Q1 2020 Earnings Call
Good afternoon, welcome to clear fields fiscal first quarter 2020 earnings Conference call. My name is Darryl and I will be your operator. This afternoon, joining us for today's presentation or the company's president and CEO , Jerry Beranek and CFO Dan Herzog.
Following their commentary we will open the call for questions.
I'd now like to remind everyone that this call will be recorded to made available for replay via a link in the Investor Relations section of the company's website.
This call is also being webcast it and accompanied by a Powerpoint presentation called the field to report, which is also available in the Investor Relations section of the company's website.
Good afternoon, and thank you everyone for joining us today.
Bookings for the first quarter of fiscal 2020 were consistent with our expectations for the period from a tough why perspective, we saw strong contributions from our national carrier and M.S., all markets, which were up 33% and 22% year over year respectfully. However, our overall.
Revenue results in the first quarter were impacted by the timing of received orders, resulting in a 1.6 million dollar increase in backlog.
We remain confident with respect to reaching or previously stated financial guidance for the fiscal year.
From an efficiency standpoint, we generated increased gross profit margin up to 39.9%, reflecting operating enhancements in multiple product categories. In fact, this quarter marked our best margin performance for any quarter out of the past seven works, especially proud of our margin expansion this quarter.
Serving more than 55% of our revenue was fulfilled through distribution, which typically has a lower margin profile, we had 310% customers this quarter, all of which where distributors.
Now before I dive deeper into our results and progress against our coming of age plan I like to spend a moment going over some of our recent operational and work in progress.
Looking at our market segments by revenue more closely starting with our core community broadband market.
In Q1, we generated revenue of $11.6 million, which was down 11% year over year.
On a trailing 12 month or TTM basis ended December 31st 2019 community broadband market revenue totaled $52.1 million down 3% from the comparable period.
Got it mix for the quarter was roughly consistent with last year with the exception of a decline in our active cabinet products, which also impacted our international revenue.
We are actively evaluating options to address these changing dynamics with the objective improved of improving our visibility and overall effectiveness of this product category.
Our national carrier business is our second largest market comprising 16% of total revenue in Q1, and 15% of our total revenue for the trailing 12 month period from a growth standpoint, we maintain the momentum weeks dalglish last year, realizing a 33% year over year increase integration.
Turning to 3.1 million in Q1, and a 32% year over year increased to $12.7 million for the trailing 12 month period.
Driving this growth is the continued demand for fiber to the home and fiber to the business applications. We believe the momentum in our national carrier market validates the strategic investments we've made over the last two years to capitalize on the tier one opportunity and also demonstrates the increasing traction we're achieving.
In addition to the positive results, we experienced in our national carrier market, we generated double digit growth in our M.S., so or cable TV market in Q1, we generated $2.3 million in revenue, which was up 22% year over year and generated $8.8 million for that.
Trailing 12 month period, which was up 11% year over year.
Revenue in our international market was down 27% year over year, but up 8% over the last 12 months.
I mentioned earlier, our international market was impacted by the softness in active cabinet sales.
Revenue in our legacy build to print business was down 3% in the first quarter, but up 11% over the trailing 12 month period. We expect we continue to expect this business to operate at approximately a 4 million dollar annual run rate for the foreseeable future.
With that I'll now turn the presentation over to our CFO , Dan Hertzog, who will walk us through our financial performance for the first quarter fiscal 2020 .
Thank you Sherry.
Now looking at our first quarter financial results in more detail.
Our revenue in the first quarter fiscal 2020 decreased 4% $19.4 million from $20.1 million in the same year ago period.
The decrease in revenue was primarily due to lower sales in our community broadband in international markets.
Gross profit for the first quarter. If this were 2020 totaled $7.7 million for 39.9% of total revenue compared to $7.9 million, 39.6% of total revenue in the first quarter fiscal 2019.
The decrease in gross profit dollars was due to the lower overall revenue, we generate even at the quarter.
