Clearfield, Inc. (NASDAQ:CLFD) Q4 2022 Earnings Call Transcript

Clearfield, Inc. (NASDAQ:CLFD) Q4 2022 Earnings Call Transcript November 17, 2022

Clearfield, Inc. beats earnings expectations. Reported EPS is $1.22, expectations were $0.86.

Operator: Good afternoon and welcome to Clearfield’s Fiscal Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Nick, and I will be your operator for this afternoon. I will now pass the call over to Mr. Matt Glover from Gateway Group. Please go ahead.

Matt Glover: Thank you, operator and good afternoon. Joining us for today’s presentation are Clearfield’s President and CEO, Cheri Beranek, and CFO, Dan Herzog. Following their commentary, we will open the call for questions. I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company’s website. This call is also being webcasted and accompanied by a PowerPoint presentation called the Field Report, which is 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-Q filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q, provide description of those risks. As a reminder, the slides in this presentation are controlled by you, the listener.

Please advance forward through the presentation as the speaker presents their remarks. With that, I would like to turn the call over to Clearfield’s CEO, Cheri Beranek. Cheri?

Cheri Beranek: Thanks. Good afternoon, everyone and thank you joining us today. It is a pleasure to speak with you this afternoon to share Clearfield’s results for the fiscal fourth quarter and full year 2022 And to provide an update on current business conditions and market trends. Clearfield delivered another phenomenal quarter of financial results in the fourth quarter, continuing our trend of record setting financial performance. Total net sales for the fourth quarter were $95 million, which includes a $7 million contribution from Nestor Cables acquired on July 26, 2022. We also set a new record for annual results in full fiscal year 2022 with total net sales of $271 million. We are very proud of these results. It reflects the strong execution and tenacity of our team through a challenging macroeconomic environment and industry labor shortage.

The significant double-digit growth in organic Clearfield’s quarterly results was driven by a 91% year-over-year increase in community broadband revenue. Clearfield is a major player in delivering high-speed broadband to underserved and unserved communities across the United States. After successfully completing our Now of Age strategic plan in fiscal year 2022. We recently launched its successor, our new Leap Plan to step up our ability to expand capacity and to rapidly scale our business. The rising demand for our scalable craft friendly high-speed broadband solutions is evident when looking at the backlog for organic Clearfield, which increased 142% at fiscal year-end to $160 million. Currently, approximately two thirds of our backlog is expected to ship within the first two quarters of the fiscal year.

With our focus on continuing strong execution broadband industry tailwinds that include robust federal subsidies, and our current visibility into our backlog and the pipeline behind it. We are guiding to estimated revenue of $380 million to $393 million, representing 40% to 45% growth over fiscal year 2022. For those of you who may be new to Clearfield and our industry, I’d like to provide a brief introduction of who we are what we do. Clearfield is a leader in the expanding cyber broadband industry. We provide cyber protection, cyber management and fiber delivery solutions that enable the rapid and cost-effective fiber fed deployment throughout the broadband service provider space. Our primary end market is community broadband, which is predominantly comprised of Tier 2 and Tier 3 incumbent local exchange carriers and an increasing number of municipalities, utilities co-ops and wireless carriers.

We also serve service providers in the Tier 1 national carrier market and multiple system cable TV operators or MSOs, as well as some international service providers in Canada, the Caribbean, Central and South America. Our goal and underlying value proposition is to enable the lifestyle that better broadband provides. The image on the right of Slide four is our patented Clearfield cassette, the foundation of our scalable and modular fiber management platform that is used to pass homes and businesses. Also shown here is FieldShield, the core to how we bring fiber into our neighborhoods in order to physically connect homes and businesses. Our entire product line including the Clearfield cassette and FieldShield technology, was thoughtfully designed friendly in the field, reducing both the amount of necessary skilled labor needed for installation and the level of skill required to install.

This enables our customers to complete their deployments faster and more efficiently, accelerating their time to revenue. Given that skill, cyber technician shortages continue to persist, our connectivity products are particularly advantageous as carriers look for ways to overcome deployment challenges. We are moving forward and on schedule to vertically integrate the supply of our fiber optic cables to meet future customer demand for FieldShield. Given the current supply chain challenges, our ability to ensure our supply of fiber optic cable is critically important so that our deliveries are maintained, and our customers can proceed with their planned deployment schedule. Another potential benefit of Nestor acquisition is evaluating the opportunity to introduce our cassette-based fiber management solutions and FieldShield technologies into the European market whose fiber deployment lags behind the U.S. We are exploring options in Finland to increase capacity, as we strongly believe Nestor will extend our market leadership and strengthen our position to service the growth in fiber deployment for every community.

