Q3 2025 Clearfield Inc Earnings Call
Speaker #1: Good afternoon, everyone, and welcome to the Clearfield Inc Q4 third quarter 2025 conference call. All participants will be in a listen-only mode. Should you ed assistance, please signal a conference specialist by pressing the star key, followed by zero.
Speaker #1: After today's presentation, there will be an opportunity to ask questions. To k a question, you may press star and then one. To withdraw your questions, you may press star and two.
Speaker #1: Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Greg McNiff, investor relations. Sir. Please go head.
Speaker #2: Thank you. Joining me on today's call are Cheryl Beranek, Clearfield's president and CEO, and Daniel Herzog, Clearfield's CFO. As a reminder, Clearfield publishes a quarterly shareholder letter which provides an overview of the company's financial results, operational highlights, and future outlook.
Speaker #2: You can find both the shareholder letter and the earnings release on Clearfield's investor relations website. After brief prepared remarks, we will open the floor for a question and answer session.
Speaker #2: 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.
Speaker #2: 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.
Speaker #2: 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.
Speaker #2: Shareholder letter and on this conference call. The risk factor section in Clearfield's most recent form 10-K filing with the securities and change commission and its subsequent filings on form 10-Q provide a description of these risks.
Speaker #2: With that, I would like to turn the call over to Clearfield's president and CEO, Cheryl Beranek. Cheryl?
Speaker #3: Good afternoon, everyone, and thank you for joining us today to discuss Clearfield's third quarter results. I will start by briefly reviewing quarter, discussing Clearfield's long-term strategy, the current state of the industry, and then turn it over to Dan for a summary of our performance and outlook.
Speaker #3: For more detailed information, please refer to our shareholder letter posted on the IR section of our website. Third quarter net sales of 49.9 million dollars were up 2% over the same period in the prior year and toward the top end of our guidance range, with Clearfield's segment net sales up 15% year over year.
Speaker #3: We are especially pleased with the Clearfield segment's performance as we focus on our objective of growing faster than the industry and driving market share gains.
Speaker #3: Despite macro and bead-related uncertainty, the company is poised for continued long-term growth as the industry returns to a normalized cadence. As we've mentioned on previous earnings calls, a trend we have been tracking for some time is a shift of electronics out of the central office to cabinets closer to end user.
Speaker #3: As we highlighted last quarter, we designed our fiber flex cabinet line to address this trend. Our field-smart fiber flex 600-powered cabinet continues to be recognized for its innovative and customer-friendly design.
Speaker #3: We are also expanding our reach deeper into the connected home. During the last quarter, we announced Tether Smart MFT, which enables Clearfield to address new applications within and beyond the broadband ecosystem.
Speaker #3: As the industry's smallest fully sealed 10-port access terminal, the Tether Smart MFT is purpose-built for fiber to the home, fiber to the business, and 5G backhaul applications.
Speaker #3: Another key highlight in the quarter is the growing success of our home deployment kits, which combine the innovation of Clearfield's fiber deploy reels with the ease of packaging all components of a home install in a single SKU.
Speaker #3: And which are being broadly recognized for labor-saving opportunity they provide. We expect these products to contribute significantly to our future revenue growth. This product development reflects our continued focus on innovation that empowers service providers to meet evolving customer needs.
Speaker #3: Whether in rural, urban, or suburban environments, however, the industry continues to change rapidly, and our ability to respond to these changes is key to our success.
Speaker #3: I'd like to take a few minutes to go a little deeper into our long-term vision which we view as three pillars upon which to build Clearfield's house.
Speaker #3: Our first pillar is protecting our core. Clearfield serves the needs of nearly a thousand broadband service providers. Whether they are a 100-year-old independent telco or a competitive startup, our broadband service team is living alongside our customers.
Speaker #3: We will strive to protect these core customers by ensuring that their product needs for today and tomorrow are met. Our second pillar is to leverage our market position into further opportunity.
Speaker #3: Our customers are moving into new applications to leverage their fiber infrastructure, and we are committed growing alongside them. For example, we have a customer which is a significant broadband provider in the Northwest that is currently using our solutions for wireless backhaul.
