Q3 2021 Clearfield Inc Earnings Call
[music].
Good afternoon welcome.
Welcome to Clearfield fiscal third quarter 2021 earnings conference call.
My name is Victor and I will be your operator for this afternoon.
Joining us for today's presentation on 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.
This call is also being webcast and accompanied by a Powerpoint presentation called the field report, which is also available on the Investor Relations section of the company's website.
Please note 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 and 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 and Clearpoint Clearfield, most recent form 10-K filing with the Securities and Exchange Commission and in subsequent filings on forms 10-Q provides descriptions of those risks.
As a reminder, the slides in this presentation are controlled use of the listener.
Please advance forward through the presentation as the speakers present their remarks.
With that I would like to turn the call over to Clearfield cereal Cheri Beranek.
Good afternoon, and thank you everyone for joining us today.
And you are continuing to stay safe and healthy.
The pleasure to speak with you this afternoon and your share of Clearfield spaced out for the fiscal third quarter and first 9 months of 2021.
Our record setting financial performance in the third quarter. The first 9 months of fiscal 2021 again demonstrates the clearfield unique positioning in the broadband market and our ability to capitalize on the robust growth factors.
By the third broadband is being recognized as the answer for future growth connectivity each of the American home and business.
Can be on site for the concur.
The demand for fiber based broadband build a 49% increase of net sales year over year to a record $38.7 million.
Our growth in the period was led by double digit increases from our committee.
On any broadband which was up 64 per cent.
At the performance demonstrates the Clearfield continues to strongly execute on our company's brand promise of provide.
The highly configurable fiber distribution and pathway product to meet broadband service provider of requirement.
Moreover, the labor saving practices that are incremental to clear sales architecture are being recognized by service providers throughout the broadband market place.
Our customers no matter if they are local exchange carriers.
We're building the cable providers, where all of electrical utilities are new to this market.
Recognize that fiber is the only technology to provide the electrical upstream and downstream performance.
Currently there are multiple government funded programs that are accelerating broadband deployment, such as the rural digital opportunity fund for Argos, which will start to be deployed later this summer and fall.
In addition, the proposed bipartisan federal infrastructure framework looks promising toward enhancing the funding available for future proof broadband deployment.
Sales bookings, which accelerated at the end of second quarter continued the momentum in the third quarter, resulting in a 377% year over year increase in backlog growing to a record $40.3 million on June 30, the 'twenty 'twenty 1 we.
We expect the ship most of our backlog in our current quarter ending in September.
Additionally, we have previously mentioned due to the challenges and the global supply chain, resulting in unprecedented times.
We are of working with our customer is the place longer lead time purchase orders to ensure the availability of components and materials from our supplier zone.
Just on current supply chain dynamics lead times have stretched to 8 to 10 weeks for certain crowd of category.
Over the next several quarters, we will be working to normalize our lead times to the more historic levels of 4 to 6 weeks from receipt of purchase order.
Continuing with our financial overview of our strong topline performance and business model leverage helped produce solid gross profit and net income margins in fiscal Q3.
Gross margin dollars totaled a record $17.1 million up 59% from Q3 of last year.
As a percentage of net sales of 44, 2% margin was up from 41, 5% in Q3 of last year.
As we communicated last quarter, our expenses increased modestly year over year for yourselves.
The $6.1 million and net income or <unk> 44 cents per diluted share.
This was the significant improvement from the $3 million for 'twenty 2 cents per diluted share in earnings we generated in Q3 of last year.
We anticipate our expenses to increase slightly in future quarters as we invest in additional resources within our community broadband program, particularly in customer facing roles and as business travel begins to increase.
Our robust financial performance in Q3 contributed to a record 9 month period for Clearfield, we've generated $95.5 million of net sales through the first 3 quarters of fiscal 2021, which was up 45 per cent from the same period of last year.
Our favorable product mix in the period, coupled with our ongoing efficiency measures helped generate $41.4 million and gross profit dollars an improvement of <unk> 55 per cent compared to last year.
We also delivered $43.4 per cent gross profit margin for the period, which was up compared to 46% last year from.
