Earnings Call Transcript - CLFD Q1 2021

Operator, Operator

Good afternoon. Welcome to Clearfield's Fiscal First Quarter 2021 Earnings Conference Call. My name is Sam and I will be your operator this afternoon. Joining us for today's presentation are the company's President and CEO, Cheri Beranek; and CFO, Dan Herzog. Following their commentary, we will open the call for questions. I would now like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website. This call is also being webcast and accompanied by a PowerPoint presentation called the FieldReport, which is also available in the Investor Relations section of the company's website. Please note, that during the course of this call, management will be making forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It is important to note also that the company undertakes no obligation to update such statements, except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, FieldReport and in 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 provides description of those risks. As a reminder, the slides in this presentation are not controlled by you, the listener. Please advance forward through the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield's CEO, Cheri Beranek. Please proceed.

Cheri Beranek, President and CEO

Good afternoon and thank you everyone for joining us today. I hope you are all continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon to share Clearfield's results for the fiscal first quarter of 2021. The first quarter of fiscal 2021 was an exceptionally strong start to our new fiscal year. As you can see on Slide 4, the $27.1 million we generated in revenue was a 40% increase over last year and marked the highest revenue level for any fiscal first quarter in Clearfield history. Our growth in the period was again led by double-digit increases from our community broadband and multiple system operator, also known as MSO or cable TV markets, which were up 71% and 30% respectively. Our extended and ongoing strong top-line performance over the last several quarters has enabled us to exceed the $100 million revenue level on a trailing 12-month basis for the first time. The surging demand and need for high-speed Internet access accelerated by COVID-19 is prevalent across the country, especially in the community broadband market in which Clearfield commands strong market leadership. Our track record and reputation in the community broadband market has positioned us extremely well to take share and further capitalize on the expansion that is currently underway, as our base of independent telephone providers is joined by utilities and municipalities in delivering high-speed broadband to consumers and businesses. Clearfield is helping these emerging providers meet the growing demand by providing our traditional products as well as helping them deploy innovative solutions like our home deployment kits, which extend our field-proven fiber management expertise and leading-edge fiber connectivity performance all the way into the home. As evidence of the success of this initiative, during this past quarter we secured a near-million dollar order for home deployment kits by an electric co-op within our community broadband market. We recognized a portion of this as revenue in Q1 and the balance is reflected in our $8.9 million backlog at quarter end. The robust industry trends we have experienced since last year have continued now into fiscal 2021, supported by sustained demand for broadband coupled with government programs such as the Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act, that are helping to fund and accelerate these deployments. While the expansion currently underway is due in part to some pull-forward build that work-from-home consumers are demanding, it nonetheless may accelerate due to the launch of the Rural Digital Opportunity Fund or RDOF program. RDOF will finance up to $20.4 billion of gigabit-speed broadband over the next 10 years to homes and businesses that were previously not economically viable. It is worth mentioning that the $19.8 million of revenue we generated in our community broadband market for Q1 includes dollars associated with the CARES Act and does not reflect any contribution from the recent awards related to RDOF. In terms of our MSO market, much of our work in this area is an extension of what we are doing in community broadband. Tier-2 MSO carriers, the regional players, are expanding their deployments of fiber community by community. We are working to penetrate the national MSO market and are proud of our recent approval of our new 288 pre-assigned FDH panel cabinet by one such carrier. Our top-line performance in fiscal Q1 also helped to drive solid gross profit dollars, which totaled $11.4 million in this most recent period. As a percentage of revenue, our 42% margin was up from the 41.2% we reported in the prior quarter and marked the highest gross profit margin we have achieved as a company in more than two years. As it relates to our gross margin profitability in Q1, we had a favorable revenue mix in the quarter associated with the increased revenue in the community broadband markets. In addition, meaningful efficiency gains were realized from our operations in Mexico. Moving down the income statement, expenses increased slightly from last year's first quarter, resulting in $3.2 million in net income or $0.23 per diluted share. This was a significant improvement from the $0.5 million or $0.04 per diluted share in earnings we generated in Q1 of last year. We anticipate expenses to increase slightly in future quarters as we invest in additional resources within our community broadband programs. In addition to our encouraging financial performance, we also made meaningful strides advancing our product portfolio. This included achieving Telcordia certification for our Aerial Strand Mount FDH as well as receiving approval by a National Carrier for using its networks. Due to the COVID crisis gripping our country end markets, the launch of our new technologies into the Tier 1 market faces headwinds associated with product introduction and training. As 5G deployments into the access network increase we foresee increasing revenue among the Tier 1 market moving forward. Looking at our market segments by revenue on Slide 5, starting first with our core community broadband market: as I mentioned previously, in the first quarter we generated revenue of $19.8 million, which was up 71% from the same period last year. For the trailing 12 months ended December 31, 2020 community broadband market revenue totaled $67.2 million, which was up 29% from the comparable period last year. Our MSO business comprised 11% of our total revenue in fiscal Q1; from a growth standpoint, we've built on the momentum we established over the last several quarters realizing a 30% year-over-year increase in revenue to $3.0 million in the first quarter of fiscal 2021 and a 49% increase year-over-year to $13.1 million for the trailing 12 months ended December 31, 2020. Revenue in our National Carrier market was up 8% year-over-year to $13.7 million for the trailing 12 months ended December 31, 2020. As I talked about on past field reports, our position in the National Carrier market is related to the continuing demand for fiber-to-the-home and fiber-through-the-business applications. As COVID constraints have limited the deployment of 5G solutions into the access part of the network, revenue for the first quarter of fiscal 2021 slipped 12% year-over-year to $2.7 million. Revenue in our international market was down 8% year-over-year in the first quarter and down 34% year-over-year for the trailing 12 months ended December 31, 2020. Weakness continued in the Caribbean and Mexican markets. However, revenue in the Canadian markets saw an exceptionally strong rebound. We are optimistic of seeing increasing revenue in international markets moving forward. Revenue in our legacy markets was down 58% year-over-year in Q1, and down 39% year-over-year for the trailing 12 months ended December 31, 2020. This legacy part of our business is highly dependent upon the industrial drivers of two customers in this segment. We believe the business is fluctuating from normal levels due to the slowdown in the economy related to COVID. With that I will now turn the presentation over to Dan, who will walk us through our financial performance for the first quarter of fiscal 2021.

