Good afternoon, everyone, and welcome to the Clearfield Fiscal Fourth Quarter 2026 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. And to withdraw your question, please press star then two. Please also note that today's call is being recorded. At this time, I would like to turn the floor over to Mr. Gregory McNiff, Investor Relations. Sir, please go ahead.
Thank you. Joining me on today's call are Cheri Beranek, Clearfield's President and CEO, and Dan Herzog, Clearfield's CFO. As a reminder, Clearfield publishes a quarterly shareholder letter, which provides an overview of the company's financial results, operational highlights, and future outlook. You can find both the shareholder letter and the earnings release on Clearfield's Investor Relations website. After brief prepared remarks, we will open the floor for a question-and-answer session. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.
It is important to also note that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, shareholder letter, and on this conference call. The risk factor section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. With that, I will turn the call over to Cheri. Cheri?
Good afternoon, everyone, and thank you for joining us to discuss Clearfield's fourth quarter and full year fiscal 2026 results. I will begin by reviewing our progress over the past year and the strategic priorities shaping our next phase of growth before turning the call over to Dan to discuss our financial results and outlook. Fiscal 2026 represented a pivotal transition year for Clearfield. We continued serving our established broadband customers while bringing our fiber management expertise to the AI build-out. We remain focused on serving our established broadband customers while applying our fiber management expertise to broader opportunities within digital infrastructure, including the data center, edge computing, and other connectivity markets. Together, the progress made during the year and our current momentum gives us confidence in this strategy.
In addition, over the past three years, we have strengthened our financial position through disciplined balance sheet management, including strong cash generation and thoughtful capital allocation. Specifically, we generated approximately $41 million in cumulative free cash flow and returned $65 million to shareholders through share repurchases while maintaining a debt-free balance sheet. This financial strength has enabled us to invest in our business, expand our addressable markets, and position Clearfield for its next phase of growth. Looking ahead, we expect a gradual recovery in the broadband demand and view the data center market as a significant catalyst for future growth. In the broadband market, we continue to see demand for fiber infrastructure and are encouraged by signs of a gradual recovery.
Since our third quarter letter, the Broadband Equity, Access, and Deployment, or BEAD program, has continued to advance toward implementation, with several states recently announcing funding disbursements or the commencement of network deployments. Recently, we shared that East Central Energy, a Minnesota-based electrical cooperative, is expanding their fiber access service across rural Minnesota and northwestern Wisconsin. East Central Energy, a Clearfield customer, is the first broadband provider in Minnesota to secure an executed BEAD agreement. We believe this company is the first of many providers to move forward with their broadband deployments that were delayed as providers awaited greater clarity on funding and investment decisions. Progress on BEAD may also help unlocking financing for non-BEAD projects, supporting a broader recovery in broadband investment.
As BEAD projects advance and investment across the broader broadband market begins to recover, we anticipate a return to mid- to high-single-digit growth in this market in fiscal 2027. We are particularly pleased with our progress in the data center market. Following the approximate $22 million initial purchase order announced in July, we began shipping products during the fourth quarter at the customer's request to support its deployment. We continue to work closely with this customer to meet its delivery requirements and to support the next phases of its expansion. As described in our third quarter letter, our involvement began early in the design process when we worked with the customer to develop a solution tailored to its needs. That collaboration has continued through production and delivery, and we believe it provides a strong foundation for future work as the customer's projects advance.
Beyond this initial relationship, we are working with the engineering teams of several prospective customers to evaluate designs for future data center deployments. We are encouraged by the level of interest. It gives us the opportunity to apply our long experience in fiber management to a market where fiber density, limited space, and installation speed are becoming critical constraints. Listening to these customers and understanding their needs led to the recent introduction of our NOVA Velocity Panel, designed to simplify the installation and management of high fiber counts in limited space. We have long taken pride in developing products that simplify the deployment and management of fiber networks. That principle continues to shape how we bring new technologies to market and find additional ways to serve our customers.
