Q1 2024 Clearfield Inc Earnings Call
Operator: Good day, and welcome to Clearfield's Fiscal First Quarter 2024 Conference. All participants will be in a listen-only mode.
Good day and welcome to Clearfield fiscal first quarter 2024 conference call.
All participants will be in a listen only mode.
Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Greg McNiff, Investor Relations, Clearfield. Thank you.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now.
I'd like to turn the conference over to you, Greg Mcniff Investor Relations for Clearfield. Please.
Please go ahead.
Greg McNiff: Joining me on the call today are Sherry Baranek, Clearfield's President and CEO, and Dan Herzog, Clearfield CFO. As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward through the presentation as the speaker presents their remarks. 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. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note that the company is under no obligation to update such statements except as required by law.
Joining me on the call today are Cheri, Beranek, Clearfield, President and CEO and Dan Herzog Clearfield CFO as a reminder, the slides in this presentation are controlled by you. The listener. Please advance forward through the presentation as the speaker presents their remarks.
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.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements.
It is important to also note that the company undertakes no obligation to update such statements except as required by law.
Greg McNiff: 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 this conference call. The risk factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. They are also summarized on slide 2 of the earnings presentation. With that, I would like to turn the call over to Clearfield's President and CEO, Sherry Baranek. Sherry?
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 10-K filing with the Securities and Exchange Commission and in subsequent filings on Form 10-Q provide a description of these risks. They are also summarized on slide two of the earnings presentation.
With that I would like to turn the call over to Claire Phillips, President and CEO Cheri Beranek Sherri.
Sherry Baranek: Good afternoon, everyone. And thank you for joining us today to discuss Clearfield's results for the fiscal first quarter of 2024. We also intend to provide an update on our business and current market trends. Please turn to slide 4.
Good afternoon, everyone.
Thank you for joining us today.
There's still tons of pellets for the fiscal first quarter 'twenty 'twenty four we also I'm planning to provide an update on our business approach where it could trend.
Please turn to slide four.
Sherry Baranek: I noted last quarter that while the industry is facing several near-term macroeconomic and seasonal headwinds, broadband service providers continue to deploy equipment, and long-term demand remains as strong as ever. In the following slides, I will preview recently released market data that demonstrates this case, as well as the basis for our optimism regarding the long-term outlook. Consistent with our optimism, Clearfield repurchased $436,000 of its shares for approximately $12 million in the first quarter ended December 31, 2023.
I know last quarter was that while the industry is facing several near term macro economic and ease all heartland broadband service providers continue to deploy equipment on long term demand remains strong.
In the following slides I will preview recently released market data that demonstrates that as.
As well as the basis for our optimism regarding the long term outlook.
With our optimism because I felt we purchased 436000 shares for approximately $12 million in the first quarter ended December 31st 2023.
Sherry Baranek: Total net sales for the first quarter of fiscal 2024 were $34.2 million, above the high end of our guidance range, driven by higher-than-expected sales from our large regional service provider customers due to their ordering of complementary products to support their inventory mix needed for current deployment. Dan will discuss our financial results for the quarter in more detail shortly. While we continue to expect the next few quarters to remain challenging due to the inventory overhang across the industry, we remain focused on positioning Clearfield to take share when ordering patterns return to a more normalized cadence. To that end, we are expanding and enhancing our product portfolio in order to reduce the overall cost of cyber deployment by making the process as efficient as possible. We recently announced the addition of an innovative vault to our current product portfolio, which is designed to reduce the cost of shipping and storage by approximately 67%. Feedback from our recently introduced CraftSmart Fiber First Pedestal and also the FieldSmart FiberFlex Active Cabinet designed to be installed in rural areas has been exceptionally positive.
Total net sales for the first quarter of fiscal 2024 were $34 $2 million above the high end of our guidance range driven by higher than expected sales from our large regional service provider customers due to their ordering a complementary product to support their inventory mix needed for current deployment.
Dan will discuss our financial results for the quarter in more detail shortly.
While we continue to expect the next few quarters to remain challenging due to the inventory overhang across the industry. We remain focused on positioning ourselves to take care of ordering patterns returning to a more normalized cadence to.
To that end, we are expanding and enhancing our product portfolio in order to reduce the overall cost of thyroid or climate or making a process as efficient.
Bob.
We recently announced the addition of innovative bolt on to our current product portfolio.
If I had to reduce the cost of shipping and storage.
Definitely 67%.
Feedback from our recently introduced craft Smart Hydro first part itself and also the field smart hybrid flash back a cabinet designed to be installed.
The real area has been exceptionally positive that.
Sherry Baranek: Both products are now shipping and reflect another step toward our goal of providing our customers with alternative choices that continue to streamline fiber deployment. In addition, we are working to ensure these products and all other Clearfield product offerings will be compliant with Buy America, Build America, known as BABA, as the bead awards are expected to translate to initial deployment near the end of this challenging year, as shown on slide 5, recently published data from RVA, an independent research firm analyzing data in the North American cyber broadband industry. Recently, it was reported that the industry passed 9 million households in 2023, nearly a million more than the year before. Furthermore, this total included 3 million households that already had access to one fiber service provider.
Both products are now shipping and reflect another step toward our goal of providing our customers with alternative choices and continue to streamline hybrid deployment.
In addition, we are working to ensure these products and all other product offerings will be compliant with buy America build America known as Barber.
These awards are expected to translate to initial deployment.
And I've been a challenging year.
As shown on slide five.
Recently published data from RBA and independent research firm analyzing data in the North American fiber broadband industry recently reported that the industry passed 9 million households in 2023, nearly a million more than the year before.
Furthermore, this total included 3 million households, which already had access to one fiber service provider.
