Earnings Call Transcript - CLFD Q4 2020

Operator, Operator

Good afternoon. Welcome to Clearfield’s Fiscal Fourth Quarter and Full Year 2020 Earnings Conference Call. This is the conference operator. 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 webcasted 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 descriptions of those risks. As a reminder, the slides in this presentation are not controlled by the speaker, but rather 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, 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 fourth quarter and full year 2020. The fourth quarter of fiscal 2020 capped off a record year for Clearfield. From a top-line standpoint, this fourth quarter marks the highest quarterly revenue level in our company's history, bringing our total revenue for this fiscal year 2020 to a record $93.1 million. An integral part of our success has been our employees' unwavering commitment to providing best-in-class products and customer support and none of this could have been accomplished without their dedication to our mission. Looking more specifically at our fourth quarter fiscal 2020 results, the $27.3 million in revenue we reported was up 14% year-over-year. This robust growth was driven by solid contributions from our MSO and community broadband markets, which were up 51% and 25% year-over-year respectively. The record top-line performance in fiscal year 2020 Q4 also helped to drive solid gross profit, which totaled $10.8 million. As a percentage of revenue, the 41.2% margin marked this second highest gross profit margin we've achieved as a company in more than two years, just behind the 41.5% we reported last quarter. From a profitability standpoint, we generated $3 million in net income. We ended the year with a robust order backlog, totaling a record $10.7 million, up 153% year-over-year, providing clear visibility into growth in the new fiscal year. I'm also encouraged to report that we continue to look at industry-best lead times for our standard products as well. Our solid performance in the fourth quarter drove several additional and noteworthy record results for the year. In addition to the $93.1 million we generated in revenue, we produced record gross profit of $37.9 million, which totaled 40.7% of total revenue. We also realized strong bottom-line results, generating $7.3 million in net income or $0.53 per diluted share. The market for Clearfield products was exceptionally strong in the second half of the year and that strength has carried into our new fiscal year. Along that line, I'd like to spend a moment reviewing some of our recent operational updates and progress in our core end markets. Then our CFO, Dan Herzog will walk you through our financial performance in more detail. Let's look at our market segments by revenue starting first with our core community broadband market. In the fourth quarter, we generated revenue of $18.5 million, which was up 25% from the same period last year. For the full fiscal year ended September 30th, 2020, community broadband market revenue totaled $59 million, which was up 10% from the comparable period last year. Our MSO business comprises 13% of our total revenue in fiscal Q4. From a growth standpoint, we built on the momentum we established over the last several quarters, realizing a 51% year-over-year increase in revenue to $3.6 million in Q4 and a 48% year-over-year increase to $12.4 million for fiscal 2020. Revenue in our National Carrier market was up 18% year-over-year to $14.1 million for the full fiscal year. As I talked about in past FieldReports, the growth we're seeing in the National Carrier market is related to the continued demand for fiber-to-the-home and fiber-to-the-business applications. Due to ordering cycles, revenue for the fourth quarter was down 19% year-over-year to $3.2 million. Revenue in our international market was down 16% year-over-year in the fourth quarter and down 37% year-over-year for the full fiscal year. Revenue in our legacy build-to-print business was down 41% year-over-year in Q4 and down 24% year-over-year for fiscal year 2020. Revenue remains near the $4 million level, which is consistent with our expectations for the year. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the fourth quarter and full fiscal year 2020.

