Q3 2024 Clearfield Inc Earnings Call
Speaker Change: Good afternoon and welcome to the Clearfield Fiscal Third Quarter 2024 Conference Call. All participants are in listen-only mode.
Operator: 2024 Conference Call All participants are in listen-only mode. A question and answer session will follow the formal presentation. Please note that this event is being recorded.
The question and answer session will follow the formal presentation.
If anyone should require operator's assistance during the conference, please press the star key, followed by the zero, on your telephone keypad.
Please note that this event is being recorded.
Greg McNiff: I would now like to turn the conference over to Greg McNiff, Investor Relations for Clearfield. Please come ahead.
Cheryl Beranek: Thank you. Joining me on the call today are Sherry Beranek, Clearfield's President and CEO, and Dan Herzog, Clearfield's CFO. As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward through the presentation as the speaker makes 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 forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statement.
Speaker Change: Thank you. Joining me on the call today are Sherry Beranek, Clearfield's President and CEO , and Dan Herzog, Clearfield's 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.
Cheryl Beranek: It is important to also note 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 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. There are also some lies on slide two of today's earnings presentation.
Speaker Change: Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company.
Speaker Change: 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 risk and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.
Speaker Change: It is important to also note 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 four looking statements contained in today's press release, earnings presentation, and on this conference call.
Speaker Change: 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 today's earnings presentation.
Speaker Change: With that, I would like to turn the call over to Clearfield's President and CEO , Sherry Beranek.
Sherry Beranek: Good afternoon, everyone. Thank you for joining us today to discuss Clearfield's results for the fiscal third quarter 2024. We also intend to provide an update on our business and current market trends.
Cheryl Beranek: We also intend to provide an update on our business and current market trends. Please turn to slide four.
Speaker Change: Please turn to slide four.
Speaker Change: We continue to view 2024 as a transition year and believe that we remain in a gradual recovery as broadband service providers continue to deploy equipment and long-term end-user demand remains robust.
Speaker Change: In the following slides, I will discuss the latest market data that supports this view.
Cheryl Beranek: Total net sales for the third quarter of fiscal 2024 were $48.8 million, above the high end of our guidance range. Specifically, community broadband revenue is comparable to last year, driven by a higher percentage of revenue from homes connected relative to last year. Dan will discuss our financial results for the quarter in more detail shortly.
Speaker Change: Specifically, community broadband revenue is comparable to last year, driven by a higher percentage of revenue from homes connected relative to last year.
Speaker Change: We continue to expect ordering patterns for the remainder of the year to be impacted by the inventory overhang, predominantly in our large regional and MSO accounts. Dan will discuss our financial results for the quarter in more detail shortly.
Dan: We are encouraged by the growing interest in our active cabinets for new applications in adjacent markets, including transportation support and traffic monitoring, which will expand our customer base to new categories such as municipalities.
Cheryl Beranek: We see this as an emerging opportunity for Clearfield starting in fiscal 2025. To that end, our recently introduced 3D interactive fiber installation tool on the built mobile app is receiving very positive feedback from customers, with one large regional provider evaluating whether to make the app available to their entire technical team. We recently enhanced the company's manufacturing facilities in Minnesota to accommodate BABA requirements and ensure customers have the products needed to meet their deployment schedule.
Dan: We see this as an emerging opportunity for Clearfield starting in fiscal 2025.
Dan: as labor constraints continue to be an issue for our service provider customers.
Speaker Change: I would now like to provide a brief update on the bead process.
Dan: We are seeing a significant increase in quoting activity for our bead-compliant products from both existing and new customers. As of earlier this week, 26 states and territories have been approved to move into the award process.
Cheryl Beranek: While we wait for the ramp and beat orders, we are currently receiving orders from service providers eligible for the $18 billion in funds allocated to the Enhanced Alternative Connect America Cost Model, or ACAM, this program, as well as private funding sources. Of these 59 million homes, roughly a third are forecast to have access to more than one fiber provider. We believe the introduction of two-fiber competition among providers is a very healthy development and also expands our total addressable market. Turning 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 third quarter of 2024. Thank you, Cheryl.