Sherry Baranek: The fact that approximately 35% of the households passed in 2023 already had access to one fiber provider confirms our view that the competitive landscape for broadband service is healthy and that our total addressable market is larger than a single fiber connection for each U.S. household. As many of you know, the $42.5 billion BEAD program is now underway with a mass release of the value of the monetary award divided per state. Slide 6 illustrates the relationship between government disbursement and service provider deployment. As you can see, this year is projected to be the largest disbursement year of government funding.
At approximately 35% of the households passed in 2023 already had access to one fiber for Bolivar convert confirms our view that the competitive landscape for broadband service is healthy and that our total addressable market is larger than a single fiber connection for each U S hostile.
Sure.
As many of you know the $42 5 billion dollar bead program is now underway with the master lease and the value of the Monetary award the buyback for states.
Slide six illustrates the relationship between the government disbursement.
Provider deployment.
And you can see the year is projected to be the largest disbursement near of government funding. However, we expect these funds to translate into deployment and revenue over the next several years.
Sherry Baranek: However, we expect these funds to translate into deployments and revenue over the next several years. As illustrated on slide 7, industry forecasts from RVA indicate that the next five-year period will see up to 12 million additional homes passed with fiber because of the federal funding initiative. These programs will bring high-speed internet access to unserved and underserved areas that will boost the forecasted total number of homes passed in the next five years in the U.S. market to over 57 million homes. Now, coming back to Clearfield's performance, I'd now like to pass the call over to our CFO, Dan Herzog, who will walk us through our financial results for the fiscal first quarter of 2024. Thank you, Sherry, and good afternoon, everyone.
As illustrated on slide seven industry forecasts from RBA indicate that the next five year period, we will see up to 12 million additional homes passed with fiber because of the federal funding initiatives.
These programs will bring high speed internet access to Unserved and underserved areas.
Boost our forecasted total homes passed in the next five years in the U S market to over 57.
All of them.
Coming back to clear sales performance I'd now like to pass the call over to our CFO Dan Herzog.
Todd who will walk us through our financial results for the fiscal first quarter of 'twenty 'twenty four.
Thank you Sherry and good afternoon, everyone.
Dan Herzog: Please turn to slide 9 to look at our fiscal first quarter 2024 results in more detail. Consolidated net sales in the first quarter of fiscal 2024 were $34.2 million, a 60% decrease from $85.9 million in the same year-ago period. The year-over-year decrease in total net sales was due to the ongoing industry dynamics that we commented on throughout the past year and that our peers in the marketplace have reported over the last several quarters. We remain focused on reducing costs and improving margins at Nestor by investing in more efficient manufacturing equipment and introducing higher-margin plug-and-play connectivity products. We continue to be focused on labor utilization, as well as driving efficiencies for enhanced productivity, in order to improve gross margins at all our manufacturing locations.
Please turn to slide nine to look at our fiscal first quarter 2024 results in more detail.
Consolidated net sales in the first quarter of fiscal 2024 were $34 2, Million% to 60% decrease from $85 9 million in the same year ago period.
The year over year decrease in total net sales was due to the ongoing industry dynamics that we commented on throughout the past year and that our peers in the marketplace have reported over the last several quarters.
We remain focused on reducing cost and improving margins, yet nester by investing in more efficient manufacturing equipment, and introducing higher margin plug and play connectivity products.
We continue to be focused on labor utilization as well as driving efficiencies for enhanced productivity in order to improve gross margins at all our manufacturing locations.
Dan Herzog: Order backlog declined 68% to $43.5 million on December 31, 2023 from $57.3 million on September 30, 2023 and $136.3 million on December 31, 2022. As our visibility remains limited, we continue to collaborate with our customers to align their open orders with their deployment schedules. As a reminder, the winter season is typically our lower order booking and revenue quarter. Our lead times are now less than four weeks across most product lines.
Order backlog declined 68% to $43 $5 million on December 31, 2023 from $57 $3 million on September 32023.
$136 $3 million on December 31, 2022.
As our visibility remains limited we continue to collaborate with our customers to align their open orders with their deployment schedules.
As a reminder, the winter season is typically our lower order booking and revenue quarters.
Our lead times are now less than four weeks across most product lines.
Dan Herzog: We continue to expect backlog to become less of an indicator for future sales, as most orders will be fulfilled within the quarter they are received. Turning to slide 10, I will now review net sales by our key market. Sales to our primary market, Community Broadband, comprised 36% of our net sales in the first quarter of fiscal 2024.
We continue can continue to expect backlog to become less of an indicator for future sales as most orders will be fulfilled within the quarter. They are received.
Turning to slide 10, I will now review net sales on our key markets.
Sales to our primary market community broadband comprised 36% of our net sales in the first quarter of fiscal 2024.
Dan Herzog: In Q1, we generated net sales of approximately $12.3 million in community broadband, down 67% from the same period last year. Net sales for the first quarter in our large regional service providers market were $7.9 million, comprising 23% of our total net sales, and declined by approximately 47% in the first quarter of this fiscal year versus the prior year's first quarter. Net sales in our MSO business were $5.2 million and comprised 15% of our net sales in the first quarter. Net sales declined by approximately 75% in the first quarter of this fiscal year compared to the prior year's first quarter.
In Q1, we generated net sales of approximately $12 $3 million in community broadband down 67% from the same period last year.
Net sales for the first quarter in our large regional service providers market were $7 $9 million, comprising 23% of our total net sales and.
It declined by approximately 47% in the first quarter of this fiscal year versus the prior year first quarter.
Net sales in our MSL business were $5 $2 million and comprised 15% of all net sales in the first quarter.
Net sales declined by approximately 75% in the first quarter of this fiscal year versus the prior year first quarter.
