Earnings Call Transcript - CLFD Q4 2025

Operator, Operator

Good day, and welcome to the Clearfield Fiscal Fourth Quarter 2025 Conference Call. Please note this event is being recorded. At this time, I'd like to turn the floor over to Gregory McNiff, Investor Relations. Sir, please go ahead.

Gregory McNiff, Investor Relations

Thank you. Joining me on today's call are Cheri 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. Additionally, as announced on November 12, 2025, Clearfield has sold its Nestor Cables business. Following the divestiture of Nestor, we are reporting only on Clearfield segment, beginning with this release Clearfield is reflected as continuing operations with Nestor classified as discontinued operations and held for sale for fiscal 2025 and all prior periods on our financials. With that, I'd like to turn the call over to Clearfield's President and CEO, Cheri Beranek. Cheri?

Cheri Beranek, President and CEO

Good morning, everyone, and thank you for joining us to discuss Clearfield's Fourth Quarter and Full Year Fiscal 2025 results. I'll begin with a brief overview of the quarter, discuss our decision to divest the Nestor business, share updates on our long-term strategy and then turn the call over to Dan for a summary of our financial performance and outlook for fiscal 2026. Fourth quarter net sales from Clearfield's continuing operations of $41.1 million were up 13% year-over-year. For the full year, Clearfield's continuing operations net sales grew 20% to $150 million demonstrating solid execution as we continue to focus on growing faster than the industry and driving market share gains. After a thorough and comprehensive review of the Nestor segment, we made a decision to divest the business. This move allows us to redeploy resources towards our core North American operations and higher return opportunities. Our acquisition of Nestor was focused on gaining access to a key technology, namely the ability to manufacture our own line of FieldShield cable, and we achieved our objective. We strengthened our vertical integration and Build America Buy America compliance through the successful transfer of Cable Manufacturing Technology into our U.S. and Mexico facilities. However, expanding Nestor's business beyond Finland into the European market proved to be a lower-margin opportunity despite our efforts to improve margins through process improvements and new product introductions, resulting in a suboptimal use of capital. The transaction resulted in a $10.4 million noncash write-down in the fourth quarter with minimal cash impact. Importantly, the operational benefits for Nestor's integration remain embedded in our manufacturing platform. This divestiture sharpens our focus, improves our long-term margin profile and better aligns resources with Clearfield's strategic priorities. Looking ahead, our focus remains on protecting what defines Clearfield. Craftsmanship, reliability and service, while leveraging our core strengths and expanding into areas where we can create the most value. We continue to execute on our Better Broadband and Beyond strategy through three core pillars: Protecting our core Community Broadband business by ensuring that the broadband service providers who have long relied on Clearfield continue to have the products, service and support they need to succeed. Leveraging our market position into new applications and environments where fiber connectivity plays a growing role, including next-generation wireless networks from the metro core to the South side. Expanding into adjacent markets by utilizing our core competencies to allow us to reach new customers and to strengthen our leadership in broadband fiber infrastructure. As hyperscalers rely on smaller ISPs to push part of their compute workloads closer to the edge, Clearfield's position with regional providers opens up a new growth vehicle to the company. This disciplined approach positions Clearfield for measured growth as the market continues to recover. As part of this next phase, Clearfield will introduce two significant new product lines. In the first quarter of calendar 2026, we will launch a complete line of splice cases, expanding our offering and deepening engagement with customers who operate in environments that require slicing. After extensive review and months of successful field demonstration, we believe this new solution represents the best-in-class. Following that product introduction, we will release a next-generation Fiber Management Cassette, optimized for non-hyperscale data centers, a fast-growing market where Clearfield's modular design and innovation provide a unique advantage. These launches mark the start of a new generation of innovation as we extend our reach within and beyond traditional broadband markets. Another important element of our strategy is investing in sales development and expanding our distribution channels. We have enhanced our leadership team to support the new phase of growth. Anis Khemakhem, our new Chief Commercial Officer, is integrating sales and marketing to align go-to-market strategy with product innovation. Mike Ward who recently joined as our new Vice Presidents of Broadband Sales and Marc Temple, who joined as Vice President of Distribution Channels and Strategic Alliances, bring deep industry experience and will strengthen our Tier 1 and channel sales capabilities. Together, these leaders bring renewed focus, operational rigor and energy to the organization, positioning Clearfield for the next chapter of growth. With respect to our distribution channels, our long-standing partners remain essential contributors to our success, connecting Clearfield solutions to broadband service providers. Building on that strong foundation, we recently added WireMasters as a distribution partner who has begun to distribute Clearfield's Fiber Optic Connectivity and Management products globally with an emphasis on the defense and aerospace markets, and we plan to add a wireless-focused distributor early in fiscal 2026, opening new opportunities in cellular backhaul and emerging edge applications. These efforts strengthen our access to new customer groups while maintaining close collaboration with new existing partners who continue to be key to our growth. I want to briefly comment on the BEAD program. We are pleased that 18 of the 52 submitted proposals have been approved by the NTIA. Fiber remains the overwhelming medium to deliver in broadband based on the proposal submitted. We intend to vigorously pursue this opportunity, and we'll keep you updated as we approach the deployment stage. Fiscal year '25 was a transformational year for Clearfield, one defined by strategic focus, leadership investment and a return to growth and profitability. As we enter fiscal 2026, we are executing with confidence on our Better Broadband and Beyond strategy, driving innovation across our core markets while expanding into adjacent opportunities that enhance long-term shareholder value. With that, I'll turn the call over to Dan Herzog, who will review our fourth quarter and full year results and provide our outlook for fiscal 2026.