Speaker Change: Industry forecasts from RVA remain unchanged in that they indicate that the next five-year period will see up to 59 million additional homes passed with fiber, which equates to a 12.5% compound annual growth rate.
Speaker Change: Of these 59 million homes, roughly a third are forecast to have access to more than one fiber provider. We believe the introduction of two-fiber competition among providers is a very healthy development and also expands our total addressable market.
Daniel Herzog: Consolidated net sales in the third quarter of fiscal 2024 were $48.8 million, a 20% decrease from $61.3 million in the same year-ago period, but above our guidance range of $40 million to $44 million. Net sales exceeded our expectations, driven by an increase in orders during the build season from both existing and new customers. Turning to slide 8, I will now review Net Sales by our Key Marketers. Sales to our primary market, Community Broadband, comprised 40% of our net sales in the third quarter of fiscal 2024. As Sherry mentioned, our community broadband market experienced a sequential uptick of 22 percent, driven by an increase in orders related to normal seasonality, as well as from new customers in the utility sectors.
Daniel Herzog: Net sales in our MSO business were $5.8 million, which comprised 12% of our net sales in the third quarter and decreased by approximately 39% in the third quarter of this fiscal year compared to the prior year's third quarter. Net sales for the third quarter in our large regional service provider market were $3.8 million, comprising 8% of our total net sales, and declined by approximately 76% in the third quarter of this fiscal year compared to the prior year's third quarter. We continue to expect future quarters in this segment to be lumpy due to product mix concentrations and potential changes in their deployment schedules and strategies.
Daniel Herzog: Net sales in our national carrier market for the third quarter were $2.3 million, accounting for 5% of total net sales and were up 17% in the third quarter of this fiscal year versus the prior year third quarter. Finally, net sales in our international market were $16.5 million and comprised 34% of total net sales in the third quarter. We anticipate that this quarter will represent our international market's peak revenue performance for the year as the build season begins to wind down in our fiscal fourth quarter.
Speaker Change: Consolidated net sales in the third quarter of fiscal 2024 were $48.8 million, a 20% decrease from $61.3 million in the same year-ago period, but above our guidance range of $40 million to $44 million.
Speaker Change: Net sales exceeded our expectations, driven by an increase in orders during the build season from both existing and new customers.
Speaker Change: In Europe , this continues to involve strategic investments in more efficient manufacturing equipment and the introduction of higher-margin, plug-and-play connectivity products.
Speaker Change: Finally, we are also actively working to reduce our inventory levels to enhance cash flow from operations.
Speaker Change: Order backlog decreased 31% to $32.6 million on June 30, 2024 from $47.2 million on March 31, 2024.
Dan: As we transition out of the build season, we anticipated the reduction in backlog as broadband service providers realigned their outstanding purchase orders to current deployment schedules, preparing for winter operations and year-end planning.
Dan: As we indicated last quarter, our customers are asking us to align their open orders with their current deployment schedules, which has resulted in some order cancellations in the quarter.
Dan: This effort will help our customers reduce excess inventory and return to normalized ordering patterns.
Dan: We do not consider this lost business as we are actively working with these customers to better realign their calendar year 2025 requirements.
Dan: We are working with these and other key customers to put in place multi-year supply agreements that will provide better mutual visibility going forward.
Dan: Turning to slide 8, I will now review net sales by our key markets.
Dan: Sales to our primary market, Community Broadband, comprised 40% of our net sales in the third quarter of fiscal 2024.
Dan: In Q3, we generated net sales of $19.6 million in community broadband, up 2% from the prior year third quarter.
Dan: As Sherry mentioned, our community broadband market experienced a sequential uptick of 22%, driven by an increase in orders related to normal seasonality, as well as from new customers in the utility sectors, where we are seeing strong momentum.