Dan Herzog: Net sales in our national carrier market for the first quarter decreased to $1.3 million, accounting for 4% of total net sales, and declined by approximately 48% in the first quarter of this fiscal year compared to the prior year's first quarter. Finally, net sales in our international market were $6.7 million, and comprised 19% of total net sales in the first quarter. Net sales in this market decreased by approximately 35% in the first quarter of fiscal 2024 versus the prior year's first quarter. As detailed on slide 11, gross profit margin in the first quarter declined to 13.7% of net sales from 35.7% of net sales in the same quarter a year ago. Our gross margin continues to be impacted by unabsorbed overhead in our manufacturing facilities due to lower levels of demand and winter seasonality. The company continues to adjust its production capacity to align to current demand and market conditions. In addition, gross margin was negatively impacted by an increase in reserves or excess inventory primarily resulting from the low level of demand.
Net sales in our national carrier market for the first quarter decreased $1 $3 million accounting for 4% of total net sales.
And declined by approximately 48% in the first quarter of this fiscal year versus the prior year first quarter.
Finally, net sales in our international market were $6 $7 million and COVID-19% of total net sales in the first quarter.
Net sales in this market decreased by approximately 35% in the first quarter of fiscal 2024 versus the prior year first quarter.
As detailed on slide 11 gross profit margin in the first quarter declined to 13, 7% of net sales from 35, 7% of net sales in the same year ago quarter.
Our gross margin continues to be impacted by unabsorbed overhead in our manufacturing facilities to lower levels of demand and winter seasonality.
The company continues to adjust its production capacity to align to current demand and market conditions.
In addition, gross margin was 92 negatively impacted by an increase in reserves for excess inventory, primarily resulting from the lull in demand.
Dan Herzog: We continue to expect revenue and gross margins in the first half of fiscal 2024 to be impacted by the continued inventory digestion at our customers, as well as the normal seasonal average. As we enter the build season in the second half of fiscal 2024, we anticipate an uptick in demand, which should lead to an increase in capacity utilization that should result in an improvement in gross margin. We continue to work to uphold price discipline as well while also ensuring the preservation of our long-term customer relationships. Moving forward, we will remain thoughtful in how we address pricing with our customers. Now, please turn to slide 12.
We continue to expect revenue in gross margins in the first half of fiscal 2020 for it to be impacted by the continued inventory digestion and our customers as well as normal seasonality.
As we enter the build season in the second half of fiscal 2024, we anticipate an uptick in demand, which should lead to an increase in capacity utilization that should result in an improvement in gross margins.
We continue to work to uphold price discipline as well, while also ensuring the preservation of our long term customer relationships.
Moving forward, we will remain thoughtful in how we address pricing with our customers.
Now please turn to slide 12.
Dan Herzog: Operating expenses for the first quarter were $12.9 million, which was consistent with $12.8 million in the same year and a quarter. The company remains committed to servicing its customer base and enhancing its long-term market position, as seen by the consistency in year-over-year expenses, which reflects our continued investment in our operations. As a percentage of net sales, operating expenses for the first quarter were 37.6%, up from 14.8% in the same year-to-go period due to lower sales volumes. Turning to slide 13, net loss in the first quarter was $5.3 million compared to net income of $14.3 million in the same miraculous period and net income of $2.7 million in the fourth quarter of fiscal 2023. Our net income is heavily affected by our reduced volume levels, which in turn results in lower gross profit percentages. However, as illustrated on slide 14, our balance sheet remains strong with $169 million of cash, short-term and long-term investments, and just $2 million of debt. We had $2.4 million in capital expenditures in the quarter, mainly to support our manufacturing operation.
Operating expenses for the first quarter were $12 $9 million, which were consistent with $12 $8 million in the same year ago quarter.
The company remains committed to servicing the customer base and enhancing its long term market position as seen by the consistency and year over year expense, which reflects our continued investment in our operations.
As a percentage of net sales operating expenses for the first quarter were 37, 6% up from 14, 8% in the same year ago period due to lower sales volumes.
Turning to slide 13, net loss in the first quarter was $5 $3 million compared to net income of $14 $3 million. The same year ago period, and net income of $2 $7 million in the fourth quarter of fiscal 2023.
Our net income was heavily affected by a reduced volume levels, which in turn results in lower gross profit percentage.
As illustrated on slide 14, our balance sheet remains strong with 169 $9 million cash short term and long term investments and just $2 million of debt.
We had $2 $4 million capital expenditures in the quarter, mainly to support our manufacturing operations.
Dan Herzog: Our inventory balance decreased from $98.1 million at fiscal 2023 year-end to $94.6 million in the first quarter of fiscal 2024. Our cash, short-term, and long-term investments reflect a reduction of just $5 million from September 30th, even though $12 million was used for the repurchase of shares in the first quarter. We recorded a cash flow from operations of positive $7.8 million in the quarter.
Our inventory balance decreased from $98 $1 million at fiscal 2023 year end to $94 $6 million in the first quarter of fiscal 2024.
Our cash short term and long term investments reflect the reduction of just $5 million from September 30th even though $12 million was used for the repurchase of shares in the first quarter.
We recorded a cash flow from operations, a positive $7 $8 million in the quarter.
Dan Herzog: Our strong balance sheet ensures that we are well positioned to effectively compete for larger customer opportunities and to pursue strategic opportunities to enhance our market and product portfolio. Likewise, our strong cash balance positions us to manage the business for the long term and, through our share repurchase program, reinvest for the long term.
Our strong balance sheet ensures that we are well positioned to effectively compete for larger customer opportunities and to pursue strategic opportunities to enhance our market and product portfolio.
Likewise, our strong cash balance positions us to manage the business for the long term and through our share repurchase program reinvest for the long term.
Please turn to slide 15.
Dan Herzog: Due to limited visibility related to the reasons we've discussed over the last several quarters, we will continue to provide quarterly guidance. For example, we anticipate the second quarter of fiscal 2024 net sales to be in the range of $29 to $33 million. We expect to generate a net loss per share in the range of $0.49 to $0.55. This increased loss over the prior quarter is due to increased inventory reserves for excess inventory, primarily resulting from the lull in demand. This loss per share range is based on the number of shares outstanding at the end of the first quarter and does not reflect share repurchases in the second quarter.