Daniel Herzog, Chief Financial Officer

Thank you, Cheri, and good afternoon everyone. It's great to be speaking with you today. Now looking at our first quarter financial results in more detail, as you can see on Slide 7 our revenue in the first quarter of fiscal 2021 increased 40% to $27.1 million from $19.4 million in the same year-ago period. The increase in revenues was primarily due to higher sales in our community broadband and MSO markets, partially offset by decreases in our legacy and National Carrier markets. Turning to Slide 8, gross profit for the first quarter of fiscal 2021 totaled a record $11.4 million or 42% of total revenue. This was an improvement from $7.7 million or 39.9% of total revenue in the first quarter of last year. The increase in gross profit dollars was due to higher sales volume. As Cheri mentioned, the increase in gross margin was due to favorable product mix associated with increased revenues into community broadband and cost reduction efforts across our product lines, including increased production at our Mexico manufacturing plants and efficiencies realized from supply chain programs. As you can see on Slide 9, our operating expenses for the first quarter of fiscal 2021 were $7.7 million, up slightly from $7.3 million in the same year-ago quarter. As a percentage of total revenue, operating expenses for the first quarter of fiscal 2021 were 28.3% compared to 37.8% in the same year-ago period. The increase in operating expenses on a dollar basis was primarily due to higher wages and compensation costs related to performance compensation. Turning to our profitability measures on Slide 10, income from operations was $3.7 million in the first quarter of fiscal 2021, which compares to $401,000 in the same year-ago quarter. Income tax expense increased $684,000 in the first quarter of fiscal 2021, up from $123,000 in the first quarter of 2020. Net income totaled $3.2 million or $0.23 per diluted share, an improvement from $501,000 or $0.04 per diluted share in the same year-ago quarter. Before I turn it back over to Cheri, I'd like to provide a brief update on the operational measures we've taken to protect and support our personnel and customers since the COVID-19 pandemic took hold and how we are continuing to effectively navigate the current environment. Both are reflected on Slide 11. I'm encouraged to report that Clearfield remains fully operational despite the unprecedented business closures and slowdown caused by the global health crisis. Our non-production employees are working remotely using collaboration tools and video conferencing to stay connected. Our production operations in both the U.S. and Mexico are operating close to normal while adhering to state and federal government social distancing guidelines. As a precautionary measure we have multiple contingency plans in the event our ability to operate is diminished or eliminated at either location. As we talked about last quarter, we dual-source most of our components to cover multiple points of failure and provide purposeful redundancies to remove potential risks. Thankfully, as of today many of our supply chain partners remain operational and have continued to provide the necessary components for our products. Our supply chain remains intact, thanks to our team's forward planning to ensure sufficient safety stock inventory levels at both our Minnesota and Mexico facilities. As Cheri has indicated previously, we made the decision to maximize the availability of all product lines at all three of our plants by ensuring that each location can manufacture across our broad product portfolio. This strategic decision has allowed us to meet the growing customer orders and enabled us to continue to fulfill our increased backlog going forward. That concludes my prepared remarks; I will now turn the call back over to Cheri.