Speaker Change: Net sales in our MSO business were $5.8 million, which comprised 12% of our net sales in the third quarter, and decreased by approximately 39% in the third quarter of this fiscal year versus the prior year third quarter.
Dan: Net sales for the third quarter in our large regional service provider market were $3.8 million, comprising 8% of our total net sales, and declined by approximately 76% in the third quarter of this fiscal year versus the prior year third quarter.
Dan: As mentioned previously, our long-term focus remains on collaborating closely with these customers to help them effectively manage their inventory levels and procurement strategies.
Dan: Finally, net sales in our international market were $16.5 million and comprised 34% of total net sales in the third quarter.
Dan: Net sales in this market increased by approximately 16% in the third quarter of fiscal 2024 versus the prior year's third quarter.
Dan: We anticipate that this quarter will represent our international market's peak revenue performance for the year as the build season begins to wind down during our fiscal fourth quarter.
Dan: Consequently, we expect revenue from our international market to decline sequentially in the fourth quarter.
Dan: As illustrated on slide 9, gross profit margin in the 3rd quarter was 21.9% of net sales, down from 31.1% of net sales in the same year-ago quarter and up from 7.7% in the prior quarter.
Dan: The sequential uptick in gross margin was due to increased production capacity utilization in our manufacturing facilities from higher revenue associated with the build season as well as lower non-cash excess inventory charges, which in the third quarter decreased sequentially by $3.2 million to about $1.7 million in the quarter.
Daniel Herzog: Operating expenses for the third quarter were $13 million, down from $13.4 million in the same year-ago quarter due to lower variable costs. The sequential decrease in operating expenses as a percentage of net sales was due to increased sales volume.
Dan: Now please turn to slide 10.
Dan: We remain committed to strategically investing in the organization while maintaining a prudent and disciplined approach to our cost controls.
Dan: As a percentage of net sales, operating expenses for the third quarter were 26.6%, down from 34.1% in the second quarter and up from 21.9% in the same year-ago period.
Dan: Turning to slide 11, net loss in the third quarter was $447,000 compared to net income of $5.2 million in the same year-ago period and net loss of $5.9 million in the second quarter of fiscal 2024.
Dan: The sequential decline in net loss was primarily driven by increased revenue, higher productivity levels and lower non-cash inventory reserves in the third quarter that I had mentioned earlier.
Daniel Herzog: As illustrated on slide 12, our balance sheet remains healthy with $148 million of cash, short-term and long-term investments, and just $2.1 million of debt. Our inventory balance decreased from $84 million at the end of the second quarter of fiscal 2024 to $75 million in the third quarter of fiscal 2024. Our cash, short-term, and long-term investments reflect a net reduction of just $1 million from March 31, of which $5.5 million was associated with the repurchase of shares in the third quarter. We recorded positive cash flow from operations of approximately $3.9 million in the third quarter. And year-to-date, we have generated $8.5 million from operations.
Dan: As illustrated on slide 12, our balance sheet remains healthy with $148 million of cash, short-term and long-term investments, and just $2.1 million of debt.
Dan: We had $1.2 million in capital expenditures in the quarter, mainly to support our manufacturing operations, and $5.6 million year-to-date.
Dan: Our inventory balance decreased from $84 million at the end of the second quarter of fiscal 2024 to $75 million in the third quarter of fiscal 2024.
Dan: Our cash, short-term, and long-term investments reflect a net reduction of just $1 million from March 31, of which $5.5 million was associated with the repurchase of shares in the third quarter.
Dan: We recorded positive cash flow from operations of approximately $3.9 million in the third quarter. And year-to-date we have generated $8.5 million from operations.
Dan: mainly due to a reduction in inventory of approximately $9 million in the quarter and $23 million year-to-date.
Daniel Herzog: We are well positioned to competitively pursue large customer prospects and strategic opportunities to enhance our market position and product portfolio, supported by our healthy balance sheet. We anticipate fourth-quarter fiscal 2024 net sales to be in the range of $40 to $43 million. This loss per share range is based on the number of shares outstanding at the end of the third quarter and does not reflect share repurchases that could occur in the fourth quarter.
