Q2 2023 Clearfield Inc Earnings Call
Okay.
And welcome to the Clearfield fiscal second quarter 2023 conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist.
He followed by DRAM.
After todays presentation, there will be an opportunity to ask question.
Can I ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
Now I'd like to turn the conference over to Greg Mcknight Investor Relations for Clearfield. Please go ahead.
Thank you joining me on the call today are Cheri, Beranek, Clearfield, President and CEO , Dan Herzog, Clearfield, CFO and Kevin Morgan Clearfield CMO. Please note that during this call management will be making remarks regarding future events and the future financial performance of the company.
These remarks constitute forward looking statements for purposes of the Safe Harbor provisions of the private Securities Litigation Reform Act.
Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements.
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 earnings presentation and on this conference call. The risk factors section in Clearfield most recent form.
Our 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks with that I would like to turn the call over to Clearfield, President and CEO Cheri Beranek Sherri.
Afternoon, everyone and thank you for joining us today to discuss Clearfield results for the second quarter of fiscal 'twenty to 'twenty. Three we will also provide an update on our business and current market trends.
Before I review, our performance and current market dynamics I want to emphasize that we remain more confident than ever.
Long term demand for fiber broadband remains exceptionally strong.
Superiority of fiber as both a technology and an investment is well established.
Accordingly, we are focused on the screen.
The company to capture market share once industry ordering patterns return to more normalized level.
I'll discuss these initiatives in more detail shortly.
Please spell has always differentiated itself.
Crisp execution as.
As demand increased throughout the pandemic.
So was able to respond quickly driving revenue beyond 40% growth.
Previous nine quarters.
Moreover, our execution allowed us to move into larger accounts and take share as demand for hardware intensifies.
We intend to remain focused on execution as the industry works through the near term dynamics and preparing for the return to growth led by significant government funding initiatives.
Our second quarter fiscal 2023 revenue and net income per share came in relatively in line with our forecast for the quarter.
Total net sales for the second quarter was $72 million, which includes the $11 million contribution from Napster cable.
However, following our first quarter report what we originally thought was the transition to a more normalized seasonally driven ordering and deployment pattern by some of our customers has developed into a much more significant lull in demand as inventory is digested.
Specifically, we have experienced order push outs by several large regional service providers.
Multiple system operators Msos are cable TV providers, who had accumulated and excess inventory position during the pandemic period.
In light of this inventory digestion.
<unk> revenue to be lower than we previously anticipated.
Accordingly, we are updating our revenue guidance for fiscal year 2023.
We now expect revenue for the full year to be in the range of $260 million to $275 million.
Additionally, we are updating our 2023 net income per share.
Now expect net income per diluted share to be the range of $1 80.
$2 and Tencent.
The majority of this downward revision to guidance is due to a pause in orders at the large regional service providers and to a lesser extent the MSL.
Of the approximately 120 Milligan and revenue reduction at the midpoint of guidance.
Significant portion was due to push outs in orders, while the remainder was due to an inventory overhang related to purchases during the pandemic.
As we discussed in our previous earnings call throughout the pandemic, our customers ordered products earlier in their deployment schedule to stay ahead of any supply chain challenges.
Just in case approach, particularly at our large regional service providers led to growth in our backlog, which reached record levels by the end of fiscal year 2022.
As our customers Digest inventory buildup, we are right sizing capacity levels with this level of demand.
In light of this inventory digestion, we expect revenues to be lower than we previously anticipated.
Order to provide more visibility into this dynamic starting this quarter, we will breakout revenue contributions from our large regional service provider customers.
Lumen frontier Windstream.
The historical financials for the new market segmentation can be found in the appendix on slide 22.
I want to stress that we have not lost any customers in this segment and we believe we will continue to take share in this segment when growth returns.
We remain confident that long term demand for high speed broadband remains strong and that we are well positioned to benefit from the significant rural broadband Bill that is still in front of us.
Well, we are right sizing capacity levels to meet current demand, we are maintaining the infrastructure and processes for long term growth.