On the profitability perspective, we've generated $12.9 million and net income of 94 cents per diluted share, which was the significant improvement compared to $4.2 million and 31 cents per diluted share in the first 3 quarters of last year.
Looking at our market segments by net sales on slide 5 in the third quarter of fiscal 2021, we generated net sales of $27.4 million for our core community broadband market, which was up 64 per cent from the same period of last year for.
For the trailing 12 months ending June 30th of 2021 community broadband market net sales totaled $86.1 million, which was up 56% from the comparable period of last year.
M S O market comprised of 11% of our net sales in fiscal Q3 from a growth standpoint, we built on the momentum we've established over the last couple of quarters, realizing a 19% year over year increase of net sales for $4.5 million in the third quarter of fiscal 2021 of 38% year.
The over your increased to $15.3 million for the trailing 12 months ending June 30th.
Net sales for a national carrier market for the trailing 12 months ending June 30 of 2021 were down 22% year over year 2 of $11.26 million.
As we've talked about previously our position in the national carrier market is related to the continuing demand for fiber to the home and fiber to the business application.
Covid constraints have limited the deployment of <unk> solutions into the active part of the network net sales to our tier 1 customers for the third quarter fiscal 'twenty, 1 decreased 14% year over year to $3.4 million.
We continue to support our sales presence in the tier 1 national carrier market for both by recruiting of home and business as well as for the <unk> initiative.
Business uncertainties at 1 of our tier 1 customers has resulted in a reduction in their capex spend in the consumer market for fiber to the home.
Resulting in a slower pace of their spend with us.
In addition, as we have previously communicated the global pandemic has all of the introduction and training of our new technologies into the tier 1 market.
As to the pandemic restrictions are lifted we are optimistic that our tier 1 revenue will rebound.
Net sales in our international market were up 233% year over year in the third quarter compared to the same period of last year and up 64% year over year for the trailing 12 months ending June 30 of 2021, we.
We have seen a strong resurgence in demand for <unk>.
With that broadband in Mexico, and Canada, and as purchases from the previous year wouldn't make the particularly affected by COVID-19 net.
Net sales in our legacy business were down 8% from Q3 last year and down 32% year over year for the trailing 12 months ending June 30 of 2021.
As we have mentioned previously our legacy sales are highly dependent upon to customers. In this segment, we believe the business to be fluctuating from normal levels due to the continued impact of Covid.
With that I'll now turn the presentation over to Dan who will walk us through our financial performance for the third quarter of fiscal 2021.
Thank you Sherry and good afternoon, everyone. It's great to be speaking with you today.
Now looking at our third quarter financial results in more detail.
As you can see on slide 7 our net sales in the third quarter of fiscal 2021 increased 49% to a record $38.7 million from $26 million in the same year ago period, and up from $29.7 million in our second quarter of 2021.
The increase in net sales was primarily due to higher sales in our community broadband international and multiple system operators msos or cable TV markets, partially offset by decreases in our legacy of national carrier markets.
Turning to slide 8.
Profit for the third quarter of fiscal 2021 increased 59% to $17.1 million for 44, 2% of net sales from $10.8 million or <unk> 41.5 per cent of net sales in the same year ago quarter. The.
The increase in gross profit margin was due to a favorable product mix associated with higher net sales in our community broadband markets and cost reduction efforts across our product lines, including increased production at its Mexico plants as well as the manufacturing efficiencies realized with increased sales volumes.
As you can see on slide 9 our operating expenses for the third quarter of fiscal 2021 were $9.4 million, which were up from $7.2 million in the same year ago quarter.
As a percentage of net sales operating expenses for the third quarter of fiscal 2021.
$24.4 per cent down from 27, 8% in the same year ago period the.
The increase in operating expenses consisted primarily of higher compensation costs related to performance compensation accruals.
Turning to our profitability measures on slide 10 income from operations was $7.7 million in the third quarter of fiscal 2021, which compares to $3.6 million in the same year ago quarter.
Income tax expense increased to $1.7 million from the third quarter of fiscal 2021 with an effective tax rate of 22, 1% up from $763000 in the third quarter of 2020.
Which had an effective tax rate of 23 per cent.