Dan: We are well positioned to competitively pursue large...
Dan: Please turn to slide 13.
Dan: We anticipate fourth quarter fiscal 2024 net sales to be in the range of $40 to $43 million.
Dan: This loss per share range is based on a number of shares outstanding at the end of the third quarter and does not reflect share repurchases that could occur in the fourth quarter.
Daniel Herzog: As we mentioned on our last call, we expect our North American revenue in fiscal third and fourth quarters to be consistent with each other. However, our visibility remains limited beyond this quarter, as the industry is working through remaining inventory-related challenges. This leaves $24.9 million remaining for future repurchases as of June 30, 2024. Our ongoing share repurchases underscore our confidence in the value of our company and the market opportunity it offers. That concludes my prepared remarks for our fiscal third quarter 2024. Thanks for the financial information.
Dan: As we mentioned on our last call, we expect our North American revenue in fiscal third and fourth quarters to be consistent with each other.
Dan: This leaves $24.9 million remaining for future repurchases as of June 30, 2024.
Dan: Our ongoing share repurchases underscore our confidence in the value of our company and the market opportunity ahead.
Dan: That concludes my prepared remarks for our fiscal third 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 Sherry.
Cheryl Beranek: Thanks for the financial update, Dan. Turning to slide 15, I would now like to provide a brief update on our strategy, the craft-friendly, craft-smart deploy reel tab box. These benefits, documented in a recent Clearfield customer deployment study, which surveyed over 150 installations utilizing the FastPass method, resulted in time savings between 35 and 38 percent versus the baseline method for outside and inside work performed.
Sherry Beranek: Thanks for the financial update, Dan. Turning to slide 15, I would now like to provide a brief update on our strategy.
Speaker Change: A core aspect of the value Clearfield brings to the market is our decades-long commitment to supporting the homes and businesses in rural and small-town communities.
Speaker Change: We focus on providing solutions which are scalable and reduce the cost of deployment by lowering the level of skilled labor required. We recently announced a new addition to our portfolio of products which reflects these qualities.
Dan: features an all-in-one flexibility that enables the technician to deploy the exact amount of cable from the curb as well as into the home, with the remainder stored safely on the reel for future use, quickly and efficiently.
Speaker Change: These benefits documented in a recent Clearfield customer deployment study.
Dan: which surveyed over 150 installations utilizing the FastPass method resulted in time savings between 35 and 38 percent versus the baseline method for outside and inside work performed.
Cheryl Beranek: Second, we continue to invest in our European operations, including our lower-cost manufacturing facility in Estonia and a high-speed fiber line for Finland. These investments will expand the skillset within our operations, including introducing the FieldShield Pushable MPO Assembly to that market. Finally, as the future bead market will require an expanded utilization of our U.S. manufacturing footprint, we continue to rationalize and streamline our product portfolio to ensure we have the optimal product mix to drive growth and margin expansion.
Dan: These investments will expand the skill set within our operations, including introducing the FieldShield pushable MPO assembly to that market.
Speaker Change: Finally, as the future bead market will require an expanded utilization of our U.S. manufacturing footprint, we continue to rationalize and streamline our product portfolio to ensure we have the optimal product mix to drive growth and margin expansion.
Cheryl Beranek: As we expressed last quarter, we remain confident that the long-term demand for fiber is as strong as ever, and Clearfield is well positioned to help service providers meet that demand. And with that, we will open the call to your questions.
Operator: Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate that Yolan is in the question queue. Our first question comes from Ryan Koontz of Needham and Company. Please go ahead.
Speaker Change: Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad.
Dan: A confirmation tone will indicate that your line is in the question queue.
Yolan: You may press star 2 to leave the question queue.
Speaker Change: For participants making use of speaking equipment, it may be necessary to pick up the handset before pressing the star keys.
Dan: Our first question comes from Ryan Koontz of Needham and Company. Please go ahead.