Daniel Herzog, CFO

Thank you, Cheri and good afternoon, everyone. Now, looking at our fourth quarter financial results in more detail. Our revenue in the fourth quarter of fiscal 2020 increased 14% to $27.3 million from $24 million in the same year-ago period. The increase in revenue was primarily due to higher sales in our community broadband and MSO markets, partially offset by lowered National Carrier and international sales as Cheri just mentioned. Gross profit for the fourth quarter of fiscal 2020 totaled $11.2 million, or 41.2% of total revenue. This was an improvement from $9.3 million or 38.8% of total revenue in the fourth quarter last year. The increase in gross profit dollars was due to increased sales volume. The increase in gross margin was due to a more favorable product mix and cost reduction efforts across our product lines as well as expanded use of our Mexico manufacturing plants, which included adding a second facility in the second quarter of fiscal 2020. Also efficiencies realized from our supply chain programs and lower tariff costs. Our operating expenses for the fourth quarter of fiscal 2020 were $7.6 million, which were up from $7.1 million in the same year-ago quarter. As a percentage of total revenue, operating expenses in fiscal year 2020 Q4 were 27.7% compared to 29.7% in the same year-ago period. The increase in operating expense dollars was primarily due to higher costs related to performance compensation accruals. In terms of our profitability measures, income from operations was $3.7 million in the fourth quarter of fiscal 2020, which compares to $2.2 million in the same year-ago quarter. Income tax expense increased to $786,000 in the fourth quarter of fiscal 2020, up from $511,000 in the fourth quarter of 2019. Net income totaled $3 million or $0.22 per diluted share, an improvement from $1.9 million or $0.14 per diluted share in the same year-ago quarter. Turning now to our annual results. Revenue for fiscal 2020 increased 9% to $93.1 million from $85 million in fiscal 2019. As Cheri mentioned, the increase in revenue was driven by growth across our key markets, especially from our community broadband customers, which was up 25% or approximately $3.7 million compared to the prior year. Gross profits for fiscal 2020 totaled $37.9 million or 40.7% of total revenue. On a dollar basis, this was a 16% improvement from the $32.7 million or 38.4% of total revenue we reported in fiscal 2019. The increase in gross profit data was due to increased sales volume. The increase in gross profit percentage was due to a favorable product mix and cost reduction efforts across the company's product lines, including increased production at its Mexico manufacturing plants and efficiencies realized from supply chain programs and lower tariff costs. Our operating expenses for fiscal 2020 were $29.5 million, which was up 7% from $27.5 million in fiscal 2019. As a percentage of revenue, operating expenses for fiscal 2020 were 31.7%. The increase in operating expense dollars was primarily due to additional personnel and higher performance-based compensation accruals as well as higher external sales commissions and agent fees, offset by lower stock-based compensation expense in travel, entertainment and marketing costs due to COVID-19 restrictions. Income from operations totaled $8.4 million in fiscal 2020, and improvement from $5.2 million in fiscal 2019. Income tax expense was $1.9 million, which was up from $1.4 million in fiscal 2019. Taken together, the resulting net income for fiscal 2020 was $7.3 million, or $0.53 per diluted share, which was an improvement from $4.6 million, or $0.34 per diluted share we reported last year. And finally, now turning to our balance sheet. At quarter end, our balance sheet remains strong with $52.2 million in cash, cash equivalents and investments. As I mentioned on recent field reports, our Board of Directors suspended the company's share repurchase plan in April to further ensure our financial stability through the current COVID-19 operating environment. Our board and leadership team will continue to evaluate our capital allocation strategy for our shareholders. I'd like to spend a few moments providing an update on how we continue to effectively navigate the COVID-19 pandemic and the operational measures we've taken since March of this year. I am 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 as connected as possible. Our production operations in both the U.S. and Mexico are working as normal while adhering to state and federal governments' 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. We dual source most of our components to cover multiple points of failure and have purposeful redundancies to remove the 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 remained 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 assuring that each location can manufacture across our broad product portfolio. This strategic decision has allowed us to meet the growing customer orders and enable us to continue to fulfill our increased order backlog going forward.

