Welcome to Needham's 20th Annual Growth Conference. I'm Ryan Koontz, covering the communications and networking sector here on the sell side. We have Clearfield with us today, who's a leading fiber connectivity provider, helping service providers reduce high costs associated with deploying, managing, protecting, and scaling their optical networks. We're joined by CEO Cheri Beranek and CFO Dan Herzog. Welcome, Cheri and Dan.
Thank you.
Nice to see you both. Let's just start maybe looking back. You just finished your fiscal 2025 in September. Last year, you saw the MSO sector and the large regionals really as bright spots there. Can you highlight what drove some of that success as far as your products and technology and sales relationships that drove some real strong performance across those two segments?
Well, thank you. Yes. Clearfield provides the equipment that broadband service providers need to be able to connect the homes and businesses across the country. And we grew our business originally in the community broadband space, the thousand small providers across the country. And that remains to be a very important core to Clearfield. But as fiber expands out into our neighborhoods across the country, we're seeing Clearfield's opportunity in the larger companies, companies like Lumen, companies like Brightspeed or Frontier. They have been overlooked. The big companies, Corning and CommScope, are really in the middle of the data center world and AI.
These are your competitors.
These are my competitors, and so as a result, there's companies who are being underserved, and our product line scales from the smallest to the largest networks in the country, and we have a very high-touch sales model so that we're using our field sales force that's deployed in the regions in which the fiber is actually being constructed, and so those large regionals, the MSOs, are coming to us and saying, "I need some extra help," and we're more than happy to be part of that business, and we see, especially the growth in the MSO business, probably one of the areas in which we have the longest runway in front of us because there's so little fiber that's actually deployed in the MSO space.
It's mostly coax still.
Exactly, and so that hybrid fiber coax world and the DOCSIS networks that they have been dependent upon for their entire generations. The regional MSO players are really being a lot like community broadband was in the last 15 years. They're pioneers in putting fiber in MSO spaces, and so companies like Midcontinent or Blue Ridge are looking at their networks, and they're being very proactive to not have to be defensive against other small regional telcos who might be going after their customer base, and so we're early days of the cable business. I think we're going to see a lot of strong growth at Clearfield in the cable business, and it's across our product portfolio. We have long been known as a cable box company, a cabinet company.
You see the first awareness of Clearfield as a company was back when Google started in Kansas City and chose our cabinets for the deployment of Google Fiber, and since then, we've grown from a cabinet company to a company that has half of our business in connecting homes and half of the business in passing.
Right. Excellent. And on the large regionals, can you kind of walk through what kind of dynamics are going on there? You're basically saying your competitors are kind of taking their eye off the ball a bit.
Yeah, I would say that's a really good way to put it. We've seen that over COVID. We certainly saw them take their eye off the ball, and we took advantage of that. The large regionals are ones in which they're sophisticated enough to be able to make the right decision based upon what is best for their networks. And when our competitors took their eye off the ball, we didn't just want their business because we had product available. We wanted their business because they knew that our product line was better. And so we've spent some time with a number of the large regionals doing field deployment studies, showing them how using their field engineering staffs, their construction teams, how they could pass twice as many homes per day using our product versus the solutions that they were used to previously.
And that's given us a really strong footprint into those companies. And you know, the large regionals, some of them are not an AT&T, but they're much more loyal to an organization than maybe an AT&T is. So we're really proud to be growing with those networks.
It sounds like your direct touch sales model has a lot of impact on the long-term customer relationships.
Absolutely. And during COVID, we didn't. I mean, we scaled to $250 million during COVID. We grew 50% in, was it 2021, and 90% in 2022 to $250 million. And so we kind of really demonstrated to the market that we could scale with the best of them and make a lot of money while we were doing it. Like a lot of other companies, like Lantronix before us for the 9:00 o'clock ., many companies had a situation in which we had a retrench a little bit after COVID. And now we're in an opportunity to go back and demonstrate that we're going to be able to build the business back from it. And why I bring that up is when we retrenched and reduced the amount of revenue, we didn't reduce the amount of people in the field.
It's really important to me to know that we keep that high-touch sales model. It's our differentiator. And you'll see moving forward that as we go into new markets and our new strategic directions, that there will be some SG&A investments. But we're going to use our balance sheet to be able to position us for the next stage of growth. And we'll maybe get into a little bit more of that today.
