All right. We ready? Great. Well, thank you and welcome everyone to the 21st Annual Needham Technology and Media and Consumer Conference. I'm Ryan Kuntz. I cover the broadband, optical, and space sectors here at Needham. Really excited to be joined today by Sherry Berenick and Dan Herzog from Clearfield. Clearfield is a leading connectivity provider, helping service providers reduce at a high cost and is associated with deploying, managing, protecting, and scaling their optical networks. Welcome, guys.
Thank you very much.
Let's start with maybe just a softball first. And, you know, I still do get questions about what exactly does Clearfield do? So let's just spend a minute there and have you explain to someone who's not familiar with the company what your products do for your customers.
Well, the fundamental thing that we do is be able to take what's called a feeder fiber and break that down to distribution fibers. And so a feeder fiber, if you think of it, is a large fiber or a large cable with lots of fiber inside of it. And then we would then protect and manage that fiber as it moves into smaller subseconds, usually in increments of 12. Part of that protection is what you see all of our different enclosures, whether that's an inside plant or a central office enclosure like a panel or something in the outside plant, which might be a cabinet. At the end of the day, you take all of that finally arriving at the home or business, and then we have to put a connector on the end of that fiber. And then that connector has to be done to a level of performance to ensure there isn't something called insertion loss. And so we believe that we can provide the best management of anyone in the world, for that matter, because we're the only company that focuses exclusively on the protection of fiber. and then terminate fiber with the best in the business. Providing service providers the opportunity, broadband service providers predominantly at this point in our career, if you call it as a business, of being able to use that equipment to connect homes and businesses with optical fiber. Back during the pandemic, before the pandemic, we spent a lot of time communicating to people the importance of high-speed broadband and then the importance of fiber by which to do that. Since the pandemic, it's been obvious to people that high-speed broadband is not a wish or a want, it's an absolute requirement, and that fiber-fed broadband is the most cost-effective means by which to do that. Clearfield is a leading provider of doing that in a different way. Our competitors early on in the movement of feeder fibers to distribution fibers, You know, our competitors early on felt that there was one way to do that. You know, they had built product for companies like Verizon, and then they told the rest of the service providers across the country that, you know, if it's good enough for Verizon and AT&T, it's good enough for the rest of you. And we knew that not to be the case. We needed to not have the fixed bulkhead approach that Verizon was using, but instead use a highly modular and scalable platform that allows, you know, smaller service providers around the country who maybe weren't deploying in Manhattan but instead were deploying you know I you know in the you know the wonderful ponderosa evergreens of Colorado you know or the you know the glaciers up in Alaska that they needed a different kind of platform and we did that with a product called the Clearview cassette yeah the Clearview cassette is a modular scalable building block it protects fiber in increments of 12 and And it allows Clearfield to compete in a different way in that we can take that building block, build it in high volume, excuse me, and then take that building block and put it into a different type of enclosure, allowing us to cost-effectively compete with the largest providers in the world.
Yeah, that's great. So let's shift to a summary of your recent results. You had a really nice quarter there in March, which I know is seasonally down for you typically. and you saw a nice rebound. So what was behind the strength in your March quarter there? And can you walk us through some of the puts and takes on the March quarter?