Cheri Beranek, CEO

Thanks, Dan. At no time in our history has the need for high-speed broadband connectivity been more apparent than during the COVID crisis. Working remotely often from home has blurred or even permanently altered the business versus consumer distinction, with all networks now carrying business-critical and entertainment data at the same time. COVID has accelerated the need for and deployment of broadband. Clearfield is well positioned in all of our markets to take advantage of this opportunity. As I mentioned earlier, our record results for Q4 and fiscal 2020 were driven by strong performance in our MSO and community broadband markets. We saw customers in these areas push forward with their purchasing decisions and deployments in response to COVID-19, which has highlighted the need for high-speed broadband front and center for both consumers and businesses alike. Much of our success since March has been with our existing customers, especially our base of community broadband providers, where we already had great rapport. These companies have looked to us to help them address the surging demand and need for high-speed internet access. As you can see from this slide, COVID's effect on broadband demand is accelerating. In February of this year, market research firm Omdia published its report for wireline broadband access equipment revenue in 2021, estimating approximately $8.6 billion would be spent on equipment. Then in July, after a dip in 2020, Omdia updated its forecast for 2021, noting that the market would strongly rebound with growth of 20%. While COVID has validated the need for broadband, the marketplace has responded with accelerated build plans. Now, shifting gears to our Coming of Age plan, which is, as most of you know, our three-year strategic plan designed to strengthen our core business and position our company for disruptive growth opportunities. As our overall performance in fiscal year 2020, Q4 and fiscal 2020 indicate, we are realizing demonstrable results from our commitment to and execution of this plan. And with that, I'll spend a moment providing a brief update on our three major initiatives within that plan. In terms of expanding our core community broadband business, Q4 represented a continuation of Clearfield customers accelerating their purchasing decisions and deployments in response to COVID-19. This trend has carried into fiscal 2021 supported by continued demand for broadband and government programs helping to fund these deployments. Clearfield's position within the community broadband market has never been better. Our track record and reputation has positioned us extremely well to take market share and further capitalize on the expansion that's currently underway. New projects have been initiated as part of the Coronavirus Aid Relief and Economic Security Act, also known as the CARES Act. The other major government funding program is the RUS, Rural Digital Opportunity Fund or RDOF, which is a 10 year program designed to bridge the digital divide and efficiently fund the deployment of broadband networks in rural America. The FCC will direct up to $20.4 billion over 10 years to finance gigabit-speed broadband networks in unserved rural areas, connecting millions of American homes and businesses to digital opportunity. On October 8, the Wireline Competition Bureau and the Office of Economics & Analytics in coordination with the rural broadband options Task Force released a final eligible Census Blocks, including certain Census Blocks primarily located in price-capped carrier territories that, based on data from June 2019 and a subsequent challenge process, were not served by the incumbent price cap carrier or an unsubsidized competitor with voice and broadband at speeds of 25 megabits or higher. To give you a better sense of the economic opportunity available here, let me explain. Through the RDOF program, approximately 540,000 homes will be connected annually. The products we provide represent an opportunity to Clearfield of $35 per home passed, and with a conservative estimate of 40% of homes passed connecting to the service, an additional opportunity of $185 per home connected. This is over $50 million of an annual opportunity for Clearfield. Moreover, it is not a question of yes, but rather how and when these homes will be connected. Regardless of the variable inputs, Clearfield is well positioned to capitalize on this opportunity. In addition, 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 rural telephone companies and are still underserved by the major carriers. As part of this effort, our strategy is to partner with established distributors in these target markets, which we anticipate securing in the coming months. Turning to our second pillar, enhancing our competitive position and operational effectiveness. Our execution in this area over the last several quarters is perhaps most evident in our increasing gross profit. One of the chief underlying drivers for this expansion is related to the investments we've made to our operations in Mexico, which are starting to yield beneficial results, both in improved efficiencies and cost-effectiveness. While we're able to build any product in all three of our manufacturing plants, Minnesota and the two in Mexico. We're also focused on optimization. In addition to process improvements, our success here has largely been a function of the efforts of our manufacturing teams. It's been an extremely busy year for them, and we are truly grateful for all of their efforts. Also encouraging, we found further opportunities to realize improved productivity from our plans to drive costs down even further. We're currently launching an extensive training and optimization program to reduce our manufacturing costs by improving floor utilization and overall labor capacity. To be sure, we are still seriously investing in our current human capital to not only care for their work quality of life but also to address their health needs. This means supporting our workforce in all measures of their daily lives to ensure their families have what they need to get through these challenging times due to COVID. Like many organizations, our people are our greatest asset. So it's incredibly important we continue to invest in our most precious resource. As the fiber to anywhere company, Clearfield is accelerating cost-effective fiber deployments with the industry's most craft-friendly fiber management and pathway product. With the launch of our FieldSmart Fiber Delivery Point Indoor 288-Port Wall Box, Clearfield now offers every service provider their optimal configuration for FTTH deployments. Clearfield is the only fiber management provider in the industry to provide enclosures designed for strand mounts, below grade, in-building, and Outside Plant. Furthermore, with the addition of these new products, Clearfield continues to allow service providers to scale their networks as demand or conditions allow, all with the same architecture and design principles. The third initiative of our Coming of Age plan involves capitalizing on disruptive growth opportunities within the wireline markets of National Carriers and all wireless markets. Our position in the Tier 1 market remains solid. Our success growing our National Carrier business by 18% in fiscal 2020 reflects the return on the strategic investments we've been making over the last couple of years. We continue to execute on our operational initiatives, including rolling out product lines, like the StreetSmart transition box to address the opportunities within this market. That said, the Tier 1 market has been progressing slower than some of our other end markets. While the National Carriers remain committed to capital equipment expenditures, COVID has impacted the deployment plans for 5G both in the near and mid-term. In the second half of our fiscal year, we saw a temporary pause in new deployments by the carriers because of these restrictions. However, the deployment of optical components specifically related to optimizing existing fiber assets to meet exploding bandwidth requirements has picked up. Longer-term, we're investigating 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 ones that would allow us to introduce products to the market that would enable the lifestyle ubiquitous broadband provides. Our comprehensive financial and operational performance in fiscal 2020 speaks to the resiliency of our business, as well as our strategic positioning within our customer base and industry. Our success in Q4 specifically has given us significant momentum starting Q1 of fiscal year 2021, giving us a bullish outlook for the next year. The business case for optical fiber and markets for 5G and access networks deployment couldn't be more evident. While we are currently unable to provide a concrete financial forecast for the upcoming fiscal year due to the ongoing volatility from COVID, we are confident that the demand for fiber-fed broadband will continue in fiscal 2021 and beyond. Based on our robust bookings and pipeline of business, we currently anticipate a strong first quarter of fiscal 2021 compared to the same year-ago period. And with that, we're ready to open the call for your questions.

