Q2 2021 Clearfield Inc Earnings Call
Good afternoon, welcome to Clearfield fiscal second quarter 'twenty 'twenty, One earnings conference call. My name is Paul and I will be your operator for this afternoon joining us for today's presentation are the company's president and CEO Cheri Beranek and CFO, Dan Herzog following their commentary we will.
The 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 and the Investor Relations section of the company of website.
This called the also being webcast and accompanied by a Powerpoint presentation called the field. The report, which is also available and the Investor Relations section of the Companys website.
Please note that during this call management 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 and the forward looking statements that is important to note also that the company undertakes no.
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 and the forward looking statements contained in today's press release filled report and and this conference call. The risk factors section and Clearfield. Most recent form 10-K filings with the securities and.
Exchange Commission and its subsequent filings on form 10-Q provides descriptions of those risks and the reminder of the slides on this presentation of Oracle are controlled you the listener.
Please advance forward through the presentation at the Speakers' prevent the remarks with that I would like to turn the call over to Clearfield CEO Cheri Beranek Paretic. Please proceed.
Good afternoon, and thank you everyone for joining us today I Hope you all are continuing to stay safe and healthy it's a pleasure to speak with you. This afternoon and the share clear sales results for the fiscal second quarter and first six months of 2021.
During the second quarter, we saw demand for fiber fed broadband networks expand across the community broadband market.
And you can see inside for this robust demand helped drive a 45% increase of net sales to a record $29 $7 million. Our gross in the period was again led by double digit increases from our community broadband and and Mr market, which were up 68% and <unk>.
60% respectfully.
Our performance demonstrates clearfield is strongly executing on its brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider of requirement.
Sales bookings started strong in January and accelerated throughout the quarter and resulting in a 115% increase and backlog growing to the $19 $2 million on March 31, 2021 person is nine $3 million on March 31 2020.
We expect the ship the majority of our backlog during the fiscal quarter, three and have begun to receive longer scheduled orders of service providers and establish locker term deploying the plan.
Our strong top line performance and business model leverage helped to produce solid gross profit and net income margins and fiscal quarter too.
Gross margin dollars totaled a record $12 9 million up 90, excuse me, 59% from quarter two last year.
As the percentage of that sales of 43, 6% margin was up from 39, 9% and quarter two of last year.
Moving down the P&L as expected our expenses increased modestly year over year, resulting and $3 $6 million and net income of 27 cents per diluted share.
This was the significant improvement from the $750000 or five cents per diluted share and earnings we generated in Q2 of last year.
We anticipate expenses to increase slightly in future quarters, as we ended the and additional resources within our community broadband programs and as business travel limitations to the.
Great.
Our robust financial performance and quarter to contribute to a record first half for clearfield.
Yes.
At a high level, we generated $56 8 million and the sales through our first two quarters of fiscal 2021, which was up 43% from the same period of last year.
Our favorable product mix and the period, coupled with our ongoing, especially with the masters helped generate $24 $3 million and gross profit and improvement of 53% compared to last year.
Also the delivered 42, 8% gross profit margin for the period was compared to 39, 9% last year from.
On a profitability perspective, we generated $6 8 million and net income or 50 cents per diluted share, which was the significant improvement compared to $1 2 million or nine cents per diluted share and the first half of last year.
Looking at our market segments right net sales on slide 531, where the core community broadband market and the <unk>.
Second quarter of fiscal 2021 we generated net sales of $20 5 million to this market, which was up 68% from the same period last year.
For the trailing 12 months ended March 31, 2021 community broadband markets net sales totaled $75 5 million, which was up 44% from the comparable period last year.
Art and with the old business comprised 13% of our net sales and fiscal quarter too.
And the growth standpoint, we built on the momentum we established over the last several quarters, realizing a 60% year over year increase and net sales of $4 $2 million from the second quarter of fiscal 2021, and a 48% year over year increase just on.
