Q1 2021 Clearfield Inc Earnings Call
Good afternoon, welcome to clear views fiscal first quarter 2021 earnings Conference call. My name is <unk> and I will be your operator this afternoon joining.
Joining us for today's presentation are the company's president and CEO, Cheri, Beranek and CFO, Dan Herzog following their commentary we will open the call for questions I would now like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website.
The call is also being webcast is accompanied by a Powerpoint presentation called the field report, which is also available in the Investor Relations section of the company's website.
Please note that during this call management will be making forward looking statements regarding future events and the future financial performance of the company.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. It's important to note also that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the.
Forward looking statements contained in today's press release She'll report and in this conference call.
The risk factors section in Clearfield, most recent form 10-K filing with the Securities and Exchange Commission and our subsequent filings on form 10-Q provide a description of those risks as a reminder, the size in this presentation of our control you the listener.
So you did transport through <unk> presentation at the speakers presenting remarks.
I would like to turn the call over to Clearfield CEO Cheri Beranek. Please proceed.
Good afternoon, and thank you everyone for joining us today.
Hope you are all continuing to stay safe and healthy it's a pleasure to speak with you. This afternoon to share Clearfield to results for the fiscal first quarter of 2021.
The first quarter of fiscal 2021 was an exceptionally strong start to our new fiscal year as you can see other side for the $27 $1 million. We generated in revenue was a 40% increase over last year and marks the highest revenue level for any fiscal first quarter and Clearfield history our.
Growth in the period was again led by double digit increases from our community broadband and multiple system. Operator also known as MSL, our cable television markets, which were up 71% and 30% respectfully our extended and ongoing strong top line performance over the last several.
Orders has enabled us to exceed the $100 million revenue level on a trailing 12 month basis for the first time.
The searching demand and need for high speed Internet access accelerated by COVID-19, it's prevalent across the country, especially in the community broadband market in which clearfield commands strong market leadership.
Our track record and reputation in the community broadband market has positioned us extremely well to take share and further capitalize on the expansion that is currently underway and our base of independent telephone providers is joined by utilities and municipalities and delivering high speed right.
Bands to consumers and businesses.
But we feel this help aid these emerging providers meet the growing demand by providing our traditional products as well as helping them deploy innovative solutions like our home deployment kits, which extend our field proven fiber management expertise and leading edge fiber connectivity performance all the way in.
She was at home.
As evidence of the success of this initiative during this past quarter, we secured a near a million dollar order for home deployment kits and then electric co ops within our community broadband market.
We recognized a portion of this win as revenue in Q1 and the balance is reflected in our $8 9 million backlog at quarter end.
The robust industry trends, we have experienced since last year has continued now into fiscal 2021 supported by sustained demand for broadband coupled with government programs such as the coronavirus aid relief and economic Security Act also known as the cares act that are helping too.
To accelerate these deployments.
Well the expansion currently underway is due in part to some pull forward Bell's that worked from home consumers are demanding.
Nonetheless may accelerate due to the launch other rural digital opportunity fund or art off program.
Our task will finance up to $24 billion, a gigabit speed broadband over the next 10 years to homes and businesses that were previously not be economically viable.
It is worth mentioning that the $19 $8 million of revenue we generated in our community broadband market for Q1 includes dollars associated with the cares Act, but does not reflect any contribution from the recent awards related to Argos.
In terms of our MSL market much of our work in this area is an extension of what we are doing in community broadband.
Tier two msos carriers or the regional players are expanding their deployments of fiber community by community. We are working to penetrate the national MSL market and are proud of our recent approval of our new 288 pre assigned F. D. H PON cabinet by one such carrier.
Our top line performance in fiscal Q1 also helped to drive solid gross profit dollars, which totaled $11 4 million and the smoke free.
As a percentage of revenue or 42% margin was up from the 41, 2% we reported in the prior quarter in March the highest gross profit margin, we have achieved as a company and more than two years.
As it relates to our gross margin profitability in Q1, we had a favorable revenue mix in the quarter associated with the increased revenue in community broadband markets in.
In addition, meaningful efficiency gains that were realized from our operations in Mexico.
Moving down the income statement expenses increased slightly from last year's first quarter, resulting in three point million $3 $2 million and net income or <unk> 23 cents per diluted share.
This was a significant improvement from the $500 million excuse me the.
Point $5 million or force.
<unk> per diluted share in earnings we generated in Q1 of last year.
We anticipate expenses to increase slightly in future quarters, as we invest in additional resources within our community broadband programs.