While the timing and size of future projects remain uncertain, this early interest supports our belief that we will build a meaningful business in this market. Alongside our product and market expansion, we are focused on improving gross margin and strengthening our manufacturing operations. After absorbing higher costs for optical fiber and other materials over the past year, we are responding through improved sourcing, greater manufacturing efficiency, better overhead absorption, and selective pricing adjustments. We also see opportunities to bring more outsourced production in-house and make better use of our existing capacity, which could lower costs and improve delivery times. The initial ramp in data center production will carry additional costs, which may limit gross margin improvement in the first quarter of fiscal 2027. We anticipate sequential improvement beginning in the second quarter as production volumes increase, manufacturing efficiencies improve, and overhead absorption strengthens.
We currently expect fiscal 2027 annual revenue in the range of $195 million-$205 million, equating to a 30% year-over-year growth at the midpoint, supported by a gradual recovery in broadband demand and the ramp-up of our data center business. Because data center deployments are project-based and can result in lumpy revenue opportunities, the timing of customer orders and shipments may cause quarterly revenue to fluctuate and vary from our traditional seasonality. With that, I will turn the call over to Dan Herzog, who will review our fourth quarter and full-year results and provide our outlook for fiscal 2027.
Thank you, Cheri, and good afternoon, everyone. As a reminder, in November of 2025, we completed the sale of our Nestor Cables business. As a result, all financial results presented for fiscal year 2026 and all prior periods reflect the Clearfield segment as continuing operations only, with Nestor results reported under discontinued operations in our statement of earnings and statement of cash flows and reported as assets and liabilities held for sale in our balance sheet. I will now review our fourth quarter results, beginning with sales. Net sales from continuing operations in the fourth quarter of fiscal 2026 were $39.3 million, a 4% decrease from $41.1 million in the prior year fourth quarter. Net sales from continuing operations for fiscal 2026 were $151.9 million, a 1% increase from $150.1 million in fiscal 2025.
Performance for the quarter and full year reflected growth in the Large Regional market, partly offset by softness in the MSO market. Gross profit margin from continuing operations in the fourth quarter was 30.7%, compared with 34.6% in the prior year quarter and 31.8% in the third quarter. For fiscal 2026, gross profit margin from continuing operations was 32%, compared to 33.7% in fiscal 2025. Gross profit margin for the fourth quarter and full year was affected by higher material costs compared to prior periods, particularly in the latter part of the fiscal year. As noted in our third quarter shareholder letter, we initiated a gross margin recovery initiative focused on improving gross margin through a combination of pricing discipline, product mix optimization, sourcing improvements, and operational efficiencies. We expect these efforts to support margin improvement beginning in the second quarter of fiscal 2027.
Operating expenses from continuing operations for the fourth quarter of fiscal 2026 were relatively unchanged at $13.1 million-$13.3 million in the prior year quarter. As a percentage of net sales, operating expenses from continuing operations for the fourth quarter increased to 33.3% from 30.3% in the prior year fourth quarter. Operating expenses from continuing operations for fiscal 2026 were $50.9 million, up 5% from $48.4 million in fiscal year 2025. As a percentage of net sales, operating expenses increased to 33.5% from 32.3% in fiscal 2025. The increase was mainly due to higher personnel and IT costs. Net loss from continuing operations in the fourth quarter of fiscal 2026 was approximately $100,000, or break-even per diluted share, a decrease from net income of $1.8 million, or $0.13 per diluted share, in the prior year fourth quarter.
Net income from continuing operations for fiscal 2026 was $2.1 million, down from $6.3 million in fiscal 2025. Earnings per diluted share from continuing operations decreased to $0.16 in fiscal 2026 from $0.45 per diluted share in fiscal 2025, reflecting higher material costs and increased operating expenses. For the first quarter of fiscal 2027, we expect net sales in the range of $48 million-$52 million, operating expenses as a percentage of net sales to remain consistent with the fourth quarter of fiscal 2026, and net income and loss per share in the range of a loss of $0.06 per share to income of $0.03 per share.
