quarter two. Gross margin dollars totaled a record 12,900,000 up 59% from quarter two last year. As a percentage of net sales, our 43.6% margin was up from 39.9% in quarter two of last year. Moving down to P and L, as expected, our expenses increased modestly year over year, resulting in $3,600,000 in net income or $0.27 per diluted share. This was a significant improvement from the $750,000 or $05 per diluted share in earnings we generated in Q2 of last year. We anticipate expenses to increase slightly in future quarters as we invest in additional resources within our community broadband programs and as business travel limitations start to decrease. Our robust financial performance in quarter two contributed to a record first half for Clearfield. At a high level, we generated $56,800,000 in net sales through our first two quarters of fiscal twenty twenty one, which was up 43% from the same period of last year. Our favorable product mix in the period, coupled with our ongoing efficiency measures, helped generate 24,300,000 in gross profit, an improvement of 53% compared to last delivered 42.8% gross profit margin for the period, which was compared to 39.9% last year. From a profitability perspective, we generated $6,800,000 in net income or $0.50 per diluted share, which was a significant improvement compared to $1,200,000 or $09 per diluted share in the first half of last year. Looking at our market segments by net sales on Slide five, starting first with our core community broadband market. In the second quarter of fiscal twenty twenty one, we generated net sales of $20,500,000 to this market, which was up 68% from the same period last year. For the trailing twelve months ended 03/31/2021, Community Broadband Markets net sales totaled $75,500,000 which was up 44% from the comparable period last year. Our MSO business comprised 13% of our net sales in fiscal quarter two. From a growth standpoint, we built on the momentum we established over the last several quarters, realizing a 60% year over year increase in net sales to $4,200,000 in the second quarter of fiscal twenty twenty one and a 48% year over year increase to $14,600,000 for the trailing 12 ended 03/31/2021. Net sales in our national carrier market was down 15% year over year to $12,100,000 for the trailing twelve months ended 03/31/2021. As I've talked about previously, our position in the national carrier market is related to the continuing demand from fiber to the home and fiber to the business application. As COVID constraints have limited the deployment of five gs solutions into the access part of the network, net sales to our Tier one customers in the second quarter of fiscal twenty twenty one decreased 42% year over year to $2,300,000 Although sales in our Tier one markets have not yet experienced the same robust growth as our other markets, 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 five gs initiatives. We shipped several new products into that market during Q2 and are working to gain a stronger foothold with them. As we have previously communicated, the global pandemic has stalled the introduction and training of our new technologies into the Tier one market. As five gs deployments into the access network increase, we are optimistic for increasing net sales among Tier one markets moving forward. Net sales to our international market was up 105% year over year in the second quarter and remained flat year over year for the trailing twelve months ended 03/31/2021. As the pandemic begins to get under control, fiber fed broadband in Mexico and Canada is showing a resurgence in demand. Net sales in our legacy business was flat year over year in Q2 and down 31% year over year for the trailing twelve months. This legacy part of our business is highly dependent upon the two key customers in this segment. We believe the business to be fluctuating from normal levels due to the slowdown in the economy related to COVID. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the second 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 second quarter financial results in more detail. As you can see on Slide seven, our net sales in the second quarter of fiscal twenty twenty one increased 45% to a record $29,700,000 from $20,400,000 in the same year ago period. The increase in net sales was primarily due to higher sales in our Community Broadband, MSO and international markets, partially offset by decreases in our National Carrier markets. Turning to Slide eight. Gross profit for the second quarter of fiscal twenty twenty one increased 59% to $12,900,000 or 43.6% of net sales from $8,200,000 or 39.9% of net sales in the same year ago quarter. The increase in gross profit dollars was due to higher sales volume. The increase in gross profit margin was due to a favorable product mix associated with the increased net sales in our community broadband markets and cost reduction efforts across our product lines, including increased production at our Mexico plants as well as manufacturing efficiencies realized from higher sales volumes. As you can see on Slide nine, our operating expenses for the second quarter of fiscal twenty twenty one were $8,500,000 which were up from $7,400,000 in the same year ago quarter. As a percentage of net sales, operating expenses for the second quarter of fiscal twenty twenty one were 28.6, down from 36.4% in the same year ago period. The increase in operating expenses on a dollar basis was primarily