Well, over the last probably 24 months, we have been recovering from the situations that were created from the pandemic and then subsequently with some changes in government funding that created some challenges within the marketplace, kind of some inventory glut and then some concerns about just general who is building and when. In March, we saw all of our different business units, you know, really just stabilize and be able to identify, you know, how are they going to be able to, you know, create, use the product line and in what areas. Probably the biggest strength was in community broadband. That's the part of our business that we refer to as companies who, you know, up to a thousand companies across the country who typically are, you know, may have less than 50,000 subscribers, but they do that and maybe as less as 2,000 subscribers. And these were the companies that were up 5% over last year. The Clearfield has, you know, taken a position of really focusing on the unserved or underserved markets. And so community broadband is, it's a term that we coined to really describe those telephone companies who live in the communities in which they serve. And, you know, so they're a standpoint in which they're smaller, they're typically served by a distributor. And that's great. Distribution is a perfect partner, but it shouldn't be your sales arm. Clearfield has, and I think it's the reason that we saw business up in this quarter, is we have maintained a very strong, you know, sales and application engineering presence all along over the course of the last few years to ensure that our customers had the support that they needed while they were evaluating their next step. The Clearfield has always had that really strong, what we call smart guy approach, where we want to have, the guys used to tease me about saying this because I'd say we had a high-touch sales model, and it's not that we were physically touching our customers, but that we were in presence of being able to provide them what they needed all day, every day. Not necessarily always when they were buying product, but whenever they were deploying network to be able to call us for whatever they might need. Yeah. So Community Broadbent was your strongest contributor in the quarter? Right. But all the other segments were also, I mean, while they were down year over year, we had a really amazing. So if you look at the quarter, you're going to say, it doesn't look all that strong. It was actually down over last year. and I think it's important to communicate what actually the difference was. Last year in the second quarter, we had a large regional that pulled in a significant piece of business from the second half of the year, making last year's second quarter look unusually strong. If you look at the six-month period, you see the grace of all of the different market segments rebounding over that period of time. And, you know, and, excuse me, the early, the large regionals that I talk about last year pulled, you know, business in. And I think it's important to look at that today because many of those large regionals are the companies that are being bought by the tier ones. And we were really, you mind grabbing me that water? the tier ones have AT&T and Verizon have been buying the large regionals companies like Frontier and Lumen and the large regionals have long been a Clearfield customer we were really pleased to see during that period that our large regionals continue to be business as usual they're continuing to deploy fiber and they were bought because they were deploying fiber Clearfield believes our products and our markets with those customers are going to continue to be sticky because when we worked with those customers, it wasn't because we had product. It was because our product reduced the amount of time that it took for them to install the networks. They did studies in the field that showed that they could pass twice as many homes and businesses using our product line than what they had as an incumbent. And so those companies have been bought because of the fiber that they're deploying at the pace at which they're deploying and then turning up subscribers. And that's another element of why the quarter was up. And the strength of the quarter is the amount of differentiation of additional products that we've been offering during that period. We principally have, you know, we talked about when we started the business, having being passed homes with feeder fibers. Now we're really about connecting those homes with the drop cables and the different types of solutions that physically go on the home. When the customer orders a service. Correct, a subscriber turn-up. And our largest increasing point of business is our home deployment kits, who take all of those products that are required by which to turn off the customer, puts them all in one place to make sure that there isn't anything missing, they don't have to do another truck roll because they're losing a part, and because that fiber is deployed at the home in a box with a deploy reel that allows you to pull the fiber back to the terminal, it actually takes a two-man job into one. And so all those different elements of craft friendliness and taking labor out of the equation are why we can take something that doesn't sound all exciting and actually make it pretty sexy, in my opinion.
I love that. I think in your March quarter, you also had a really strong bookings, if I recall. You guys do disclose backlog and took a nice step up in what traditionally is a seasonally soft quarter. I think that's why there's a lot of excitement around the business and kind of walk us through the bookings and kind of your view of the second half. It's a pretty steep ramp on revenue, but maybe explain what gives you the confidence here in the balance of your fiscal year.