With that, I’ll now turn the presentation over to Dan, who will walk us through our financial performance for the fiscal fourth quarter and full year 2022.

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Dan Herzog: Thank you, Cheri, and good afternoon, everyone. It’s a pleasure to be speaking with you today about our fiscal fourth quarter and full year 2022 results. Looking at our fiscal fourth quarter and full year 2022 results in more detail. Consolidated net sales in the fourth quarter of fiscal 2022 were record $95 million, a 110% increase from $45 million in the same year ago period, and up 33% from $71 million in our third quarter of 2022. This figure includes $88 million from organic Clearfield and a $7 million contribution from the two-month period that we own Nestor Cables, which we acquired on July 26. The increase in net sales was due to higher demand across our core end markets, particularly in our community broadband, multiple system operator and national carrier markets, consistent with our past quarters of fiscal 2022.

Strong momentum and sales bookings continued into the fourth quarter of fiscal 2022 resulting in a 148% year-over-year increase in our sales order backlog. Order backlog grew to a record $165 million on September 30, 2022, up from $157 million on June 30, 2022 and up from $66 million on September 30, 2021. As we’ve previously discussed, we expect the expanded capacity at our Mexico and U.S.-based facilities will enable us to capitalize on the significant revenue opportunities we expect for the quarters ahead. I’ll now review net sales by our key markets. Sales to our primary market community broadband comprised 61% of our net sales in the fourth quarter of fiscal 2022 consistent with prior quarters in fiscal 2022. In Q4, we generated net sales of approximately $58 million in community broadband up 91% from the same period last year.

In addition for the trailing 12 months ended on September 30, 2022, our community broadband market net sales totaled approximately $181 million, which was up 84% from the comparable period last year. Our MSO business comprised 22% of our net sales in the fourth quarter of fiscal 2022. Momentum in the MSO market continues to be strong with net sales growing 204% year-over-year, and we’re up 164% for the trailing 12-month period. Net sales in our national carrier market for the fourth quarter of fiscal 2022 increased 69% year-over-year. On a trailing 12-month basis net sales in our national carrier market were up 96% from the comparable year ago period. The national carrier market seems to be staging their material to have product on hand before deployment in the spring, resulting in more product in the field than we have traditionally seen.

Net sales in our international market increased 166% year-over-year in the fourth quarter compared to the same period last year, and up 61% year-over-year on a trailing 12-month basis due to the acquisition of Nestor Cables. Consolidated net sales for fiscal 2022 increased 92% to a record $271 million from $141 million in fiscal 2021. Revenue for standalone Clearfield was $264 million, up 87% year-over-year. The increase in net sales was due to higher demand across our core end markets, most notably our community broadband, MSO, cable TV, national carrier and international markets. Gross profit in the fourth quarter of fiscal 2022 increased 90% to $37.5 million, or 39.5% of net sales from approximately $20 million or 43.6% of net sales in the same year ago quarter.

As expected, overhead costs associated with our new facilities in Minnesota and Mexico negatively impacted gross margins. Alongside real estate costs increased shipping costs and inflationary increases in some components negatively affected margins. Nestor Cables experienced one-time acquisition costs reducing gross profit by approximately 400,000 in the fiscal fourth quarter. Gross profit for fiscal 2022 increased 85% to $113 million, or 41.7% of net sales from $61 million or 43.5% of net sales in fiscal 2021. Operating expenses for the fourth quarter of fiscal 2022 were $15 million, which were up from approximately $10 million in the same year ago quarter. The increase in operating expenses consisted primarily of higher compensation costs due to increased personnel and higher performance-based compensation, increased travel expenses, as well as professional fees mainly associated with the acquisition of Nestor Cables, which were approximately $900,000.

Our higher personnel costs are consistent with the company’s strategic investment and sales, product management and engineering personnel to establish a firm organizational infrastructure to support the growing business. As a percentage of net sales, operating expenses for the fourth quarter of fiscal 2022 was 16.1%, down 6.8% from 22.9% in the same year ago period. Our current OpEx at less than 17% of sales continues to reflect strong operating leverage. Operating expenses for fiscal 2022 were $49 million, which were up from $36 million in fiscal 2021. As a percentage of net sales, operating expenses for fiscal 2022 was 18.1%, down from 25.5% in fiscal 2021. The increase in operating expenses consisted primarily of higher compensation costs due to increased personnel and higher performance-based compensation, increased travel expenses, as well as acquisition-related professional fees of approximately $1.6 million.