You need to design products to address our customers' biggest pain points and reduced the amount of skilled labor required to install.
As many of you are aware our primary end market is community broadband, which is predominantly comprised of tier two and tier three incumbent local exchange carriers as well as a number of municipalities utilities co ops and wireless carriers.
There are pockets of excess inventory within this market segment. We believe it has less exposure to these headwinds.
I now want to highlight how clearfield is preparing to take share once we get through this period at an inventory digestion.
First we continue to design our product line to be craft friendly in the fields, reducing both the amount of necessary skilled labor needed for the installation and the level of skill required to install our hardware.
As illustrated on slide five the most recent example of this strategy is a key change product.
The change is designed to enable customers to complete their deployments faster and more efficiently accelerating their time to revenue.
As a reminder, labor accounts for approximately 70% of total deployment cost.
So these savings can be significant.
The change has already received significant positive feedback from multiple carriers.
Okay. The scalable nature of our equipment allows customers to pursue a pay as you grow strategy.
Our clear mucus that has changed the rules of fiber management.
Integrated fiber management system is based on multiple of 12 fibers. It can be utilized whenever and wherever it is required in the network.
Other vendors' equipment is customized to specific parts of their network and approach, which requires more labor to install and resources to manage.
This modular and scalable strategy has allowed us to extend our market leadership and underserved rural broadband to become the leading provider.
Additionally, we have been able to move up market to larger customers looking to accelerate their deployment cycle and to reduce labor costs.
We intend to keep delivering additional craft friendly products that shorten the deployment time.
Combined with superior execution.
This strategy will allow us to continue taking share.
Please turn to slide six.
To further enhance our positioning we have worked to improve our product delivery lead times.
During the pandemic lead times reached a high of 20 weeks due to supply constraints.
Lead times now are more in the range of six to eight weeks and we are targeting long term lead times of four to six weeks across all product lines with the exception of active cabinet, we're still face supply constraints.
This work to improve our lead times covenant is our customer ordering cycles begin to return to pre COVID-19 patterns, but as post COVID-19 volumes.
For some additional insights on what we are seeing in the market and the significant long term opportunity I would like to welcome our Chief marketing officer, Kevin mortgage to the call.
Kevin.
Thank you Gerry great to be joining all of you. This afternoon.
The latest market research forecasts from RBI, a leading market research authority in the field of prop Robert.
Market research.
The industry commitment for fiber expansion.
As you can see from the chart the tier one independent local exchange carriers or ILEC.
The initial build out of the province.
The whole market.
The first 20 years of deployment.
However, in 2023 shift is occurring in the market.
According to the data the other service providers in the market collectively surpassed the cumulative fiber to the home market of total of the.
Tier one pilot.
Other service providers include the community broadband.
Of customer segments.
The appetite for high speed broadband communications has never been greater and so no signs of letting up.
This continues to drive fiber deployment deeper into every corner of society across all market segments.
As Jerry mentioned, we believe our work to maintain a world class lead time and further progress.
<unk> strategic plan enhances our position for the long term demand environment.
And then 2020.
Robert Robert Survey.
In December the fiber broadband Association estimated 10 year annual average run rate of 11 3 billion fiber deployment.
In 2022 alone.
Bob will provide his past seven 9 million additional homes, representing a new record for annual performance.
This momentum gives us a powerful foundation for 2023 and the years ahead.
We're positioned within an investment cycle.
Yes.
We continue to view the gradual disbursement of ARPA and Argos.
And the upcoming distribution of the funding is meaningful but gradual industry tailwind further.
Our market opportunity.
Turning back to Clearfield fiscal second quarter performance.
Now ill pass the call over to our CFO Dan Herzog.
Who will walk us through our financial results for the fiscal second quarter of 2023.
Thank you, Kevin and good afternoon, everyone.
Please turn to slide nine to look at our fiscal second quarter 2023 results in more detail.
Consolidated net sales in the second quarter of fiscal 2023 were $72 million 34.