For fiscal 2027, we expect net sales to be in the range of $195 million-$205 million, operating expenses as a percentage of net sales to remain consistent with fiscal 2026, and net income per diluted share in the range of $0.25-$0.46. This guidance reflects an increase in operating expenses driven by investments in additional personnel related to our growth strategy and higher incentive-based compensation. Additionally, gross margin has been negatively affected due to the rising cost of optical fiber and the ongoing tariff impacts of Chinese fiber. The company's procurement organization has identified potential relationships that could free up sources of global optical fiber, which could improve this guidance as agreements are finalized and the materials are delivered to our North American manufacturing sites.
The net income and loss per share ranges are based on the number of shares outstanding at the end of the fourth quarter of fiscal 2026 and do not reflect potential share repurchases completed in fiscal 2027. Our guidance also reflects our current expectations regarding the potential supply chain constraints for optical fiber, cable, and connectors, as discussed in our previous fiscal 2026 quarterly letters to shareholders, as well as our current understanding of the impact of the evolving tariff situation. These factors could contribute to uncertainty in our business and in the macroeconomic environment. With that, we will open the call to your questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question for today will come from Ryan Koontz with Needham. Please go ahead.
Hi, this is Jeff Hobson on for Ryan Koontz. Thank you for the question. Maybe if you could just provide a little more info on the gross margin progression in Q1 and then throughout the year. Just maybe try to level set of what is specifically related to the ramp of the data center project versus the other headwinds that are seen just in part of the rest of the business. Thank you.
Jeff, thanks for your question. Are you talking fiscal year 2026?
2027 in Q1.
Moving forward.
Oh, moving forward. We see that being relatively consistent with where we finished. Certainly, an opportunity to potentially increase that, but as of right now, we are going to conservatively call that maybe a slight increase over where we finished this last or a little increase over where we finished at Q4, a little bit closer to where we were probably in Q2. Again, some of those margin improvement things that we signaled that we are doing, some of those things kind of began in the beginning of October here. Some of them are going to take a little while with notices to customers. Some of them are operational things that we have been implemented that we would see a little bit more material change to in the second quarter onward.
Mm-hmm. I guess I would add to that I think if you look at our last two quarters, you can really see the impact. It is about a 2% decline in quarter three and then an additional 2% decline in quarter four, while our revenues were pretty flat or level set during that period. You can really see the impact of increased costs on sheet metal, optical fiber, all the things that are happening right now due to the data center explosion. We as a company do not historically pass on those costs to our customers, and we were trying to take that same position over the last six months, but have found that that simply is not going to be possible.
As Dan said, one part of our margin recovery initiative is to be able to provide a revised price adjustment to our customers that went out the 1st of October. Most of our customers have 30, 60, and 90-day notice periods, so that is why Dan said you will see an impact of that more in second quarter than in first. In addition to that, I wanted to point out that a big part of our world is being able to get back to the capacity position, so that we can absorb our overhead. Our magic period kind of happens when we hit $200 million. If you look back into 2021 and 2022, when we got over $200 million, gross margin was really strong in the high 30%. We were able to bring down a significant amount of that revenue down into operating income.
That is really a factor of our increase in capacity, tripling our capacity in Mexico and doubling it in the U.S. at the time. So we are really built for that $200+ million position. Now, over the course of the last few years, employment costs in Mexico have significantly increased as you look at 15%, 20%, and 25% increases in labor rates, as well as increases in other inflationary costs. So that $200 million kind of magic point is inching upwards a little bit. But we are confident that we can get back to probably mid-30% once we get a little bit past the $200 million price point, or revenue point.
In addition to that, I wanted to address your question as related to data centers, in that as you can see in our revenue forecast for the year, single-digit percentage growth in the broadband market, but a significant $50 million-$60 million win in the data center market, really positioning our entry in a marketplace that was relatively new to us. As we are entering that marketplace, our costs are a little higher because our business has been built as a low-volume, high-mix manufacturing environment. And we are making investments now as we see this business go from just a first purchase order to now a $50 million-$60 million plan, that we are going to be able to make the investments in CapEx and other equipment to ensure that we have a well-run, high-volume, low-mix, high-velocity manufacturing environment.
