Q2 2022 Clearfield Inc Earnings Call
Good afternoon.
Welcome to <unk> fiscal second quarter 2022 earnings conference call.
My name is hemant and I will be your operator 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 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 it didn't.
Company 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 the 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.
Please report and in this conference call.
There's the risk factors section in Clearfield, most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provides descriptions of those risks.
As a reminder, these slides in this presentation are controlled you the listener.
Please advance forward through the presentation as the speaker presents their remarks with that I would like to turn the call over to clear.
Clear for you as a CEO Cheri beranek.
Thank you and over to you.
Good afternoon, and thank you everyone for joining us today, we hope you're all doing well it is a pleasure to speak with you. This afternoon to share Clearfield. They felt for the fiscal second quarter of 2022 and to provide an update on the business and market trends.
We'll continue to execute in an environment in which demand is accelerating bookings led shipments by $34 million for the free.
Caribbean, creating a backlog of 136 million as of March 31, 2022.
Continued to maintain a healthy balance sheet with $43 million in cash and investments and no debt.
We have filed a shelf registration statement and secured a $40 million line of credit with member Bank. So sure we have the financial flexibility and how we respond to current and future robust client demand.
The investment strategy that will enhance our growth opportunities in the future.
We believe we are well positioned to capitalize on any new government funds, they're just first to market with.
All of our customers are already beginning to place advanced orders in anticipation of that was the first thing.
For all of those reasons, we are raising our fiscal year 2022 net sales guidance from a range of 177 to 183 million to a range of 204 million to $218 million.
Our guidance represents growth of 45% to 55% over fiscal year 2021 rabbit.
Once again, we'd like to provide a brief overview of who we are and what we do for those of you who may be new to our company and interesting.
Chris is a leader in the expanding fiber broadband data.
We provide fiber precaution hybrid management and fiber delivery solution that enabled a rapid and cost effective fiber side the climate throughout the broadband service providers thing.
Primarily for service providers in the community broadband market, mainly for two or three clinical service providers. We also serve providers in the tier one market and multiple system a cable TV operators also known as the Marcellus as well as some international service providers, primarily in Canada.
The Caribbean Central and South America.
By focusing on scalable modular requirement.
Fossil and developed a crowded portfolio enables our customers to complete their deployments faster and more efficiently.
Products are designed to reduce both the amount of necessary skilled labor needed for information as well as the level required for gamestop.
This is particularly advantageous for days labor market, where there is a significant shortage of trained technicians.
The foundation of our scalable and modular fiber management platform.
Patented clarity that shown here.
Slide four.
Our mission is.
To enable the lifestyle that better broadband provider.
People need access to high speed broadband could be able to work so they're kind of school and to fully participate in today's modern society.
Broadband is changing the way, we communicate with each other and fiber as a means to enable that change.
Company's founding vision was to deliver the products that build a better broadband network.
This is not something that we implemented recently, it's fundamental to who we are as an organization. We have developed a product portfolio sales organization and operational infrastructure to service the growth in fiber deployment for every community.
With that I'll now turn the presentation over to Dan who will walk us through our financial performance for the second quarter of 2022.
Thank you Sherry and good afternoon, everyone. It's a pleasure to be speaking with you today about our second quarter of our fiscal year 'twenty two results.
Looking at our second quarter financial results in more detail.
Net sales in the second quarter of fiscal 'twenty, two we're a record $53 million, an 80% increase from $30 million in the same year ago period, and up 5% from $51 million in our first quarter of 2022.
We had 210% customers in the period.
A distributor at 14% and our regional broadband service provider, who was 13% of sales.
In addition to our revenue increase sales bookings maintained their strong momentum in the second quarter of fiscal 2022 resulting in a 605% year over year increase in our sales order backlog.
Order backlog grew to a record $136 million on March 31, 2022 up from 101 million on December 31, 2021 and up from $19 million on March 31, 2021 .
Our recent investments in our new facility in Mexico has tripled our Mexico manufacturing square footage in our Minnesota warehouse has doubled our Minnesota footprint, which will enhance our capacity and revenue potential in the quarters ahead.
Now on slide eight we will review our net sales by our markets in greater detail.
Our core community broadband market comprised 75% of our net sales in the second quarter of fiscal 2022.
In Q2, we generated net sales of approximately $40 million in community broadband up 94% from the same period last year.
In addition for the trailing 12 months ended on March 31, 2022 or community broadband market net sales totaled approximately $133 million, which was up 76% from the comparable 12 month period last year.
Our M S O business comprised 14% of our net sales in the second quarter of fiscal 2022.
From a growth perspective, we have maintained the positive momentum established in this market over the last several quarters.