4% increase from $53 million in the same year ago period.
This figure includes $61 billion of organic net sales from Clearfield and an $11 million contribution from Nestor cables.
Reflecting a 50% increase from Nestor cables over the previous quarter.
As many of you are aware, we acquired that business in July of last year.
We are investing in capital equipment, and faster processing capability to reduce costs and improve margins at investor.
Furthermore, the discovery process and how to best provide higher margin connectivity solutions into the European market continues.
The year over year increase in net sales was due to higher sales across our core end markets, particularly in our community broadband and <unk> markets along with the contribution from Nestor cables in our international markets.
Order backlog declined 21% to $108 million on March 31, 2023 down from $136 million on March 31, 2022, and $136 million on December 31 2022.
We expect backlog will reduce further and that it will be roughly equivalent to quarterly revenue.
While we continue to disclose backlog based on the feedback we received from our investors. We believe our lead time progress remains a more meaningful measure of our operational performance going forward.
As Sherry noted our lead times are currently six to eight weeks with a goal of getting down to four to six weeks excluding active cabinets.
Turning to slide 10, I will now review net sales by our key markets.
Sales to our primary market community broadband comprised 47% of our net sales in the second quarter of fiscal 2023.
In Q2, we generated net sales of approximately $34 million in community broadband up 26% from the same period last year.
In addition for the trailing 12 months ended on March 31, 2023, our community broadband market net sales totaled approximately $152 million, which was up 72% from the comparable period last year.
As Sheri indicated we are breaking out revenue contribution from our large regional service provider customers, which was previously included in the community broadband and national carrier segments.
We believe this new customer segmentation will allow investors to better understand the near term industry dynamics Sherri highlighted earlier.
To provide clarity to this customer group, we have broken our powered our community broadband customer market to disclose revenue from the traditional smaller providers and from ILEC with footprints of 500000 subscribers and above which.
Which we refer to as large regional service providers.
While net sales in our large regional service providers market were up 19% over the trailing 12 months period net sales for the second quarter declined by approximately 17% year over year for this mark.
We anticipate the revenue decrease among this customer group will continue for a period of time.
Please refer to the slide at the end of this presentation to view the historical revenue contribution for this new customer market.
Our MSL business comprised 14% of our net sales in the second quarter.
Net sales grew 39% year over year and are up 127% for the trailing 12 month period.
Net sales in our national carrier market for the second quarter decreased by approximately 16% year over year.
On a trailing 12 month basis net sales in our national carrier market were up 25% from the year ago period.
Finally, net sales in the international market increased 800% year over year in the second quarter compared to the same period last year and were up 255% in net sales year over year on a trailing 12 month basis due to the acquisition of Mr cables.
Tribute to $11 million toward this market.
As detailed on slide 12 gross profit margin in the second quarter declined to 32, 8% of net sales from 43, 3% of net sales in the same year ago quarter.
Our gross margin was impacted by unused capacity in our Mexico facility due to the lower levels of demand as well as Nestor has lower gross margins as its revenue contribution represented a higher percentage of overall revenue.
Given the dynamics impacting the industry, including rising supply costs as well as our exposure to large regional service providers. We now expect gross margins to finish the fiscal year near 30%.
And expect to achieve mid 30% to 40% when volumes ramp up to our initial fiscal year 'twenty three revenue guidance levels.
Oh Clearfield does not compete on price we have been prudent in how we pass along rising cost to our customers in the interest of maintaining our long term relationships we.
We will continue to be thoughtful and addressing these costs with our customers going forward.
Now please turn to slide 13.
Operating expenses for the second quarter were $11 $5 million.
Which were up slightly from $11 2 million in the same year ago quarter.
This increase is the result of the addition of operating expenses of the Nestor cables business acquired in July 2022, offset by the reversal of performance based compensation accruals during the fiscal second quarter.
As a percentage of net sales operating expenses for the second quarter was 16% down from 21% in the same year ago period, which reflects improved operating leverage.