The increase in gross profit margin was due to cost reduction efforts across the product lines, including expanded use of our Mexican manufacturing plant supply chain programs and initiatives to reduce the impact of tariffs for products sourced from China.
Our operating expenses for fiscal Q1 of 2020 were $7.3 million, which were up from $86.8 million in the same your goal quarter.
The increase in operating expenses was primarily due to an expansion of sales resources and the costs associated with product testing required for tier one certification.
Income from operations totaled $400000 in the first quarter fiscal 2020 compared to $1.2 million from the same year ago quarter.
Income tax expense was $123000 compared to $296000 in the first quarter of last year.
The resulting net income was $501000 or four cents per diluted share for the first quarter fiscal 2020.
Compares to net income of $1 million or eight cents per diluted share in the first quarter fiscal 2019.
During the first quarter or cash cash equivalents and investments decreased $700000 to $46.8 million from $47.5 million in the prior quarter ended September 30 2019.
This was the result of the payment of fiscal year 2019 bonuses during the quarter as well as an increase in inventory for new product introductions planned for later this quarter.
As I have mentioned on prior fuel reports, our board and management team will continue to evaluate how we deploy our capital to generate the highest returns for our shareholders, whether that's through share repurchases or continuing to invest in our business to further reduce our cost structure and or expand our marketing revenue opportunities.
That concludes my prepared remarks, I'll now turn the call back over to shared Sherry.
Thanks for the financial overview Dan.
As many of you know we're entering the second year over three year coming of age plan, which has helped us to strengthen our core business and position merrifield, where disruptive growth opportunities, especially around fiveg.
Oh, no spend a moment, providing a brief update on our three major initiatives within that plan.
As it relates to expanding our core community broadband business clear smoke has established a solid position in this market for more than two decade customers have relied on our technology to cost effectively deploy and manage their fiber infrastructure.
Your field has been helping these carriers reduce their short term and longer term expenses, while still supporting future bandwidth and network growth.
As utilities municipalities and cooperative enter into this market alongside the traditional tier three service provider, we expect our unique modular architecture to help us further grow our share.
In connection with our operational excellence plan, which I will touch on shortly we are moving toward a more distributors centric approach as I mentioned earlier more than 55% of our revenue in Q1 was through distributors, which was up from 45% in the year ago period.
We expect the mix of revenue between distributors and direct sales to vary quarter to quarter, but overtime sales through distributors will increase.
Operational effectiveness is a primary focus of our entire organization in fiscal 2020. Our success in this area is perhaps best demonstrated by the nearly 40% gross profit margin we realized in this first quarter and.
And despite the success, we are not resting on our laurels, we're continuing to judiciously invest in improving our manufacturing capabilities and just and supply chain to further increase their fields competitiveness as well as operational efficiencies.
In fact this month, we're signing a lease for a second manufacturing facility in Mexico, which is in the same industrial park as our current facility.
The second facility will double our square footage and allow us to establish lean manufacturing initiatives by dedicating one facility to connectivity and the other displacing operations associated with her and closures. We are moving quickly on this effort and expect to be shipping out of the new facility by the end of fiscal quarter too.
It's worth mentioning that the costs associated with the second facility are already included in our financial guidance for fiscal 2020.
The third initiative of our plan involves capitalizing on our fiveg opportunities within the wireline markets with national carriers, and all wireless markets. We continue to gain traction in these markets along that line as we look into fiscal Q2. We believe we are at the very early stage of realizing tier.
One revenue that is associated with Fiveg deployments and the handoff between wireline and wireless networks.
The sequel, if you will to the coming of age plan is what we call accelerating operating cadence as many of you know ingrained in Clearfield DNA is nimbleness, which has allowed us to listen and swiftly respond to our customers needs as well as to react quickly to changing market conditions.
Longer term, we believe playing to our core strength in speed will help create new opportunities for a company and is that the foundation of the accelerating operating cadence initiative.
Opening or second facility in Mexico is a Prime example of this initiative a ready in motion.
Our ability to securely and plan shipping a product out of the new facility in just two months demonstrates just how quickly and efficiently we operate.