Great. And just maybe wrap up, we're wrapping up 2025. Community broadband maybe underperformed a little bit there. Can you maybe walk through some of the puts and takes on that business, looking in the rearview mirror a little bit?
Yeah. If you look at our numbers and go back to our fourth quarter report, you'll see that community broadband didn't grow at the rate as the rest of the marketplace, and it was, I would say, soft was the word that we used to it because our revenue was consistent year-over-year rather than showing any growth, which was really the first time in a growth period that you would see that. Community broadband has been most affected by the BEAD situation, and for those of you who aren't familiar with BEAD, BEAD is a $42 billion program that was put into place at the early stages of the Biden administration to fund broadband deployment across the country. It's been a highly political situation, and over the course of the last five years, we still don't have any money out into the marketplace.
Community broadband is expected to be a big recipient of that. As a result, as we wait for those awards, our community broadband customers have been taking a little bit more of a wait-and-see approach because if you get a BEAD award, you've got to match that with a 25% match. You've got to have the financing by which to respond. You have to have done the engineering work and the construction planning work. It has disproportionately affected our community broadband environment. It was soft fourth quarter. We said we anticipated it to be soft until BEAD has some finality to it. We're hopeful and we're encouraged on a lot of the BEAD stuff.
We're seeing a higher level of quoting for BEAD than we've ever had before, seeing our customers ask for BABA-compliant pricing so that they can be ready because we think it's so close. But we'll see. At this point, we don't have any BEAD dollars in our 2026 forecast. And as BEAD starts to come into reality, we'll relook at those numbers and talk to you.
So your philosophy is not to make assumptions on BEAD with your street guidance.
Right. Exactly.
Until there's any firm grasp of what our orders are because we're on what year four of it right now, and we can't project that until we really know that there's something firm out there.
Yeah. But would you estimate we start to see some business flowing later in 2026?
Yeah, we would estimate that, right, based on people getting quoting, based on some of the approvals that are out there. Some of those things still have some challenges behind the scenes that still have to do. But yes, just not material right now.
Yeah. Anything you point out as far as, I guess, political risk is always there, but anything from a logistics perspective that you're concerned on BEAD or timing?
Logistics?
Main logistics.
Well, I mean, I'd say there's a. I think Washington is a challenge. One of the things that came out right before Christmas was that the General Accountability Office was identifying the fact that they felt NTIA's involvement in BEAD and pulling it back was against the congressional. So it was an illegal act. We haven't heard anything since then. So what the accounting office does and what the next steps are is still undetermined. So they've been quiet for a couple of weeks. But at least we have a much more we know who to be working with now. In each of the 42 states, we've got enough definitions so that we know who's going to, at least at this point, receive the money. And we can work with them on the quotes.
The operators.
Right. Exactly. And so that's really exciting. It actually gives us an action plan, which before was just more fuzzy.
When you said the claw- policy, the kind of clawback, you're talking about the non-deployment fund clawback?
Right. Right.
Because of the $42 billion, only like 20.
About 20. Right.
2021 was allocated.
Right. And unfortunately, it didn't get the level. It still gets, I think, about 60% of the locations are going to get fiber, and about 70% of the spend is going to go toward fiber. So it's not the 100% that we wanted. We never felt we'd get 100%. We thought we'd get closer to 90%. But it's still a really big program, and it's going to do a lot for the country once it's actually deployed.
Definitely. Maybe Dan shift into gross margins. You saw some nice improvement from 2024 to fiscal 2025, exited the year in the mid-30s. What are the drivers here of gross margins in 2026? What are the puts and takes there we should think about?
Right. So we came off a year of 20% sales growth. So right there, some volume has improved our margins, I think, from 20%- 33% is what you just said. We were out of balance on some inventory the prior year, not uncommon coming out of that pandemic. And so we had much better utilization this past year that significantly improved our bottom line. So way better inventory utilization, way better volume on your production minutes and hours that you run through your line. So those were in a good normalized world. That's kind of where we are right now. So as volume continues to get better, and we don't see any reason why the inventory tailwinds that we have won't continue as well. I think we have about $12 million or so on our books as far as excess inventory reserves that are all available to be reclaimed.