$14 6 million and the trailing 12 months ended March 31 2021.
Net sales and our national carrier market was down 15% year over year to $12 $1 million for the trailing 12 months ended March 31 2021.
And I've talked about previously our position and the national carrier market is related to the continuing demand from fiber to the home and fiber to the business application.
And that's Covid some strength have limited the deployment of <unk> solutions into the access part of the network net sales to our tier one customers and the second quarter of fiscal 2020, one decreased 42% year over year to $2 $3 million.
Although sales and our tier one market have not yet experienced the same robust growth as our other markets. We continue to support our sales presence and the tier one national carrier market for both fiber to the home of the business as well as by the initiatives we.
We shipped several new products into that market during Q2 and are working to gain a stronger foothold with them.
We have previously communicated the global kind of be on that has all of the introduction and training of our new technologies into the tier one market.
That's five G deployment and to the access network increase we are optimistic or increasing net sales and non tier one markets moving forward.
Net sales to our international market was up 105% year over year, and the second quarter and remained flat year over year. The trailing 12 months ended March 31 2021.
And it depends on it begins to get out of control fiber fed broadband and Mexico, and Canada, it's showing a resurgence and demand net sales.
The business was flat year over year, and Q2 and down 31% year over year for the trailing 12 months.
This was this the part of our business is highly dependent upon the two key customers and this segment.
We believe the business to be fluctuating from normal levels due to the slowdown and 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 second quarter of fiscal 2021.
Thank you Sherry and good afternoon, everyone. It's great to be speaking with you today.
And I'm looking at our second quarter financial results in more detail.
As you can see on slide seven and our net sales and the second quarter of fiscal 2021 increased 45% to a record $29 $7 million from $24 million from the same year ago period.
The increase and net sales was primarily due to higher sales and our community broadband NSO and international markets, partially offset by decreases in our national carrier markets.
Turning to slide eight gross profit for the second quarter of fiscal 2021 increased 59% to $12 $9 million or 43, 6% of net sales from $8 $2 million or <unk> 39, 9% of net sales in the same year ago quarter.
The increase in gross profit dollars was due to higher sales volume.
The increase in gross profit margin was due to a favorable product mix <expletive>ociated with the increased net sales in our community broadband markets and cost reduction efforts across our product lines, including increased production and our Mexico plants as well as manufacturing efficiencies realized from higher sales volumes.
As you can see on slide nine our operating expenses for the second quarter of fiscal 2021 were $8 $5 million, which were up from $7 $4 million and the same year ago quarter.
As a percentage of net sales operating expenses for the second quarter of fiscal 2021, or 28, 6% down from 36, 4% and the same year ago period the.
The increase in operating expenses on a dollar basis was primarily due to additional head count and higher compensation costs related to performance compensation accruals and increased stock compensation expense offset by lower travel and entertainment costs.
Turning to our profitability measures on slide 10 and.
From operations was $4 $5 million and the second quarter of fiscal 2021, which compares to $720000 in the same year ago quarter.
Income tax expense increased to $935000 from the second quarter of fiscal 2021, with an effective tax rate of 24% up from $190000 and the second quarter of 2020, which had an effective tax rate of 23%.
Net income totaled $3 $6 million or 27 cents per diluted share and improvement of approximately $2 $9 million over the $750000 or five 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.
Reflected on slide 11.
I am encouraged to report the Clearfield continues to remain fully operational.
The majority of our non production employees are working remotely effectively 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 and the event our ability to operate is diminished or eliminated at either location.
And as many of you know we dual source most of all the components to cover multiple points of failure and provide purposeful redundancies to reduce potential risks.
While the COVID-19 pandemic has dramatically boosted broadening of demand. It has also created supply chain challenges to fulfill that demand.
Thankfully the strong partnerships, we have built with our suppliers globally have and will continue to be crucial.
At the outset of Covid, 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 the broad product portfolio.