We believe our agility and our decisiveness have allowed us and we'll continue to enable us to stay ahead of the competition.
And while being agile is important just as important isn't Torrance, we're confident that the strategy systems and processes. We haven't place will enable clear filled to maintain our competitiveness over the long haul.
We continue to believe fiscal 2020 will be a period of solid growth and profitability, especially in the second half of the year.
As I talked about on our prior feel report the main reason for this back loaded trajectory is that we're strategically investing in our business to support our continued success in the wireless and wireline market as a national carriers, both in the near and long term.
So to reiterate our financial guidance for fiscal 2020, we expect revenue to range between 92 million and $95 million representing growth of 10% at the midpoint.
Embedded in our guidance is that our revenue will build throughout the year similar to what we've seen historically.
Looking at some of our other financial metrics, we continue to anticipate gross margins to range between 37% to 38%.
Well, we're encouraged by the strong margin we realized in our first quarter, we remain cognizant of the potential for pricing pressure in the tier one market as we continue to drive growth in market share gains in this segment of our business.
Moving down the income statement, we continue to expect her operating expenses as a percentage of revenue to be between 31, and 33% of total revenue for the year, which is essentially flat compared to fiscal 2019.
As I talked about on our last call. We anticipate that are operating expenses will level off in the later half of fiscal 2020, enabling an acceleration in margin improvement to continue with mid to high single digit earnings to continue as we enter the accelerating operating cadence phase of our growth plan in fiscal 2021.
As it relates to our bottom line, we expect net income as a percentage of revenue to remain between three and 5% for the year underscoring our commitment to continue growing profitably and responsibly.
Net income percentage will be in the low single digits early in the first half of the year didn't rising to mid to high single digits near the yearend.
As we look ahead in fiscal 2020, we're well positioned for industry, leading solutions, a strong competitive position into proven business model to capitalize on a disruptive growth opportunities within the fiber optics industry.
And with that we're ready to open the call for your questions.
Thank you we will now be taking questions from the company's publishing sell side analysts if he would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question Q.
You May press Star too if you would like to remove your question from the Q.
For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith one moment, please while we poll for questions.
Our first set of questions come from the line of Tim Savageaux of Northland Capital markets. Please proceed with your question.
[noise] [noise] pardon hi, good afternoon.
A couple of question burst Warner focus on.
I guess the dynamics around the community brought them.
Market in the quarter mentioned, Doug or building backlog and maybe orders coming in later in the quarter.
Should we assume that no community broadband principally what's the kind of focus to that.
Ah dynamic or do you have other market verticals that were.
That's that's all that kind of late developing order flow as well.
Right. The you inside of the first quarter 2020 results inside of the press release, we do indicate that the increase in backlog is driven by community broadband.
And so the community broadband was down about one and a half million dollars for the quarter them, but the increase in backlog for the quarter.
Of 1.6 million I think over September Thirtyth was principally driven by community broadband. So it's directly relational the Evan I think that's important to note because in the history of please feel due to the seasonality of our business. The M. I don't believe we've ever seen a increase in backlog for the December 31st quarter.
Because of the seasonality what we do.
So this was really unusual and so we wanted to make a make that kind of front and center so that people understood that.
Bookings for the period, we're right on where we wanted them to be it just happened to be that they ended up getting late into the middle of December and with the lot of our equipment gets shipped to unmanned sites at the time between Christmas and new years, just wasn't as they time.
For us to be shipping that product.
But the business, it's still sound.
Area, and we continue to appreciates chunk share within the community broadband market.
Right and then as now kind of reiterate your annual guidance despite.
Lower than expected lease revenue not bookings.
Ward.
What kind of.
Given you that that visibility or corporate income era, you're obviously you have the backlog building community broadband.
But do you have you mentioned.
No pure.
Guiding for some initial revenue largely related product projects in Q2, but.
As it is a tier one that you're driving up visibility for the year or.
Right.
Sure.