Turning to slide 14, net income in the second quarter increased 12% to $10 4 million from $9 2 million in the same year ago period, and was down from $14 $3 million in the first quarter of fiscal 2023.
As a percentage of net sales net income for the second quarter was 14% down from 17% in the same year ago period and down from 17% in the first quarter of fiscal 2023.
As illustrated on slide 15, our balance sheet remains strong with $166 million of cash short term and long term investments and $2 million of debt.
We had $2 5 million in capital expenditures in the quarter, mainly to support our manufacturing operations.
Our inventory balance increased from 90 million to $101 million in the second quarter driven by the industry dynamics, we have discussed.
While we expect inventory levels to increase slightly throughout the year, we do not expect them to do so at the same levels as we experienced in fiscal year 2022, resulting in improved free cash flow in the fiscal year ahead.
As Sherry noted, we now expect revenue for the full year to be in the range of $260 million to $275 million.
Additionally, we now expect net income per diluted share to be in the range of $1 80 to $2 10 per share.
With the capital raise we undertook last year, we plan to continue investing in our infrastructure and other necessary strategic areas.
Additionally, our strong balance sheet ensures that we are well positioned to effectively compete for larger customer opportunities and the ability to pursue strategic opportunities to enhance our product portfolio.
That concludes my prepared remarks for our second quarter of fiscal 2023, we appreciate the support of our investors as we continue to work to drive shareholder value.
I'll now turn the call back over to Sherri.
Thanks for the financial update.
Turning to slide 17.
I'd now like to provide an update on our multiyear strategic plan.
Which is our roadmap for how we intend to capitalize on the significant opportunities ahead.
Starting with L, which stands for leverage.
We remain focused on leveraging our significant relationship the community broadband.
Listening to our customers and responding with solutions that address their pain points.
As I mentioned earlier, we recently announced that launch a sea change.
Reduces deployment time and labor costs, we expect to make similar announcements throughout the year.
He stands for execution.
And we are currently right sizing our capacity in our Mexico facility in order to navigate current market dynamics.
Sure we are ready to meet the market opportunity ahead.
Likewise, we remain focused on reducing our lead times by strengthening our supply chain partnerships.
Finally, we are pursuing cross selling opportunities with nesters fiber cable both domestically and at some point in the near future.
The AE and we plan to accelerate infrastructure investment.
We expect investments in our systems to continue to drive incremental growth and margin expansion going forward.
We will also continue to expand Purcell college to provide online and infield training support as our industry navigates the ongoing shortage of skilled labor in the market.
Finally, the <unk> stands for a position innovation at the forefront of our value proposition.
To that end, we intend to increase the cadence of our product releases, while ensuring we provide the best value for our customers through our innovative product design.
Several third party analysts have estimated the total government funding for underserved and under served markets to be approximately $100 billion over the next several years.
Moreover, this funding is aimed at those markets in which we are a clear leader.
As Kevin highlighted this spending will drive a sizable shift in the coverage of fiber deployment.
Share of household passed will shift to the smaller and alternative carriers.
Crystals is favorably positioned to benefit from this shift and expect to recognize revenue from these funding initiatives beginning next year.
In addition to the significant demand generated by the government funding outlays, we are preparing for several large opportunities over the coming years, including expansion into Europe for which Nestor cables provides a strong base.
The integration of wireline and wireless architectures <unk> ramps up.
And the evolution of our fiber network to the edge to manage low latency data intensive applications in summary, while our second quarter financial results and guidance reflect the current state of the market. We are focused on building a strong foundation from which to address the long term demand for high speed broadband.
Across our markets.
Well, we're right sizing capacity levels to meet current demand, we are maintaining the infrastructure and processes for long term growth and continue to design products to address our customers' biggest pain points and shrinking the amount of skilled labor required to install.
And with that we will open the call to your questions.
Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Ryan.
Needham. Please go ahead.
Thanks for the question and thanks for the.
Added metrics on the regionals, it's clearly an area of concern here.
I Wonder if you can kind of walk through I mean, we've seen the regionals.