Daniel Herzog, CFO

Thank you, Cheri, and good morning, everyone. I will now review our fourth quarter results, beginning with sales. This quarter marks the first period in which Nestor's results are classified under discontinued operations on our income statement. As a result, the Clearfield segment now reflects our continuing operations and all quarter, full year and period comparisons are now provided on a Clearfield continuing operations-only basis to ensure clarity. Fourth quarter net sales from Clearfield's continuing operations were $41.1 million, up 13% over the same period from $36.2 million in the prior year. Gross margin improved from 26.6% to 34.6%, which was driven by better manufacturing efficiencies and overhead absorption with higher volume. Net income per share from continuing operations was $0.13 in the fourth quarter of fiscal 2025 versus a loss of $0.01 per share in the comparable period last year. For the full fiscal year, net sales from continuing operations were $150.1 million, up 20% from $125.6 million in fiscal year 2024. Gross margin expanded from 20.6% to 33.7%, mainly as a result of better overhead absorption with higher volume, lower inventory reserve charges as a result of improved inventory utilization along with increases in production efficiency from our continued improvement programs. While we reported an overall loss per share for fiscal 2025 of $0.58, Nestor's discontinued operations and our impairment write-down of that business contributed a net loss of $1.03 per share. This was offset by net income per share of $0.45 from Clearfield's continuing operations, which compares to a net loss per share of $0.58 in the comparable period in fiscal 2024. These results underscore the strength of our continuing operations moving forward which continued to demonstrate solid execution and share gains. We ended the quarter with approximately $166 million in cash and investments, up from $153 million in the prior year, reflecting continued strength in our balance sheet and disciplined operational execution. This financial position enables us to invest in innovation, product development and market expand programs that will drive long-term value creation. The company also invested $16.5 million in repurchasing 551,000 shares during the fiscal year. In addition, our Board of Directors has increased our share buyback authorization from $65 million to $85 million, providing us with $28.4 million available for additional repurchases when added to the $8.4 million repurchase amount remaining on September 30, 2025. For the full year fiscal 2026, we expect net sales from continuing operations in the range of $160 million to $170 million. We expect growth to be driven by steady demand for Fiber Connectivity with continued strength across our Large Regional and MSO customers. We expect the late start to the BEAD program and the recent government shutdown to pressure investments, both from private funding as well as government programs in our Community Broadband market early in the year. We expect operating expenses as a percentage of revenue to remain consistent with fiscal 2025 and earnings per share from continuing operations in the range of $0.48 to $0.62. For the first fiscal quarter of 2026, we anticipate net sales from continuing operations in the range of $30 million to $33 million. Total operating expenses remained consistent with the fiscal fourth quarter of 2025 and net loss per share in the range of $0.08 to breakeven. The earnings per share ranges are based on the number of shares outstanding at the end of the fourth quarter and do not reflect potential share repurchases completed. And with that, we will open the call to your questions.

Operator, Operator

The first question today comes from Ryan Koontz with Needham & Co.

Ryan Koontz, Analyst

I wanted to ask about your comments regarding the shutdown. Clearly, there may be some impacts on BEAD, but can you point to any other programs, subsidy initiatives, or customer behaviors that might have affected either revenue, bookings, or your outlook for Q4, which is your fiscal Q1?

Cheri Beranek, President and CEO

Right. Ryan, we saw it in everything, kind of across the board, probably ACAM probably the most affected, not that it's going to diminish the amount of money available, but it did affect bookings in the fourth quarter that would then both because of our short lead times, both ship in fourth quarter and lead into first. So it's an unfortunate circumstance in one of those things that, I guess, we all don't even realize how much government funding and government operation affect us.

Ryan Koontz, Analyst

And Cheri, do you have a kind of a timeline when you expect that to catch up to normal, I would think maybe over the next few quarters? Or is it just a...