Great I mean, I think the unless we go back to our operating pillars generally beside the I'm on the coming of age plan I mean, our first pillar was to support enhancement positioning community broadband and we feel that we've accomplished that.
Continuing to support that.
But then in regard to the third pillar, which is about being able to expand upon disruptive technologies and opportunities. We're really excited about I think three things and I tried to point them out on with a limited amount of time that we have within the materials. The first is that our fiber to the home Inns play, which is a business business inside of tier one.
<unk> is up 33% over last year and the it for the period. The 90 days and I also wanted to make sure that we called out the trailing 12 month period, because I really think its irresponsible for us to look that just an eight a. period, so at the momentum and the cadence that we have within the tier one favorite at the home, especially in a favorite the whole.
Market in the tier one space at a substantially down in 2019 versus 2018.
I think really shows the share that we're building.
Second is the opportunity within cable TV.
It's a small market for us, but it is a deliberate continual expansion and you know 22%. This last trailing 12 month period and no matter, where you look in cable TV, you'll see their capex spends are down across the board.
So being able to continue to take share although it's a small revenue dollar I think shows us to treat that as revenue dollar as that spend increases and we anticipate that well as fiveg in the wireless spend creates.
Competitive market share.
At a customer churn issues is that a cable TV well see cable TV start to spend this year and we're in we're well positioned to take advantage of that.
And then the third aspect of why we believe that we're comfortable with our forecast for next year is that you know beginning level of business in the Fiveg space.
We did not see fiveg revenue in quarter, one, but there is fiveg backlog.
In order to its small in that decided she business is still from a technology standpoint, there's more disruption then there is build beyond that we're very excited about being able to in a market whenever there's a market that is changing and they need new technologies, just fabulous opportunity for us to be able to replace.
Yes, the incumbent with new new ideas, and there's new things that need to be done inside g. for that handoffs between the wireline and wireless space and we've talked now for over a year that that's where we were attacking and we'll start to see beginning revenues for that in order to.
Okay got it and I'm like a follow up on <unk> capacity.
Andrew Thank you mentioned, you're doubling the size of your footprint in Mexico preparing us for the current square.
Oh I Wonder if you could.
Maybe speak to that.
Kind of going or maybe a dollar based or understanding you're making different products in different locations, but when you're ramped that up what will your where can you give us an estimate of what your overall, maybe quarterly revenue capacity will be.
[laughter] I think that's.
I mean, it's difficult because it's based upon product mix. The I think the if we look at I mean, we entered into the first facility in Mexico three years ago.
And I have a it had that first 50000 square feet a capacity that we put in place to that period of time.
We have not maxed out the capacity levels that first building at this point, but it's it's fabulous time right now for us to add a second facility because were because of the some of the Chinese tariffs and some of the class structures associated there we've been really aggressive moving additional solutions to that into that manufacturing footprint.
And so being able to dedicate a a facility to connectivity in the termination is favor in a second facility to splicing for those enclosures, which is just a forklift.
Apart from each other really will allow us to optimize cost structures be able to put in lean initiatives be able to deal with its statistical process control for cost reductions so that enhancement as an additional 50000 square feet Ism is about as much about cost reductions as it isn't capacity.
We continue to do not believe that we should be doing anything on a clear so footprint that isn't really that we can't do better than someone else. So we still have some virtual manufacturing partners behind that but we've got a word but I think we've got two years left in our lease here in Brazil.
On Clark and a and then we will be resigning or at least in Brooklyn in Mexico for the original facility for another three to three and a half years into that second facility will be coterminous. So we think we're in a good place right now for our growth initiatives for the next two to three years.
Right and if I could just follow up on that with one more question at all how if at all and.
Can you hear me.
Yeah, I'll good debt Oh, okay for.
Well, it's kind of approaching that another way and I know you've been or think shifting capacity to deal with the or.
The China her issues, but.
I'll be your current revenue base and I Wonder can give us an estimate of what a portion of that is sourced under your Mexico facility at present or yeah, Oh, well this whole predominate occur.