In addition to our encouraging financial performance. We also made meaningful strides advancing our product portfolio. This included achieving <unk> certification for our aerial strand Mount F D H as well as receiving approval by the national carrier of the aerial F D. H for use in its networks.
Due to the Covid crisis, gripping, our country and market the launch of our new technologies into the tier one market faces headwinds associated with product introduction and training.
As five day deployment into the access network increase we foresee increasing revenue among the tier one market moving forward.
Looking at our market segments by revenue on slide five starting first with our core community broadband market.
As I mentioned previously in the first quarter, we generated revenue of $19 $8 million, which was up 71% from the same period last year.
For the trailing 12 months ended December 31, 2020 community broadband market revenue totaled $67 $2 million, which was up 29% from the comparable period last year.
Our MSL business comprised 11% of our total revenue in fiscal Q1 from a growth standpoint, we've built on the momentum we established over the last several quarters, realizing a 30% year over year increase in revenue to $3 million in the first quarter of fiscal 2021, and a 40.
9% increase year over year to $13 $1 million for the trailing 12 months ended December 31 2020.
Revenue in our national carrier market was up 8% year over year to $13 7 million for the trailing 12 months ended December 31 2020.
As I've talked about on past sales reports, our position and the national carrier market is related to the continuing demand for fiber to the home and fiber to the business applications.
As Covid constraints have limited the deployment of <unk> solutions into the access part of the network revenue for the first quarter of fiscal 2021 slipped to 12% year over year to $2 7 million.
Revenue in our international market was down 8% year over year in the first quarter and down 34% year over year for the trailing 12 months ended December 31 2020.
Weakness continued in the Caribbean and Mexican markets. However, revenue in the Canadian markets saw an exceptionally strong rebound we are optimistic of seeing increasing revenue in international markets moving forward.
Revenue in our legacy markets.
It was down 58% year over year in Q1 and down 39% year over year for the trailing 12 months ended December 31 2020.
This legacy part of our business is highly dependent upon the industrial drivers of two customers. In this segment, we believe the business to be fluctuating from normal levels due to the slowdown in the economy related to Covid.
With that I'll now turn the presentation over to Dan who will walk us through our financial performance for the first quarter of fiscal 2021.
Thank you Sherry and good afternoon, everyone. It's great to be speaking with you today.
Looking at our first quarter financial results in more detail.
As you can see on slide seven.
Our revenue in the first quarter of fiscal 2021 increased 40% to $27 $1 million from $19 $4 million in the same year ago period.
The increase in revenues was primarily due to higher sales in our community broadband and MSL markets, partially offset by decreases in our legacy and national carrier markets.
Turning to slide eight gross profit for the first quarter of fiscal 2021 totaled a record 11 $4 million or 42% of total revenue.
This was an improvement from $7 $7 million or 39, 9% of total revenue over the first quarter last year.
The increase in gross profit dollars was due to higher sales volume.
As Sheri mentioned the increase in gross margin was due to favorable product mix associated with increased revenues into community broadband and cost reduction efforts across our product lines, including increased production at our Mexico manufacturing plants and efficiencies realized from supply chain programs.
As you can see on slide nine.
Our operating expenses for the first quarter of fiscal 2021, or $7 $7 million, which were up slightly from $7 $3 million at the same year ago quarter.
As a percentage of total revenue operating expenses for the first quarter of fiscal 2021, or 28, 3% compared to 37, 8% in the same year ago period.
The increase in operating expenses on a dollar basis was primarily due to higher wages and compensation costs related to performance compensation.
Turning to our profitability measures on slide 10.
Income from operations was $3 $7 million in the first quarter of fiscal 2021, which compares to $401000 in the same year ago quarter.
Income tax expense increased $684000 in the first quarter of fiscal 2021 up from $123000 from the first quarter of 2020.
Net income totaled $3 $2 million or 23 cents per diluted share an improvement from $501000 or four cents per diluted share in the same year ago quarter.
Before I turn it back over to Sherry I'd like to provide a brief update on the operational measures, we've taken to protect and support our business our personnel and customers since the COVID-19 pandemic took hold and how we are continuing to effectively navigate the current environment both reflected on slide 11.
I am encouraged to report that Clearfield remains fully operational despite the unprecedented business closures and slowdown caused by the global health crisis.
Our non production employees are working remotely using collaboration tools and video conferencing to stay connected.
Our production operations in both the U S and Mexico are operating close to normal while adhering to state and federal government social distancing guidelines.