A lot of them downsize their plans and.
Revised capex lower this year, that's obviously.
<unk> and kind of doubling the problem of over buying last year.
If you could reflect on that and.
Maybe some of the other segments, specifically community broadband and how you think about that market evolving over the next couple of quarters, where I don't think we are aware of such an inventory issue but.
Labor, our labor costs, and a big of an issue in the community broadband side as well.
Well as the regionals.
Yeah.
Thanks, Brian .
As you've noted and this is very much an industry issue as it relates to the regional service providers in that the economic and where all the macro economic issues across the world and inflation and are like her.
Causing some of the regional service providers to readdress their capex as they have announced over the course of really the last month.
And as you stated that teamed with the fact that they did.
We did place a significant just in case inventory position last year that I think they even.
Came to understand better understand as we came into the beginning of the build season, because we started to and our conversations with them and in February and March and April there was definitely a different tune to what they were doing.
Long term absolute commitment to broadband and as many others in the industry have talked about today and over the last.
Last week is we see a strong return to broadband deployment.
In the latter half of the year.
It's just unfortunate for Clearfield that are latter half of the year is not that far away since our year end happens in September .
<unk> community drive that in comparison to to the regional service providers.
It's a little less inventory intense.
Some pockets out there a bit but mostly what we see there is a world in which there are so many more.
Community broadband providers at a smaller scale.
There's just a number of them that are starting to ramp up that are starting their deployment.
And our ability to have such a broad range of customers. This really shows the strength of our business.
Community broadband.
I think in in all of the areas you were seeing issues associated with labor. We've been told that is getting better.
But incrementally not.
You know not overnight and the other thing that is emerging.
Less so on community broadband, but absolutely within the regional providers is challenges associated with permitting and permitting is related not only to them being a single provider, but I'm hearing stories of multiple providers going into a market and as a result, the cities and.
Communities, who are providing permits are just overrun with trying to be able to respond effectively.
So I think this is a changing world a changing dynamic that is kind of going to have to work itself through and but we're excited and remain excited about our ability to execute within it. It's just unfortunately very bumpy.
Understood just a quick follow if I could around.
The ARPA contribution are you still seeing momentum there or is there also a similar pause going on.
The area of the lease.
ARPA words, it seemed to be a nice steady stream of awards over the last few months.
Right were seeing that for this summer that will kind of see the revenues associated with that in community broadband.
Small orders.
Smaller providers a couple.
They're not going to be passing 10000 homes this year.
Those awards are going to communities that are passing 3000 homes here 2000 homes there.
But they all all add up and we're excited that we're working with.
Directly with some of those accounts and very much through distribution as well.
Got it alright, I'll pass onto the queue. Thank you.
Our next question comes from Jason Smith with Lake Street. Please go ahead.
Hey, guys. This is Max on for Jason.
Just in terms of the guide I wanted to get your cadence for the next couple of quarters in other words.
Should investors, which we are which we see a trough in revenue.
Yeah.
We anticipate the next couple of quarters will be pretty consistent with each other so it will drop from current conditions.
For third quarter, and then third and fourth quarter, we think will be pretty consistent with each other.
This is at this point the build season at higher Bill season.
And so as a result, we tend to see some nice momentum already which we haven't unfortunately picked up in March and.
In April we're looking for that in May and June DM and.
And because of the lead times now shrinking drastically.
Should work out just fine.
Sure.
Hope that answers your question.
No. It does thank you and then I just want to clear something up so you've mentioned that GM you expect gross margin you expect to be 30% is that for the next two quarters or do you expect the entire fiscal year 'twenty three gross margins to end up.
30%, Yes, thats right.
That's a cumulative so obviously third and fourth quarter will be less than that.
Okay. Thank you that's it from me guys.
Our next question comes from Tim <unk> with <unk>.
Northland Capital markets. Please go ahead.
Hi, good afternoon.
Afternoon couple of questions.
As you look at your kind of re class.
I'm going to assume you took alumina at a national carrier.