We are optimistic that we will be able to procure the necessary components for our growth ahead.
However, the pressure on the supply chain by increased demand and global supply chain disruptions caused by the pandemic the harsh Texas winter container shortages, the blocking of the Suez Canal and the other logistical issues have shown how fragile the supply chain can be.
In particular.
And your fields manufacturing requires supplies of raw materials like optical fiber cable and resins necessary for its fiber management product line.
That concludes my prepared remarks, I will now turn the call back over to Sherry Sherry.
Thanks, Tim now looking at our operational initiatives and focus and fiscal 2021 highlighted on slide 13.
Our strategic plan.
And I'll say your initiative to enable clearfield to come of age our organization has specific and measurable objectives designed to increase our top line reduced our cost and expand our reach key to our success remains of our loyalty to the providers that have grown alongside of while leveraging new innovation.
For the integration of wireline and wireless networks as we move into new markets.
This brings me to our first pillar building a better broadband one community at a time.
It Leverages clearfield long standing customer and partnership relationships to build brand awareness and expertise.
As I mentioned, the clearfield with sales to facilitate the enablement of pervasive high speed broadband to underserved.
Or communities Clearfield position within the community broadband market.
Never been better.
Our track record and reputation.
And does extremely well and continue to grab market share and further capitalize on the expansion and that's currently underway.
Clearfield remains committed to fulfill and the increased demand of smaller providers across the country.
We began investing early last fall and our drop cable production facility, because we anticipated take rates would increase among the existing providers as potential subscribers were added to existing networks.
And this timely investment has proven to be a meaningful and competitive advantage as we continue to offer superior lead times compared to the competition.
In addition, as providers with multi state networks are now building, our overbuild and their networks and that's fiber and we are developing and increasing presence within the tier two community.
Dissipate this market based demand will continue and moving forward.
A key market driver is the government finance broadband programs under the rural digital opportunities on our Argos and <unk>.
Currently in the planning stages for providers and in addition, while the recently announced American jobs plan within the Biden and infrastructure Bill is still being debated in Congress and the White house's request of 100 billion and funding our sustainable high speed broadband is a positive reflection.
And on expanded fiber opportunities, we believe are possible and the years ahead.
Our second pillar is delivering innovation for true one fiber deployment.
Foundation of one fiber deployment and began with the development and introduction of the clear view of c<expletive>ette.
And the fact is the essential building blocks of every element of clearfield filled smart product portfolio.
This 12 part building block is designed and multiple configurations, and then manufactured and volume.
And is designed to handle the toughest operating environments. It provides flexibility as well as reliable performer within the inside the plant outside plan and access networks.
Livery and the most scalable fiber management platform and the industry Clearfield ensures the service Provider's investments and capital equipment and grow alongside their subscriber take rate.
Reducing the overall footprint of the fiber management element reduces real estate costs and improve the density without compromising critical design elements of access bend radius protection, physical and cyber protection and route path diversity.
Our third pillar involves scaling operational excellence for our superior customer experience.
Our production facilities, and Mexico continued to provide meaningful competitive advantages to both clearfield and our customers not only of our Mexico facilities and enhance our overall protection capabilities and produce cost effectiveness, but they have also allowed us to deliver product to customers and the time for.
And that our competition simply can't match.
To maintain these advantages we have systematically added capacity over the last several months to meet the growing demand we are seeing for our products and we'll continue to evaluate as the.
Neat for army on ongoing basis.
Looking ahead to the balance of fiscal 2021, the rural broadband market remains right for growth and the strategic investments we have made and the presence we have established over the last 10 years it will be beneficial for clearfield.
While the volatility of the supply chain potentially pose this challenge and in the near term our growing backlog expanding pipeline and building the market demand gives this confidence and our ability to realize net sales of 120 million to $125 million and fiscal 2021.
And which represents year over year growth of 32% at the midpoint.
S traveled the emerges we anticipate our selling general and administrative costs will grow moderately and <unk>.