Got it. And from a raw materials cost, any major concerns? I mean, fiber cable's kind of been out there as a concern. You feel like net-net, you can keep it in balance there?
We do our best. It's really hard to pass on a lot of that stuff to customers in a competitive environment. But we're a continuous cost reduction type of a place. And so we'll continue to improve our products and lower our costs. That's just in our DNA. So we do our best to manage that. So any increases come our way, we can neutralize those.
That's great. And as far as other programs, BEAD takes the headlines. Are there any other programs you'd point out that are important from the DC, like ACAM, etc., that may be turning on and getting some more momentum rolling?
Yeah. There are a number of federal programs and state programs that are funding broadband deployment across the country. Enhanced ACAM has been an important one. What we love about Enhanced ACAM is that these are going to experienced service providers that know what they're doing and can continue the builds that they had under the original ACAM program. There's still money coming through the RUS. And so the more sophisticated of the service providers, the more they have visibility into options for how to fund their networks. I think the challenge there has just been the volatility of some of that funding. And so when you can't plan for it is when, because it's not whether it's there or not, it's the FUD factor associated with the fear, uncertainty, and doubt.
In rural America, I think some of the challenges are that we, being a farmer's daughter, I remember what it was like and being my service provider, Nuvera was a small-town telco, right? I grew up in this space. Their world is when you control what you know, and when the world is uncontrollable, you retrench. So some of the socioeconomic situations that are going on right now, even if they aren't directly related to broadband, are preventing some of the broadband deployment in these markets. They're risk-averse, but it keeps the engine in front of us and keeps an opportunity for us to continue to leverage and build through it.
And to balance it, I think it's one of the things that we've done really well as a company is we don't have a single customer worth more than that's 10% of our business, with the exception of two distributors who service between them 600 or 700 small customers. So that means of being able to balance between one customer and the next has allowed us to be able to grow the organization with less risk associated with our plans.
That's great. Maybe talk about you mentioned earlier kind of the passings versus connected. What some of the drivers have been there, I think, is I assume some of the operators have been more focused on cash generation in this climate in the last couple of years. So really trying to focus on subscriber adds.
Right. Yeah. I mean, we sold thousands of cabinets during COVID, and so we've had an opportunity now to be able to go back with those customers to be able to connect the homes that they passed, and certainly turning on subscriber, connecting subscribers, turning on that subscriber revenue has been proof points for those organizations, and I've been pretty open that Frontier is a major customer of Clearfield, and you can see their deployment schedules when they talk about the homes that have been connected, the increase in their subscribers, and the opportunity by which to use that as a means by which to prove out the value of their network, so being able to connect those homes, being able to provide the product lines that connect those homes and extend what we call to become portfolio customers of Clearfield.
A portfolio customer is someone who buys both a product in the connected home as well as in the passed home, which means we maintain our relationship over a much longer period of time, so after they've passed those homes, we're still their vendor of choice. When they pass the home, they're using what's called a product called the Clearview Cassette, and the cassette is used in a variety of different enclosures to be able to pass the home and protect the fiber as it is going from the central office into the neighborhoods to, excuse me, to actually connect to the home. It's a different product portfolio associated with FieldShield. That's a more labor-intensive product. It uses more minutes on the floor from a Clearfield perspective, and it allows us to be able, as I said, to stay with that customer long-term.
And then when they go back to pass more homes, we can redo the cycle and grow with them as they add strength to their network. It's one of the things that you don't think about, but as an example of just how critical some of these small customers are, we started with a company called Paul Bunyan Telephone 15 years ago. Tiny little company in Bemidji, Minnesota, probably a place you've never heard of. The population of about 5,000 people. Between Paul Bunyan Telephone and Crosslake Communications, they probably right now pass most of northern Minnesota, so about half of the state.
So they've grown from a small network of passing a home and then connecting it to a bigger network, to a bigger network, to a bigger network, and overbuilding companies like AT&T and Comcast throughout northern Minnesota to be able to expand their footprint and become a very profitable organization. That's the kind of growth that you don't think about why community broadband is such an important part of our business. It's not that they all stay small companies. Some of them become pretty major forces.
I think the connected home, I imagine, gives you a longer revenue tail.