Regional but if.
If we look at that particular segment of revenue.
Should we consider that effectively going to de minimis levels.
Immaterial levels. The next couple of quarters as <unk>.
Is the primary driver of.
The revenue decline.
Yes, Yeah, third and fourth quarter it'll be it will be it will be very small and it's not just.
It's some situations about inventory push outs and then it's.
Our order push outs, but then also our anticipation when we.
Put together the initial guide for follow on orders that have not yet materialized now.
That said looking forward to a very strong awkward market opportunity for us and our products are as well respected in that market as they are in community broadband.
And none of those carriers represented more than 10% of our business.
In a single quarter, but when they're high single digits and there is multiple ones of them, who have had some similar inventory carrying positions as well as some chronic project deadlines associated with Capex get pushed out.
It starts to take a significant tool.
Okay, well I guess, maybe the reason I ask is dead.
While the community broadband.
I don't think I mean.
Obviously, you had big Big second half of last year, the fiscal year, but the impact on the smaller.
Carriers seems.
Much less significant.
Maybe down slightly from current levels in my.
Reading that the right way and I.
I know you saw a big drop.
Alright.
Let's just hit that one I won't go through the community.
Community broadband is is definitely mean.
I mean, if we look at the course of a community broadband as an aggregate.
And in second quarter in comparison to the last.
12 months.
The second quarter, it's up high 20% in comparison to the 70 some percent of it was that over the course of the last year.
So that really represents there are some inventory positions within community broadband as well as some pockets and some of the larger community broadband carriers.
But what's different there.
We look to third quarter DM is there'll be new community broadband providers, who were going to that we are working with that will come online.
Question really will be how fast they will come online for their permitting and there are different issues.
The long term I think we see the balance kind.
Returning to where we're at today, but there's going to be.
That's the downturn over the course of the next two quarters as you highlighted is going to be predominantly because of the large providers who have taken.
Using the inventory positions they have to deploy for this summer.
Okay got it and then maybe just kind of a similar question on the cable side you obviously saw.
So a pretty significant drop off there in the second quarter, but looking forward.
You did reference I guess I don't know to the extent to which your commentary on cable is about the quarter or forward looking and whether you.
Expect further significant declines from that segment through the balance of the year.
Yeah, We did mentioned that it was going to be among clients within regional service providers as well as that to a more limited basis within the msos.
So.
I really don't see that much difference between this segment.
About the differences in regards to rate what's different is the one carrier can represent multiple millions or the forecast in msos and then regional service provider rather than community broadband a much smaller number so the again the intent within cable TV I don't see it as being any.
Different they are very bullish on being able to protect their their strong base of ownership in the residential broadband market.
But as some of the Capex spend among the telcos decreases the threat that they have been experiencing also declines.
And so I'm, what I see across the industry is whereas last year. It was a it was a foot race for being able to get a landgrab whoever was pass eaten at home first who's going to get that business and what we see this year is really changing that position from being a land.
Grab to today being more about success based deployment and really concentrating on connecting the homes that they passed already in addition to additional homes moving forward. So they've got a change there.
Mouse models have to change their cost to pass a home was underestimated labor costs are much more than what many of these accounts that they were going to be and that said the interest rates now for this year are totally different position than what their business plans were based on.
And so it's really.
Pushed out.
Opportunity.
Rather than for it to be just immediate I mean, if we look at the fiber to the home Council numbers. They said, if we hit a record of $7 9 million homes last year, which is fantastic, but they also said that over the next 10 years. The average was going to be over 11.
It's all just pushed out moving forward rather than for it to be in a shorter period of time.
Okay. Thanks, very much and last question from me historically kind of pre the big.
Pandemic, driven surge you had talked about kind of sustainable growth rates for clearfield.
The double digit 10% to 15% range as we kind of look forward realizing visibility is not great right now.
Care to frame growth expectations heading into 'twenty four relative to those historic benchmarks.
While we're not giving 'twenty for guidance.