As a precautionary measure we have multiple contingency plans in the event our ability to operate is diminished or eliminated at either location.
As we talked about last quarter, we dual source most of our components to cover multiple points of failure to provide purposeful redundancies to remove potential risks.
Thankfully as of today, many of our supply chain partners remain operational and have continued to provide the necessary components for our products.
Our supply chain remains intact. Thanks to our team's forward planning to ensure sufficient safety stock inventory levels at both our Minnesota and Mexico facilities.
As Sheri has indicated previously we made the decision to maximize the availability of all product lines at all three of our plants by ensuring that each location can manufacturer across our broad product portfolio.
This strategic decision has allowed us to meet the growing customer orders and enable us to continue to fulfill our order increased backlog going forward.
Yeah.
That concludes my prepared remarks, I will now turn the call back over to Sherry Sherry.
Thanks, Dan.
Now shifting gears to our operational initiatives and focus in fiscal 2021.
Our strategic plan has been a multiyear initiative to prepare clearfield for the accelerated rate of demand and growth. We are now seeing as you can see on slide 12. Other sales report we are now ready to come of age which is the next phase of our growth plan to further strengthen our core business and position our company for disruptive.
Growth opportunities.
While the underlying objectives are unchanged. The three pillars upholding our comes of age plan has evolved to better align with where clearfield is today as a company.
End markets and customer needs and the near and long term trends, we're seeing in the industry.
Our first pillar building a better broadband one community at a time Leverages Clearfield long standing consumer customer and partnership relationships to build brand awareness and expertise ultimately our goal here is to facilitate the enablement of pervasive high speed broadband to underserved in Unserved communities.
A major initiative for 2021 is extending our reach within community broadband into electrical co ops rural utilities and municipalities that are not currently being serviced by a rural telephone company and are still underserved by the major carriers as part of this effort our strategy includes partnering with.
Establishing distributors in these target markets, we anticipate securing these relationships in the coming months.
So it feels position within the community broadband market has never been better.
Our track record and reputation has positioned us extremely well to continue to grab market share and further capitalize on the expansion that is currently underway.
Building on my earlier comments and for the benefit for those newer to our company our industry. The U S Rural digital opportunity fund or Argos is a 10 year program designed to bridge the digital divide to efficiently fund the deployment of broadband networks in Rural America.
Communications Commission will direct up to $24 billion over 10 years.
Finance uptake gigabit speed broadband networks, and Unserved rural areas connecting millions of American homes and businesses to digital opportunity.
On December 7th the FCC announced that millions of real Americans will gain access to high speed Internet service through the Eidos phase one auction.
As reflected on slide 13 of our field report auction results showed that bidders one funding to deploy high speed broadband to over $5 2 million Unserved homes and businesses almost 99 percentage of locations available in the auction Mauro.
Moreover, and Moreover, an overwhelming majority are scheduled to get gigabit speed broadband.
C C, which is tasked with figuring out how to administer the program is taking public comment through February 16th.
The financial opportunity for Clearfield is significant.
The art off program approximately 540000 homes will be conducted annually. Moreover, it's not a question of if but rather how and when these homes will be connected regardless of the variable inputs clearfield is well positioned to capitalize on this opportunity.
Turning to our second new pillar delivering innovation for true one fiber deployment, which is highlighted on slide 14.
The pillar involves three key initiatives.
First leveraging our presence in community broadband to enable one fiber backhaul.
Second removing obstacles for the integration of wireline and wireless networks.
And third bringing fiber management expertise just five G N G PON and edge computing.
In the area of focus is looking at adjacent product categories to expanded our total addressable market.
Consistent with our approach of being a fiber to anywhere company. We're looking at investing in product categories or areas that may not be fiber, which today, but would allow us to introduce products to the market that would enable the lifestyle ubiquitous broadband provides.
One fit innovation in this area is the recent approval of our aerial F D H into the networks of a national carrier.
Five G deployments intersect with the utilization of fiber to deliver residential and business broadband permitting or right of way agreements are ongoing obstacles. The aerial F. D. H provides a new and unique means to deploy fiber management assets satisfying these challenging situations.
On Slide 15, you can see that the third initiative of our comes of age pillar is scaling operational excellence for our superior customer experience. This approach includes strategically investing in products manufacturing and supply chain to increase competitiveness and reduce costs.
Investments, we've made to our operations in Mexico are integral to this effort. The beneficial results. We're seeing have yielded both improved efficiency and cost effectiveness.