Net income in the fourth quarter of fiscal 2022 increased 129% to $17 million from approximately $7 million in the same year ago period, and up from approximately $13 million in the third quarter of fiscal 2022. Net income increased as a result of higher revenues. As a percentage of net sales, net income for the fourth quarter of fiscal 2022 was 17.9%, up from 16.4% in the same year ago period, and up from 17.9% in the third quarter of fiscal 2022. In terms of our balance sheet, we had $2.4 million in capital expenditures in the quarter to support increased capacity and new facility-built outs and our inventory balance increased from $69 million to $82 million in the fourth quarter due to the acquisition of Nestor. The company did utilize approximately $16.7 million of its line of credit in July 2022 to fund the Nestor acquisition.

Since that time Clearfield has not drawn on the line of credit, Net income for fiscal 2022 increased 143% to a record $49 million from $20 million in fiscal 2021. As a percentage of net sales, net income for fiscal 2022 was 18.2%, up from 14.4% in fiscal 2021. That concludes my prepared remarks for our fourth quarter of fiscal 2022. I will now turn the call back over to Cheri. Cheri?

Cheri Beranek: Thanks, Dan. As I mentioned in our opening remarks, we recently launched our new multi-year strategic plan Leap after successfully executing on our previous Now of Age plan. To us Leap means jumping higher, further and with greater force. The Leap plan is our roadmap to how we will scale as a company in order to seize the opportunity Clearfield was built to achieve. There are four tenants in our Leap plan, one for each letter. The L is to leverage our decade long excellence and community broadband. We are a leader in community broadband fiber connectivity and has been focused on serving this market since we were founded. We make decisions by listening to our clients and understanding their evolving needs. Building on our decade plus of proven success in this market.

We’ve demonstrated that we can nimbly adapt to a changing marketplace and grow with our customers as they grow. One building block of this tenant is our innovative Fast Path approach. Fast Path uses in cassette splicing to significantly reduced fiber distribution hub cabinet class and speed up installation time. This enables broadband providers to pass twice as many homes as a competition, while also reducing the time to turn up new dwellings by 50%. We were able to leverage our deep expertise in community broadband to develop a solution that is particularly well suited for this market were faster fiber deployments are a clear competitive advantage. The E is to execute capacity enhancement. This tenant is the successor to the Now of Age pillar augmenting capacity for ongoing growth.

For Clearfield, maintain its leadership position continue to gain market share from competitors and grow the business overall, our capacity must continue to expand to address the significant market demand for fiber broadband. There are several recent examples of how we have or plan to enhance our capacity. The acquisition of Nestor Cables brings us in-house cable manufacturing alongside our termination program, optimizing our time to market. Tripling our Mexican facility footprint and expanding capacity at our Minnesota facility, developing our supply chain partners allowing us to add additional flexibility into increased production as well. And then virtual programming such as our cabling centers, which allows us to scale without added overhead.

Furthermore, as I mentioned earlier, we will also look to expand Nestor’s capacity to support their growth in Finland and other European markets. The A in Leap is our plan to accelerate infrastructure investments. This tenant reflects our commitment to continue investing in our organizational infrastructure to support the growing business and effectively manage our expanded capacity. This includes adding personnel and sales, product management and engineering who can navigate Clearfield to achieve scalable growth. This may also include adding headcount at our facilities in the U.S., Mexico and Finland to ensure we can maintain our product deliveries to customers. The shortage of trained labor in the market continues to be a challenge for our industry.

Look for announcements as we expand Clearfield College, adding virtual online instructor led as well as infield training programs. Finally, the P in Leap stands for position innovation at the forefront of our value proposition. Accelerating our customers time to revenue by designing craft friendly products that require less skilled labor is the foundation of our value proposition. We intend to achieve this tenant by emphasizing innovation in our product designs and increasing the cadence of our product expansions with the goal of facilitating our customers fiber broadband deployments. A great example of an innovative new product is our FiberFirst Pedestal, which we announced in August 2022. The FiberFirst Pedestal is the first of its kind in the industry, built for the optimal deployment of fiber particularly in rural markets.

The Pedestal is deployable in any outdoor environment is cost effective and exceeds industry standards for strength reliability and environmental concerns. We expect to launch more fiber connectivity and fiber management solutions that offer our customers faster, more streamlined installations that are aligned with federal and state funding program requirements. To summarize, our fourth quarter and full year financial results demonstrate outstanding execution of our proven growth strategy. Demand for fiber fed broadband remains very strong. In addition to organic customer demand for high-speed broadband operators will begin to see additional disbursements of federal funds to support the development of broadband infrastructure. We continue to remain very optimistic about Clearfield’s growth potential.