Cheri Beranek, President and CEO

Yes, we'll be back to normal by second quarter as it relates to the government shutdown. So the government shutdown did affect bookings and our forecast for a soft first quarter, into next year. But I don't expect it to affect the total year. So second quarter, we should be normalized.

Ryan Koontz, Analyst

Got it. And specifically there, then within your reported fourth quarter Community Broadband looked a little soft. That's what you're pointing to there in...

Cheri Beranek, President and CEO

The Community Broadband sector experienced a decline, remaining flat compared to last year, which is quite unusual. Although the government shutdown played a role, the primary issue over the year was the delay in BEAD funding. Smaller service providers faced the most significant impact from the BEAD delays, affecting their deployments, planning, engineering resources, and financing. This situation also influenced private investments at the smaller scale, as funds were often held back while waiting for clarity on BEAD allocations. The locations of BEAD funds significantly impact private investment timing, since the fiber investments made for BEAD networks can also support middle-mile projects. We are eager for the BEAD awards to be announced, and while we anticipate some BEAD funding in 2026, the most substantial effect will be the return of private investment as BEAD gets clarified.

Ryan Koontz, Analyst

Helpful. And Dan, on the gross margin outlook there relative to where you are in continuing operations, how do you think about broadly margins going forward? Is it purely a matter of scale at this point and you expect some modest improvements in gross margin going forward with higher revenues?

Daniel Herzog, CFO

Yes, that's exactly how to interpret that, Ryan. It is certainly volume dependent. The first quarter may appear somewhat lighter, but it will scale with revenue increases from there.

Ryan Koontz, Analyst

Got it. And Cheri, any thoughts about industry fibers supply right now? Is that coming up much of a concern? Have you heard that from your customers at all in terms of raw fiber?

Cheri Beranek, President and CEO

Unfortunately, across all customers, regardless of size, the utilization of fiber in data centers is impacting Corning's allocation. This, in turn, affects how allocation is distributed to other service providers, which subsequently influences broadband deployments. We are proactively working to identify and source equivalent fibers that can be approved in those networks, both for our own interests and for the benefit of our customers.

Operator, Operator

The next question comes from Scott Searle with ROTH Capital.

Scott Searle, Analyst

Maybe just a couple of quick calibration questions. Dan, I'm just wondering what Nestor was in the September quarter just to kind of look at our published numbers, apples-to-apples. And then looking into the December quarter, could you give us a little bit of color in terms of the sequential outlook by the different customer classifications? It sounds like Community Broadband will be under a little bit of pressure given BEAD and government shutdowns, but I'd love to have a little bit of color on that front. And what you need in terms of turns to get to the lower end of the range and what the visibility is in the immediate outlook? And then I had a follow-up.

Daniel Herzog, CFO

Yes, I'll take the first one there. Nestor finished their fourth quarter was $9.4 million in revenue, with the Clearfield being $41.1 million. So that would have put us at 50.4% exactly.

Scott Searle, Analyst

That's helpful. And then in terms of the December outlook.

Cheryl Beranek, President and CEO

Community Broadband is currently facing some pressure due to BEAD, the government shutdown, and the surrounding private funding. However, we are very satisfied with our performance in the Large Regional group and the Regional MSO markets, which now represent nearly 40% of our business. This allows us to utilize our existing sales channels, as both large regional and regional cable operators often serve the same neighborhoods as the Community Broadband team. Our reputation and sales channels in Community Broadband provide leverage for the MSOs and Large Regionals, who are generally larger clients than the Community Broadband team itself, resulting in bigger orders and greater scaling opportunities. Although Community Broadband is under pressure now, the MSOs experienced an increase of nearly 40% over the year, while the Large Regionals grew close to 60%. Given this momentum and the expectation for Community Broadband to rebound in the second quarter, we anticipate a strong build season for next year. I also wanted to revisit the fiber supply issue that Ryan mentioned earlier. This is why our long-term annual forecast remains cautious. Our forecast reflects what we can realistically anticipate. Our reputation as a company is to be thoughtful and measured in our forecasting, especially considering that the fiber supply constraints are beyond our control and may impact our long-term projections.

Scott Searle, Analyst

Great. And Cheri, if I could, just to follow in terms of the annual outlook, starting the year slow, but it sounds like you start to see normalization in the second quarter. The math on the $160 million to $170 million range implies kind of mid-40s through the rest of the year. So I assume that's kind of ramping. But I'm wondering what your factoring into that forecast? Is it just normalization of the existing customer base and spending patterns? How much are you factoring in for BEAD? And then you've got some new products that seem like they're kind of intriguing in terms of your next-gen splicing and data center. I'm wondering how they fit into the equation as well?