Due to limited visibility related to the reasons, we've discussed over the last several quarters. We will continue to provide quarterly guidance we have.
Anticipating the second quarter of fiscal 2024, net sales to be in the range of $29 million to $33 million.
We expect to generate a net loss per share in the range of 49 to 55 cents.
This increased loss over the prior quarter as it used to increased inventory reserves for excess inventory, primarily resulting from the lull in demand.
This loss per share ranges based on the number of shares outstanding at the end of the first quarter. It does not reflect share repurchases in the second quarter.
Dan Herzog: As I indicated earlier, we repurchased $12 million in stock as part of our share buyback program in the first quarter, which represented 436,000 shares at an average price of $27.69, leaving approximately $21 million available for additional repurchases. The significance of our buyback underscores our clear and proactive commitment as we believe in the enduring strength and potential of our company and this market. In the coming quarters, we will continue to make thoughtful and strategic decisions regarding share repurchases, driven by our strong conviction that our current share price is not reflective of our long-term opportunities. That concludes my prepared remarks for our fiscal first quarter of 2024. We appreciate the support of our investors as we continue to work to drive shareholder value. I will now turn the call back over to Sherry.
As I indicated earlier, we repurchased $12 million in stock as part of our share buyback program in the first quarter, which represented 436000 shares at an average price of $27 69.
Leaving approximately $21 million available for additional repurchases.
The significance of our buyback underscores our clear and proactive commitment as we believe in the enduring strength and potential of our company and this market.
In the coming quarters, we will continue to make thoughtful and strategic decisions regarding share repurchases driven by our strong conviction that our current share price is not reflective of our long term opportunity.
That concludes my prepared remarks for our fiscal first quarter 2024.
We appreciate the support of our investors as we continue to work to drive shareholder value.
I will now turn the call back over to Sherri.
Sherry Baranek: Thanks for the financial update, Dan. Turning to slide 17, I would now like to provide a brief update on our multi-year strategic plan, which we have labeled LEAP. LEAP is our roadmap for how we intend to capitalize on the significant opportunities ahead when industry demand returns to a more normalized capacity. Over the last 12 months, Clearfield's performance has been negatively affected by a misalignment between our capacity and market needs. We view this mismatch between supply and demand as a temporary challenge that we have addressed through reductions in variable costs, yet we must and will continue to execute at the highest level. We're all broadbanded in our DNA, and the reason we are the leading provider to this customer segment.
Thanks for the financial update then.
Turning to slide 17, I would now like to provide a brief update on our multiyear strategic plan, which when you have a label.
We have with our roadmap for how we intend to capitalize on the significant opportunities ahead on industry demand returns to a more normalized.
Over the last 12 months core sales performance has been negatively affected a misalignment between our capacity and market needs.
This mismatch between supply and demand at the temporary challenge that we have addressed through reductions in variable costs.
What we must and will continue to execute at the highest level.
Mandy and rdna and reasonably idle leading provider to this customer segment.
Sherry Baranek: As I highlighted earlier, we're not sitting still. Rather, we continue to develop new labor-saving products and align our sales and support staff to the markets where fiber is being deployed. Expect more product announcements to come highlighting these attributes. Listening to our customers and then delivering on their needs is the foundation upon which our North American business was built. Recently, we hired an executive with significant connectivity experience for our European operations, who will work alongside our existing European team to lead our initiative to cross-sell extensions of Clearfield connectivity products. We have also recently hired a senior-level operations executive to lead our North American manufacturing and procurement programs as part of our ongoing operational initiative to drive cost reduction, align capacity to near-term demand, and convert inventory to cash.
As I highlighted earlier, we're not sitting still.
We continue to develop new labor saving products and align ourselves and support staff to the markets where fiber is being deployed.
We expect more project announcements to come highlighting these attributes.
Listening to our customers and then delivering to their needs is the foundation upon which our north American business is built.
Recently, we hired an executive with significant connectivity experience for our European operations.
Work alongside our existing European team to lead our initiatives to cross sell expansion of Clearfield connectivity products.
We have also recently hired a senior level operations executive to lead our North American manufacturing and procurement programs as part of our ongoing operational initiatives to drive cost reduction.
<unk> capacity to near term demand.
Turning to cash.
Sherry Baranek: In addition, this edge strength to Clearfield's management team is an investment that will accelerate our ability to deliver strong earnings as market dynamics return to a more normalized pattern. While the near-term industry dynamics remain challenging, we also remain confident that future growth in fiber is absolute, and the value proposition that Clearfield brings to the market is as strong as ever. And with that, we will open the call to your questions. Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone. Confirmation Tunnel. Indicate your line is in the question. You may press star 2 if you would like to remove your question, for participants using a speaker.
In addition, this bench strength to our sales management team that.
That will accelerate our ability to deliver strong earnings as market dynamics return to a more normalized pattern.
Although near term industry dynamics remain challenging we also remain confident that the future growth of Fiverr is absolute.
Your proposition that for someone brings to the market is as strong as ever and with that we will open the call to your question.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask you a question you May press star one on your telephone keypad.
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Operator: It may be necessary to pick up your hands. Before pressing start, our first question comes from the line of Scott Searle with Roth. Please proceed with your question. Good afternoon, thanks for taking my questions.
Our first question comes from the line of Scott Searle with Roth. Please proceed with your question.
Hey, good afternoon, thanks for taking my questions.
Maybe just to dive in in terms of some of the government funding earlier in the week.
We calix was indicating that there had been some delays in deployments as customers were evaluating the b programs I'm.