And we will be making strategic investments and additional customer facing positions in order to maintain our leading customer service programs and we're expanding customer base.
For the remaining quarters of fiscal 2021, we anticipate net income to be at or above 12% and the goodness net sales.
In summary, our consistent financial performance highlighted by 13 years of profitability and positive cash flow demonstrates the durability of our business and a range of environments.
Do you feel the continues to benefit from and take advantage of robust industry tailwind and Clearfield established presence within our key growth markets.
We remain confident the demand for fiber fed broadband will continue through fiscal 2021.
The longer term, our and enhanced comes of age plan, which targets growth and fiber fed broadband and <unk> access fiber positions us for continued success for Clearfield and the years ahead.
And with that we're ready to open the call for your questions operator.
Thank you we will now be taking questions from the company's publishing sell side analysts. If you would like to ask the question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the.
<unk> one moment, please while we poll for questions.
Yeah.
Thank you. Our first question comes from Jason Schmidt with Lake Street Capital Markets. Please proceed with your question.
Hey, guys. Thanks for taking my questions and congrats on really impressive results.
One of the Dart with the outlook, which was also really strong.
Obviously expecting some nice growth here in Q3, and Q4 does this <expletive>ume any meaningful pickup in the national carrier business or is this largely just continued momentum and the community broadband segment.
And it's absolutely both the content of the broadband and the strength that we've seen to date with and community broadband and the MSL well yeah on the tier one markets.
I would say we'd be at the established to momentum in that area. So that is not part of the growth initiative or the growth outlook.
Okay.
And then just looking at fiscal 'twenty, one and some really nice growth ex <unk>.
Did you mean, when you say true today are you at all concerned that there has been some pull forward and demand.
Hum.
And I would say there might be a little bit of a pull forward, maybe a little bit of what I'd call panic buying to get themselves and get people in place for their orders because they certainly have been the supply chain initiatives and and the.
General availability concerns the them but.
And in General I wouldn't say this is I have no concern about it being.
Ongoing or continually viable this is absolutely a trend and ongoing momentum it's not.
And our perception is not a spike.
Okay. That's helpful. And then just the last one from me and I'll jump back into queue. Just wanted to clarify sort of your comments on the supply chain, where are you at all impacted by constraints of the quarter.
Not at this point or or group of our procurement group has been doing an amazing job I would call it a spinning plates.
And as the kind of walked through issues between bringing on product on that.
I think it's just the me think about the standpoint that we've got new.
Products coming in on them you on bolt and we've got products coming in on Air and then you've got sitting and waiting to unload them just trying to be able to put that altogether has been a little bit of the challenge about it did not impact our ability to provide product.
And if you are alluding to the backlog of that backlog came in by the way.
And when we were on a call last January we talked about that January had started strong and it just continued to escalate from there and extremely strong March on the ASIC and providing the same level of general liability as we would on ongoing basis and as I indicated and the call I know of.
The preliminary notes, we anticipate the b, having majority of the backlog that we have in place shipping and quarter three.
Okay.
Thanks, a lot guys.
Youre welcome touching on Jason.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is on the question queue.
Our next question comes from Tim <unk> with Northland Capital markets. Please proceed with your question.
Hi, good afternoon, and my congratulations as well on the results and.
And I wanted to focus on.
And your commentary about at least the.
And the beginnings of some.
The visibility extending beyond.
What's normally a pretty short cycle business for you guys and.
From some.
Order scheduled further out and into the future I Wonder if you could.
Give us a little more color perhaps on.
How far the visibility might extend.
And.
And maybe relative to the the backlog.
And that you saw on the quarter significant increase.
Meaningful that.
Longer dated dimmed.
Demand is and whether Thats also coming from community broadband.
From there.
Okay.
The what we see happening in the space is is people.
From a legacy standpoint over the course of of I'd say the last five years, you know many of our customers would look at theirs.