Speaker #3: We have another customer in the Midwest that has deployed our products in its data centers. And we are seeing our cabinets extend non-hardened electronics to edge networks.
Speaker #3: These areas aren't new to Clearfield. But we believe they will be a significantly higher percentage of revenue as our customers adapt their business models.
Speaker #3: Our third pillar is to target select, adjacent markets that we believe will allow us to expand our customer base and drive further growth. The modular nature of our product platforms driven by the Clearview cassette will allow us to take existing products to new customers as well as design exciting new products for applications in emerging markets.
Speaker #3: An example of this is our recently announced Tether Smart MFT, which not only serves our existing customer base but is under review by target customers in the wireless provider markets due to its ultimate configurability.
Speaker #3: This strategy is how we will expand from enabling a lifestyle of better broadband to our expanded purpose of enabling better broadband and beyond. The goal of this three-pillar approach is to drive revenue growth as well as operational excellence, thereby enhancing long-term shareholder value.
Speaker #3: Turning to the industry, the fundamentals of the industry remain strong. A leading market research firm projects the fiber industry to grow at a 12% compound annual growth rate over the next five years, with approximately one-third of households expected to gain access to multiple providers.
Speaker #3: Similarly, industry analysts anticipate that the annual number of homes connected will outpace homes passed. Clearly, artificial intelligence, or AI, represents the next industrial revolution.
Speaker #3: As the demand for greater processing power continues to grow, communication infrastructure providers will be critical in connecting this ecosystem. Specifically, the power requirements for running AI are driving cloud providers to build multiple data centers while the need for low latency performance is pushing computing to the edge of that network.
Speaker #3: Both of these trends will require significant fiber deployments in coming years. Going forward, we will discuss the investments we are making to ensure our customer base has the equipment and support necessary to meet this growing demand.
Speaker #3: We believe Clearfield is well-positioned to benefit from these industry trends. I'd now like to turn the call over to our CFO, Dan Herzog, who will provide an overview of our financial results for the third quarter of fiscal 2025 as well as to share our outlook for the remainder of the fiscal year.
Speaker #4: Thank you, Cheryl, and good afternoon, everyone. I will now review our third quarter results beginning with sales. Third quarter net sales of 49.9 million dollars were up 2% over the same period in the prior year and toward the top end of our guidance range.
Speaker #4: With Clearfield segment net sales up 15% year over year. Gross margin for the period improved from 21.9% to 30.5%. Driven by continued improvements in overhead absorption, recoveries of previously reserved excess inventory, as well as optimized capacity for current and growing product lines at our North American facilities.
Speaker #4: Net income per share of 11 cents was above our guidance range and reflects a significant improvement from the year-ago period. We continue to ake progress on improving product costs while also managing the cost structure of our net source segment.
Speaker #4: Despite lower revenue, driven by a redirected focus among broadband service providers toward operating rather than building out networks in some targeted countries in Europe, we saw a modest year-over-year improvement in gross profit margin for the net source segment in the third quarter.
Speaker #4: As bookings have continued to outpace shipments through third quarter, lead times decreasing with deployments continuing in a healthy fashion, we are increasing our fiscal 2025 outlook for net sales in the range of 180 million to 184 million dollars.
Speaker #4: As Cheryl noted, we anticipate annual revenue growth for the Clearfield segment to be in line or above industry growth, while we expect annual revenue from our net source segment for fiscal 2025 to fall slightly year over year as we continue to focus on improving margins.
Speaker #4: For our fourth fiscal quarter of 2025, we anticipate net sales in the range of 47 million to 51 million dollars and net income per share in the range of 3 cents to 11 cents.
Speaker #4: The net income per share range is based on the number of shares outstanding at the end of the third quarter and does not reflect potential share repurchases completed in the fourth quarter.
Speaker #4: Our guidance reflects the evolving tariff situation currently in place, which we do not believe will materially affect our operating results. And with that, we will open the call to our questions.
Speaker #1: Ladies and gentlemen, at this time, we'll the question and answer session. If you would like to ask a estion, please press star and then one using a ouchstone telephone.
Speaker #1: To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys.
Speaker #1: To ensure the best sound quality, once in, that is star and then one to join the question queue. In our first question today comes from Ryan Koons from Needleman Company.
