Earnings Call Transcript - CLFD Q3 2025

Operator, Operator

Good afternoon, everyone, and welcome to the Clearfield Fiscal Third Quarter 2025 Conference Call. Please note that today's event is being recorded. I will now turn the floor over to Gregory McNiff from Investor Relations. Please proceed, Gregory.

Gregory McNiff, Investor Relations

Thank you. Joining me on today's call are Cheryl Beranek, Clearfield's President and CEO; and Dan 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. 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. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note that the company undertakes no obligation to update such statements, except as required by law. 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, shareholder letter and on 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. With that, I would like to turn the call over to Clearfield's President and CEO, Cheryl Beranek. Cheryl?

Cheryl P. Beranek, President and CEO

Good afternoon, everyone, and thank you for joining us today to discuss Clearfield's third quarter results. I will start by briefly reviewing the 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. 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 were up 2% over the same period in the prior year and toward the top end of our guidance range, with Clearfield segment net sales up 15% year-over-year. 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. 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 the end user. As we highlighted last quarter, we designed our FiberFlex cabinet line to address this trend. Our FieldSmart FiberFlex 600 Powered Cabinet continues to be recognized for its innovative and customer-friendly design. We are also expanding our reach deeper into the connected home. During the last quarter we announced TetherSmart MFT, which enables Clearfield to address new applications within and beyond the broadband ecosystem. As the industry's smallest, fully sealed, 10-port access terminal, the TetherSmart MFT is purpose-built for Fiber-to-the-Home, Fiber-to-the-Business, and 5G backhaul applications. 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, and which are being broadly recognized for the 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, 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. 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. Our first pillar is protecting our core. Clearfield serves the needs of nearly 1,000 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. 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. Our customers are moving into new applications to leverage their fiber infrastructure and we are committed to growing alongside them. For example, we have a customer who is a significant broadband provider in the Northwest that is currently using our solutions for wireless backhaul. 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. 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. 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. An example of this is our recently announced TetherSmart 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. 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. 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 5 years, with approximately one-third of households expected to gain access to multiple providers. 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. 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. Both of these trends will require significant fiber deployments in the 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. 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 share our outlook for the remainder of the fiscal year.

Daniel R. Herzog, CFO

Thank you, Cheri, and good afternoon, everyone. I will now review our third quarter results, beginning with sales. Third quarter net sales of $49.9 million were up 2% over the same period in the prior year and toward the top end of our guidance range. 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. Net income per share of $0.11 was above our guidance range and reflects a significant improvement from the year-ago period. We continue to make progress on improving product costs while also managing the cost structure of our Nestor segment. 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 Nestor segment in the third quarter. As bookings have continued to outpace shipments through the 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. As Cheri 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 Nestor segment for fiscal 2025 to fall slightly year-over-year as we continue to focus on improving margins. For our fourth fiscal quarter of 2025 we anticipate net sales in the range of $47 million to $51 million and net income per share in the range of $0.03 to $0.11. 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. 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 your questions.

Operator, Operator

And our first question today comes from Ryan Koontz from Needham & Company.

Ryan Koontz, Analyst

I wanted to ask about the product mix for your core Clearfield business. Are you still seeing unusually high numbers in Connected Home compared to what you consider normal, or is that starting to balance out? Any thoughts on this?

Cheryl P. Beranek, President and CEO

We're definitely seeing the product mix for the connected home come back to a more normalized cadence. I think that's reflective of the fact that there were a lot of cabinets that were sitting in yards over the course of last year, and we're not seeing that as much this year. So 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 the connected home revenue. So it's a little bit of both in regard to where we see the product mix for this year over last year.

Ryan Koontz, Analyst

Great. Reflecting on last year, there were some inventory impacts, and the core business has seen a slight increase, which I believe you mentioned is in the teens percentage year-over-year. Is that still consistent with what you've stated about the core Clearfield business growing in double digits compared to last year, considering the inventory impacts?

Cheryl P. Beranek, President and CEO

Right. Clearfield, our Clearfield segment is up 15% year-over-year for the quarter. And so even though the total revenues showed a 2% increase, total revenues were negatively impacted by, unfortunately, our performance under the Nestor segment. Clearfield continues to do very strong in our markets, principally driven this year and this quarter by our large regional and MSO business.