Absolutely. Right. And so it's not completely recurring revenue because once the home is connected, but it stays connected, but it does create a recurring standpoint that you have a customer that stays with you for a long period of time. And then because of the model of when we pass a home, when we place a cabinet, we're different from our competition in that our competition designed their cabinet lines to pass homes based upon Verizon's deployment here in New York 20 years ago and having what's called a fixed bulkhead approach so that the cabinet is fully placed as a, let's say, it's a 288-count cabinet. It's placed fully populated. In our market, because they're smaller footprints, we're going to place that cabinet, but we're only going to put in as many ports as they need.
Let's say that they need 98. They have 96 homes that they're going to connect. So we put in, maybe we put in 10 cassettes for 120 passings, so a little bit of room. But then we still have room in that cabinet to put another 12 more cassettes. That gives us, again, a means by which to continue doing business with that same provider and having a sticky provider. And that's something I probably don't speak enough about, is just how sticky our customers are and how much the relationship that we've built allows us to build upon it. And if I may, since I get so excited about this, our sticky customers are really part of the future of what we're looking to do. I don't talk perhaps enough about. If you know me, I'm a very. I try to be very authentic.
I try to be very transparent, and I don't hype what we're doing. It's like, this is what's ahead of us, but what you're going to see next week, actually, we're announcing a whole new product category.
Oh, great.
The product category is about being able to provide. It's a very high-density cassette. The cassette allows us to be able to be passing homes and businesses, especially new businesses associated with edge compute, to be able to put higher-density solutions both in the data center, but to be able to leverage what's happening in the AI world and the data center world. As they bring that compute power out of the data center and into the edge, where is the edge, right? The edge is my customers. It's New Ulm, Minnesota, and it's Paul Bunyan Communications in Bemidji, and it's in Missouri Telephone outside of St. Louis . Those customers are going to be who the hyperscalers need in order to move that power, that compute power to the edge. Our new product portfolio will allow those customers to do that.
Wow. Exciting. In general, there's been a lot of investment in AI data centers today and $100 billion- $200 billion this year. It's incredible.
Yeah. Amazing. Yeah.
And I think I agree. It's going to migrate to the edge. And you're saying that you have new products that are going to allow your customers to participate in that.
Exactly.
And that build ecosystem.
And as what we've learned over the 15 years of our business line is we can compete with the best of the business, but we have to compete in a marketplace in which we have a competitive advantage where we can be able to maintain that cost point. And so going after a hyperscaler and going after Meta and playing the game by the same rules as our competition puts us at a strategic disadvantage. But if we look at where AI is going and the need for all of that data processing at the edge in rural America where our customer footprint is at, our customer base gives AI the opportunity to become real. You take it to the transference of actually operating AI and being able for you and I to be able to see the impact of it. That's the excitement of where we're going.
But it's not in '26, right? But it's also not five years from now. I mean, the pace at which AI has changed our world, and we just wanted to make sure that we were ready. And so AI, I think, is an exciting element of what we're all about. Like I said, our product line, just like today, our product line, we have a small part of our business that is Tier 1. A small part of our business will be the hyperscalers. But a bigger part of our business will be about making compute power reality in the networks in which our customers are currently building.
Yeah. The AI builders are moving from these massively scaled data centers. As you move up to the edge, they need real estate, power, and fiber. There's not many places you'll find that.
Right, and I think it's a really exciting time to think about what role the growth of rural America and what the economic engine is in place for. I think it's one of the reasons why BEAD is actually going to be more than $20 billion. I mean, think if it's part of, I've tried to be optimistic. I'm not inside the NTIA, but if I want to be optimistic about where they're going, how do we take the AI compute power into leveraging the fiber that's being deployed in the first element? How do we use those unallocated funds to allow the fiber that was placed in the first element of BEAD to really leverage it for productivity and revenue?
There's been some proposals in DC to reallocate BEAD funds toward this AI.
Exactly. Right, and so I think we're in a unique position to take advantage of that. It's just so undefined now that I can't know exactly where it's going to head.
Yeah. Understood. There's been some changes in the industry, some consolidation. You saw a big competitor sell off their competitive products to Amphenol. Can we talk about what you saw in the past behavior from CommScope and how things are changing now and what you think will happen in the future there on the competitive playing field?
Right. When a business is not healthy, as CommScope wasn't.
Very good.