Cheri Beranek, President and CEO

Thanks, Dan. Now shifting gears to our operational initiatives and focus in fiscal 2021. Our strategic plan has been a multi-year initiative to prepare Clearfield for the accelerated rate of demand and growth we are now seeing. As you can see on Slide 12 of the FieldReport, we are now ready for our Coming of Age, which is the next phase of our growth plan to further strengthen our core business and position our company for disruptive growth opportunities. While the underlying objectives are unchanged, the three pillars upholding our Coming of Age plan have evolved to better align with where Clearfield is today as a company, our end markets and customer needs, and the near- and long-term trends we're seeing in the industry. Our first pillar, building a better broadband one community at a time: leverage Clearfield's long-standing customer and partnership relationships to build brand awareness and expertise. Ultimately, our goal here is to facilitate the enablement of pervasive high-speed broadband to underserved and unserved communities. A major initiative for 2021 is extending our reach within community broadband into electrical co-ops, rural utilities and municipalities that are not currently being serviced by a rural telephone company and are still underserved by the major carriers. As part of this effort our strategy includes partnering with established distributors in these target markets. We anticipate securing these relationships in the coming months. Clearfield's position within the community broadband market has never been better. Our track record and reputation has positioned us extremely well to continue to grab market share and further capitalize on the expansion that's currently underway. Building on my earlier comments and for the benefit of those newer to our company or industry: the U.S. Rural Digital Opportunity Fund, or RDOF, is a 10-year program designed to bridge the digital divide and efficiently fund the deployment of broadband networks in rural America. The Federal Communications Commission will direct up to $20.4 billion over 10 years to finance up to gigabit-speed broadband networks in unserved rural areas, connecting millions of American homes and businesses to digital opportunity. On December 7, the FCC announced that millions of rural Americans will gain access to high-speed internet service through the RDOF Phase 1 auction. As reflected on Slide 13 of our sales report, auction results show the bidders won funding to deploy high-speed broadband to over 5.2 million unserved homes and businesses, almost 99% of the locations available in the auction. Moreover, an overwhelming majority are scheduled to get gigabit-speed broadband. The FCC, which is tasked with figuring out how to administer the program, is taking public comment through February 16. The financial opportunity for Clearfield is significant through the RDOF program — approximately 540,000 homes will be connected annually. Moreover, it is not a question of if, but rather how and when these homes will be connected. Regardless of the variable inputs, Clearfield is well positioned to capitalize on this opportunity. Turning to our second pillar, delivering innovation for true one-fiber deployment, which is highlighted on Slide 14: this pillar involves three key initiatives. First, leveraging our presence in community broadband to enable one-fiber backhaul. Second, removing obstacles for the integration of wireline and wireless networks. Third, bringing fiber management expertise to 5G and edge computing. In the area of focus we are looking at adjacent product categories to expand our total addressable market. Consistent with our approach of being a fiber-to-anywhere company, we're looking at investing in product categories or areas that may not be fiber-rich today but would allow us to introduce products to the market that enable the lifestyle ubiquitous broadband provides. One innovation in this area is the recent approval of our aerial FTTH into the networks of a National Carrier. As 5G deployments intersect with the utilization of fiber to deliver residential and business broadband, permitting and right-of-way agreements are ongoing obstacles. The aerial FTTH provides a new and unique means to deploy fiber management assets satisfying these challenging situations. On Slide 15, you can see that the third initiative of our Coming of Age plan is scaling operational excellence for a superior customer experience. This approach includes strategically investing in products, manufacturing and supply chain to increase competitiveness and reduce costs. The investments we've made to our operations in Mexico are integral to this effort. The beneficial results we are seeing have yielded both improved efficiency and cost effectiveness; I am encouraged to report that our operations in Mexico remain fully operational and are expanding. In early Q2 of fiscal 2021, our initial Mexican facility achieved its ISO audit recertification, while our newest facility in this region achieved its initial ISO certification. We have systematically added personnel at the facilities to meet the growing demand we are seeing for our products, and will continue to evaluate our needs on an ongoing basis. Further, as we scale our business, we are exploring means to expand our footprint in Asia. Our engineering resources, which include boots on the ground in China, are allowing us to expand our efforts in Asia from manufacturing to our specifications, and to assist in our engineering design. Utilizing some of the process gains we've achieved in our virtual world, driven by having our U.S. forces working remotely due to COVID, we are now working directly with Asian design personnel who can help us reduce cost from the inception as a design rather than through the two-step process we've implemented previously. Our strong finish to fiscal 2020 provided significant momentum in the first quarter of FY '21, which we were able to capitalize on as demonstrated by the 40% top-line growth we achieved and strong profitability metrics. Our consistent performance speaks to the resiliency and durability of our business in a range of environments. Moreover, we are continuing to benefit from and take advantage of favorable industry tailwinds and Clearfield's established presence within our key growth markets. Looking ahead, due to the ongoing volatility from COVID-19, we are currently in a position to provide only limited financial guidance. We are, however, confident the demand for fiber-fed broadband will continue throughout fiscal 2021 and beyond. Near-term, we anticipate the second quarter to be consistent with the traditional seasonality of revenue, being slightly down on a sequential basis. Longer term, our enhanced Coming of Age plan, which targets growth in fiber-fed broadband and 5G access, positions us for continued success for Clearfield in the years ahead. And with that, we're ready to open the call for your questions. Operator?