Ryan Koontz, Analyst

Got it. And your new products introduced for connected home...

Cheryl P. Beranek, President and CEO

The Home Deployment Kits are doing really well and we're...

Ryan Koontz, Analyst

What was that called?

Cheryl P. Beranek, President and CEO

They are called the Home Deployment Kits, and so these provide the opportunity to actually connect the physical home with our drop cables and with a device that sits on the home itself. And by doing that, one installer can do the work that was previously done by two. And so we're seeing some trials that have been underway now turning into ongoing revenue and new trials being started in different places. So we see that as a significant revenue opportunity for us. We see it demonstrated this year and we're excited about where it's going to go.

Ryan Koontz, Analyst

Great. And then on the Amphenol acquisition of CommScope's Connectivity business and cabling. Any commentary there on what you think that means for the industry?

Cheryl P. Beranek, President and CEO

Well, congratulations to CommScope for figuring out how to be able to rebalance their financial situation. I think it's good for the industry that we don't have companies in financial distress. Amphenol's acquisition of CommScope, I do think it's good for the fiber industry. As they pointed out, their focus is the hyperscalers, the Amazons, the Googles and their deployment of fiber for AI. That's not a target of Clearfield. We see CommScope's focus there today and under the acquisition of Amphenol as being positive for them and not detrimental to us. In fact, our focus on AI is really part of our third pillar. It's the opportunity for not just serving inside of those data centers, but to work with our community broadband service providers, our large regionals and our MSOs to help provide the fiber that's going to have to connect those data centers together.

Ryan Koontz, Analyst

Great. And just one last one maybe for Dan. On the gross margin, you mentioned consumption of E&O reserves on the quarter. Was that material on the Clearfield side? Any idea how many basis points it was to gross margin?

Daniel R. Herzog, CFO

Yes. Last year, we had an expense of approximately $1.7 million. This quarter, we saw a gain of around $1.1 million, which I estimate had a 1.7% impact. This assessment is based on our run rate; if we had only looked at our recovery run rate, we exceeded expectations with about $1.6 million in recoveries, and we've been averaging around $500,000. Therefore, I concluded that the change from our run rate is around 1.7% to 1.8%.

Ryan Koontz, Analyst

Got it. Maybe one more for you, Dan, on supply chain. 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 supply chain?

Daniel R. Herzog, CFO

I think that's Cheri, you want that one?

Cheryl P. Beranek, President and CEO

I would say that our challenge is still in battery backup and some rectifiers associated in the active cabinet business. Much of that is related to tariffs and is related to managing how that's brought into the country. We've been absorbing those costs rather than passing them along, and we're managing that aspect of it. The challenge just is, it creates extra time issues on the border, things that have been difficult for us to navigate around. But like I said, our lead times have been better in most situations. It's just those electronic challenges for the active cabinets.

Ryan Koontz, Analyst

Are you seeing any progress regarding on-shoring or bringing battery production to North America? I know there was some...

Cheryl P. Beranek, President and CEO

Yes, right. I think the challenge there is just the timing and how long that onshoring could take. So we're considering alternative suppliers at this point.

Operator, Operator

Our next question comes from Jaeson Schmidt from Lake Street.

Jaeson Schmidt, Analyst

Cheri, I just want to expand on sort of that data center opportunity you highlighted in the script. When you think about that market as a whole, how should we be thinking about that market impacting the P&L in a more sizable way? Is that a kind of fiscal '26 story? Is it beyond? How are you looking at that?

Cheryl P. Beranek, President and CEO

I would say there is some revenue in the data center space, but not in the large hyperscale segment that generates significant numbers at CommScope and Corning. We have chosen not to participate in that area because it could negatively impact the consistency of our operations and our ability to protect our core business. However, we believe we can engage in both the data centers our customers are constructing and those in their markets that will need connectivity. We expect to begin seeing some revenue from this starting in '26, with more significant contributions in '27, at least based on our current outlook. We also have new products in development and have invested in marketing resources to identify our specific needs. These new offerings are exciting and will utilize the modularity of the Clearview Cassette, which represents a fundamentally different approach. There is still significant opportunity in data centers, and we want to ensure we pursue it correctly.