due to additional headcount and higher compensation costs related to performance compensation accruals and increased stock compensation expense, offset by lower travel and entertainment costs. Turning to our profitability measures on slide 10, income from operations was $4,500,000 in the second quarter of fiscal twenty twenty one, which compares to $720,000 in the same year ago quarter. Income tax expense increased to $935,000 in the second quarter of fiscal twenty twenty one with an effective tax rate of 20.4%, up from $190,000 in the second quarter twenty twenty, which had an effective tax rate of 20.3%. Net income totaled $3,600,000 or 27¢ per diluted share, an improvement of approximately $2,900,000 over the $750,000 or $05 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. The majority of our non production employees are working remotely, effectively using collaboration tools and video conferencing to stay connected. Our production operations in both The US and Mexico are operating close to normal while adhering to state and federal government social distancing guidelines. As a precautionary measure, we have multiple contingency plans in the event our ability to operate is diminished or eliminated at either location. As many of you know, we dual source most of our components to cover multiple points of failure and provide purposeful redundancies to reduce potential risks. 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 suppliers globally 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 the broad product portfolio. We are optimistic that we will be able to procure the necessary components for our growth ahead. However, the pressure on the supply chain by increased demand and global supply chain disruptions caused by the pandemic, the harsh Texas winter, container shortages, the blocking of the Suez Canal, and other logistical issues 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. I will now turn the call back over to Sherry. Sherry? Thanks, Sam. Now looking at our operational initiatives and focus in fiscal twenty twenty one highlighted on slide 13. Our strategic plan is its multiyear initiative to enable Clearfield to come of age. Our organization has specific and measurable objectives designed to increase our top line, reduce our cost, and expand our reach. Key to our success remains our loyalty to the providers that have grown alongside us while leveraging new innovations for the integration of wireline and wireless networks as we move into new markets. This brings me to our first pillar, building a better broadband, one community at a time. It leverages Clearfield's long standing customer and partnership relationships to build brand awareness and expertise. As I mentioned, Clearfield was built to facilitate the enablement of pervasive high speed broadband to underserved and unserved communities. Clearfield's position within the community broadband market has never been better. Our track record and reputation has positioned us extremely well to continue to grab market share and further capitalize on the expansion that's currently underway. Clearfield remains committed to fulfilling the increased demand of smaller providers across the country. We began investing early last fall in our drop cable production facilities because we anticipated take rates would increase among existing providers as potential subscribers were added to existing networks. This timely investment has proven to be a meaningful and competitive advantage as we continue to offer superior lead times compared to the competition. In addition, as providers with multistate networks are now building or overbuilding their networks with fiber, we are developing an increasing presence within the tier two community. We anticipate this market based demand will continue moving forward. A key market driver is the government financed broadband programs under the Rural Digital Opportunity Fund or RDOF that is currently in the planning stages for providers. In addition, while the recently announced American Jobs Plan within the Biden infrastructure bill is still being debated in congress, the White House's request for 100,000,000,000 in funding for sustainable high speed broadband is a positive reflection on expanded fiber opportunities we believe are possible in the years ahead. Our second pillar is delivering innovation for true One Fiber deployment. The foundation of One Fiber deployment began with the development and introduction of the ClearView cassette. The cassette is the central building block of every element of Clearfield's FieldSmart product portfolio. This 12 port building block is designed in multiple configurations and then manufactured in volume As it is designed to handle the toughest operating environments, it provides flexibility as well as reliable performance within the inside plant, outside plant, and access networks, Delivering the most scalable fiber management platform in the industry, Clearfield ensures the service providers' investments in capital equipment can grow alongside their subscriber take rate. Reducing the overall footprint of the fiber management element reduces real estate costs and improves the density without compromising critical design elements of access, bend radius protection, physical fiber protection, and route path diversity. Our third pillar involves scaling operational excellence for a superior customer experience. Our production facilities in Mexico