Yeah. This fiscal years. The first time that we started in manufacturing more out of Mexico than in Brooklyn bark I'm. So we're at about a 60 40 split right now.
The and so our ability then to to enhancing our double in that space in Mexico with just even a first shift will allow us to probably double our revenue without a major capex expansion.
We have right now.
150 people in Mexico.
And is important for us to continue to just to grab that additional building because we've invested a lot and training you know we don't believe in.
Yeah employees that come in and out we have the same level investment in training and quality and the ability to ensure our product line is it is better than anything else. It's in the marketplace. So we continue to invest in that so from a from a modeling standpoint, I think we're at that point where that.
37% to 38%.
Gross profit for this year is is it good point for us for that 10% growth that were identifying but that's where we're going to be able to see some of the improved gross profit margins intersect to fiscal year 21, as we expand the capacity in that space to take advantage of it.
Got it thanks.
But they stuck to see you soon.
Our next set of questions come from the line of Jason Smith of Lake Street. Please proceed with your questions.
Hi, guys. Thanks for taking my questions I just wanted to start with the are up a new that got pushed out at December curious if you could quantify how much got pushed out.
And then related Lee if you expect to recognize that Oh here in the March quarter.
Yeah, I was about one and a half million dollars, the and Ah I think we will.
See most of that recognized in quarter two.
One of the challenges we have in regard to specifically identifying revenue in each quarter.
Does that mean January is the month in which I always say where did they go because you've got all this activity in quoting and we we do still much business in a in a short lead time in short guaranteed time.
And that its really like when will the budgets get approved and somebody other challenges that you see in something larger customers.
So from a model standpoint, we're still committed to the 90 to 95.
I think we'll we'll see a little increased over some of the analysts expectations for Q2 than what were originally forecast.
But I don't know if the full million they half will show up as an increase.
Maybe a millionaire for your two and then the other half million in quarter three.
Okay. That's helpful.
And I know you guys are planning to her targeting to increase the amount of revenue coming from just sure viewership no longer term what sort of split do you think would be fair for you guys a target.
[noise], that's really dependent upon on customer choice.
As we continue to expand into the tier one markets.
One other things that we're finding in the RF Q process is that we bed direct.
To the a two to the tier one service provider and then if they should choose to go through distribution. They take price point that we did we bid into the our Q as our selling price and then negotiate with a distributor for their services. The so it's a little bit clouded for us a little bit hoped.
Because we don't really know where the with the tier one vendors who want to do I think as our tier one revenues increased its probably likely that are a distribution revenues will increase as well because the distributors have that functionality you know this some of the packaging and stage any.
And then for the national providers that we haven't seen in community broadband.
I think we're going to see some fluctuation I don't think it's going to be 55, and then growing every quarter I think we'll see some 55 that maybe go down the maybe go back up again, you probably by the ended the year, you'll probably see a 55% to 60% the probably not much more than that at least initially term.
Okay and the last one for me and I'll jump back in the Q.
No it sounded like keeping it.
Gross margin outlook to bake in the potential for pricing pressure, but just curious if you could comment on what you're seeing from a pricing standpoint today.
[laughter] the I think we're competitive in this space.
But in addition to the okay. The tier one world and we can't so our goal is not to go into the tier one world and win business on price that's not a sustainable competitive advantage for us so we need to be in the market space, we need to be competitive, but we're not looking to undercut.
The incumbents by a significant margin in order to win business.
We're going after that space with new technology, and then in in markets that are changing requiring new solutions. So it's not an apples to apples comparison.
However, I think theres always a standpoint as we move forward that producing those first solutions like as I talked about in quarter. Two as we start to now actually start shipping Fiveg technologies. The M that those first products will be at a lower margin and until we get to age I run rate or a cadence level for some of those.
Products, so dips in the front end with some.
Opportunities for expansion you know afterwards.
Another thing that we we haven't talked I'm very much about but if it is a price pressure that we're dealing with is that me can you community broadband is growing and it's also growing but it's growing with new companies municipalities utilities, and we have some poem bottom feeders I'm coming in to that or.