Sherry Baranek: Hey, Sherry, maybe just to dive in, in terms of some of the government funding, earlier in the week, Calix was indicating that there had been some delays in deployments as customers were evaluating the BEAD programs. I'm wondering if you could comment on that, if you're seeing a similar type of slowdown with your customers, and then also more specifically in some of the BEAD programs funding and award themselves. I appreciate the detail in the slides, but when do you expect to see awards start to happen, and when would you expect those to materialize in order to benefit Clearfield?
I'm wondering if you could comment on that if you're seeing a similar type of slowdown with your customers and then also more specifically in some of the bead programs funding and award themselves.
Appreciate the detail in the slides, but when do you expect to see awards to start to happen and when would you expect those to materialize in orders benefiting our clearfield is that still on track for the first calendar quarter of 'twenty five or is there the potential for some of this to slip.
Okay.
Yeah Yeah.
Yeah, Hi, Scott.
Listening to the Calix World I mean, that's that's really consistent with our world and really probably consistent with what we've been saying for a couple of quarters now that you know as people put together their plans and their engineering directives and and how it relates to what's coming with need.
Sherry Baranek: Is that still on track for the first calendar quarter of 25, or is there the potential for some of this to stop? Yeah. Hi Scott.
Sherry Baranek: Listening to the Calix world, I mean, that's really consistent with our world and really probably consistent with what we've been saying for a couple of quarters now that as people put together their plans and their engineering directives and how it relates to what's coming with LEAD, there needs to be a choice. And so there has been less revenue, and less activity than one might expect. There are only so many engineering companies to go around.
There needs to be a choice and so there has been less.
Less revenue and less.
Activity that we might expect there are only so many engineering companies to go around them and so their engineering for potential be towards it not necessarily for deployment. This year and we've also talked about that the balance sheet needs to be in a good place for when they go after the the bead funding because they're competing with others.
Sherry Baranek: And so they're engineering for potential LEAD awards and not necessarily for deployments this year. And we've also talked about that the balance sheet needs to be in a good place for when they go after the LEAD funding because they're competing with others. And there is a level of financial match that's necessary as well.
And there is a level of financial match, that's necessary as well.
Dan Herzog: It really doesn't change our outlook that, you know, the BEAD initiatives will start to be rolled out now in late 24 and consistent with what, you know, we've said in the past and what Kellix has said is that it's meaningful, you know, in 25 and for the next 3 to 5 years as those programs are put into play. The one thing that I want to make sure that we talk through, though, is, you know, when we look at one of the slides early in the presentation, you know, the number of homes passed in the next five years, even without BEAD, is going to be close to 35% higher than it was in the previous five years.
Yeah, It really doesn't change our outlook that you know the beat initiatives will start to see being rolled out now in late 'twenty four and consistent with what we've said in the past and like Calix has said is that meaningful in 'twenty five and for the next three to five years as those programs are put into place.
The one thing that I want to make sure that we talked through though as well is you know when we look at one of the slides.
In the presentation.
The number of homes passed in the next five years, even without beat you know, there's going to be close to 35% higher than it was in the previous five years, it's just really a timing of the quarters and how we can put this all together.
I'm not anticipating that be it is going to slip as much as I think it is this a disciplined manner of of getting everyone's kinda back together.
Dan Herzog: It's just really the timing of the quarters and how we can put this all together. So I'm not anticipating that BEAD is going to slip as much as I think it is a disciplined manner of getting everyone's kind of act together. Very helpful. And if I could, for a follow-up, looking into your guidance for the March quarter, a couple of items. I'm wondering if you could quantify the inventory charge. It looks like it's probably somewhere in the two-plus million range.
Okay very helpful and if I could for a follow up looking at your guidance into the March quarter. A couple of items I'm wondering if you could quantify the inventory charge. It looks like it's probably somewhere in the two plus million dollars range just wanted to get a handle on that and in terms of March sales outlook are you comfortable that this is marking the bottom and we should see sequential.
Improvement through the course of this year and I know, it's a little bit early but I'm wondering.
What's the timeline that you would expect kind of quote unquote normalization of your revenue stream where.
Dan Herzog: Just wanted to get a handle on that. And in terms of March sales outlook, are you comfortable that this is marking the bottom and we should see sequential improvement through the course of this year? And I know it's a little bit early, but I'm wondering, what's the timeline that you would expect, kind of, quote-unquote, normalization of your revenue stream where demand is, your shipments are more in line with end-market demand? Right, I'll take the second half and I'll have Dan talk to the inventory reserves. As we look at the you know the quarter in in March that's it's still the winter seasonality and so beyond the bead program and beyond the issues associated you know with inventory overhang we are going through winter issues although it doesn't look like it you know here in Minnesota it's 50 degrees today and and not any snow so we're actually hopeful that we might get a with so much warm weather across the country that we might get an early spring and an early build and that I think is one of the factors that I think we're going to see the March quarter would be my expectation that it'll be part of that it'll be kind of the bottom of our you I've talked previously about a you shaped recovery and I think we're going to start to see you know more of a normalized world and a normalized pattern closer to a you know this you know we're still in this winter and pulling down the backlog right now but we'll see closer to that one-to-one book to build ratio that we kind of were famous for as we get into the summer months and we expect our revenues to increase we just don't have a forecast at this point to what level, Dan, do you want to address inventory? Mm-hmm, right. So, yeah, Scott, hi.
Demand is your shipments are more in line with end market demand. Thanks, Mhm right, Oh, I'll take the second half and I'll have him Dan talks to the inventory reserves.
So we look at the quarter end in March that's it's still the winter seasonality and so beyond the bead programs beyond the issues associated with.
With the inventory overhang and we are going through the winter.
It went to issues, although it doesn't look like it you know here in Minnesota was 50 degrees did end and not any snow. So we're actually hopeful that we might get with so much warm weather across the country that we might get an early spring and an early build and that I think is one of the factors that I think we're going to see them then.