Jaeson Schmidt, Analyst

That's really helpful. And then just as a follow-up, how should we think about OpEx trending, the remainder of this calendar year?

Daniel R. Herzog, CFO

I expect our operating expenses to trend slightly upward in the fourth quarter. We have some trade shows and travel expenses, along with higher variable costs towards the end of the quarter as we prepare for year-end audits and engage in extensive consulting related to administrative matters.

Operator, Operator

Our next question comes from Tim Savageaux from Northland Capital Markets. As a follow-up, how should we consider the operating expenses for the rest of this calendar year? I would say that operating expenses are likely to trend slightly upward in our fourth quarter. We have some trade shows and travel expenses occurring, along with a slight increase in variable costs towards the end of the fourth quarter as we prepare for our year-end audits and engage in various consulting related to administrative matters.

Timothy P. Savageaux, Analyst

I have a question regarding the smaller carrier markets or the U.S. markets in general. There was a slight increase among your smaller community broadband customers, but it fell short of what is typically seen seasonally. I know you mentioned pull-ins in large regional markets. Was there a similar trend among the smaller carriers? How would you describe what you observed for both June and September in terms of a potentially below-normal seasonal build?

Cheryl P. Beranek, President and CEO

The small carriers have been significantly affected by the uncertainty surrounding BEAD. These carriers cannot undertake multiple builds and are focusing their engineering and development resources on areas they consider most viable. As a result, some carriers that were expected to build with BEAD funding for fiscal year '25 are not proceeding at all because they haven't completed the necessary engineering. This isn't due to a lack of commitment to fiber but rather a result of the uncertainty in the BEAD program. While it is frustrating to witness this delay, it does not mean we will lose that revenue; it simply means the revenue has been postponed due to the challenges posed by the BEAD program's issues.

Timothy P. Savageaux, Analyst

Got it. And maybe along those lines, you mentioned kind of industry forecasts for this low double-digit type growth rate. I know historically, Clearfield has been targeting growth normalized post these big ups and downs in the same range. Meaning, is that a reasonable place to start as we look out to fiscal '26 in terms of growth expectations and might this revenue pushing out a bit, add to that or have a positive impact on that level of growth out in '26?

Cheryl P. Beranek, President and CEO

Yes. Given the current uncertainty surrounding BEAD, I am comfortable with an outlook that aligns with industry norms. Our objective has been clear: we aim to grow at the same pace or faster than the industry to capture market share. I believe we are positioned to achieve this across all our markets, with substantial year-over-year growth in both large regional areas and among MSOs. In the Community Broadband sector, we will see providers diversifying their strategies rather than solely relying on BEAD’s funding, which will lead to a more balanced approach next year. I would also like to highlight the importance of distinguishing between growth initiatives in the Nestor segment and the Clearfield segment. We provided clarity in this quarter regarding the organic revenue of Clearfield and the additional revenue from the Nestor acquisition in Europe over the last two quarters. The industry growth rates for Clearfield are slightly higher, while Nestor's growth is expected to be flat and possibly decrease slightly in the fourth quarter. However, for next year, Nestor is projected to remain flat as we prioritize improving its cost structure through a revised product mix, allowing the organization to restore profitability.

Timothy P. Savageaux, Analyst

Got it. And last one for me. You're guiding kind of flat here for September. Any notable moves among your end markets below that, that are worth calling out up or down?

Cheryl P. Beranek, President and CEO

We've traditionally observed the most revenue and ordering patterns in the third and fourth quarters. However, this year, those patterns started a bit earlier as customers resumed their buying trends. In the fourth quarter, we expect to see strong ongoing demand from the Clearfield segment, while the European market continues to be weak. The revenue mix between the Clearfield and Nestor segments will likely be similar in the upcoming quarter, with possibly slightly higher revenue from Clearfield compared to the third quarter.

Operator, Operator

And at this time, I’m showing no additional questions. I’d like to turn the floor back over to management for any closing remarks.

Cheryl P. Beranek, President and CEO

Thanks, Danny. And thank you to all of you who are listening to the call today, either live or recorded. We do not take your trust and our management team lightly. We are very bullish on what we're doing and confident in our strategic plan. I look forward to outlining that further for you in the months and quarters ahead. And again, thank you for your support.

Operator, Operator

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.