In this market, we realized an 82% year over year increase in net sales to approximately $7 million in the second quarter of fiscal 2022 and delivered a 95% increase in trailing 12 month net sales to approximately $28 million.
Net sales in our national carrier market for the second quarter of fiscal 2022 were up 76% year over year to approximately $4 million.
On a trailing 12 month basis net sales in our national carrier market totaled approximately $15 million up 20% from the comparable year ago period.
Net sales in our international markets were down 25% year over year in the second quarter compared to the same period last year.
But up 98% year over year for the trailing 12 month period ended March 31 2022.
Overall as a company our net sales over the trailing 12 months is now up 71% an increase from 63% recorded the previous quarter end.
Gross profit in the second quarter of fiscal 2022 increased 79% to approximately $23 million or 43% of net sales from approximately $13 million or 43, 6% of net sales in the same year ago quarter.
The slight sequential decline in gross profit margin was expected and due to increased overhead costs associated with our new facilities in Minnesota in Mexico.
As well as higher freight and transportation costs associated with the global supply chain challenges with higher sales and inventory volumes.
Operating expenses for the second quarter of fiscal 2022 were approximately $11 million, which were up from approximately $9 million in the same year ago quarter.
The increase in operating expenses consisted primarily of higher compensation costs due to increased personnel and higher performance based compensation as well as increased travel expenses and professional fees.
We were happy to say, we are able to be in front of customers more now than in the past two years be it through onsite visits or through trade shows which have recently picked up.
As a percentage of net sales operating expenses for the second quarter of fiscal 2022 was 21% down from 28% in the same year ago period.
It's important to note that while our operating expenses are up with our sales growth. Our opex remains near 20% of sales representing strong operating leverage results.
Net income in the second quarter of fiscal 2022 increased 154% to $9 $2 million from $3 $6 million in the same year ago period, and slightly down from $10.4 million in the first quarter of fiscal 2022.
Net income was lower than last quarter due to the increase in SG&A costs associated with increased travel professional fees and the introduction of additional overhead associated with the new buildings.
As a percentage of net sales net income for the second quarter of fiscal 'twenty 'twenty. Two was 17, 3% up from 12, 3% in the same year ago period and down from 23% in the first quarter of fiscal 2022.
On the balance sheet side, we had $2.7 million in capital expenditures, mainly to support increased capacity and new facility build outs and increased our inventory $17 million to $61 million in the second quarter as we utilize our cash position to acquire the necessary inventory to meet the <unk>.
High demand for our products is represented in our sales order backlog.
Lastly, as discussed in our first quarter call. The company has reinstated its stock repurchase program, but did not repurchase any of its common stock in this period.
With that I'll turn it over to Sherri.
Thanks for the financial update Dan.
The clear value proposition is driven by a thoughtfully designed fiber management and fiber connectivity products. We have made it our goals remove the obstacles that would prevent our customers from adopting fiber broadband.
Since its founding Clearfield was built to scale, we were built for the opportunity that lies in front of us.
As we mentioned from the beginning Clearfield has been positioned to deliver fiber products to communities that have historically been underserved or unserved clearfield truly is community broadband.
We are often asked how long its elevated demand for high speed broadband might last and whether it's sustainable.
As previously stated we are in the middle of our historic investment cycle for high speed broadband, particularly fiberglass Brian .
Chart on slide 14 put together by Jefferies Research shows the anticipated increase in government funding through 2020 five and includes the nearly 55 billion in funding available through the infrastructure investment and job that passed by Congress enacted in November of 2021 .
The scale of this market opportunity is quite simply massive.
As our Doctor alloys have moved through.
Q.
With around 50% of the first round of those funds being approved for distribution. We are now seeing some of our customers anticipating those dollars and beginning to place advanced orders.
Moreover, the broadband equity assets and deploying that program known as speed, which.
That's the 42 billion inside of the infrastructure and well mostly be distributed sometime in late 'twenty, three or possibly into 2020 for the FCC recently announced the broadband maps, which identify the areas by census flat, whereas the bead programs fun are most likely to be allocated and this will be updated this.
Paul.
The administration's stated goal prioritizing underserved community broadband access and our deep knowledge of the community broadband market.
Another significant growth opportunity for cross sell.
Yeah elevated demand in this market is not a short term event.
Delaware Research identifies the specific service providers.
It's gone on to say that more than 50 million homes will be passed by fiber that's my concern.
The research goes all I can say that we are in the third year of an investment cycle that many people in 'twenty 'twenty four with the spending cycle continuing beyond that point as projects get pushed out due to labor and components starting pool.