And with the identify for US. This is what we're anticipating this year. What we're seeing now is the commitment to build out their entire networks and having multi year initiatives that they are committed to building out and p<expletive>ing and the majority of their homes and working through your projected take rates.
Because of the past it was more of an orientation of.
Or kind of the build strategy that was success based whereas today I think the success is insured.
Cause broadband take rates are so high and so there is a longer term commitment to those bills.
You know as it relates to our backlog a little of that is staged deployment and that.
The builds that were orders.
Orders that we were getting in March.
Some from some larger suppliers that we're looking at helping.
Helping us stage of our billed and giving us orders that were not long long term, but saying I want ex in March why in April the.
And Julien so.
That they could get into the production schedule and we're working to ensure that all of our customers can get the products that they need and not.
Put ourselves in a position of where our customers and acquisition.
Our customers might be stockpiling of equipment and coming at the expense of others. So we're really trying to work collaboratively with all of our customers. So that we can really help ensure they get the products that they need.
Okay, Thanks and.
You mentioned kind of art of being in the planning stages of obviously awards have been made.
From your perspective is there any dynamic or potential dynamic around you know kind of spending or planning.
<unk> now kind of and perhaps in advance of actual receipt of funds or or a lot of these projects separate and distinct from.
What you might see and your kind of current or core community broadband customer base.
Yeah, I mean revenue to date has and is very isolated.
There are some pockets.
Of the off related business, but principally the says we do not see <unk> funds and our current revenues are in our backlog.
And what we see on the art off where all of these people now getting their plans together putting out their engineering drawings aren't really going into markets, where they haven't been involved and before so we believe we're going to start to see that revenue and the very tail end of of quarter, three and then and a more meaningful basis in quarter four but basically that's the.
Our calendar year, 2020 two opportunity starting and.
You know what the the fed's of have asked for and are hoping for is that we can see 40% of those funds.
Had been allocated the happened in the first three years, so I really think that show significant opportunity for 2020 two and.
And 'twenty three as well.
Yeah.
Great and.
Over on the.
Thanks for that over and the tier one side of the business. You know we have seen some dynamics with various of the tier one carriers getting a pretty early and fast start to the year.
Understanding that your tier one customer base doesn't always match up with the.
Some of the kind of near term strength, we've seen and at least high level of spending numbers from guys like AT&T and Verizon.
Maybe you could give us a little more color on the.
And Doug the dynamics around your tier one business and what what might be driving that to the extent it's not.
And some of the CJR and stuff or.
Fiber to the home and get the womens makes a lot of larger carriers doing.
Yeah, and Theres a lot of money being spent by the wireless carriers, especially.
As it relates to C band and C band work and they spend a fortune.
On spectrum and the C band work for deployment is principally going to be based on the tower, it's not going to be based at the small cell. So that's good for the incumbent provider that has those towers.
And it's good for the the consumer because it means that they'll get a you get five G service on their cell phones and <unk>.
Faster the.
It means that our opportunity for five G, which is going to be small cell based has been delayed into the year and potentially into next year.
The challenge I think that that's not that doesn't mean that that revenue isn't going to be there and that means the true five <unk> performance that we want to see the breakout to true of late and see them.
And and the high speed as well.
Phil coming but it has been the reason that we have seen.
Lack of.
The same kind of growth has not shown up in the tier one base because of it.
Got it thanks, very much and I'll p<expletive> it on and congrats once again.
You're welcome thank you.
At this time. This concludes the company's question and answer session. If your question was not taken you may contact Clearfield, the Investor Relations team at C. O F. The gateway IR Dot com and.
I'd now like to turn the call back over to MS. Beranek for closing comments.
And thank you Paul and thank you all of you for joining us today.
And we look forward to updating you again soon on our progress happy spring and talk to you soon.
Thank you for joining.
Joining us today for Clearfield fiscal second quarter 2021 earnings Conference call you may now disconnect.