Operator, Operator

Thank you. We will now take questions from the company’s publishing sell-side analysts. Our first question is from Jaeson Schmidt with Lake Street. Please proceed.

Jaeson Schmidt, Analyst

Hey, guys. Thank you for taking my questions. Cheri, just want to follow up on your last comments in the prepared remarks. I mean, how should we think about just general seasonality in fiscal 2021 just given the momentum you've seen, and it sounds like expect to continue to see here in the near term?

Cheri Beranek, CEO

Yes, we are not experiencing the usual decline in business during the first quarter. We started the quarter with a strong backlog of over $10 million, most of which is set to ship in the first quarter, leading to a robust performance. We believe some of this strength is influenced by the CARES Act and its deadlines for project completion by December 31. There were concerns that this deadline might be extended, but currently, there is a lack of urgency to complete things within this quarter. Therefore, we anticipate a very strong first quarter, which aligns with our forecast. In the second quarter, we expect to face typical challenges related to budgeting and forecasting, along with weather impacts. However, the demand in Community Broadband and for fiber is very strong, and we remain optimistic for the entire year.

Jaeson Schmidt, Analyst

Okay. That's helpful. And just given the strength you've been seeing, do you think this is more of a function of sort of a rising tide across the industry? Or do you guys think you're still taking share in your select markets?

Cheri Beranek, CEO

I believe it's both. Across the marketplace, we see that many of our partner companies, such as Calix, ADTRAN, and Nokia, are experiencing growth in the access market. We're capitalizing on this increase in demand. Additionally, we're well-positioned due to our strong market presence in Community Broadband. Our sales team is extensive and well-distributed throughout the market, and we also have our application engineers in the field to assist organizations that have been underserved or are new to fiber, helping them design and manage their networks. The marketplace is robust, and we are leveraging that demand strength while also gaining additional market share.

Jaeson Schmidt, Analyst

Okay. And then just last one for me, and I'll jump back into the queue. How should we think about OpEx going forward? It was up here sequentially in September, is this sort of a new level in fiscal 2021?

Cheri Beranek, CEO

See, until we get a little bit of seasonality of fourth-quarter expenses due to compensation increases for achievement of a revenue threshold. But that said, we're scaling the organization, we need to continue to be able to build into our resources as well as build into the infrastructure of our company. So our SG&A levels will not climb significantly. But the percentage of business is probably pretty consistent at fourth-quarter levels.

Operator, Operator

And our next question is from the line of Tim Savageaux with Northland Capital Markets. Please go ahead.