Yeah, our book to bill was 1.3 in the quarter ending in March. And typically people would say that, you know, you're right, the March quarter is typically our low point. But in the work that we had done early in the year, because when we do a forecast, we're going to be able to do that from a bottoms-up approach, account by account, as to where they're building. And so we were aware of the builds that were going on in our part to them. And so it's always difficult to know when those bookings are going to come in. But we were pleased that they were in the March quarter so that we could disclose those to our base business. And again, those are up across all of the market segments. And so whether it's a large regional, whether it's community broadband, or our cable business, which is actually a part of the business that I think it's overlooked, but is one of the most exciting parts of the work that we do. In the early days, it was the telco business that was trying to be able to recover because all they had was DSL. And so they were deploying fiber, and that was an easy decision because DSL couldn't compete. And being able to put the fiber in the ground allowed them to reduce the cost of deployment or reduce the cost of operating their business and increase the amount of revenue per subscriber. So the telcos were first to market to deploy fiber. But when you hear all of the cable guys talking about losing subscribers, they're losing subscribers to telcos. and they're losing subscribers to telcos with Fiber. Our MSO business is predominantly at this point large regionals who have figured it out that waiting for DOCSIS to get to a level of the next stage of performance will happen, but it's not always going to continue to get better. Only Fiber can get you the speed and the performance of being able to move information over glass. I mean, it's over the speed of light, and nothing else is going to be able to keep up with that.
And the cost of upgrading fiber is a fraction of just about any other technology out there once it's in the ground.
Once it's in the ground, exactly. And so the cable guys have been responding, and we see it from the Fiber Broadband Association. They've released numbers that say up to about a third of the fiber that's being deployed right now is a second fiber in the ground competing for the same subscriber. That's impressive. And so the first fiber that goes in is about a 40% take rate. The second fiber increases that take rate about another 50%. And so experiencing a 60% to 70% take rate over two providers, which means this is a for-profit business that works. And once you get market dynamics of supply and demand, and you get kind of the government out of the way sometimes, you get a really nice curvature of a business, and we look forward to that growth in the years ahead.
Yeah, excellent. And you raised your guide, I think, a little bit for the full year that you beat. Do you want to bet?
Just a little slightly within it, just a little bit in regard to earnings. I think it's most importantly to just say that we are looking at a 7% to 12% increase in revenue. At midpoint, it's about a 10% increase in revenue. in a general overall marketplace that really has a lot of uncertainty, I think, in it. We've had some challenges. You look at, you know, Calix and others here domestically. That business has been a little bumpy. I think our steady growth to 10%. And we'll cross our fingers and work hard just to make sure it's closer to the higher end of the guide. But right now, the midpoint's 10%, and we feel good about that.
And Dan, the gross margin front, you guys have made some changes. You had a divestiture last year, and your margins sound like you're on a real nice march here. Can you kind of walk us through some of the puts and takes on the margin line?
Yeah, absolutely. So like last year, we had a different business. It was in Finland, and a lot more commodity and a lower margin business that kind of looked like it changed the profile of Clearfield's overall margin profile, which really wasn't the case. So we sold that off in November, and now you can kind of see us matching up with what we've done historically, our continuing operations. So we've been in about the 32 to 34 percent range on our own, and so now we're kind of back to that, publishing that, versus some of the lower percentages that we were doing. So we've built for capacity $400 to $500 million. In the fourth quarter of our fiscal year 22, we finished at 39.5% roughly on a $95 million run rate. So we know we can get back to that. We do need to get back to higher volume to make it happen for all the investments. But we don't have to put in any much more significant investments into our operations to increase our capacity. It's already there. And as we increase our revenue, our gross profit percentage will incrementally crawl up towards that 39-some percent to cover our fixed capital investments you've made there to fit your leveraging. So we went from like a 200,000 square foot type of total operation to up to about 500,000 square foot. So we now have a 300,000 square foot operation in Mexico, beautiful new building that can really ramp up quite a bit. We have an additional 100,000 square foot in our Twin Cities location as well. And so we can handle the size. And so anytime large customers are asking, can you take these orders, you know, and they're looking to vet us, you know, they want to look at capacity. They want to look at our balance sheet. And those types of things matter to them. So we're happy with our gross profit profile now, percentage profile now, and just look to increase volume and have that grow. A lot of leverage there.
That's great. Really great story. Maybe while I have you, maybe talk a little bit about how you're thinking about supply chain going forward here in terms of any kind of critical parts you have within your own portfolio.