We truly believe this once in a generation investment opportunity will change the way people communicate in the future.
As shown on slide 16, Clearfield Nowadays plan.
Our strategic plan to establish a clear skill at the plant.
Has choice for fiber management and connectivity.
As we discussed the three pillars have been nowadays plan are intended to enhance clearfield market position with the aim of tasks during the fiber to the home and business market share that the company was built to obtain well simultaneously powering the innovation for new and existing markets in the years ahead.
Accelerating our operating cadence. This is a clear commitment to address the market exponential demand for fiber broadband and to ensure our operations to nimbly respond to our customers' demands.
Our ability to deliver our products on time to our customers is crucial so that their deployment schedules are cleaned and they're kind of revenue can accelerate.
As discussed in our fiscal Q1 call. We have made significant investments in inventory to ensure that we can deliver our products on time to our promise shifting this.
This in turn allows our customers to effectively manage their service technician and the new install technicians, who are in high demand given the present labor market shortage.
Customers are not working more closely with us in the mid to long term business plan submitting purchase orders months in advance providing us with increasing visibility into the particular products that they intend to deploy.
As a result, we are better prepared to ship those required products. So that our customers' deployment schedules can stay on track.
Nevertheless, we cannot overlook the fact that fiber availability continues to be challenged and supply chain initiatives persist across all industries. We are continuously working on ways to strengthen our relationship with our suppliers going forward.
We are also making incremental investments in SG&A to effectively meet the demand. We have added key personnel to the company and our recruiting for a number of different conditions throughout the company to help capture future growth.
The second pillar I, probably know how well they manage amplifying bold and disruptive growth.
<unk> commitment to continue delivering market changing product.
Current and future market requirements there.
Build programs for fiber to the home and business, we see today.
Transform into the integration of wireline and wireless networks and feature backhaul opportunities over the next several years.
Our substantial 136 million dollar backlog up 34% sequentially and over 600% year over year reflects the progress we have made towards achieving this pillars objective.
Responsiveness, what's there still has always excelled.
Proven to be a significant competitive advantage, enabling us to pick up incremental market share from new and existing customers.
We are working transparently with our customers to shorten lead times when we can ship.
Ship to promise delivery date.
Okay field labor utilization.
Finally on the product front in fiscal Q2, we began shipping in 96 core cabinet.
The specific part of the backlog and is particularly well suited for rural deployment.
Our engineering team continues to develop new products that would expand our total available market in fiscal 2022.
We look forward to providing updates on our product pipeline in the future, including solutions for future five G and edge computing opportunities.
Our third pillar augmenting capacity for ongoing growth.
Those commitments are scaling its operations to meet the incredible demand for high speed broadband.
Our agility and the ability to adapt to our customers and their changing needs are the key facets of this pillar.
You know what did you meet the significant demand for our products to new facilities came online in fiscal Q2.
We added 200 people to our manufacturing centers, expanding our head count by 50%.
We aim to add additional personnel and improved labor utilization in the coming quarters, just recruiting and training continues and facility optimization is achieved.
Here, you see images of our new distribution center in Minnesota, and the manufacturing center in Mexico.
Our supply chain management remains a key priority for Brookdale.
That work of partners can increase our capacity if needed due to higher demand, thereby ensuring we can continue to ship product without delay.
This helps us to safeguard our deliveries against any supply chain interruptions.
We also continue to utilize our supply chain network to further augment our capacity and grow demand.
Those continued organic growth as well as the right inorganic opportunities that would enable us to keep growing with our customers.
Looking at our financial outlook for fiscal 2022, we remain very optimistic about the sales growth potential. The majority of our record backlog is scheduled to ship in the next six months and the demand for high speed broadband, especially fight related broadband remains very strong.
With the current visibility until our substantial order backlog as well as the pipeline behind it we are raising our guidance for net sales from a range of $176 million to $183 million to a range of $204 million to $218 million in fiscal year 2020.
Two representing growth of 45% to 55% over fiscal year 2021 robin.
As discussed at the supply chain for sand materials continues to be challenging labor requirements and availability at customers and they also pose an additional challenge to customers deployments and this year's build season, while we cannot be certain there won't be labor challenges over the season. Currently we have not been notified of any.
Significant issues by our service provider customers.
We believe we are in the middle of a long term investment cycle for broadband deployment. We are experts in community broadband design for the opportunity in front of us and built to scale.
With strong execution of our proven growth strategy. We are confident that we can maintain the market leadership at Clearfield was built to achieve based on our agility innovation and commitment to customers needs.
With that we're ready to open the call for your questions.
Yeah.
Sure.
Yeah.
Thank you.