Cheryl Beranek: Thanks for the questions. A few to start out with on the timing of MBEAD, sounds like a little more push out there. Not super surprising, given the kind of pace of Louisiana, some of the early guys moving through the process. But, you know, sounds like there is some optimism in the industry about projects beginning mid-25. Does that still align with your expectations, or is there something specific about your commentary about late 25s in your prepared remarks?
Speaker Change: Thanks for the questions. A few to start out with. On the timing of MBEAD, it sounds like a little more push out there.
Speaker Change: Not super surprising given the pace of Louisiana and some of the early guys moving through the process. But it sounds like there is some optimism in the industry about projects beginning mid-25.
Speaker Change: Does that still align with your expectations or is there something specific with your commentary about late 25 in your prepared remarks?
Cheryl Beranek: Yeah, hi Ryan. I think it's just being realistic. I think everybody's hoping for summer, but, you know, everyone that we talked to, if we really look through a Gantt chart of deliverables as to what has to happen in order for that to succeed, it's, you know, more likely than not that we're looking at quite late in the year. And one of our challenges for this fiscal year, in fact, is that since we closed in September, it will be difficult for us to see revenue next year within the fiscal year. So we're hopeful, but realistically, probably not.
Speaker Change: So we're hopeful, but realistically, probably not.
Cheryl Beranek: And on the international front, any specific geographies or products you might call out as strengths from Nestor there?
Speaker Change: Got it.
Speaker Change: You know, strongly investing in that space and our success there is more in the alternative carriers.
Cheryl Beranek: Several quarters.
Speaker Change: And so I would say our cabinet business is definitely more down, whereas our connected business sales is definitely up. Within community broadband itself, it's closer probably to a 50-50 mix, which I think is really healthy.
Cheryl Beranek: That's great. And would you call out any share gains you're seeing there, or is it really more just about spending at this point in terms of connecting?
Speaker Change: That's great. And would you call out any share gains you're seeing there or is it really more just about spend still at this point in terms of connected?
Cheryl Beranek: I think it's a standpoint of, I wouldn't go so far as share gain yet. I would say it's a standpoint of being able to get a share of Pocketbook at this point. We're monitoring the share gain process as we look to see, since most of these customers were not customers that we had worked with before, you would assume share gain, but since they didn't buy from us for connected homes, but we also want to, or previously, but we want to be careful to quantify those who were kind of connecting their first homes, especially those through distribution, so that we can accurately provide that information to the market.
Speaker Change: Yeah, I think it's a standpoint of, I wouldn't go so far as share gain yet, I would say it's a standpoint of being able to get a share of pocketbook.
Speaker Change: at this point.
Speaker Change: assume share gain because they didn't buy from us for a connected home, but we also want, or previously, but we want to be careful to quantify those who were kind of connecting their first homes, especially those through distribution so that we can...
Cheryl Beranek: Great. And a nice improvement in gross margin there sequentially. Just a clarification here, did I hear that the E&O write-off was maybe a little lower than expected in the quarter?
Speaker Change: to accurately provide that information to the market.
Speaker Change: Great, and nice improvement in gross margin there, sequentially, just a clarification here, did I hear that the E&O write-off was maybe a little lower than expected in the quarter?
Cheryl Beranek: Yeah, yeah, it definitely was. I think we had forecasted something up like towards $3 million, and we were closer to about $1.7 million. So much better utilization. That's what happens when you have higher demand, and so we're happy about that.
Speaker Change: Yeah, it definitely was. I think we had forecasted something up like towards three million dollars and we were closer to about a 1.7, so much better utilization. That's what happens when you have higher demand and so we're happy about that.
Cheryl Beranek: Got it. And then maybe a couple quick product questions. On the fiber front, from Nestor, are you seeing much of an opportunity in data centers? I'm sure you saw the Corning results earlier in the week and the strong attach rate, the new share gains, or CN in these AI clusters. Is that something you're evaluating?
Speaker Change: Got it.