That does not happen overnight, which is one of the reasons why you are not going to see some of the significant improvements in quarter one that you may be hoping for as an organization. But rest assured, we are absolutely building an organization that can get us back to those mid- to high -30% from a gross profit standpoint, or gross margin standpoint. And I think we have the programs in place by which to get there.
Perfect. That is very helpful. I guess related to that, you guided a little bit up on OpEx. I assume that is kind of related to these investments in the data center. Is that correct? Is there a little bit of a different sales motion or different incentives that you are doing from a selling standpoint?
Right. Yeah, I mean, our broadband programs have a very mature sales channel and a significant amount of people that have been brought on to broadband. That's a very, like I said, high-mix, low-volume, high-touch model in which an individual salesperson might carry a $5 million-$6 million quota. That's in comparison to our data center business, where we currently have a team of four going after $60 million. That's not sustainable. We believe that as we get the next proof of, as we bring to market, that this is not a single purchase order, but it is a longstanding building program that will achieve $50 million-$60 million for this year, that we should bring on additional investments to ensure that that growth strategy can continue.
We move that from being a relationship from one salesperson to one account, to really being a true key account program for some of these large accounts. We are moving from what I would call business development to a true key account sales program. That's some of the investments that you see coming in Q2 and Q3. Clearfield has always demonstrated, we've been very fiscally conservative and prudent and have not placed those investments into our sales organization until after we have validated that this business is real. I want our shareholders to recognize the prudency and the conservative nature of how we have run the business over the last few years to ensure that we were consistent with the strategies that we brought to market.
We said that we would be sure to protect and strengthen our core business in Community Broadband and in the broadband business in telco in general, in that we are absolutely confident that that business will regain its health. Today, the BEAD program, up until the now recent launch of BEAD, that business has been stymied by the inability to provide financing. We'll have some additional needs in regard to breakout before it can get some of the optical fiber that has been consumed by AT&T in the big data center spaces. We have been committed to ensuring that we have protected that business, maintained our investment in our sales staff, and ensured that we've had steady state revenue there to ensure that while we're building the data center business, while broadband comes back, that we're using our balance sheet effectively.
I guess I would kind of summarize to where we're at is, broadband is strong. Our position in broadband is growing for the national accounts where business is moving, but that business cannot grow until supply has been improved. That's why it's not the lack of demand, but it's that lack of supply that has our growth rate there in the mid to single high digits. We get a significant win at a Large Regional, and we could see that grow, which I think is very possible. You guys know me and Dan, we're pretty conservative in the way that we look at our guidance. With that, I would say in the data center space, I think we're pretty conservative there as well, even at $50 million, $60 million.
It is just amazing as to what is available to us and what the potential is for us to be able to uncover.
Perfect. That was very helpful. Thank you very much for the questions.
You are very welcome.
The next question will come from Scott Searle with Roth Capital. Please go ahead.
Good afternoon. Thanks for taking the questions. Cheri, wanted to wish you all the best in your retirement. Been a pleasure working with you over the last several years.
Oh, thank you so very much.
Hey, to follow up quickly on the data center front, I just wanted to clarify a couple of things. I think you said $50 million-$60 million. The quick back-of-the-napkin math for fiscal 2027, I think if you got mid-single-digit growth, would be more $40 million. I'm just wondering what the difference is there. In terms of the ramp-up, how you're seeing that over the next couple of quarters, when do you start to get to double-digit revenue? In terms of some of the customer engagements, are you actually within working on custom solutions for each individual customer? I'm just kind of wondering how that function, because it seems like there's a high level of engagement, but just understanding how that translates in terms of timeline and cost as it relates to those customers.
Right. Great, thanks. I apologize that I was talking bookings rather than revenue shipments in regard to what we're anticipating. So you caught me in those numbers. So we anticipate that our bookings will outstrip shipments just a little bit. So $160 million or so for the single-digit growth rates for broadband, and then the $40 million that you would see in the data center space, with some wiggle room back and forth. The engagement has been fantastic. Most of the revenue that we see in data center is related to cable assemblies that are relatively standard in regard to their termination, but their lengths are absolutely all over the map, and we can have thousands of different SKUs for any one build based upon the different custom lengths that are being ordered.