I'm encouraged to report that our operations in Mexico remained fully operational and are expanding in early Q2 of fiscal 2021, our initial and Mexican facility achieved its ISO audit recertification well our newest facility in this region achieved its initial ISO certification we have system.
<unk> added personnel at the facilities to meet the growing demand we are seeing for our products and we'll continue to evaluate our needs on an ongoing basis.
Yeah.
Further as we scale our business, we are exploring means to expand our footprint in Asia, Our engineering resources, which include boots on the ground in China are allowing us to expand our efforts in Asia manufacturing to our specifications to assisting in our engineering design.
Utilizing some of the process gains we've achieved in our virtual world driven by having our U S forces working remotely due to COVID-19.
We are now working directly with Asian design personnel, who can help us class produced from the inception of the design rather than through the two step process. We've implemented previously.
Our strong finish to fiscal 'twenty 'twenty provided significant momentum in the first quarter of FY 'twenty, one, which we were able to capitalize on as demonstrated by the 40% topline growth we achieved in strong profitability metrics, Arkansas.
This performance speaks to the resiliency and durability of our business in a range of environments. Moreover, we are continuing to benefit and take advantage of favorable industry tailwind and clearfield established presence within our key growth markets.
Looking ahead due to the ongoing volatility from COVID-19, we are currently in a position to provide only limited financial guidance. We are however, confident the demand for fiber broadband will continue throughout fiscal 2021 and beyond.
Near term, we anticipate second quarter to be consistent with the traditional seasonality of revenue being slightly down on a sequential basis.
Longer term, our enhanced comes of age plan, which targets growth in fiber broadband and fiber access positions us for continued success for clearfield in the years ahead.
And with that we're ready to open the call for your questions.
Operator.
Yeah.
And at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone Keypad, Inc.
Confirmation tone will indicate your line is in the question to you you May press star two if you'd like to remove your question from the queue from participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
One moment, please while we pull from questions.
And our first question is from Jason Smith with Lake Street Capital. Please proceed with your other question.
Hey, guys. Thanks for taking my questions just I understand that at lead times can be pretty sure for you guys, but just curious if you could comment on the linearity of bookings in the December quarter.
Hum.
Hi, Jason define linearity, what do you mean by that.
Just trying to get a sense of order pattern patterns were pretty consistent throughout the quarter or if it was more back end loaded.
No very consistent.
So I mean, it was really a I mean it was.
Having a mild winter that certainly always helps but I think overall in the general market. We're seeing just a continual demand are ongoing as people evaluate and build their environments and then plan for the future.
No it was a very nice and consistent quarter.
Okay, and then I know you outlined some of the potential tailwind going forward, obviously, you've benefited from some of the tailwind related to Covid. Just curious if you could comment on any change in visibility over the past three months.
We're actually getting kind of I would say increased visibility to business needs I think the Covid World has actually created a situation in which communication service providers are really kind of looking out two things by a season by season basis.
And trying to work with their suppliers to give them at least from visibility to their plans and needs.
Not necessarily blanket purchase orders, but definitely a little bit more long range visibility than we would have had in the past. However, I think that's also coupled with some concerns about the availability of them.
Labor and installation.
Some concerns, especially in the national carrier market.
About union individuals' not.
Not wanting to be able to require to be able to go into homes.
It's that kind of push pull that has created some challenge for our visibility standpoint.
But we are continuing to really manage our lead times.
We are really industry, leading today at three to four weeks and then working with our distribution partners to even improve upon that for high volume product.
It will be available from our distribution like I said distribution partners in three to four days.
So we're aggressive about what we see the marketplace heading and as long as the market labors continues to be available we're very optimistic.
Okay. That's helpful. And then just last one from me and ill jump back into queue.
Margin a nice uptick in December how should we think about sort of the opportunity for expansion this fiscal year Hum.
Yeah, well the margin was positively affected by the strong dominance of community broadband.
Community broadband being up 70% and.
Representing about $65, 67% of our total business.
That business is.
Because it's Dennis smaller projects is typically higher margin and so we certainly benefited from that with the carrier business the tier one business being down a little bit in the quarter.
That also.
Also from a product mix standpoint was representative so we think 42% is a great target. We don't think it's a scale to move above.
So I think.
We are comfortable that we.
We're doing a lot of great programming to reduce the class, but from a modeling standpoint I think this is should be kind of the pinnacle of what words, we can achieve.
Okay.
Thanks, a lot guys.
Youre welcome.
Yes.