Speaker Change: And then maybe a couple of quick product questions on the fiber front from Nestor. Are you seeing much of an opportunity in data centers? I'm sure you saw the corning results earlier in the week and the strong attach rate, the new share gains we're seeing in these AI clusters.
Cheryl Beranek: The product would definitely fit into those spaces. However, to date, we don't have a channel into the data center world, so I would say yes, we're evaluating, but not something that I think shareholders should take into consideration as being a near-term opportunity. All right, great. Thanks for the questions.
Speaker Change: Is that something you're evaluating?
Cheryl Beranek: Only in the international markets was a couple of million dollars that we had a customer in the European space who asked to take some product that was in backlog early to maximize their build season period. And that's why we are forecasting the fourth quarter to be a little less than the third quarter in the European markets but consistent in the U.S. markets, the North American markets in the third and fourth quarter.
Speaker Change: Only in the international markets was a couple of million dollars that we had
Speaker Change: We had a customer in the European space who asked to take some product that was in backlog early to maximize their build season period.
Speaker Change: And that's why we are forecasting the fourth quarter to be a little less than third quarter in the European markets, but consistent in the U.S. markets, the North American markets in third and fourth quarter.
Cheryl Beranek: Okay, that's helpful. And looking at the Nester Cables business, is the gross margin for that business where you guys originally thought it could be once this business was fully ramped? Or is there still potential upside on the gross margin line within Nester?
Speaker Change: Okay, that's helpful. And looking at the Nestor Cables business, is the gross margin for that business where you guys originally thought it could be once this business was fully ramped, or is there still potential upside on the gross margin line within Nestor?
Speaker Change: Oh, they're significantly more upside, and no, it's not where we want it to be. That's why we're investing in the Estonia plant, why we're investing in the high-speed fiber line. Those things, there's some things we could do certainly with capacity, but mostly it's about being able to continue to lower the cost of manufacturing in that environment.
Daniel Herzog: Okay, that's helpful. And then just the last one for me, and I'll jump back into queue. On your inventory, Dan, should we look for levels to continue to decline here in September?
Speaker Change: Okay, that's helpful and then just the last one for me and I'll jump back into queue. On your inventory, Dan, should we look for levels to continue to decline here in September ?
Daniel Herzog: Yeah, I think I feel good about us declining a little bit more, maybe not at the rate that we just did in this quarter, but Okay, that's helpful.
Operator: Ladies and gentlemen, just a reminder, if you'd like to ask a question, you're welcome to press and 1 to place yourself in the question queue. Our next question comes from Scott Searle of Roth Capital Partners. Please go ahead.
Speaker Change: Thank you. Ladies and gentlemen, just a reminder, if you'd like to ask a question, you're welcome to press star and 1 to place yourself in the question queue.
Speaker Change: Our next question comes from Scott Searle of Roth Capital Partners. Please go ahead.
Scott Searle: Good afternoon. Thanks for taking my questions. Nice to see the business bottoming and starting to recover.
Scott Searle: I apologize I got a little bit late on the call, but Dan, I was wondering if you could just, I'm not sure if I heard a number in terms of Nestor sales with International, and was there a gross margin number that you provided for the September quarter, and then I had several follow-ups.
Dan: For the September course, so Nester we had about 15 million dollars of our international pool.
Speaker Change: And you were looking for our guide on our gross margin? Correct.
Speaker Change: Oh, our guide at mid was, I think it's around 21.3.
Cheryl Beranek: Gotcha. You know, Sherry, diving in a little bit on the BEAD front, coming out of FiberConnect this week, I'm wondering, you know, initially when we started to talk about BEAD, probably going back 12 or 18 months ago, there started to be momentum swinging towards the tier ones. Now it feels like there's been a shift back, you know, just in terms of the states are getting to allocate the funding.
Speaker Change: Okay, perfect. At midpoint. Mm-hmm.
Scott Searle: Gotcha. And then, you know, Sherry, diving in a little bit on the bead front, you know, coming out of FiberConnect this week,
Speaker Change: I'm wondering...