As it relates to our custom work, our custom work tends to be in the actual panel that is being provided, and the panel is going to be really what might come in at the DCI, or it might come in as it enters the white space. It's more of a meet-me point as to where the panel comes into play, and that's where the custom build is being provided. At this point, it is not a huge engineering drain for us in regard to the custom development. I would say we are spending more time listening than we are designing. That listening is what provides us really, I think, the potential for the future in that we're not looking to design one-offs case by case.
We are truly looking to design a platform that we can bring to a much broader group of customers that have broad applicability to all of the developments that are in play. It's no secret that the data center market has been beat up over the last six months. In the last week, some of the words that came back and the voting that came back in the data center world wasn't the most positive. I take that as being data centers and the need to manage all of this data that we are processing for the future of communication, that is not going to go away. What will change is that these mega data center hyperscale environments are going to stop being bullies to the communities in which they are engaging, but instead being the community partners that we all want them to be.
That's the culture and the people that we have seen in dealing with these organizations, and I think that's the area that we have gravitated toward. We're seeking the regional. Even though they're at the hyperscale level, many decisions are being made at the regional basis. So, we're mimicking many of the same lessons that we learned in Community Broadband, working with the construction teams, the engineers, the people in the field who are digging the trenches, who are dealing with meeting their timelines, and/or the inefficiency of meeting their timelines. That's why I'm just really confident that this company is at the right place and time for growth.
As you mentioned when you opened your comments, I am retiring in spring, and I think this is just the best time to be able to hand off the company to someone else, because it's really positioned for growth. This is a really pretty baby that we've grown, and someone who has perhaps a broader background in the data center market can take this to a bigger potential than I maybe.
Very helpful. If I could, just to follow up, your comments about BEAD are nice to start to see that thawing a little bit, maybe freeing up some additional financing opportunities. I'm wondering from a macro level, Starlink, given that many of your customers are tier two's, tier three's in less dense populated markets. What is the competitive response that you're seeing from them. Is it doubling down within the existing footprint to drive penetration? Are they looking for a competitive response? I'd just love to get some high-level thoughts on that front. Thanks.
Mm-hmm. Right. Yeah. I mean, we think Starlink is a phenomenal opportunity for an interim solution to be able to expand broadband access. We are very thankful for the investments that have been made by Musk and what he's doing with Starlink to be able to improve access to connectivity. At the same time, we also believe that rural connectivity and the means by which for these rural markets to be able to compete does not happen unless they have the same speeds that are available to other parts of the market. These consumers are going to demand having that access, which will allow our Community Broadband service providers and Large Regionals and national accounts by which to fulfill that.
I think we will see an increase in satellite take rates over the course of the next year or so, because right now, bluntly, AT&T has consumed all of the supply of U.S.-made cable in the U.S. alongside the data centers, and many of our customers have built their networks on U.S. cable, and they're going to wait until U.S. cable is available. That's why we're not anticipating this huge increase because BEAD is finally available. I'm sorry to disappoint our shareholders that now that BEAD's available, we're not going to see this hockey stick. That's frustrating for all of us, but it's the nature of how, over the course of the last five years since we started this, how much the market has changed. I think the opportunity to reach these millions of homes will come.
It will come over the next five years, because that's the length of the program. I don't see the satellites getting BEAD money beyond what they were already awarded, but I think the satellites will get take rates until fiber is built in these rural markets.
Great. Thanks so much. I'll get back in the queue.
Again, if you have a question, please press star then one. The next question will come from Tim Savageaux with Northland Capital Markets. Please go ahead.
Hey, good afternoon, and congrats on both the data center traction and your upcoming retirement, Cheri. It's been over 11 years.
Yeah.
I really enjoyed working with you.
Thank you.
I want to try and dig in a little bit more. Clearly, you are looking for traction here in data center beyond the $22 million order that it looks like was reflected in your backlog increase in Q4. Just in characterizing that, I think we may have discussed in the past, would you characterize this as increased penetration in different facilities within the same campus? Would all this be with the same initial customer, or do you contemplate the bookings target that you mentioned coming from additional customers? How would you characterize this relative to the total size of the opportunity that you are seeing, what you are talking about from a bookings perspective? Thanks.