And again as a reminder, if you have any questions you May press star one on your telephone keypad doing so will ensure you join the question queue and our next question is from Tim <unk> with Northland Capital markets. Please proceed with your question.
Okay.
Hi, good afternoon, and congrats on the strong results.
From a couple of questions, but I'll start with with backlog.
You actually saw.
Obviously, a pretty sharp increase relative to last year, but somewhat of a decline sequentially I wonder if you could.
Discuss the puts and takes in terms of bookings and backlog in the quarter that led to that.
Your line sequentially.
Thanks.
Yeah that is a very it's a very.
The decline sequentially is very standard is very seasonal.
We don't we don't typically a service provider is not.
All that excited about putting a purchase order over overextending there their fiscal year.
So we tend to see December bookings go down as their budgets are not yet approved in and that they are putting together their plans so that I.
I always say, we have offered backlog as a point of information, but it should it be taken with a grain of salt.
The backlog is not indicative of future demand.
Alright, well I guess with that in mind, I mean would you expect or can you comment on what youre seeing thus far this quarter with regard to.
Two bookings relative to that understanding that your smaller customers may not have the type of cumbersome budget cycles, you might see among.
The larger carriers, but we're having a great January.
So it is a I'm you know without giving any future guidance within that because we can only do what we can see with the three to four week lead times, but booking.
Bookings have been good.
I do not have a concern in regard to lack of of of market demand is strong.
A lot of projects and activities in place.
Community broadband is really excited about the available of the energy available from where they can put it together.
And then I think we have a we've worked for years to have the community did have the reputation that we have in community broadband and the support that we're providing.
So I believe we're taking share in this marketplace and are positioned to grow with it as you know.
As the Covid world tends to settle down.
Got it.
And then if I could move over to your commentary on the art off process from the potential to.
To accelerate growth from what looked to be already pretty strong levels I wonder if we could be a little more granular on.
Kind of expectations for timing, there you'd referenced kind of some degree of pull forward in demand.
Is it likely that we're.
Likely to see a normal normalization and that pull forward maybe in contrast to traditional seasonality in the business.
Prior to seeing any type of acceleration from RF projects, maybe later in calendar 'twenty one.
Yeah.
The general frame of thought is that it's always difficult to know with government projects, but the general.
Train of thought is that we'll start to see the beginning of that revenue in July and August so since.
Our fiscal year ends in September I don't see the <unk> program, having a really significant increase for our numbers. This year. It certainly will be what other mechanisms to improve numbers moving forward.
To date the growth that we're seeing.
Theres been some business that it's been cares act funded and we certainly saw some business in that.
The December quarter.
But I think what we're seeing really is true organic need in the marketplace.
Covid absolutely created.
Yeah.
Yeah, the requirement that broadband is necessary and yes. There were those individuals over the course of the first seven to eight months of the of the pandemic that were able to immediately put dollars into place, but most of them are really in a place where they're just being able to truly free app now and build out.
Their networks and a broad term basis I mean.
One other things that was really surprising to me at all.
Send it.
On the call.
Haven't seen it.
Is in the state of Minnesota.
Traditionally, we would view as being community broadband centric.
The Star Tribune.
Our metropolitan newspaper published a here's where high speed broadband is available in our state and what we saw was the seven county Metro area and the few of Clearfield customers across the country across the state such as Paul Bunyan telephone <unk> and Crosley communications in Brainerd Theres still a.
Huge amount of need out there and I think we're going to see that over the course of the summer.
I've listened to some of the same broadcasts.
Probably have been great as some of the others in our market.
And I think our timing is sometimes a little bit different.
For the space, there's a lot of work that has to be done in regard to construction to actually deliver.
The physical dig and physical infrastructure to each home and business.
So we're optimistic about this year as well as for the fiscal year 'twenty two when we can take advantage of government initiatives on top of this.
Great. Thanks very much.
Okay.
At this time. This concludes the company's question and answer session. If your question was not taken you may contact Clearfield Investor Relations team at C. O M D right.
Gateway IR Dot com.
I'd now like to turn the call back over to Mr. Beranek for closing remarks.
Yeah. Thank you so very much.
It's a difficult time now with the pandemic and the inability to.
Receive vaccinations for those that we love.
But I encourage you all to be patient and to keep yourself safe. Thank you for joining US today, we look forward to updating you again on our Frac Christian.
Okay.
Thank you for joining us today for clear she was fiscal first quarter 2021 earnings Conference call you may now disconnect.
Okay.