We all just know they weren't healthy in regard to a balance sheet that was not sustainable. You do actions that aren't reasonable, and they aren't designed for sustainability. And so there was a lot of pricing actions and inventory dumping and the like that happened during the point in time in which they were the most ill. So we're very pleased that CommScope is going to be in a healthy position and to be given an opportunity now to, again, grow their business in a healthy and dynamic manner. And what we've seen from them is a, let's go after where the biggest dollar they're a big engine. Let's go after the biggest dollars. And so they're going after the hyperscalers, and good luck to them competing against Corning in that space. It's kind of like what we did years ago in regard to the Tier 1 space.
I mean, they could beat it out and go after low margins at that world, and so I think we're in a better place today because of that acquisition, so I'm pleased it's happening. I think the consolidation of so much fiber management under the Amphenol brand leads to a level of confusion as to who's on first within that organization, and we're hoping to take advantage of that and grow our business because we're focused and people know who to call when they have a problem.
Yeah. It wouldn't seem that Amphenol is going to increase their focus down market in small players.
They can't pay back $10 billion or whatever the insane number was that they bought the organization for by looking at my marketplace. So yeah.
You guys had some changes last year also around the Nestor divestiture. Can you walk us through kind of what transpired there, kind of quick background of why you bought it, what you did with it, and why you spun it back out?
Sure. So Nestor is a supplier of Clearfield in the early days of Clearfield as we were first a company that was passing homes with our cabinet line. We didn't have our own optical cable solution, and we couldn't be competitive with a drop cable if we weren't producing our own fiber. And so we introduced a product called FieldShield. And FieldShield is a pushable fiber that allows you to be able to deploy fiber in environments that you normally couldn't. It's pushed through a microduct. And the microduct we provide has a different type of slip layer so that you can push that fiber into environments both inside and outside plant. Initially, when we brought that product to market, we were too small to produce it ourselves.
We found that because we were going to buy a couple million dollars worth of manufacturing equipment from a company out of Finland called Maillefer. Maillefer recommended us to Nestor. Nestor started building our product over the course of 10 years. When we got to the point where we could have enough volume that we should be doing it ourselves, we approached Nestor and said, "We want to buy you. We want to bring you part of Clearfield so that we could reduce the cost because we were bringing that fiber in from Finland." They were a phenomenal organization because they were engineers outside that came from Nokia when Nokia departed Finland for the production of fiber. They were world-class suppliers. We bought the organization. They were amazing working with us about bringing in their capabilities into our North American facilities.
First, we brought it into Mexico where we have a 300,000 sq ft plant. And then when the BABA requirements came into play, we doubled down, and we have four times the capacity in the U.S. that we have in Mexico. Got that accomplished and then looked at and said, "Okay, now what do I do with this asset?" And so we looked at the European marketplace. And unfortunately, the return on that asset, it was not the right time to enter Europe. And with an 800-mi border to Russia, it definitely wasn't the political environment by which to enter into that space either. So that organization had been losing money. And so we made the decision to divest Nestor from our organization. Strategically, it made sense because we have three pillars of growth. And Nestor wasn't part of that. The European marketplace wasn't part of that.
So we divested last quarter, took a write-down associated with it. We will, from continuing operations moving forward, no longer have that low commodity-based margin footprint as part of our ongoing operations. And it kind of unleashes us to be able to move forward onto a more strategic engine. We can produce everything that we need internally in our North American plants. And we still have access to Nestor as a supplier should we need so. So it's kind of a win-win situation. Moving forward, you'll see our numbers extracted. So from a comparative standpoint, you'll need to be able to look at continuing operations outside of the discontinuing operations. But it gives us a much better footprint of profitability and a much better opportunity to invest some of those dollars into the strategic plan, into the new pillars that we announced last year.
The pillars of growth for Clearfield are first, to protect our core, to protect who we are and what we've built over the last 15 years. Second, to be able to look into how do we expand on our existing customer base and give that existing customer base new opportunities, like I talked about with Edge Computing. And then to be able to look at adjacent markets and to be able to say, "What adjacent application scenarios in the wireless space, in the Internet of Things space that we can take our fiber expertise into?" And so we're much more actively investing R&D dollars into those new markets. You'll see one of the reasons why our SG&A spend will be up this year. But it does position us for that 2027, 2028, the five-year plan of the 2030 initiative.