Right. The initial order is for one building on a very significant campus. The opportunity for us to grow with this customer for additional buildings on this campus is right in front of us. We have a direct relationship with the end user and a very active working relationship in training the contractors that are building this platform. We believe not only do we have an opportunity to scale with this customer, but to use the validation that this customer provides, that Clearfield is a fiber management player for data centers and not a broadband player trying to enter the data center market. This validation that we really are a data center solution provider for this customer will play out for additional customers that we currently have in our pipeline.
The work that we have done over the course of the last year is moving from a small three-person business development group to now adding a sales development and key account group to be able to work more closely and deeper into this account to ensure we are really managing the account and not just selling into the contractor. To also leverage the business development organization that has proven to be so effective to go after customer number two, three, and four. It is a multi-pronged effect. I think that, as I mentioned earlier, our product development, while it is being driven by listening to these customers, it is not unique to one customer or one building. It will scale to multiple solutions across the space.
The NOVA cassette will eventually be brought into the broadband platform to allow our broadband service providers to sell data center solutions in their community environments. It's a very long-term platform development process, and really the reinvention of Clearfield 2.0, which is why I thought it was the right time for me to hand over the reins. 20 years ago, I had a vision that we could compete against the biggest companies in the world. We could become the number one provider in the network that we chose to do business in. That was the small community provider. We've proven over the last couple of years that we can move from the small provider to some of the larger networks in the country, Large Regionals and some of the national carriers.
I think we've built an environment, and I intend to hand over an organization with a nice backlog position for my predecessor to just grow on top of that and move forward with additional opportunity from there.
Great. Makes sense. As you think about the ramp throughout the year, I know you mentioned it can be lumpy, but fiscal Q1, you're normally seasonally weaker in broadband. Do you expect that trend to continue and the growth that you're talking about be driven by an initial data center ramp? How do you see that kind of—
Right. Yes, absolutely.
—going throughout the year?
Right. My apologies, I shouldn't have cut you off. We had said that this initial $20 million-$22 million order would be shipped over the first six months of the year, and we are thrilled that we are already shipping and believe we can get a significant part of that order actually in the hands of the customer before the end of the calendar year or the end of our first fiscal year. It's a big lump going out the door.
I think it's really, it's a wonderful validation that we can build to the customer's demand in advance, because they said, we'll take it as fast as you can deliver it, but no later than X. We're pleased to be having it shipping out the door, and I think that gives us credence to be able to go after our next order and to be able to build as they scale this campus. Also talking and relating to the recent election, this is a campus that has all permitting already approved, so we're not in a position of being concerned that there will be a delay on this particular campus. I think across the country, we're going to see some noise, and I think rightfully so.
I think we're in a position to There is more demand than there is supply right now for the permitted solutions. We anticipate the pipeline that we have in front of us to just grow rather than to be challenged.
Okay. Thanks very much.
You're welcome.
This concludes our question and answer session. I would like to turn the conference back over to Ms. Cheri Beranek for any closing remarks. Please go ahead.
Yeah. Thank you so very much. As several of our analysts have mentioned, I have announced my retirement, my planned retirement from Clearfield, which will, at this point, is scheduled for the end of March 2027. I'll remain in my current role until my successor is appointed, and I look forward to a very smooth transition as following the appointment of my successor, I will continue serving Clearfield as President and CEO Emeritus. Since co-founding Clearfield in 2008, I have had the unique privilege to help build a company alongside a very dedicated team. This organization and this team, we've grown up together. Many of us have worked together at not only this company, but companies before. And we've gone from being single to being married, to having children, to now raising our grandchildren, and have built this beautiful company along the way.
But I believe now is the right time to ensure Clearfield has the next generation of leadership to guide it through its next phase of growth. I am so very, very proud of what we have accomplished, and I am confident in the company's future and grateful to our new employees as they continue the task and their continued dedication. Thank you again to all of our employees, our customers, our partners, and our shareholders for your continued support, and we look forward to updating you on our progress next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.