Supply chain. We feel pretty good about what we can control. It's what some of the things that we can't control that have the issue. So our inventory levels are good. They've come down quite a bit. You'll see some tailwinds in our gross profit because of that. But as far as the parts that we can control and that we can make, we feel good about. There are some supply chain challenges out there with ribbon cable.
Yeah, so we use ribbon fiber for what are called the tails on a panel or a cabinet. But that might be 100 feet long. Our customers are going to use ribbon fiber in high counts for miles. And the challenge, of course, is that the same ribbon fiber that we're using for broadband deployment is the ribbon fiber that the large data centers are also using for their deployments. So especially as it relates to American-made fiber, there is not a lot of cushion there right now. And so everyone is kind of doing a little bit of juggling to see if we can get the right product at the right place. It's causing optical fiber to increase in cost from the suppliers. And it is causing our service provider customers, especially those who are receiving BEAD awards, to try to structure and schedule their deployments in a measured fashion.
While we're on that topic, let's talk about BEAD. And it's been a journey we've all been on for many years. but it seems like there's a light at the end of the tunnel here. We're starting to see some money distributed to states. And, like, how would you characterize where we are today for the industry and yourselves and how you think this rolls out over the next 12, 24 months?
Yeah, it's been a five-year journey with no money given to service providers, but I can't imagine the millions that have been spent in overhead in administration. So at some point in time, we're going to ask the administration to go back and count that in for those dollars. But BEEB was originally designed to provide $42 billion for unserved and underserved homes across the country. And the first two years were really about mapping. And, you know, a year ago, we were ready to go. We had everything in place. And with the change in administration, the rules changed and all of a sudden maps were redrawn. And now we had half as much revenue or half as much funding by which to work with, $20 billion, and a fraction of the number of homes that were going to be connected. But at the end of the day, we now have 338 awardees. The industry is tracking them with most states, with the exception of a few, who have gone through the hoops to be able to identify how they're going to fund which providers at which point in time. We're waiting for NTIA approval of those requests from each of those states. And the very first 5,000 homes have been approved in Louisiana, so we know it can happen. So what we're doing, since we are the predominant supplier in so many of these rural areas, is we've tracked every one of these 338 accounts. We've identified them as red, yellow, or green. You know, red, they're probably a, you know, they're going to be a LEO satellite, and our fiber opportunity is to connect the, you know, the trunk station all the way up to an existing customer who is going to be able to add some subscribers that were going to be too costly had they been, you know, running it independently. We don't see, unfortunately, there's still a lot of paperwork to do. And because the service provider wants to ensure that the fiber is there and their labor is there all at the same time, we see this revenue and activity not happening until 27. But then we think it starts in a strong fashion and grows into 28 with 28 and 29 probably peaking and then rolling off from there. I think Clearfield's in an excellent place to be able to capitalize on both traditional community broadband customers, as well as some of the large regionals and the MSOs and others who you wouldn't necessarily consider rural providers. But if you look at some of those award winners, Charter, as an example, is one of the strongest winners. And so we're proving...
They're going to deploy fiber.
We know how to deploy fiber. We're serving those communities. we think we're going to get a disproportionate share of that business.
And I've also heard some excitement about kind of the edge out from Bede, because once you go deliver fiber to a community that has no broadband at all, you're going to probably pass a lot of homes that are served by cable and can't qualify for subsidies. But you've got the fiber nearby.
Exactly. And then you build from it because you've got the passing lines coming through, and you take the edge and you build from the next stage. And it reduces the cost. So the deployment in Bede actually reduces the cost of neighboring communities as well. We also think that the more wireline fiber that's out there, the more the introduction of edge computing is going to be enabled. And what I mean by edge computing is there's so much work going on. and everybody talks about AI and the data centers, but they forget about the fact that in order for us to move from training to inference, compute really needs to happen as close to the user as possible. One of the things I haven't talked about in regard to our product lines is we have a very strong active cabinet business, and so this is deploying powered cabinets in the field to store the electronics that are closer to the customer. In a traditional broadband deployment, those electronics have been from companies like Calix or AdTran. But as we move more to edge compute, these are going to be Siena and Cisco and being able to take the compute power and put it next to hospitals and libraries and universities that are going to have a lot of computing power required. The mini data center is going to be right outside those buildings, So those are going to be cabinets and using some of that fiber that we've deployed for traditional broadband.