We firmly believe that clearfield is in a position.
As the shift moves from larger carriers to the smaller alternative carriers that we can grow faster than market rates and so that'll be our goal and our positioning by which to do that.
Yeah, Thanks very much.
Our next question comes from Scott Searle with Roth. Please go ahead.
Hey, good afternoon, thanks for taking my questions.
Sure maybe just just looking at the mix of business across the different customers. Just last year was really a covered you are building out the footprint.
But you also get paid for the connection and the success based Capex I'm wondering if you could give us an idea about what that mix of business looks across.
The broader space in general.
Are you seeing the growth and how the gross margins compare there they had a couple of follow ups.
Mhm.
Our gross margins for homes passed as well as homes connected are actually quite similar to that.
That's that doesn't change the gross profit outlook.
We as a company have a much higher penetration in homes passed with the with our cabinet line.
Than we do with the number of homes connected and that our share among homes connected is less than our share of homes passed.
One of our big initiatives. This year is to establish ourselves now.
Okay.
Maybe to a caveat in community broadband we have a much higher penetration of homes.
Connected than we do in the large regional service providers and the regional service providers, we have very much about passing homes and have not yet become a portfolio of provider for the full range of our solutions.
One of the reasons that we saw a need for even simpler products than we currently have and so in addition to the terminals and draw peoples that we had provided previously this spring we launched a product line called sea change and change is an entirely.
Pack in place with no splice.
Plug it in and move on solution.
So not only is it easier to install but it is easier to win here and so that will.
That is a.
Patent protected new proprietary product to clearfield.
Just a bit on the market now for about 60 days and so it'll be.
We look forward into 'twenty, four and beyond one of the tools by which that we will have to increase that penetration rate into homes connected.
Right very helpful.
And maybe to follow up I know, we talked a lot about.
Excess inventory and kind of hitting the pause button and a number of the different categories in terms of regional providers and Msos, but do you have an idea of what the existing inventory levels look like within those two groups.
Seems like it's built into the expectations now.
Persist into June and September timeframe, but it also seems like you're seeing some indication that maybe in December there starts to be a pickup so.
That's on inventory within those customers.
Two quarters to kind of work through those inventory excess levels.
So we do have.
Visibility into some of the accounts directly into their own excel charts in your own inventory levels.
And we do it into.
Into the distributors, but not necessarily into every community broadband provider.
We do talk with every with most community broadband customers.
These quarterly and all of the regional service providers, probably weekly if not daily depending upon.
You know who we're talking to.
So we don't I can't give you an absolute that it's.
Three months or six months in regard to the inventory position.
Because I think part of it is whether or not these customers theyre going to actually execute the plans that they are in.
Because last year bluntly, they didn't execute to their original plan, which is why they have this excess inventory.
So I think my best response to that is we're entirely bullish on the environment.
Our conservative approach to this guidance level because of the uncertainty and the uncertainty toward their plan versus their execution and their demonstrated history.
And we will keep our investors as.
As advised as we can.
It's why we broke out the.
The additional market segments. So that we can continue to be as transparent as possible.
But I think one of the Fabulous parts about Clearfield is we built this company they make money from the beginning and so while we for nine consecutive quarters, we increased the.
Topline growth of the company by 40%, while we were delivering high teens and net income.
There is an experience.
The expense to that or the return on that has been strongly for investors over the course of the last nine quarters and others. What Lee, Yes, we have a capacity.
In excess of what current demand is.
But we've executed strongly to demand when demand was there and I think we know after that Oh.
Environment that the demand will return.
Our product lines has been well received and now we have additional infrastructure by which to respond. So we can grow.
Our original forecasted levels.
Not this year, but certainly in the years to come.
Great very helpful and lastly, if I could on the gross margin front.
Certainly you are going through some absorption issues over the next couple of quarters, but you you referenced rationalizing some of the Mexican capacity I Wonder if you could talk about that and then as well inventory levels are elevated by design.