Speaker Change: You know, initially when we started to talk about BEAT, probably going back 12 or 18 months ago, there started to be momentum swinging towards the Tier 1s.
Speaker Change: Now it feels like that there has been a shift back, you know, just in terms of the states are getting to allocate the funding. How are you seeing this ultimately play out in terms of the impact and the market share that it has into the community broadband providers, so the Tier 3s, the Tier 2s, that benefit more so?
Cheryl Beranek: How are you seeing this ultimately play out in terms of the impact and the market share that it has on community broadband providers, so the tier 3s and tier 2s that benefit more so? Are you seeing a share shift there versus early expectations, and how are you thinking about that?
Scott Searle: seeing a share shift there versus early expectations and how are you thinking about that?
Cheryl Beranek: Well, I think the qualification process continues to change, right? I mean early, and I think the NTA has done, you know, a phenomenal job of listening and trying to adapt to try to meet the original intention of the program. So, you know, early on, the thought was that we would see, you know, small providers close to the customer being the heavy users. But, then, because of the complexity of the application process and the length of the requirement, as well as the original letter of credit, that was required.
Speaker Change: Well, I think the qualification process continues to change, right? I mean, early, and I think the NTA has done, you know, a phenomenal job of listening and trying to adapt.
Speaker Change: to try to meet the original intention of the program.
Cheryl Beranek: That was shifting away from the small provider and back to the tier ones and the large providers. Now, through, you know, our efforts at, you know, the FBA and many others, as well as, like I said, the reasonableness of the environment, they've taken a lot of that complexity away, and they continue to try to be able to streamline the process. And so, as a result, I think it's more of an equal playing ground than it was, you know, ever before.
Speaker Change: Early on, the thought was that we would see small providers close to the customer being the heavy user. Then, because of the complexity of the application process and the
Speaker Change: Just the length of the requirement as well as the original letter of credit, you know, that was required. That was shifting away from the small provider and back to the tier ones and the large provider.
Speaker Change: Now, through our efforts at the FDA and many others, as well as, like I said, the reasonableness of the environment, they've taken a lot of that complexity away and they continue to try to be able to streamline the process.
Speaker Change: And so as a result, I think it's more of an equal playing ground than it was ever before. So I think it's going to be a very heterogeneous award. You're going to see things very different from state to state. I think that's going to be the biggest challenge for the large providers.
Cheryl Beranek: So, I think it's going to be a very heterogeneous award. You're going to see things very different from state to state. I think that's going to be the biggest challenge for the large providers, because the application process is going to be done, you know, census map by census map. And so, a large provider really doesn't necessarily have a huge administrative advantage because of the fact that they've got to do it 56 times.
Speaker Change: is that the application process is going to be done, you know, census map by census map. And so a large provider really doesn't necessarily have a huge administration.
Cheryl Beranek: And whereas a small provider is going to hone in on the areas that make the most sense for them, one of the things that we have been talking to customers about is how LEAD is complex, but it may be strategic if they have an island of unserved customers that is bracketed by two middle-mile lines that have already been established. That makes perfect sense for them to go after and zero sense for a large provider.
Speaker Change: advantage because of the fact they got to do it 56 times and whereas a small provider is going to hone in on the areas that make the most sense for them.
Speaker Change: how VEED is complex, but it may be strategic if they have an island of unserved customers that is bracketed by two middle-mile lines that have already been established. That makes perfect sense for them to go after and zero sense.
Cheryl Beranek: On the contrary, if you have a serving area that might be 500 square miles, that is going to be a different scenario, and you are probably going to see the big guys come in. We are anxious to work with all of them. We do not think we are cut out of even Tier 1 because they still have to be deployed in a rural way. Our understanding of the rural markets and our ability to provide products that fit that footprint will be to our advantage.
Speaker Change: for a large provider. On the concourse, you know, on the contrary, you know, if you've got a serving area that might be...