Cheri Beranek, President and CEO

We are not expecting to generate a significant amount of revenue from new product introductions, just a few million dollars. Usually, it takes a full year for outside plant products to undergo a weather cycle before we can count on substantial long-term revenue. However, we believe that the new product introductions for splice cases and the upcoming next-generation cassette line will contribute more significantly to our revenue in 2027.

Scott Searle, Analyst

Very good. And just in terms of how you're thinking about BEAD and that number in that $160 million to $170 million?

Cheri Beranek, President and CEO

Yes, I would say we're looking at probably less than $10 million in that. Remember, they have to build first with middle-mile infrastructure, and the actual construction of placing cabinets will likely occur in our fourth quarter. It's important to consider that our fiscal year ends in September, so we tend to miss some of the fall numbers during the construction season. Therefore, next year's fourth quarter and first quarter will be significantly stronger than what we're seeing now.

Scott Searle, Analyst

Great. And last, if I could, new products, what does that do to your addressable market? Cassettes, I'm sure it's just extending your existing position. But what does the data center do?

Cheri Beranek, President and CEO

The next-generation cassette line is focused on attracting new customers while also eventually catering to our existing customers. We plan to target non-hyperscale data centers with a disciplined approach because pursuing hyperscalers would result in losses due to the high volume, low-mix nature of their needs. That doesn’t align with Clearfield’s capabilities or our manufacturing setup. We are competitive in a low-volume, high-mix environment. Smaller data centers at the edge are where we anticipate significant opportunities as they take on computing power from larger players. This is our area of expertise, where high-value manufacturing doesn’t apply and flexibility is essential. The new data center cassettes will provide unique configurations within a 19-inch panel, allowing for customized designs. We expect to launch this product in January, with a full display at that time.

Operator, Operator

The next question comes from Tim Savageaux with Northland Capital Markets.

Timothy Savageaux, Analyst

I want to stay on the BEAD theme here. And with a couple of questions. First, we've seen some of your peers in the access systems space talk about the receipt of initial orders for BEAD, I think historically, maybe you have some correlation there on the cabinet side. But it sounds like you're talking about an overall uptick in activity with these approvals, with maybe some delay from shutdown. But can you talk to when you expect initial orders? Or have you seen them yet for BEAD?

Cheri Beranek, President and CEO

Due to our short lead time, we are observing quoting activity, but not necessarily shipping activity associated with it. We have a good understanding of which customers expect to receive funding, which has allowed for some planning flexibility. However, I expect that we won’t see significant revenue until the summer construction season, specifically in the third and fourth quarters.

Timothy Savageaux, Analyst

Yes, it makes sense. To gauge the size of that opportunity, we recently received a significant round of approvals, totaling around $9 billion. I believe the total is even greater than that, as you mentioned earlier. For Clearfield, we previously estimated that about 4% to 5% of that total award value could be addressed by the company. Is that still accurate? With this recent round of approvals, we are approaching $500 million, which is quite noteworthy compared to what you are currently doing. Are there any strategies we should consider?

Cheri Beranek, President and CEO

They absolutely are. So 4% to 5% of the cost of deployment of the products we offer. We are increasingly working to become that portfolio supplier to provide solutions that can both pass and connect the home. The full line and next generation of splice cases is part of that strategy, helping keep our portfolio customers away from the competition and encouraging those using our competitors' splice cases to return to our next generation and fully integrate into our offerings. Every time we install a patch-only cabinet, a competitor's splice case has been used, and before that, a competitor's vault. Completing our product line is a strategic move to defend our position while also being more aggressive in the market. Our competition is projected to capture 25% of the BEAD market. We could estimate $500 million, which is accurate. However, keep in mind that this is a 4- to 5-year build. Therefore, we want to make sure we manage expectations carefully. We believe we will capture a significant portion of that market share, but it would be irresponsible to provide a specific number.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

Cheri Beranek, President and CEO

Yes. Well, thank you so much for the opportunity to speak with you this morning, our apologies that are our numbers were delayed by a week, but you can understand with the divestiture of Nestor that we had a few numbers to be able to tie out and put together. We wish our friends at Nestor well. We think the opportunity to focus having been able to bring that infrastructure into our world to be able to transform Clearfield into a vertically integrated supply chain is really exciting for our potential gross margin and our ability to be that portfolio supplier is exciting. Like I said, we wish Nestor well. We think the transformation of Clearfield into being a bigger, broader supplier with a fully integrated line as we move forward, will be opportunistic for our world and '26 will be transformational putting us together for that long-term strategy plan of Better Broadband and Beyond. Thank you for our world. I'm grateful to you now at Thanksgiving time, and I wish you the best and the most joyous of Thanksgiving holidays. Enjoy your families.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.