Operator, Operator

And our first question is from Jaeson Schmidt with Lake Street Capital. Please proceed with your question.

Jaeson Schmidt, Analyst, Lake Street Capital

Hey guys, thanks for taking my questions. I understand that lead times can be pretty short for you guys, but just curious if you could comment on the linearity of bookings in the December quarter?

Cheri Beranek, President and CEO

Defined linearity; what do you mean by that?

Jaeson Schmidt, Analyst, Lake Street Capital

Just trying to get a sense of whether order patterns were pretty consistent throughout the quarter or if it was more back-end loaded.

Cheri Beranek, President and CEO

No, very consistent. I mean, we're having a mild winter, which certainly always helps, but I think overall in the general market we are seeing continual and ongoing demand as people evaluate and build their environments and then plan for the future. So, no, it was a very nice and consistent quarter.

Jaeson Schmidt, Analyst, Lake Street Capital

Okay. And then, I know you outlined some of the potential tailwinds going forward, obviously you've benefited from some of the tailwinds related to COVID. Just curious if you could comment on any change in visibility over the past three months?

Cheri Beranek, President and CEO

We're actually getting, I would say, increased visibility to business needs. I think the COVID world has actually created a situation in which communication service providers are really looking out season by season, and trying to work with their suppliers to give them at least some visibility to their plans and needs, not necessarily blanket purchase orders but definitely a little bit more long-range visibility than we would have had in the past. However, I think that's also coupled with some concerns about the availability of labor and installation. We've heard some concerns, especially in the national carrier market, about union individuals not wanting to be required to go into homes; so it's that kind of push/pull that has created some challenges for our visibility standpoint. But we are continuing to really manage our lead times; we are industry-leading today at three to four weeks, and then working with our distribution partners to even improve upon that for high-volume product so that it will be available from our distribution partners in three or four days. So we're aggressive about what we see the marketplace heading, and as long as labor continues to be available, we're very optimistic.

Jaeson Schmidt, Analyst, Lake Street Capital

Okay, that's helpful. And then just last one for me and I'll jump back in the queue. Gross margin, a nice uptick in December; how should we think about sort of the opportunity for expansion this fiscal year?