Now as the World has started to normalize from a supply chain perspective, how is that playing into the gross margin headwinds because youre dealt within the factories as hard as well to absorb conditions.
Exacerbating that and.
And how quickly do they come back with the top line is starting to recover at some point as we get into fiscal 'twenty four.
Right.
So you're right, we have enough capacity allocations that arent being.
Overhead allocations that have not been absorbed we have on some of the variable costs.
We have reduced our class by having fewer workers in some of our factories.
From an inventory standpoint, there is an increase associated with our inventory summit's.
Organic Clearfield and also a significant increase at master cable and we couldnt be more proud of of.
Nestor cable to increase over the first quarter of almost 50%.
There the demand opportunity in Europe is proving to be significant and we anticipate to see a strong network cables contribution in third quarter.
And I think.
That's the good part the unfortunate part of that is there at a lower gross profit percentage than we are than organic clearfield is so the mix between Clearfield, Andrew Kent and Nestor.
It's going to bring that number down now we are significantly investing in an additional.
Equipment and lines and capacity in Europe , So that we can increase their gross profit of Nestor.
And not necessarily.
On the cable to clearfield connectivity levels, but as we introduce connectivity products.
<unk> Europe will see there.
Our global numbers gross profit numbers going up.
As we look into 'twenty four.
It will be it's still a.
We can't take the fixed costs out of our Mexican facilities, and or Minneapolis facilities, but we're certainly managing the variable cost to the best levels that we can and we anticipate we would be at a gross margin level.
Close to what we forecast of about 40% once we get the revenue lines that we had in this year's guidance program.
Thank you.
Yes.
If you'd like to ask a question. Please press Star then one.
Our next question comes from Greg Matz Monopolies, most part capital. Please go ahead.
Yes. Thank you.
When you look at the order intake softness across your various.
Customer categories.
I'm, assuming that the vast majority of it relates to products.
<unk> for the residential broadband market enough for the small to medium size business is that correct.
Our product line and that clearly you can see that can be used for residential as well as for business class deployment. It's one of the advantages of our architecture.
It's you use all of the same products, regardless of where it's being deployed right.
No you don't know whether the.
The lower orders are related to our.
Softer residential demand on the part of your customers or business that's no no no.
No I Couldnt tell you that.
Okay and second part of the question is as you as your customer base moves further upstream into the larger carriers.
What kind of if any competitive landscape issues are you running into as far as competition.
Well, we will certainly as we move up into the regional service providers, we're coming up to the larger or larger competitors on a more aggressive.
Aggressive basis and last year.
Last couple of years during the Covid environment, when our competitors did not have capacity to respond to these providers. It gave us the opportunity to compete for business and it was important for us during that period of time that we did not simply take orders.
Wanted I wanted to share I wanted the opportunity for repeat business and we did a number of trials to facilitate and identify the labor savings and how we could be long term customers.
As long term suppliers into that environment.
Now a larger service providers typically youre going to have lower gross profit than that then community broadband.
But that will be hidden in our numbers moving forward because of the capacity the overhead absorption is what's going to be at a level that it'll high the increased.
Margin that we would normally see by a straight community broadband business.
Thank you for that and then one final any commentary or color on use of proceeds from euros.
Ian.
We were very fortunate to be in a position to raise money last winter.
And that I.
Our balance sheet being very strong.
<unk> has not given us the opportunity to really look at a variety of factors.
Certainly in a time of uncertainty like now.
Having a strong balance sheet gives us a lot of considerations. It allows us to compete for big business in bigger customers and it also allows us the opportunity to strategically look at opportunities to.
To expand our product lines or to expand the channels by which we offer them. So no definitive plans at this point, but.
But we are.
Looking and managing our balance sheet with a very disciplined orientation.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Sherri.
<unk> for any closing remarks.
Thank you very much it's certainly been a challenging time and it's.
And I.
I take it very personally to disappoint investors in that your support and confidence in US is something that we take great pride in the M. I believe in this company I believe in everything that we're doing and I look forward to continued continue to earning your respect and your trust moving forward.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.