continue to provide meaningful competitive advantages to both Clearfield and our customers. Not only have our Mexico facilities enhanced our overall protection capabilities and produced cost effectiveness, but they have also allowed us to deliver product to customers at a time frame that our competition simply can't match. To maintain these advantages, we have systematically added capacity over the last several months to meet the growing demand we are seeing for our products and will continue to evaluate for our needs on an ongoing basis. Looking ahead to the balance of fiscal twenty twenty one, the rural broadband market remains ripe for growth and the strategic investments we have made and the presence we have established over the last ten years will be beneficial for Clearfield. While the volatility of the supply chain potentially poses challenges in the near term, our growing backlog, expanding pipeline and building the market demand gives us confidence in our ability to realize net sales of $120,000,000 to $125,000,000 in fiscal twenty twenty one, which represents year over year growth of 32% as the midpoint. As travel reemerges, we anticipate our selling, general and administrative costs will grow moderately. In addition, we will be making strategic investments in additional customer facing positions in order to maintain our leading customer service programs for our expanding customer base. For the remaining quarters of fiscal twenty twenty one, we anticipate net income to be at or above 12% as a percentage of net sales. In summary, our consistent financial performance highlighted by thirteen years of profitability and positive cash flow demonstrates the durability of our business in a range of environments. Clearfield continues to benefit from and take advantage of robust industry tailwinds and Clearfield's established presence within our key growth markets. We remain confident that demand for fiber fed broadband will continue through fiscal twenty twenty one. Longer term, our enhanced Comes of Age plan, targets growth in 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. A confirmation tone will indicate that your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Jason Schmidt with Lake Street Capital Markets. Please proceed with your question. Hey, guys. Thanks for taking my questions, and congrats on really impressive results. I want to start with the outlook, which was also really strong. Obviously, expecting some nice growth here in Q3 and Q4. Does this assume any meaningful pickup in the National Carrier business? Or is this largely just continued momentum in the Community Broadband segment? It's absolutely based upon community broadband and the strength that we've seen to date within community broadband and the MSO world. The tier one markets, I would say, we've yet to establish true momentum in that area. So that is not part of the growth initiative or growth outlook. Okay. And then just looking at fiscal twenty one, some really nice growth expected. I mean, when you sit here today, are you at all concerned that there has been some pull forward in demand? Jason, I would say there might be a little bit of a pull forward, maybe a little bit of what I'd call panic buying to get some get people in place because there certainly have been some supply chain initiatives and, you know, just general availability concerns. But in general, I wouldn't say this is I I have no concern about it being ongoing or continually viable. This is absolutely a trend and ongoing momentum. It's not a in our perception, it's not a spike. Okay. That's helpful. And then just the last one for me, and I'll jump back into queue. Just want to clarify sort of your comments on the supply chain. Were you at all impacted by constraints in the quarter? Not at this point. Our our group, our procurement group, has been doing an amazing job. I would call it spinning plates as we kind of walk through, you know, issues between, you know, bringing in product. I mean, I think it's just I mean, think about the standpoint that we've got, you know, products coming in on, you know, on boat. We've got products coming in on air. You know, then you've got boats sitting in waiting to unload. Just trying to be able to put that all together has been a little bit of a challenge, but it did not impact our ability to provide product. If you're alluding to the backlog, that backlog came in. But when we we, you know, we were on our call last in January. We talked about that January had started strong, and it just continued to escalate from there. Extremely strong March and and providing the same level of of general viability as we would on an ongoing basis. And And as I indicated in the call, on the preliminary notes, we anticipate to be having majority of the backlog that we have in place shipping in quarter three. Okay. Thanks a lot, guys. You're welcome. Talk to you again, Jason. Yep. Our next question comes from Tim Savageaux with Northland Capital Markets. Please proceed with your question. Hi. Good afternoon, and my congratulations as well, on the results. And I wanted to focus on, your commentary about at least the the beginnings of some visibility extending beyond, you know, what's normally a pretty short cycle business for you guys and some some orders scheduled farther out into the future. I wonder if you could, you know, give us a little more color perhaps on, you know, how far that bill visibility might extend, you