Net income totaled $6.1 million for 44 cents per diluted share an improvement of approximately $3.1 million over the $3 million or 22 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 continues to remain fully operational.
While the majority of our non production employees are continuing to work remotely effectively using collaboration tools and video conferencing to stay connected.
We're beginning to work toward a hybrid work model that we'll see most employees returning to the office of few days of week later this quarter.
Our production operations in both the U S and Mexico are operating at full capacity and we have been able to increase head count while adhering to state and federal social distancing guidelines.
While the COVID-19 pandemic has dramatically boosted broadband the demand. It has also created supply chain challenges to fulfill that demand.
Thankfully the strong partnerships, we have built with our global suppliers have and will continue to be true crucial.
At the outset of Covid, we made the decision to maximize the availability of all product lines at all 3 of our plants by ensuring that each location can manufacturer across our broad product portfolio.
We are optimistic that we will be able to procure the necessary components for our growth ahead. However, the pressure on supply chain by increased demand and global supply chain disruptions have shown how fragile the supply chain can be.
In particular Clearfield for manufacturing requires supplies of raw materials like the optical fiber cable and resins necessary for its fiber management product line.
That concludes my prepared remarks, this quarter I will now turn the call back over to Sherry Sherry.
Thanks, Dan.
Now as highlighted on slide 13, we'd like to share an update to our multiyear strategic plan as we look at our operational initiatives and focus for the balance of fiscal 2021 and beginning of fiscal 2022.
3 years ago, Clearfield launched its coming of age plan, which we completed successfully this past year. Our team has been working diligently true that comes of age initiatives. We have previously discussed in order to establish market readiness for the expanding market requirements for the fiber broadband and fiber.
The access fiber buildout.
Hey, we are introducing the next phase of our plan that we call nowadays that advances our ongoing mission to establish the yourself as a platform of choice for fiber management and kind of cool the.
Most of your plan is designed to capture of the fiber to the home and business market share Clearfield was built to obtain for delivering the innovation for new and existing markets for the years ahead.
The first pillar of the nowadays class is accelerating our operating cadence.
This is of course sales commitment to respond to the market heightened post pandemic demand for fiber broadband.
As evidenced by our explosive 45% growth over the first 3 quarters of fiscal 2021 and the 377% increase of year over year growth in the order backlog.
Still stands ready to serve our service provider customers as they capture and deploy the private and public funding that will soon become available.
We'll continue our active investment in systems and process development to enable an agile work environment for you.
For the delivery has been and will continue to be paramount to our success.
The second pillar amplifying bowls and disruptive growth.
Our commitment to continue delivering market changing products for current and future market requirement.
We are introducing a small form factor lots of field shows that the cable solution that reduces the size weight and the environmental impact of the direct fiber solution.
The number of connected homes continues to expand next year and beyond we believe this product and many others will be instrumental in addressing the crafts persons need for flexible and easy to handle by the solution.
Our third pillar augmenting capacity for ongoing growth.
Our commitment to scaling clearance sales operations to meet this burgeoning demand.
To that end, we are currently expanding our manufacturing network of contract manufacturing partners. We are also broadening our global network of supply chain partners for all sorts of components to ensure we can meet customer demand.
Look forward to announcing future developments regarding clearfield the on manufacturing footprint in the coming quarters.
In 2020, the world changed fundamentally the so does the data requirements that makes the world go round.
As COVID-19 swept the growth nearly every aspect of life from work, they're working out moving online and people depended more and more on App and the internet the socialized for education and to entertain themselves.
For the 15% of Americans working from home now over 50% due and the trend shows no sign of staffing.
The federal programs have responded to enable all Americans to have the effective high speed broadband and we've been thrilled to see the preference that fiber has earned it needs to play net.
This chart was prepared principally by Jefferies research and it illustrates the level of funding debt is expected over the next 4 years. The chart does not include the infrastructure builds currently in Congress.
That of reported to add an additional 65 billion of investment to our market.
That's at least doubling the value of subsidies that are shown here.
Clearfield is poised to benefit from the incremental funding as it represents the government dollars that will both enable environments that were previously not economically viable for fiber investment to come on line as well as encouraging the broadband service provider to accelerate their rate of deployment and their existing footprint.