At this time, we will be conducting a question and answer session from the company's publishing publishing.
Side analyst.
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One moment, please while we poll for questions.
Yeah.
Thank you.
The first question comes from the line of Jason Smith.
With Lake Street capital.
Thank you and please go ahead.
Hey, guys. Thanks for taking my questions and congrats on the really impressive results here.
I just wanted to start with sort of the March quarter I'm trying to reconcile all the moving pieces, obviously the supply chain remains challenging and you noted.
Lead times continued.
Stan but was there any demand in the March quarter that you were unable to fulfill and if so could you quantify that.
Oh, there's absolutely demand unable to sell and that there was I mean, our customers are looking to shorten their lead time across the board and so we know that our responsibility is to continue to expand our capacity and to expand it as quickly as possible I comment.
Within the materials that we're.
We're working diligently to.
Shorten the lead time, we current leap.
Except promising to our customers doing the best that we can to ship to the date that we have provided you know this is a really unusual market for people. There. They are learning about your planning three and six months in advance and we're working to help them deal with those challenges right.
Now.
I couldn't really quantify specifically how much we could have pulled into this quarter.
But theres certainly it was demand that would have been significant.
Okay. That's helpful and I know a couple quarters ago, you noted that the backlog at that time comprised around 200 mirrors just curious how that is today and if that growth in backlog you were saying, it's really being driven by the current customers.
Expanding their orders or if that customer a customer base has broadened out.
Oh, it's both the we continue to.
Be it really et cetera about working with new customers. We're seeing you know the utility is do they missed the pallet is coming through and and have been very.
I had the opportunity earlier this quarter to spend some time at the power until annual conference. We were recognized as their product and vendor of the year. So there and they are a great supplier distributor to work with them that they provided the opportunity for us to continue to expand to additional customer.
I mean I can I can tell you that there are more than a dozen customers in our backlog with more than a million dollars a piece.
Several hundred customers in the backlog.
That are continuing to put your backlog members over 100000 and newer ones that we're not in there in the prior quarters.
Okay, No. That's that's nice to hear and very helpful and.
And then just the last one for me and I'll jump back into queue. Just curious if you could help us think about the cadence over the remainder of this year I know the past 18, plus months or your normal seasonality has already gone out the window, but typically I mean June the June quarter tends to be a strong one for you.
Should we think about that strength continuing here in this current quarter and then maybe a drop off in September or.
Kind of a gradual grow through the remainder of this fiscal year.
Yeah, I think our seasonality at this point, it's gone out the door.
We're going to see incremental enhancement incremental improvement on a quarter to quarter basis as we continue to work with the backlog. It can't Kinder you continue to expand the capacity in front of us.
You know as we talked about on the materials. We added 200 people last quarter and we only moved into that do building in Mexico in the first part of March. So we have a lot of training in front of US a lot of space utilization to implement so we're looking forward to enhancing the revenue.
That goes out the door on an incremental basis each quarter.
And working with our customers to be able that's build season to continue to get product in their hands.
Okay got it.
Sure at the color thanks, guys.
You're welcome thank you.
Thank you. The next question comes from the line of.
Jim.
Avi go with Northland capital markets.
Please go ahead.
Yeah.
Hi, good afternoon.
Congrats from me as well on another great quarter.
We had a question about.
Kind of government funding environment.
It's really.
Levering off of something I guess, one of your competitors.
Corning commented on earlier in the week with also very strong numbers from optical fiber and.
And thinking about the their bead program in particular.
I think what's a little over $40 billion of infrastructure spending.
They commented that they thought that could mean, an incremental $1 billion a year for them or about 20% of their current run rate over a four year period.
Yeah, I Wonder if you guys have given any thought to kind of.
Looking at the opportunity that way you know of a certain amount of award funding I know you've have per home metrics, but.
What sort of opportunity might come.
Clearfield toy or if you've got any kind of equivalent metrics.
To to think about with regard to what the impact of this upcoming program might be on the company and I know I have a follow up.
Hi, we're really trying to get our hands around that because yeah. We are.
Historically of course Corning was the big dog in the market and they were the big drag because of of AT&T and Verizon being the predominant deploy or you know today in this market.
Those organizations still being very strong for delivery agents of fiber to the home. There's so many more than that so many part of our world about what community broadband has in place.
Corning talked about 20% incremental growth than they had at 20% growth rate. This year over last year. So what we're trying to get our hands around with is that growing at 80% over last year. We're nowhere, we know that we're taking share and we need to be able to identify a how we're taking that share.
Keeping that share sticky.
Establishing the.
The organizational capacity by which to grow with that.