Tim Savageaux, Analyst

Thanks very much, and good afternoon and congratulations on the strong results. We certainly have been seeing that, fairly broad based across especially the rural fiber access space. And I kind of want to follow up on that sort of high level. It's an interesting forecast that you featured in the field report and I kind of want to follow up on that sort of high level. It's an interesting forecast that you featured in the field report talking about 20% growth in the industry. And that seems to be somewhat of a recurring theme. With regard to some of your recent results, your community broadband has been growing in excess, at least the last couple of quarters. And to the extent that you don't see normal seasonality in the first quarter, you'll be growing well above that level as well. So that 20% mark seems to be kind of a reasonable target in my view for maybe gauging the company's growth potential in fiscal 2021, I'd be interested in your thoughts on that?

Cheri Beranek, CEO

I believe there's potential to achieve our goals, and there is strong demand to support this effort. The metrics indicate that we are slightly ahead of the expected growth for calendar year 2021. I'm encouraged by the fact that we have gained market share, especially considering the significant decline in demand during 2020. While I feel optimistic about our current position and our ability to take advantage of this momentum, forecasting a 20% growth for the year is challenging due to the uncertainties in the market. The issues related to COVID may affect deployment and our access to labor and resources, so we need to stay cautious. We appreciate the opportunities and execution required for success. We are continuing to invest in multiple facilities to meet these demands, but we are not providing long-term guidance at this time. However, as we move further into the year, I will feel more confident about leveraging market demand.

Tim Savageaux, Analyst

And that's absolutely fair enough. Following up on the backlog, obviously, an impressive number there. Just I have two questions about that.

Cheri Beranek, CEO

We believe the backlog is well-distributed across all market categories, except for international markets. We operate in the Canadian, Latin American, and Mexican markets, which have experienced stagnation, particularly in Mexico and South America, where they have been reallocating their currency. Therefore, international orders are not prominent in our backlog; however, we are optimistic that once conditions stabilize in those regions, we will see improvement next year. The rest of our business is driven by strong community broadband, cable TV, and carrier services. The carrier sector is currently experiencing some delays in orders. Our strengths in cable TV are mainly in the Tier 2 market, with some business from Charter and Content, but primarily in Tier 2. We are pleased with our performance and the operational growth we are achieving. One of the main challenges we face as we aim for the Tier 1 cable TV market is the delayed orders and the need for more project-based business, which has not yet reached a steady state for accurate forecasting. Nonetheless, I expect cable TV to respond positively to funding in underserved markets, working to protect their market interests. This development may not materialize in the fourth quarter of this calendar year or the first quarter of our fiscal year, but it’s an area where we have been investing long-term and anticipate seeing benefits next year.

Tim Savageaux, Analyst

Great. Thanks. And last question for me, as you maybe consider that overall growth potential in fiscal 2021. I wonder if you could address kind of what kind of assumptions you may or may not be making with regard to new product growth. You mentioned the fiber distribution opportunity. I don't know if that $50 million was an annualized number you felt the market opportunity might be for Clearfield, or how you were defining that. But is there kind of a timeframe that you envision kind of ramping here, maybe towards the back half of the fiscal year?

Cheri Beranek, CEO

That $50 million opportunity represents an annual potential for our level of product. While we don't expect to achieve complete market share, it is exciting to see a new market opportunity emerging in areas that were previously difficult to target due to being underserved or unserved. These regions have not been economically viable for deployment before, making this a fresh market for us. However, significant revenue won't start to materialize until the end of the calendar year next year. The auctions are ongoing, and once they are awarded, engineered, and implemented, we might see revenue around the 4th of July and in the fourth quarter of next year. This positions us well for fiscal year 2022. We haven’t needed to allocate additional resources for this; we have been developing this business for the past 13 years and are now adding new resources in the utility sector, where we haven't been as strong. This echoes our early work with independent telephone companies. There are about 900 utilities across the country, similar to the 900 independent telephone companies we dealt with a decade ago. It's encouraging to return to those pioneering days of fiber, and I look forward to that progress, likely by late next year.

Tim Savageaux, Analyst

Okay. Thanks very much, and congrats once again.

Cheri Beranek, CEO

Thank you.

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 Ms. Beranek for closing remarks.

Cheri Beranek, CEO

Thank you again for joining us today. It's a tumultuous time in our country. I hope you're all safe and appreciative of the country that we live in and look forward to our opportunity to continue to make it a strong organizational environment for all of us to do business. We look forward to updating you again on our progress soon.

Operator, Operator

Thank you for joining us today for Clearfield's fiscal fourth quarter and full year 2020 earnings conference call. You may now disconnect your lines.