March quarter would be my expectation that it'll be a part of that it'll be kind of the bottom of our U M. I've talked previously about at a U shaped recovery.
And I think we're going to start to see.
More of a normalized world in a normalized pattern closer I'm sure. You know this you know we're still in this winter and book pulling down the backlog right now, but we will see closer to that one to one book to bill ratio that we kind of Oh no. We're famous for as we get into the summer months and we expect our revenues to increase.
Just don't have a forecast at this point to what level.
Dan do you want to address inventory.
Mhm right, so, yes, Scott Hi.
So we've tried to conservatively estimate and it's somewhere in the area of about $5 5 million for the upcoming quarter.
Those are hard to estimate you kind of got to get through the quarter and see what relieves in the quarter. So that's an estimation right now.
Clearly those things are going to be prevalent in the market and you'll probably hear more people talking about that but as people are stocked up for longer term demand, but we have to get through this pause and everybody else, reducing their inventories youre going to probably see this more so it's a you know what you can look at people's inventory to their revenue.
Dan Herzog: So we've tried to conservatively estimate, and it's somewhere in the area of about five and a half million for the upcoming quarter. Those are hard to estimate. You kind of got to get through the quarter and see what happens in the quarter.
Hum.
Numbers you can you can kind of anticipate those things are going to happen. So it's important to note that these aren't things that we're obsoleting. These are not things that we're putting in the dumpster. The words what were using around its reserves and its an excess inventory, meaning we just have too much of what we make we don't stock up a lot on finished goods were pretty much.
Dan Herzog: So that's an estimation right now, but clearly, those things are going to be prevalent in the market. You'll probably hear more people talking about that, but as people are stocked up for longer-term demand, but we have to get through this pause and everybody else is reducing their inventories, you're probably going to see this more. So it's, you know, we can look at people's inventory and see their revenue numbers. You can kind of anticipate that those things are going to happen. So it's important to note that these aren't things that we're obsoleting. These are not things that we're putting in the dumpster.
You know doing components or sub assemblies that will eventually go to those finished goods, but we are not this to us looks it's kind of like a noncash charge that we expect that when markets return to demand returns will be used and at that point in time, you get recoveries back on those and it actually helps improve your reserves. So I'm looking at this as a.
Dan Herzog: The words that we're using around it are reserves, and it's on excess inventory, meaning we just have too much of what we make. We don't stock up a lot on finished goods. We're pretty much, you know, doing components or subassemblies that will eventually go into those finished goods. But we are not, this to us looks, it's kind of like a non-cash charge that we expect that when markets return and demand returns, it will be used, and at that point in time, you get recoveries back on those, and it actually helps improve your reserve. So I'm looking at this as a timing thing. Great, thanks. I'll get back in the queue, and Sherry, please send that warm weather east.
A timing thing.
Great. Thanks, I'll get back in the queue and Sherry, please send that that warm weather east. Thanks [laughter].
[laughter] no.
[laughter]. Our next question comes from the line of Ryan Koontz with Needham and company. Please proceed with your question.
Thanks for the question on your customer segments here with the step down in community broadband, it's definitely at a multiyear low pre pandemic.
I Wonder if you've thought about you know if you parsed out the root.
The results you had in December and thought forward at least into March.
Sherry Baranek: Thanks. Thank you. No.
What the impact what the headwind is there specifically in community broadband is it dominantly inventory is a dominantly conservation of capital and our resources to plan for bead.
Operator: Our next question comes from the line of Ryan Kuntz with Needham & Company. Please proceed with your question. Thanks for the question. On your customer segments here, with the step down to community broadband, it's definitely a multi-year low, pre-pandemic, and I wonder if you thought about, parsed out, the results you had in December and thought forward at least into March. What the impact, what the headwind is there specifically in community broadband, is it dominantly inventory, is it dominantly... Conservation of Capital and Resources to Plan for Bede. If you can help us there, that'd be really helpful. Thank you. I think it's a combination of all of the above.
Can help us there that'd be really helpful. Thank you.
Yeah, I think it's a combination of all of the above I mean, mostly community broadband did not have a strong inventory position the higher level of inventory.
Being held is that the large regional providers and so with those regional providers now starting to kind of work through their mix. That's actually a really positive sign for us I think the community broadband numbers are very.
Very relative to what others in the industry as yeah was there I'm not sure you know as Scott said from Ross the Calix announcements earlier. This week, it's very consistent community broadband is holding.
Sherry Baranek: I mean, mostly community broadband did not have a strong inventory. The higher level of inventory being held is at the large regional providers. And so with those regional providers now starting to kind of work through their own mix, that's actually a really positive sign for us. I think the community broadband numbers are very relative to what others in the industry are. As Scott said from Ross and the Calix announcements earlier this week, it's a very consistent message that community broadband is holding back, evaluating what they're going to do, making sure they have the right funding, and they're going to be able to have their engineers in the right place for where they get their funding and where they don't. So, I mean, those of us who have been in this market for a long time know that government funding is fabulous, but it is also frustrating because, you know, back in 2008 when we probably got the previous time that we got a chunk of money into this market, it put a lull in our business for probably close to nine months.
Holding back evaluating what they're going to do in making sure. They have the right funding and theyre going to be able to have their engineers in the right place for where they get their funding or where they don't.
So I mean those of US who've been in this market for a long time know that government funding is fabulous, but it also is frustrating because I'm you know back in 2008, when we probably got the the previous time that we got a chunk of money into this market yeah. It they put a low in our business for probably close to nine months and so this is no.
Different so we're confident it'll come back it is just a reflection of people evaluating their options.
Great and it sounds like from your comment there.
The regionals, you're seeing some improvement in the inventory situation at the regionals and little more poll is that accurate.
Right I think it's the <unk>.
The endpoint of the analogy I have used.