We are very optimistic about growth potential.
The market presents we've established over the last 10 years, along with our recent strategic investments will enable us to respond to market demand and to grow with our customers. While the supply chain remains volatile and may pose challenges in the future.
Our strong financial performance of $40.3 million dollar backlog gives us confidence to increase our net sales guidance for fiscal $2000.21 million to $130 million to $135 million, which represents year over year growth of more than 40%.
We anticipate our selling general and administrative class book grow moderately as the.
Increased travel resumes and we add additional customer facing position we.
We anticipate net income as a percentage of total net sales.
Insistent with year to day levels.
While very early in our nowadays plan, we believe with current demand new government initiatives and overall market strength, our current market forecast for translate to projected annual net sales of 150 million to $160 million in fiscal year 2022.
Representing growth of 15% to 20% over of rejected for fiscal year 'twenty 'twenty 1 revenues.
You'll be able to provide more clarity to this guidance in coming quarters as we were.
Work to minimize supply chain and capacity challenges as the timing of some of these government funding programs becomes more clear.
In summary.
Our record setting financial performance for fiscal Q3, which extends the our track record of consistent profitability and positive cash flows over the last decade reflects the strength of our business in a range of environments.
Clearfield continues to benefit from and take advantage of robust industry tailwind and our established and expanding presence within our key growth market.
We remain confident the demand for fiber fed broadband will persist through fiscal 2021 and into fiscal 2020 true.
Our recently launched now of age plan in which we offer the maturity and capacity to scale, the expanding marketplace of fiber broadband and fiber access fiber 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.
We will now be taking questions from the company's publishing sell side analysts.
If you'd like to ask the question. Please press star 1 on your telephone keypad.
Confirmation tone will indicate that your line is on the question queue.
Also press star 2 if he would like to remove your question from the queue.
1 moment, please where we now poll for questions.
Our first question comes from Jason Smith with Lake Street. Please proceed with your question.
Hey, guys. Thanks for taking my questions I, just wanted to start with how you're thinking about seasonality going forward. We're just trying to reconcile the.
The strong demand across the community broadband segment.
Within the backdrop of that normal kind of weather related seasonality you guys typically see in the winter months.
I think we'll continue to see you know traditional seasonality, there's no reason to expect that way of wallets.
There's still the level of of.
Traditional budgeting and traditional whether as you related.
I think 1 caveat however, it for that is due to the just you know really well.
You know network wide market wide demand that is just exploding for all markets I think we might see more placement of orders in anticipation of getting ready.
That we might see orders of potential revenues on.
That will be placed for kind of inventory readiness, so that they can maximize and ensure their availability.
So as a result, I think we might see a little uptick in the and the second quarters of next year that we witnessed normally seen.
Okay. That's really helpful. And then I know you called out some government funded programs, specifically art off of them, but when we look at your fiscal 'twenty 2 guidance is that the baking in a meaningful contribution from some of these programs.
No. It isn't you know as you indicated as I indicated earlier, the we really have a limited vision of that.
Walk watching the marketplace. The yeah, there's a lot of conversation going on right now between the couple of senators with the FCC and their frustration that.
7 to 8 months after the initial art off release of.
Being.
Appropriate at that no monies have been distributed.
You've seen from business of people moving forward.
Using kind of their own bank roll it and using some subsidiary.
The financing, but until we get some real broad knowledge of where that's going to go.
There's not a significant level of BARDA op dollars in our forecast.
Okay that makes sense and then just the last 1 for me and I'll jump back into queue, just as it relates to inflationary pressures just curious if youre seeing anything there and if so are you passing along these increased costs for your customers.
The biggest cost pressures, we're seeing are on resin.
And so when you have of.
From a product line that is extensively plastics such as well.
Or put us of those costs are absorbed it in and we've seen 40, and 50 and more per cent increases the them.
On that world and we do provide them.
Yep.
All of our customers, while we don't manufacture them, we do customize them for a particular pin out in particular.
Setting patterns and so our customers recognize the supply chain dynamics and while they are not happy about it. The do you understand the necessity for us to pass those cost increases on as it relates to our overall total revenue as you know those are relatively insignificant to me there.
For less than probably 3% of our total revenue base.