Cheryl Beranek: Very helpful. And if I could follow up, just in terms of the inventory levels with your customers, the community broadband guys seem like they bottomed and started to recover a little bit, but I think you had some comments specifically that inventories remain elevated, large service providers, and MSOs. I'm wondering, you know, what your early thoughts are in terms of when you think that inventory will clear and we start to get back to equilibrium in terms of end market demand and shipments.
Speaker Change: Very helpful. And if I could follow up, just in terms of some of the inventory levels with your customers.
Cheryl Beranek: Yeah, like you highlighted, community broadband is, I think, very close. It won't be there by the end of this build season.
Speaker Change: Yeah, like you highlighted, community broadband, I think, is very close. It's not there.
Cheryl Beranek: Unfortunately, I would say the large regionals and the MSOs have a way to go. They had big pockets when we started. The MSOs have traditionally been, at least the small regionals, cash-rich, and so they use that to their advantage. So I think we have a period of time yet in the MSO market. I think the large regionals are getting close, and by the end of this build season, I am anticipating that we could potentially see a new range of orders by the first quarter of our next fiscal year.
Speaker Change: Unfortunately, I would say the large regionals and the MSOs have a way to go.
Speaker Change: They had big pocketbooks.
Speaker Change: By the end of this build season, I am anticipating that we would potentially see a new range of orders by first quarter of our next fiscal year.
Cheryl Beranek: Great, very helpful. And last, if I could, just in terms of cash utilization, you know, kind of how you're thinking about things in terms of buyback, we're starting to look elsewhere, you know, as the market is normalized now and you've found the bottom, are you starting to think about inorganic?
Cheryl Beranek: I was going to say, we're always going to be evaluating inorganic opportunities as well. We're really happy with [inaudible] something that is always in our playbook. I would just augment that by saying that we continue to evaluate adjacent markets, and the adjacent markets being areas of the non-telco environment where we already have pockets of success. What we wouldn't want to do is to be able to go into an entirely new space where it's foreign to us.
Speaker Change: the share buyback actions that we've taken and continue to, we'll watch that, but absolutely putting a little bit more focus on the inorganic as well as...
Speaker Change: continue to evaluate adjacent markets, and the adjacent markets being areas of non-telco environment where we already have pockets of success. What we wouldn't want to do is to be able to go into an entirely new space where
Cheryl Beranek: The best acquisitions are ones that you have a base upon which you can build upon. And so you see some of the things that we're doing with the active cabinets and our use of the active cabinets in transportation, as we highlighted, in traffic monitoring. Perhaps we've always used our active cabinets in backhaul, so there are a variety of options. I would say, you know, that's not an commitment to an inorganic opportunity but rather a standpoint that, as any prudent public company, we're evaluating those adjacent markets and looking for the best match.
Speaker Change: So there's a variety of options. I would say you know there's that's not a commitment for an inorganic opportunity but rather a standpoint that is as any prudent public company you know we're evaluating those adjacent markets and looking for the best match.
Scott Searle: Thanks so much. I'll get back in the queue.
Speaker Change: Great, thanks so much, I'll get back in the queue.
Operator: Ladies and gentlemen, it appears we have no further questions in the question queue. Scott, would you like to go ahead with the next question, if you have one?
Cheryl Beranek: You know, I'm good, thank you. Thank you. Ladies and gentlemen, that concludes today's question and answer session. I will now hand over to Cheryl Beranek for closing remarks.
Cheryl Beranek: Well, thank you all for joining us. We absolutely treasure the investment and the trust that you have placed in us as investors in Clearfield. We're reaching an opportunity here in front of us. We talk about this as being a generational build, but having just come home from the Fiber Broadband Association meetings in Nashville, I couldn't be more excited about the opportunities in front of us.
Cheryl Beranek: So pleased to meet you again this year, meet you over the airwaves, and look forward to meeting you in person in the near future. You know, goodbye for now. Thank you.
Operator: Thank you. That concludes today's event. Thank you for attending, and you may now disconnect your line.
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