Speaker #1: Please go ahead with your question.
Speaker #5: Great. thanks for the question. I wanted to k about, what a type typically do around product mix. And for your core, Clearfield business, you know, are you still seeing, abnormally high connected home relative to what you consider norm?
Speaker #5: Are you seeing that come back and more to balance? Any thoughts on that?
Speaker #6: oh, the, the, we're definitely seeing the product mix for the, past home come back to a more normalized cadence. I think that's reflective of the fact that, you know, there were a lot of cabinets that were sitting, in yards over the course of last year and we're seeing that as much, this year.
Speaker #6: So we're, we're definitely seeing an increase in cabinet sales. that said, we are seeing, also an increase in the connected home as we enhance our share, in connected home revenue.
Speaker #6: So it's a, it's a little bit of both in regard to where we see product mix for this year over last year.
Speaker #5: Great. And just, just reflecting to last year, I know there were some inventory impacts to last year and, the core businesses is up a bit, I think.
Speaker #5: I think you said, teens percentage year over year. Is that still aligned with what you've, coming out of this quarter, what you've id before that, the core Clearfield business is, is up, double digits over last year on, on the inventory?
Speaker #5: impacts last year?
Speaker #6: Right. Clearfield, our, our Clearfield segment is up 15%. year over year for the quarter. And so it, so even though the total revenues showed a, a 2% increase, total revenues were negatively impacted by, unfortunately, our performance, under the net source segment.
Speaker #6: Clearfield continues to do very strong, in our, in our, in our markets. Principally driven, this year and this quarter by our large regional and MSO business.
Speaker #5: Got it. And, and your new, new product introduced for connected home, mm-hmm.
Speaker #6: The home deployment kits are doing really well.
Speaker #5: Okay.
Speaker #6: And, we're.
Speaker #5: Same as CC Clear, or what it was called, the,
Speaker #6: They're called the home deployment kits. And
Speaker #5: Okay.
Speaker #6: so, these provide the opportunity to, to actually connect the physical home, with our, our, our drop cables and with a device, you ow, that sits on the home itself.
Speaker #6: and that by doing that, the, one installer can do the work that was previously done by two. And so we're seeing, you know, some trials that have been underway now turning into, ongoing revenue.
Speaker #6: And new trials, you ow, being started in different places. So, we see that as a, a significant revenue opportunity for us, we see it demonstrated this year and they're excited about where it's gonna go.
Speaker #5: Great. Thanks for that. And then, on, on the, the amphenol acquisition of, of ComSpo, ComScope's, connectivity business and, and, cabling, any, any commentary there on what, what you, what you ink that means for the ustry?
Speaker #6: well, congratulations to ComScope for, figuring out, you know, how to be able to rebalance, you know, their financial situation. I think it's good for the industry that we don't have companies in financial distress.
Speaker #6: And so amphenols acquisition of ComScope, I, I do think it's good the fiber industry. as they pointed out, their focus is the, you know, the, hyperscalers, you know, the Amazons, the Googles, and their deployment of fiber for AI.
Speaker #6: You know, that's not, a target of Clearfield's. And so, we see, you know, ComScope's focus there today and under the acquisition of amphenol as being positive for them and not detrimental to us.
Speaker #6: in fact, you know, our focus on AI is really part of our third pillar. It's the opportunity for not be serving inside of those data centers but to work with our community broadband service providers, our large regionals and, and our MSOs, to help provide the fiber that's gonna have to connect those data centers together.
Speaker #5: Right. Great. And just one last one maybe for Dan on the gross margin. c you mentioned, consumption of, of E&O reserves, on the quarter.
Speaker #5: Was that, was that material on the Clearfield side, any idea how many basis points it to a gross margin?
Speaker #7: yeah. It was probably about a we, you know, last year we had, I think, 1.7 million dollar expense. This year, this quarter, we had like a 1.1 million dollar gain.
Speaker #7: And I think it was about a 1.7% effect on it. if, and I do that based on our run rates. Like, if we would've just considered our run rate of recoveries, from, we, we beat that.
Speaker #7: You know, we had like 1.6 million in recoveries and we've been running about 500K. So I figure that a bit of a 1.7 or 8 of a change from, from our run rate.