Coming in at or some really amazingly low price points, the m. without certifications without the technologies around them, then I'm just trying to kind of explore fit into it. So we've got that baked into some of it's where expectations for this year as well.
I think I've got a world class sales organization, who knows how to sell against that and to sell our features but there could be some yeah quarterly lumpiness until we get that works through.
Okay. Thanks, a lot.
All right.
Our next set of questions come from the line of William Gibson of Roth Capital Partners. Please proceed with your question.
Thank you.
What are your capital expenditure plans for the year.
Yeah, I want to pass that to dancing.
Yeah, Bill last year was a little bit higher we did about 2.4, but we had a lot of expansion going on in our.
Current Mexico facility.
This year.
We since we incurred significant chunk of that in last year, it's going to somewhere between 1.5 and too.
Okay.
India, Mexico, a part of the first quarter I'm speaking at the second facility.
No no yeah. So we'll we'll start shipping out of the second facility.
In March will start incurring costs in February .
Okay.
Thank you and lastly, the rural opportunity digital opportunity fund.
<unk>.
Yeah.
No. It's just confusing [laughter], so we call it Rudolph and it's gonna be good for everybody.
Like some of this stuff that's heading out because there is you part of the changes our do require increase speeds or to basically of what's the where they're looking for giving some advantages to the conditioning or a the it but if it.
Good comes in at a higher speed the m., they actually provide some balance to that so that they're not on equal footing to lower ones. It's good for as long term. It's good for fiber long term the fiber broadband Association has done some really good work I mean, there legislation in their lobbying in that world, but I think it's actually slow it down.
Some of the community broadband rather than increasing it. This year I think next year's build cycle will start to see a little bit of increase but they really impacts for that is 2021.
Thank you.
You're welcome.
Our next set of questions come from the line of Tim Savageaux from Northland Capital markets. Please proceed with your question.
Yeah, I wanted to follow up actually and kind of touched on it a little bit which is kind of overall.
Growth expectations for community broadband.
Marker.
Seems like a marker could be a double digit grower, but.
She started off fairly slow there can you know.
On a bookings basis kind of flattish.
And I Wonder if you can give us an estimate of what you think or you're you're kind of core market what rate, it's growing up and then what you might be no giving up.
Remember marketshare standpoint relative to some of these lower than competitors you mentioned.
Right.
I mean, we think it's growing at about somewhere between eight and 11%.
Basis.
You kind of averaging in that 9% area. The m.. We've made a conscious decision that individuals who are going to buy solely on price or not our target customer in that it's just there's sometimes you have to say noted business the and we've done that in the past too much usually happens as they come back.
The first time, they buy a $200 splitter you know they think they saved a fortune and then the first winter when it goes out they come back and you rip it Allison and start over.
So the we look to grow community broadband about 9% them, we're going to work hard to be able to continue to make that happen.
But it'll be interesting to to play out where the build cycle starts and yes. The challenges associated with you know with when you when you work into a municipality.
And they're going to send it out for our Q B M. They don't have some of the fiber sophistication in regard to network planning an engineering a that they probably need to make good choices. So there'd be a short term market share.
Risks that we will take based upon our decision to to to be competitive, but not to go to the low end, but I think.
When you putting fiber in the ground for the next 40 or 50 years, it's important to do it right.
[noise], thanks very much.
You're welcome.
Thank you. This does conclude our question and answer session. If your question. It was not taken you may contact clear feels investor relations team at C.L. Ft had gateway IR Dotcom the company will post the most relevant questions and answers and the foreign investors section of clear fields Web site.
Now I'd like to turn the call back the C O Sherry beranek for her closing remarks.
Thank you so much for joining us today Im pleased look to our website and our proxy materials for annual meeting, which will be held at the last week in February and we look forward to updating you again on our progress soon.
Please note that during the course of this call management made forward looking statements regarding future events in 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 on the forward looking statement. It's important to note also that the company undertakes.
Occasion to update such statements, except as required by law.