So that's those are figures that we hope to be able to put together and perhaps provide at a later call but at this point, it's more of our research and mostly importantly, just want to make sure. We can continue to build capacity back to us.
Got it and.
Yeah, while we're on Corning.
What are you.
Seeing out of your kind of traditional larger competitors in the community broadband market boosters, Corning and Commscope as well.
The change that's notable in and their behavior are they.
Kind of tied up with the big tier ones or whatnot.
Yeah, certainly Corning is a very well run company and has.
Service their large customers in a very good well with a strong way. The commscope is the market is watched them is.
It was figuring out how to best be able to solve some of their own financial challenges and we think theres an opportunity for us there I've taking share.
Within some of those customers as that that organization, perhaps bundles the ball a little bit.
Hello.
Okay and then last question for me you had mentioned that.
Given that I am a fair bit of the funding from Argos had been.
Dispersed or at least earmarked or.
More than half of it that you were starting to see.
Some activity either with our customers who would receive funds are.
And we're about to receive funds shortly ordering ahead.
You can give us some sense of the.
The quantitative impact of that is that.
You know after I guess several quarters or maybe not being material can we say that there aren't off is getting to have a material impact on your business kind of this quarter and heading forward.
Yeah.
For the quarter ending in March snow it just not material it will begin to become material moving forward and that those orders are now in backlog.
Yes.
<unk> was identified as being more than 10%.
Right, Yeah, that's what I was thinking great I'll pass it on thanks very much.
Thank you.
Thank you. The next question comes from the line of Ryan Koontz with Needham. Please go ahead.
On a quarter to the team there.
Sure do you have any commentary on product mix in terms of passing versus connections are you still seeing more heavy.
Passing his business.
This past quarter was.
And intense weather quarter that becomes more of a connections mixes of product.
Yes.
Actually as the weather gets nisource connections to improve Oh I'm. So we're still in the quarter ending in March very very heavy in passing.
And a very and very certainly a disproportionate amount of business in the past and in cabinets and the products that are necessary to be able to paas homes. In fact, we introduced this last month.
A program that we call Paas Paas, and it's really helping our customers identify how they can't pass twice as many homes as they would with a competitive technology so far.
<unk> passed has proven to you get a lot of traction at at trade shows and as seminars and so we think we're going to actually see a continued high concentration.
Of passing.
Moving forward because of the make ready work that you know that has to happen and we'll see that connection started to pick up probably late in the summer and mostly the connections will be our fiscal year 'twenty three opportunity and then that will augment the work that we're already doing.
Got it and as the connections.
The same exact competitor set generally that you deal with on the on the passive.
Yes, yes, absolutely.
Got it.
In your commentary on art off was was really interesting youre seeing some nice order flow there and any commentary around the ARPA funds or is that kind of timing similar to art off right now.
Oh, that's separate physically allowed ARPA.
Pardon me, yes.
The bead program, it's going to be awhile and that you know they're still working through.
How to do that to the NTIA, where we've seen the NTIA administration getting out.
<unk> entered the community talking to community providers on how to being able to apply for it but that's really a.
Calendar year, 'twenty, three and 'twenty four impact on New York.
Okay. That's helpful and then on the on the MSR business being down is that more of just kind of a typical seasonality to the cable capex. We've seen in the past that you might be seeing there being down sequentially.
M S O business is actually up.
See I'm quite substantially for year over year, 82% over a year you know it's.
You know, it's it's lumpy like any other project business.
But no we actually see the cable business is a strong growth market for us.
The visibility is pretty good there for you as well.
It is.
Great.
That's all I have thanks a lot.
Very good thanks Ryan.
Yeah.
Thank you.
At this time this concludes the company's question and answer session.
Your question was not taken you may contact Clearfield investor relation team at C. L. F D at Gateway IR Dot com.
I'd now like to turn the call back to you.
This is Mr. Bernick for closing remarks.
Please go ahead.
Thank you.
Has been absolutely a pleasure to talk about and maybe to brag a little bit about player. So because we're so thrilled with.
What my team is doing and the Africa and how we are working with our customers I also want to thank our customers because we need to continue to improve our performance to the to the level that they are expecting and so for those customers who are also investors in our organization. Please know that we do not take your business for granted and we will be.
Anyway to.
To improve our performance in that area.
And finally.
I'm excited to let everyone know that we got back to Clearfield and while we are working in a hybrid environment. It is so nice to not have to wear masks have a safe and healthy summer.
Yeah.
Thank you for joining us today for Clearfield fiscal second quarter 'twenty to 'twenty two earnings conference call you may now disconnect.
Yeah.
Yeah.
Yeah.
Yeah.