Speaker #5: Got it. And maybe one more for you, Dan, on, on supply chain. y-you've mentioned maybe some tight supply. As you saw extended lead times, any particular area you can point us to where you see tightness in ply chain?
Speaker #7: I think that's Cheryl, Cheryl wants that one.
Speaker #3: Yeah. Yeah. Yeah. I'll go , yeah, I'll go over how long the, the, I would say that our challenge is still go to, battery backup and some rectifiers associated in the active cabinet business.
Speaker #3: And, so much of that is, related to tariffs and is related to, managing how that's brought into the country. you know, we've been, absorbing those costs, rather than passing them along.
Speaker #3: That's not a, I mean, we're managing that aspect of it. The challenge just is, it creates extra time issues on the border, you know, things that, you know, have been difficult for us to, to get around.
Speaker #3: But like I said, we're, our lead times have been better. On most, situations, it's just those electronic, challenges for the active cabinets.
Speaker #5: Are you seeing any light in the tunnel as far as onshoring or bringing it to North America, battery? I know there was, some,
Speaker #6: we're, we're, yeah. Yeah. Right. There, I think the challenge there is just the timing and how long, that onshoring could take. so, we're, we're considering alternative suppliers at this point.
Speaker #5: Got it. Great. That's all I've got. Thank you.
Speaker #1: Our next question comes from Jason Schmidt from Lake Street. Please go ahead with your question.
Speaker #8: Yes. Thanks for taking my opportunities. Cheryl, I just na expand on sort of that data center opportunity you highlighted in this script. When you think about that market as a whole, how should we be thinking about it in that market impacting the P&L in a more sizable way?
Speaker #8: Is that a kind of fiscal '26 story? Is it beyond? how are you looking at that?
Speaker #6: The, I'd say there would be some, some there, I mean, we have revenue today in the data center space, not in the, the big hyperscale space that, you know, is causing the big numbers at ComScope and Corning.
Speaker #6: you know, that's not a space that we've chosen to participate in because it's, it would be detrimental to, just the lumpiness, the how it would affect our factories and our ability to, really protect our core.
Speaker #6: we do believe we can participate in the both the data centers that our well as the data centers in our customers' markets. And then that gonna need to be connected.
Speaker #6: I think that we're gonna start to see some that revenue, slightly in '26. But more importantly, in '27, at least that's what we're eing at this point in time.
Speaker #6: we do have customers are building as new products under development, and we have made some investments in, product marketing resources, that to evaluate the right needs, that we have there.
Speaker #6: So those are some exciting new additions that we put into the organization to, to better position us, not to bring out, you know, like products but to bring out products, foundationally using the modularity of the Clearview cassette that are fundamentally different.
Speaker #6: The, so, there's a long runway yet in data centers and, we wanna make sure that we do it the right way.
Speaker #8: Okay. That's really helpful. And then just as a follow-up, how should we think about topics trending the remainder of this calendar year?
Speaker #6: Yeah.
Speaker #8: Topics we see are.
Speaker #6: Yep. Yeah. Go ahead, Dan.
Speaker #8: Yeah.
Speaker #6: Sorry.
Speaker #7: No. I was gonna say, opics, probably trending, slightly up here for our fourth quarter. It's, we've got, some, you know, trade show and some travel things going on.
Speaker #7: a little higher variable. costs at end of the f quarter with, as we ramp up our year-end audits and, a lot of, consulting things re-regarding, administration things.
Speaker #8: Gotcha. Thanks a lot, uys.
Speaker #6: Mm-hmm.
Speaker #7: Yep.
Speaker #1: Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two.
Speaker #1: Our next question comes from Tim Savageau from Northland Capital Markets. Please go ahead with your estion.
Speaker #9: Hey. Good afternoon. I have a question on the, smaller carrier markets or really kind of the US markets in general. So you saw a small increase I think amongst your smaller community broadband customers and, but, but short of what you might typically see seasonally.
Speaker #9: And I know you referenced pull-ins in large regional. I mean, was there some of that dynamic at work amongst the smaller carriers as well?
Speaker #9: Or how would you you ow, characterize kind of at you're seeing here for both June and September as kind of a maybe less than normal seasonal build?