I think it's very descriptive as F forks and knives.
Sherry Baranek: And so this is no different. So we're confident it'll come back. It is just a reflection of people evaluating their options. Great, and it sounds like from your comment there... you're seeing some improvement in the inventory situation at your regionals and a little more pull. Is that accurate? Right. I think it's from the standpoint of the analogy I've used. I think it's very descriptive of forks and knives
You've got all the forks, they need that they know they're finding out they need more nice and so that's a really good sign that it's starting to.
Kind of work itself out and that you know they've made.
Tim it's upon what they're going to need and they made estimates in regard to the mix of what they're going to need.
Sherry Baranek: They've got all the forks they need, but now they're finding out they need more knives. And so that's a really good sign that it's starting to kind of work itself out and that they made estimates upon what they're going to need, and they made estimates in regards to the mix of what they're going to need. So it is definitely starting to improve, and I think it's important to note that we did have a record high in the number of homes passed last year.
So it is definitely starting to improve and I think it's important.
To note that we did have a record high at a record high in the number of homes passed last year and so this disconnect.
Between the number of homes actually connected and the number of <unk>.
That's the dollar signs being shown by the manufacturers is a mismatch at the moment.
Sherry Baranek: And so this disconnect between the number of homes actually connected and the number of dollar signs being shown by the manufacturers is a mismatch at the moment. I think that's really the best reflection of or answer to your question. Okay. Okay, that's all I have.
I think that's really what the best reflection of or answer to your question.
Okay, great Great. That's all I have.
Our next question comes from the line of.
Tim Sovereigns, you know with Northland capital markets. Please proceed with your question.
Operator: Our next question comes from the line of... Tim Savageaux with Northland Capital Markets. Please proceed with your question. Hi, good afternoon.
Hi, good afternoon.
I think you've already touched on this a little bit but.
I did note a little.
Timothy Paul Savageaux: I think you might have touched on this a little bit, but yeah, I did note a little uptick, at least sequentially amongst the larger regional players and, I guess, as you look forward. I'm here for your, I don't know, your..., your guide for fiscal Q2 or even farther out. You know, what do you think?
Uptick at least sequentially.
Amongst the larger regional players and.
I guess as you look forward.
Here for Ya and I don't know your.
Your guide for fiscal Q2 or.
Even farther out.
What are you.
Timothy Paul Savageaux: I guess, what do you expect to see from that cohort and, you know, is there any reason that that would, you know, diverge from what you're seeing from your broader community broadband market? And I'll follow up from there. I wouldn't call it diverge.
I guess, what do you expect to see from that cohort.
Is there any reason that that would diverge from what you from what Youre seeing from your broader community broadband market.
Blow up from here.
I wouldn't call. It diverged I mean, I think what we're seeing is clearfield has been strong for a decade in community broadband, but is emerging as a presence in the large regional providers and that we took share you know during the pandemic period, we're working very hard during that time.
Sherry Baranek: I mean, I think what we're seeing is Clearfield has been strong for a decade in community broadband but is emerging as a presence among the large regional providers in that we took share, you know, during the pandemic period. We're working very hard during that time and now to ensure the stickiness of that relationship, the partnership that we're doing to help them manage their inventory, and to help them reduce the cost of their deployment by taking out labor. So I think it'll be an increasing part of our business, but it could be lumpy because, you know, you get an order from a large regional provider that can dwarf some of the other business and maybe put it out of perspective. So I wouldn't read into a single quarter at this point in time, but I think it's good for you and for us all to see the level of activity underway and the pull through that we're starting to see.
And now to ensure the stickiness of that relationship.
During that we're doing to help them manage their inventory.
To help them.
Reduce the cost of their deployment by taking out labor. So I think it'll be an increasing part of our business, but it could be lumpy. Because you know you get a an order from a large regional provider that can dwarf them to some of the other business and maybe put it out of perspective, so I wouldn't.
Read into a single quarter at this point in time, but I think it's good for you for all of us to see that level of activity underway and the pull through that we're starting to see.
Sherry Baranek: Okay, great. And, you know, obviously, I think we saw a seasonal downturn on the international side. I imagine that will, do you expect that to continue to decline into Q2 or stabilize? Oh, very much so. I apologize for the interruption. Yeah, no. I apologize for interrupting, Kim. Very seasonal, and it's very cold in Northern Europe, even colder than a normal year.
Okay great.
Obviously, I think we saw a seasonal downturn on the international side.
Alright, I imagine that will be.
When do you expect that to continue to decline into Q2 or.
Alright.
Yes.
Okay.
Yeah, I know I apologize for interrupting Ken are very seasonal.
And and.
And it's very cold in northern Europe.
Sherry Baranek: So lots of, and it started, and winter started very early as well. So know that the first quarter down in international sales is very seasonal, and I fully expect that to be a better number next quarter. Okay, and last one for me, and you may have touched on this, apologies if you did, but given the bottom line guide, I'm assuming you're looking for a little more pressure on the gross margin trump in Q2, but if you have any specifics you want to share there, that'd be great. Thanks.
Even colder than in a normal year, so lots of and it started in the winter started very early as well. So that's the first quarter down in international sales is very seasonal and I fully expect that to be a better number next.
Next quarter.
Okay and last one for me and you may have touched on this apologies. If you did but you know given the Bottomline guide I'm, assuming you're looking for a little more pressure on the gross margin front.
In Q2.
Do you have any.
Is it because you want to share there that'd be great. Thanks.
Dan Herzog: Yeah, you know, kind of consistent with where we finished in Q1 in revenue, so we're not forecasting going up on that. So you'd see, you know, you're kind of seeing it slightly lower than the range that we provided, so that's there. And then, you know, it's predominantly related to the non-cash inventory reserves that we'd be taking. So, like I mentioned to Scott, like five and a half on that. So, you know, that puts pressure on us. Obviously, the lower volume is there.