With our new Leap plan, we will leverage our deep expertise and community broadband, continue to enhance our capacity and prioritize innovative product design to meet this robust customer demand and to capitalize on strong industry tailwind. Our backlog currently stands at an unprecedented $165 million, including 4 million for Nestor Cables, with roughly two-thirds of that total schedule for customer deployments in the next two quarters. We anticipate revenues to follow year-over-year seasonal patterns, resulting in expected strong year-over-year growth in the first half of fiscal year 2023. We will continue to build capacity and expect to reduce order backlog and as a result, the lead-time associated with our product line. While our pipeline and outlook remain strong, there continues to be uncertainty regarding the availability of labor necessary for our customers to build their networks that we expect will be most prevalent in the second half of fiscal year 2023.

We are guiding to estimated revenues of $380 million to $393 million, representing 40% to 45% growth over fiscal year 2022. Clearfield is a leader in community broadband fiber connectivity. And we were built for this generational opportunity that lies ahead of us. And with that we are ready to open the call to your questions.

Q&A Session

Operator: Thank you. . First question comes from Jaeson Schmidt, Lake Street. Please go ahead, sir.

Jaeson Schmidt: Hey, guys. Thanks for taking my questions. And congrats on some really impressive results and a fantastic outlook. Want to start Cheri with kind of your most recent comments there towards the end about some uncertainty in the second half of your fiscal year. Is this what your customers are already telling you or are already seeing? Are these concerns more due to just the general macro uncertainty out there?

Cheri Beranek: This is more general macro environment in that there’s the continuing commentary from everyone about, how are we going to put this all together? But not any specific individual organization.

Jaeson Schmidt: Okay. That’s helpful. And then the migration of the Nestor products to Mexico. You mentioned early calendar, next calendar year, when should we expect to see any potential gross margin benefit from some of these cost savings?

Cheri Beranek: Probably 12 months. Yes, it’s a not a short-term expectation there. We’ll start manufacturing, as I said in the first quarter, but that’s predominantly to enhance capacity. We will not be reducing the amount of product that we’re manufacturing in Finland. We’re actually going to be increasing that and using the Mexican plant for augmentation at this point in time. And then over the course of the next 12 months, we’ll be looking at when the crossover point comes where it’s more effective than to be building more in Mexico than Finland.

Jaeson Schmidt: Okay. Got it. And then just the last one for me, and I’ll jump back into queue. If I recall correctly in the past, I think you mentioned you thought about 5% or so of your revenue was a result of the government programs such as RDOF, when you look into fiscal 23, what do you think this percentage could potentially be?

Cheri Beranek: I actually don’t see 23 growing hugely. Certainly the funds and the RDOF funds are beginning to enter, our world and we’ll see more of that in 23. But the big stuff, the stuff associated with the Infrastructure Act that unfortunately is a long-involved process. Now in November is the whole orientation around the Infrastructure Act is that it’s going to be distributed through the states and distributed through the states based upon map, unserved and underserved communities. So those maps are being released now in November but released under the guidance that they will have six months by which to review and challenge them, meaning that we won’t see distribution of funding probably until next summer, which means we probably won’t see builds until late next year and into 24.

So, unfortunately, I don’t think the Infrastructure Act is going to be a big part of the bills for next year. But I do believe that what we’re seeing today interact organics investment, private equity investment, municipal investment, private public partnerships, all of those are underway and making very good progress.

Jaeson Schmidt: Okay. Appreciate the color. Thanks a lot, guys.

Cheri Beranek: You’re very welcome.

Operator: Thank you. Next question will be from Ryan Koontz with Needham & Company. Please go ahead.

Ryan Koontz: Good afternoon and congrats on a phenomenal quarter. Within the community broadband segment there, are you still acquiring a number of new customers in that segment? Or is it more same-store sales? Is it more customers are spending more on their fiber builds?

Cheri Beranek: Oh, it’s both. We’re definitely seeing our existing customer group starting to get into — some of them are still struggling a little bit to get into the groove and to establish a cadence, but many are beginning to expand the number of solutions that they’re able to meet the doors, are able to penetrate. And then we’re seeing a number of new companies both new startups that are kind of new to our industry in general, as well as new spaces that are new to Clearfield that have been in the market in the past but are now using our products for the first time.