know, and and maybe relative to the, the backlog that you saw in the quarter, significant increase, you know, how how meaningful that longer dated demand is and and whether that's also coming from, community broadband. And I'll follow-up from there. The you know, I what we see happening, you know, in the space is is people, from a legacy standpoint over the course of, I'd say, the last five years, you know, many of our customers would look at their and would identify for us, this is what we're anticipating this year. What we're seeing now is a commitment to build out their entire networks and having multiyear initiatives that they're committed to building out and passing the majority of their homes, you know, working through, you know, projected take rates. Because in the past, you know, it was more of an orientation of of of of kind of a a build strategy that was success based. Whereas today, I think the success is insured, because broadband take rates are so high, and so there's a longer term commitment to those bills. You know, as it relates to, you know, our backlog, a little of that is staged deployment in that, for bills that were, orders that we were getting in March, some from some larger suppliers that were looking at helping us stage our bills and giving us orders that were not long long term, but saying I want x in March, y in April, you know, z in June so that they could get into the production schedule. And we're working to ensure that all of our customers can get the products that they need, and not put ourselves in a position or our customers in a position where customers might be stockpiling equipment and coming at expense of others. So we're really trying to work collaboratively with all of our customers so that, we can really help ensure they get the products that they need. Okay. Thanks. And, you know, you mentioned kind of Ardof being in the planning stages. Obviously, awards have been made. You know, from your perspective, is is there any dynamic or potential dynamic around, you know, kind of spending or planning occurring now kind of, you know, in perhaps in advance of of actual receipt of funds? Or are a lot of these projects separate and distinct from what you might see in your kind of current or core community broadband customer base? Yeah. I mean, revenue to date has is very isolated. There's some pockets of of RDOF related business, but, principally, this isn't we do not see RDOF funds in our current revenues or in our backlog. The and what we see on the RDOF world is people now getting their plans together, putting out their engineering drawings, really going into markets where they hadn't been involved, you know, in before. So we believe we're gonna start to see that revenue in the very tail end of of quarter three and then in a more meaningful basis in quarter four. But, basically, that's a a calendar year 2022 opportunity starting. And, you know, what the the feds have have asked for and are hoping for is that we can see 40% of those funds that have been allocated to happen in the first three years. So I really think that shows significant opportunity for 2022 and '23 as well. Great. And and over on the, thanks for that. Over on the tier one side of the business, you know, we have seen some dynamics with, you know, various of the tier one carriers getting a pretty early and fast start to the year. Now understanding that your tier one customer base doesn't always match up with, you know, some of the kind of near term strength we've seen in, you know, at least high level spending numbers from guys like AT and T and Verizon. But maybe you can give us a little more color on the the the dynamics around your tier one business and and what meet what might be driving that to the extent it's not, you know, some of the c band stuff or or or fiber to the home deployments that Exactly. The larger carriers might be doing. Yeah. There's a of money, you being spent by the wireless carriers, especially as it relates to c band. That c band work I mean, they spent a fortune on Spectrum, and that C band work for deployment is principally gonna be based at the tower. It's not gonna be based at the small cell. So that's good for the incumbent provider that has those towers, and it's good for the the consumer because it means that they'll be able to get five g service on their cell phones faster. The it means that our opportunity for five g, which is gonna be small cell based, has been delayed, you know, into the year and potentially into next year. The the challenge you know, I think that it's not that doesn't mean that that revenue isn't going to be there. That means that true five g performance that we wanna see in regard to true low latency and and the high speed as well as is is still coming. But it has been the reason that we have seen, you know, a lack of the same kind of growth has not shown up in the tier one base because of it. Got it. Thanks very much. I'll pass it on, and congrats once again. You're welcome. Thank you. 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 clfdgatewayir dot com. I'd now like to turn the call back over to Ms. Baranek for closing comments. Thank you, Paul, and thank you all of you for joining us today. We look forward to updating you again soon on our progress. Happy spring, and talk to you soon. Thank you for joining us today for Clearfield's fiscal second quarter twenty twenty one earnings conference call. You may now disconnect.