Speaker #6: Yeah. Right. Yeah. The small carriers are the ones who have been the most impacted by, the level of uncertainty associated with bead. so you've got small carriers who are not in a position to jockey lots of different builds.
Speaker #6: I mean, they're gonna put their engineering and development resources into the area that they think is gonna be the most likely or most prominent.
Speaker #6: And so we're itely seeing some carriers who would have been building expecting to have received bead funding for fiscal year '25. Not building at all because they, they didn't have their engine not because they're not dedicated or committed to fiber but because they didn't have those other areas engineered and designed for deployment.
Speaker #6: so that's really frustrating. on our part, to, to see. But it, it doesn't mean that w-we're gonna lose that revenue. It just means that that revenue has been you know, delayed because of the uncertainty associated with the, the mess that has been created in the bead program.
Speaker #9: Got it. And, you know, maybe along those lines, you mentioned kind industry forecasts for this, you know, low double-digit type growth rate. I know.
Speaker #6: Mm-hmm.
Speaker #9: Historically, Clear, Clearfield has been targeting growth, you know. Normalized
Speaker #6: Mm-hmm.
Speaker #9: post these big ups and ups downs in the same range. I mean, is that a reasonable place to start as we look out to fiscal '26 in terms of growth expectations and, you know, might this revenue pushing out a bit?
Speaker #9: You know, add to that or, you know, or have a, a positive impact on, on that level of growth? Out in '26.
Speaker #6: Ye-yeah. Yeah. I think for, f a-at this point in time with the uncertainty with bead still out there, the, I-I'm comfortable with an outlook that's around the industry norms.
Speaker #6: we have been very clear that our, our goal is to grow as fast as the industry or faster in order to be able to take share.
Speaker #6: And we're in a position, I think, where we see that happening, in all of our territory or within the large regions and in the MSOs with really significant growth year over year.
Speaker #6: And then in community broadband, I think we're gonna see, community broadband providers not putting all of their eggs in one basket. and, not being entirely dependent upon, you know, b-bead financing.
Speaker #6: So next year, we'll more more balanced than that. I would, encourage you though to s and to separate the growth initiatives on the numbers between the net source segment and the Clearfield segment.
Speaker #6: And so that's why we brought out in this quarter some clarity around the last two quarters really, around some clarity around what is Clearfield's, organic revenue and what has been the incremental revenue associated with the net source acquisition in Europe.
Speaker #6: So industry growth rates, are a little higher for the Clearfield segment and then flat for, for net it'll be a little incrementally down in fourth quarter.
Speaker #6: For net store, but, for next year, flat, as we focus that organization on, improving cost structures through a changing product mix. so that, that organization can re-establish profitability.
Speaker #9: Got it. And, last one for me, you ow, you're guiding kind of flat here for September. Any notable moves among your, you ow, end markets, below that?
Speaker #9: That are, are worth calling out up or down?
Speaker #6: yeah. We've seen, incre I'd say while we had, traditionally, we saw third and fourth quarters, you know, being, where we saw the, the, most of our revenues, or most of our ordering patterns.
Speaker #6: You know, things came in a little bit earlier this year as people, you ow, re-established, you ow, their buying trends. The, I think fourth quarter, we're going to see our fourth quarter, you ow, we're gonna see strong, kind of continual demand, from the, the Clearfield segment with the European, unfortunately, continuing to be weak.
Speaker #6: and so, you would see, a, a similar mix between Clearfield and net source segment revenue in the upcoming quarter. In fact, per-perhaps a little bit higher Clearfield revenue, than what we saw in third quarter.
Speaker #9: Okay. Thanks very much.
Speaker #6: Thank you.
Speaker #1: Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two.
Speaker #1: And at this time, I'm ing no additional questions. I'd like turn the floor back over to management for any closing remarks.
Speaker #3: thanks, Danny. and thank you, all of you who are, listening to the call today. either live or recorded. The, w-we do not take your trust in our management team lightly.
Speaker #3: we are very, bullish on what we're ing and confident in our investor or our, excuse me, our strategic plan. I look forward to outlining that further for you in the months and quarters ahead.
Speaker #3: And, again, thank you for your support.