As things become more stable, I think, in the socioeconomic space, we'll be able to give a longer range forecast rather than just the fiscal year '26 outlook that we currently have.
Great. And as you think about capital allocation, Dan, M&A, buybacks, any general comments there about philosophy going forward?
Yeah, so we clearly look at our internal growth and what we need to do to support our current market as part of our allocation. We've got a pretty strong share buyback program right now. I think we ended up with about 15% allocated, $28 million available at the end of the year towards that, and we have a good outlook now with shedding of the Nestor here to look at what would be good strategic and accretive opportunities. We need to be selective on that and make sure that they meet our market, our North American market, but we're in a better position now to evaluate that and to take that underneath our allocation concept.
Excellent. Super. We'll turn to audience questions. Any final remarks you want to make about what investors might be missing about the Clearfield story?
I think the important thing is to look at us as not a provider to small companies. You need to look at us as a provider to markets that are underserved by our competitors, and those markets can be very early in some of their developments. But then we'll expand to it as we take the concept of fiber and fiber management. Fiber is the engine upon which all data is going to be transmitted, and the expertise in fiber puts us in a position to be early and to have a lot of growth initiatives in front of us. One of the things that we haven't talked about for those of you who might be new to Clearfield is we have an extremely strong balance sheet in that we have no debt, about $160 million in cash.
We're looking to find the right way by which to use it.
Great. Any quick questions from the audience? We just have a couple of minutes left. Yes, sir.
When you talk about passings and connected homes, are you talking about selling the boxes to the customers that are actually doing the labor of the install and driving that growth that you talked about, some of the operators you work with? Or are you guys actually doing the labor, doing the installs themselves, adding the cassettes?
No. So we do.
Are they buying it and adding it?
Right. They're buying it and adding it, so we do not have a labor element. We're all products. There's no labor or service in our revenue mix. We do have a little bit of a love-hate relationship with the labor force because our job is to reduce the amount of labor required in an area to deploy, and so from a legacy standpoint, I sometimes got into trouble with a service provider or a contractor. I was having dinner with them. They'd be saying, "You're taking bread off my table," and I'm like, "The unions were not happy with me early on," but now there's a standpoint in which there just isn't sufficient labor by which to deploy, so there is enough business for everyone and then some. We just initiated a new program that I'm really proud of to try to be able to address that.
It's part of a tribal initiative to be able to get opportunities because there's so much money in that billion dollars that are going to some of the reservations and some of the areas in which are truly underserved. And so we've initiated a program where anyone from a tribal community can receive the free training under the FOA guidelines. And we supply all of that. And so our first initiative is going on right now in Minneapolis. And then we have two initiatives going on with other tribes across the country. It's an initiative that we actually put into play in partnership with Lumen. So we're trying to do things a little bit differently. It's under our Clearfield Cares program in that I don't have a big foundation, but I have a lot of people in the field that I can leverage.
And so those people are going to be the ones who are going to be training that group.
Yes, sir.
How will the divestiture of Nestor manifest itself in my gross margins? Will you see that in this next quarter?
So if you look at our continuing operations, they are removed from that. So you could look at our last year and see what it did in that with them. They were a 10% type of a gross profit margin type of a company. Clearfield finished up at like 33%. So we don't have that weight on there. So our numbers are all restated already for that. So as Ryan alluded to earlier, we finished out in the 33-ish type range last year. And we look to continue that as opposed to being something that would have been weighted more towards the low 20s because of their drag.
Yes, quick one, please.
I'm sorry if I missed it. The Corning fiber availability, any changes there?
Corning's a problem. Yeah. They're definitely allocating their fiber to AT&T and to the hyperscalers. And so the availability of ribbon fiber especially is part of the passing of the homes that is necessary. I would say that you're going to see Corning fiber being used for BABA in our markets. And you're going to see somebody else's fiber being used for everything else.
From overseas.
From overseas. Like 20 years ago, you wouldn't have seen that because the compatibility and the performance of overseas fiber just was not the same. But now with A2 fiber standards and the like, we're seeing a lot of our customers certify overseas solutions, solutions from Japan, Korea, India. And we have some of those. We have really strong relationships with those companies.
Super. Well, thank you both for joining. Thanks for coming today.
Yeah.
Appreciate it.
Thanks for having us.
Thank you.