Yeah. It's you know kind of consistent with where we finished you know or I'm sorry.
Our Q1 in revenue so were not.
Forecasting going up on that so you'd see.
You kind of seen it slightly lower.
The range that we provided so that's there and then.
Predominantly related to the noncash inventory reserves that we'd be taken so like I mentioned to Scott like five and a half on that so you know that puts pressure on us obviously the lower volume is there. That's that's just going to be a given anytime that were you know, let's say below or a higher higher revenue quarters.
Dan Herzog: That's just going to be a given anytime that we're, you know, let's say below our higher revenue quarters. So that's a given. But the big change is related to the excess inventory reserves, and that's what pushes the margin down.
So that's a given but the big change.
Is related to the.
The excess inventory reserves.
And that's what pushes the margin down.
Dan Herzog: Got it. Thanks very much. As a reminder, it is Star 1 to ask a question. Our next question comes from the line of Jaeson Schmidt with Lake Street. Please proceed with your question. Hey guys, thanks for taking my questions. Just a few questions on Nestor.
Got it thanks very much.
As a reminder, it is star one to ask a question.
Next question comes from the line of Jason Smith with Lake Street. Please proceed with your question.
Hey, guys. Thanks for taking my questions just a few questions on nester I think previously there was the expectation for the investor business to be able to ramp to that $15 million range in the summer months is that still possible.
Operator: I think previously there was the expectation that the Nestor business would be able to ramp up to that $15 million range in the summer months. Is that still possible? We're not providing guidance that far out, and so I'd say there is an opportunity in that we're building a company to be able to address that, and we're building capacity to address that. One of the enhancements that we've made over the course of the last year is the expansion of the amount of microduct that we're able to provide, and what's exciting about microduct is not only that it increases revenue and increases the margin, but it also is a precursor to future connectivity sales, so it gives you an early indicator, and the addition of resources there for connectivity, someone who has a strong background in connectivity and understands the differences and I'd say don't get it again, it's more of a trend line there, I think, for us, rather than a specific target for the summer months, and because of the fact that, because of the rockiness or the lumpiness of their seasonality, 15 million is possible, but not a forecast for us. Okay, that's fair.
Oh, we're not providing guidance that far out and so there I would say there is an opportunity and that we're building a company to be able to address that.
And we're building capacity to address that one of the enhancements that we've made over the course of the last year is the expansion of the amount of my first act and that we're able to provide and what's exciting about micro <unk> not only that it increases the revenue increases the margin, but it also is a precursor.
Her to future connectivity sales. So it gives you an early indicator.
So the and they are edition of resources, there for a kind of a connectivity a someone who has a strong background in connectivity and understands the differences and nuances of the types of connectivity solutions that are necessary certainly will help them help us pull that.
True.
I'd say don't get again, it's more of a trend line there I think for us rather than a specific target for the summer months.
And because of the fact that the the rockiness or the lumpiness of their seasonality.
Millions possible, but not a forecast for us.
Okay. That's fair and then can you update us on the timeline on where youre at from being able to manufacture the <unk> product line in the Mexico facility.
Sherry Baranek: And then can you update us on the timeline on where you're at from being able to manufacture the Nesta product line in the Mexico facility? We're already doing so. So, the only issue we have is the availability of PVDF materials. And so, we are fully manufacturing the Nester product types in Mexico. Mostly, what I think is important, though, is that we're not intending to manufacture high-count fiber for the U.S. market. That tends to be a commodity-level product line, and so we aren't going to make the capital equipment investment for that. But certainly, all of the products that Nester made for Clearfield were able to do in the Mexico facility. And we'll be able to do, with the expansion of our manufacturing lines and the new cable lines that we're putting into one of our Brooklyn Park facilities, all of the previously Nester-supplied equipment in Minnesota as well. Okay, perfect. Thanks a lot, guys. There are no further questions in the queue. I'd like to hand the call back to management for closing.
We're already doing that.
And so the only issue we have is the availability of PV D S materials and so.
Well we are fully.
Fully manufacturing in Mexico, the Nestor product types.
Mostly what we're what.
I think it's important though there is that we're not intending to manufacture high count favor for the U S market that tends to be a.
Commodity level product line, and so we aren't going to make the capital equipment investment for that yeah, but.
But.
Certainly all of the products that Nestor made for Clearfield, we're able to do in the Mexico facility and we'll be able to do with the expansion of our manufacturing lines and the new cable lines that we're putting into our.
One of our Brooklyn Park facilities will be able to do all of the previously investors supplied equipment and Minnesota as well.
Okay perfect. Thanks, a lot guys.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Sherry Baranek: Thanks for the opportunity to spend some time with you all at this time of year and to really help to provide, I think, some insight into a long-term investment opportunity. We are at an amazing time right now in the U.S. market and on the brink of really becoming a fiber-rich country, and the opportunities that that presents for us and the economy that it will build are certainly a strong one. The Clearfield opportunity here remains the same. Our value proposition is exactly built for this time, and I welcome the opportunity for you to join me in recognizing some of the benefits that fiber is going to provide, and hopefully, you see that and want to participate in that as being a shareholder of Clearfield. Ladies and gentlemen, this does include today's teleconference. Part 2. Please connect your lines at this time and have a wonderful day.
Yeah, no. Thanks for the opportunity to spend some time with you all at this period of time and it really helped to provide I think some insight behind.
Our long term investment opportunity.
Are an amazing time right now in the U S market and on the brink of really be coming a fiber rich fiber rich country and the opportunities that that presents for us in the economy that it will build is certainly a strong one and clearfield opportunity here.
The same I mean, it was a very our value proposition is exactly built for this time and I welcome the opportunity for you to join me in recognizing some of this.
The benefit that fiber is going to provide and hopefully you see that and want to participate in that as being a shareholder threshold.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.