They are of product requirement in order to study of the cabinets that we produce.
Otherwise, we've seen some price pressures in sheet metal of some price pressures in labor.
At this point, we've been able to absorb those and pass the things on on the only 1 is the thing that I think.
Get them out I think that's a an ongoing challenge that we're gonna have to deal with them I think we've been extremely fortunate.
At this point, we've worked very hard to achieve our 44% gross profit level.
But I think we're going to need to continue to.
Work.
As you have been in order to keep that there I don't see a huge I don't see the trend pattern of our accelerating gross profit dollars of grass.
Excuse me the gross profit percentage, increasing but I do think gross profit that was the increase of their revenue decline of debt.
Okay. Thanks, a lot guys.
Okay. Thank you.
Thank you.
As a reminder to our audience. If you would like to ask a question. Please press star 1 on your telephone keypad.
Our next question comes from Tim Savi, Cheryl with Northland Capital markets. Please proceed with your question.
Hi, good afternoon and.
Congratulations on some spectacular.
The results here.
My first question is on the.
On the drivers of those results from the quarter and maybe in your going forward guidance for fiscal 'twenty 2 as well.
To what extent you've been talking about this little more recently or.
The increased.
The fiber builds among slightly larger call them tier 2 carriers.
Getting to be.
The meaningful driver.
They're either short term or anticipated.
On into next year and no follow on from here.
Yeah, we've been very pleased with the recognition by the tier 2 providers of the value proposition that Clearfield offers.
And that.
In that you know most of the tier 2 providers did not have an extensive fiber network previously of these for organizations that had the opportunity to really look from the beginning at the craft friendly Timesaving product line and their engineers have recognized the value of the Quebec Clearfield on our private client can offer.
For the you'll find when the Q.
It comes out that we don't have a single customer of this quarter that represents more than 10 per cent of our income excuse me, 10% of our revenue.
But they are definitely a growth trend for the organization and we're very pleased and proud to be working with them.
Okay, well just to follow up on that could we.
Speculate the perhaps as a group the tier 2 carriers are approaching or exceeding the 10 per cent of revenue or I mean can you give us any sense of.
There was the they're definitely true reality.
Yeah, I think there definitely are approaching it and I think there'll be called out in future quarters.
Great.
And you kind of hinted at this in your or made reference to it.
Some of your comments, but.
We've seen the number of kind of state level broadband initiatives some employee federal funding.
Announced.
<unk> fairly recently and.
No.
Or are you starting to see opportunities kind of derived from from those efforts may be.
Separate from whatever you might expect with with art off and could we.
Let's say a similar thing with regard to where expectations built into your guidance for next year.
You characterize them as fairly modest for our it off if you look at and obviously, probably nothing for whatever's working through.
Congress right now, but if you look at those state level initiatives.
Are those becoming more important for I guess the growth driver.
Yeah, I mean, most of the state of initiatives or I have.
Somewhat started I mean, we saw some revenues that are the things date.
That's the wrong way to put it I mean, we can do business across the country and in almost all of I think for the 8 of the 50 states, but yeah, there's certainly been more prevalence.
And some of the core markets like Iowa that have had a higher level of state funding in the we already see the.
Moving forward you know some of the new programs in the south from the northeast the the program that wasn't the Alastair approved in California. This week those are still very early and they're not included in our guidance.
Great. Thanks, very much I'll pass it on.
Youre welcome.
Thank you.
As a reminder tour of audience if he would like to ask a question. Please press star 1 on your telephone keypad.
Okay.
Well, ladies and gentlemen at this time. This concludes the company's question and answer session.
For your question was not taken you may contact Clearfield Investor Relations team at C. O M D.
The way I Orange Dot com.
I'd now like to turn the call back over to Mr. Beranek for closing remarks.
Thank you very much.
Other operators indicated I will be happy to take any questions from investors. However, I do like to do that on a time sensitive basis. The please send those questions to the gateway and we'll be able to follow up I'd add another time.
But I think all of you for joining US today, we absolutely look forward to updating you again soon on our progress.
Thank you for joining us today for Clearfield fiscal third quarter 2021 earnings conference call.
Now disconnect.