Cheri Beranek, President and CEO

Yes. So the margin was positively affected by the strong dominance of community broadband; with community broadband being up 70% and representing roughly 65% to 67% of our total business, that business — because it's typically done in smaller projects — is typically higher margin, and so we certainly benefited from that. With the carrier business, the Tier 1 business being down a little bit in the quarter, that also affected the product mix. So we think 42% is a great level and a strong target; we don't think it's easy to scale much above that. We are doing a lot of programs to reduce costs. But from a modeling standpoint, I think this is likely the pinnacle of what we can achieve in the near term.

Jaeson Schmidt, Analyst, Lake Street Capital

Okay. Thanks a lot guys.

Cheri Beranek, President and CEO

You're welcome.

Operator, Operator

And our next question is from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Tim Savageaux, Analyst, Northland Capital Markets

Hi, good afternoon, and congrats on the strong results. I have a couple of questions, but I'll start with backlog — we actually saw obviously a pretty sharp increase relative to last year, but somewhat of a decline sequentially. I'm wondering if you could discuss the puts and takes in terms of bookings and backlog in the quarter that led to that decline sequentially? Thanks.

Cheri Beranek, President and CEO

Yes, the decline sequentially is very standard and seasonal. We don't typically see service providers putting a purchase order that extends over their fiscal year when budgets are not yet approved. So we tend to see December bookings go down as they're putting together their plans. I would always say backlog should be taken with a grain of salt; backlog is not necessarily indicative of future demand.

Tim Savageaux, Analyst, Northland Capital Markets

Well, I guess with that in mind, would you expect or can you comment on what you're seeing thus far this quarter with regard to bookings relative to that? We understand that your smaller customers may not have the type of cumbersome budget cycles you might see among the larger carriers.

Cheri Beranek, President and CEO

We're having a great January. So, without giving any future guidance beyond what we can see with the three- to four-week lead times, bookings have been good. I do not have a concern regarding lack of market demand; it's strong. There are a lot of projects and activities in place. Community broadband is really excited about the available energy for where they can put together networks. I think we have worked for years to build the reputation that we have in community broadband and the support that we're providing. So I believe we're taking share in this marketplace and are positioned to grow with it as the COVID world tends to settle down.

Tim Savageaux, Analyst, Northland Capital Markets

Got it. And then, if I could move over to your commentary on the RDOF process and the potential to accelerate growth from what looked to be already pretty strong levels. I wonder if you could be a little more granular on expectations for timing there? You'd referenced some degree of pull-forward in demand. Is it likely that we'll see a normalization of that pull-forward, maybe in contrast to traditional seasonality in the business, prior to seeing any type of acceleration from RDOF projects, maybe later in calendar '21?

Cheri Beranek, President and CEO

The general frame of thought is that it's always difficult to know what government projects will do, but the general expectation is that we'll start to see the beginning of that revenue in July and August. Since our fiscal year ends in September, I don't see the RDOF program having a really significant impact on our numbers for this fiscal year, but it certainly will be one of the mechanisms to improve numbers moving forward. To date, some of the growth we're seeing has been CARES Act funded and we saw some of that in the December quarter, but I think much of what we're seeing really is true organic need in the marketplace. COVID absolutely created the requirement that broadband is necessary. There were individuals early in the pandemic who were able to immediately put dollars into place, but most providers are now in a place where they're reacting and planning to build out their networks in a broader way. One thing that was really surprising to me — for anyone on the call who hasn't seen it — in the State of Minnesota the metropolitan newspaper published where high-speed broadband is available in our state; and what we saw was even in the 7-county metro area and in regions with Clearfield customers across the country, there is still a huge amount of need out there and I think we're going to see that over the course of the summer. There is a lot of construction work that has to be done to deliver the physical infrastructure to each home and business. So we're optimistic about this year as well as fiscal year 2022, when we can take advantage of government initiatives on top of this.

Tim Savageaux, Analyst, Northland Capital Markets

Great, thanks very much.

Operator, Operator

At this time, this concludes the company's question-and-answer session. If your question was not taken you may contact Clearfield's Investor Relations team at [email protected]. I'd now like to turn the call back over to Mrs. Beranek for closing remarks.

Cheri Beranek, President and CEO

Thank you so very much. It's a difficult time now with the pandemic and the inability to receive vaccinations for those that we love. But I encourage you all to be patient and to keep yourselves safe. Thank you for joining us today. We look forward to updating you again on our progress soon.

Operator, Operator

Thank you for joining us today for Clearfield's fiscal first quarter 2021 earnings conference call. You may now disconnect.