Yeah, great. And can you remind us a little bit as well about the seasonality of your business, how you're getting into build season, how it's impacted by weather and budget cycles, and what gives you confidence in this ramp this year?
Yeah, I think I should have introduced that a little bit as we talked about the 1.3 and where we're sitting at the end of the March quarter. Traditionally, our business is a summer build. I always say that I can't why I get so excited for build season, because build season is typically March through October. And we're from Minnesota, so we think it's nice outside all the time. But at the end of the day, you don't deploy fiber when the ice is in the ground or when it's raining and it's 40 degrees. Or at least you don't deploy it as quickly or as cost-effectively. So we do at least 55% of our business in the summer months and summer quarters, which are our third and fourth quarter ending, fourth quarter ending, September 30th. And this year we think it could be even disproportionately higher than that. And the reason being is that there was so much uncertainty and question marks early on in the year. And even as to what the cost of petroleum was going to be. All those things you don't think about in regard to the cost of deployment. all add up. And so when you're using internal financing, it's one thing. When you're using external financing and you need to work with your bank about what are your gates and when are you going to meet them, as a result, it slowed it down, and there was a lot more planning going on in the winter months. Summertime, we're ready to go. I think we're seeing it's not should we deploy fiber. is how fast can we make it happen and how can we work with our customers to enable that.
Yeah, great. We talked a little about, you know, AI data centers and how that's impacting supply chain concerning some of your customers. How are you adapting your product lines to go after that opportunity? I think some exciting news.
Yeah, well, you know, at the end of the day, whether you use fiber in a broadband deployment or you use it in a data center, it's just more in the data center. It's still the same techniques. And so you have, you know, I talked earlier about a feeder fiber moving to a distribution fiber. The feeder fibers coming into these data centers are huge trunk cables with thousands and thousands of cables. But they all still have to be broken down into subunits so that they can be then distributed to the individual ports in the data center. So it's the same technique, just a different scale. And so we recently announced a new product line called Nova. Nova is based on the same concepts that we brought to market 15 years ago of taking a modular, scalable approach, all based around a cassette, and then being able to take that cassette and do it in a lot of different ways and put it into a lot of different platforms. And so I think my biggest surprise has been the means, the receptiveness of the data center community of recognizing Clearfield as being an expert in fiber management, as being knowledgeable and superior in our termination skills. And so we really have received, you know, a strong open-door welcoming from the data center community. And we expect that we'll start to see the Nova platform business in third and fourth quarter.
That's great. What type of customers would buy that then? Would it be traditional telcos?
We have two different growth initiatives for the business. We have two pillars. The second pillar is our existing customers who are going to be adapting their central offices to become data centers. And so what we can do with the Clearview cassette and with Nova is we can take the new Nova platform and move it into our existing customers' sites and make an existing central office panel more dense. So you don't have to have a bigger building. You just need to be able to make the frame that you're using more dense to serve that market. That's the second pillar, to be able to use our existing customers and be able to help them. Those weren't originally built to handle that scale of fiber. But they know fiber, they can adapt to the kind of a, we kind of almost call it a brownfield data center. The third pillar is to go to new customers that have not been experienced with Clearfield before, but to be able to demonstrate the innovation and nimbleness of Clearfield. You know, people may say, okay, you're a small company, and I'm like, yeah, today we are certainly not the behemoth, but, you know, we have the footprint of a much larger organization, so we like to look at ourselves as being nimble and scalable, and our nimbleness is in the innovation upon which we can design product to meet the unique needs that aren't being served by our competitors. You know, we look at it as our competitors are fabulous at mass scale. You know, they're high-volume, low-mix manufacturers.
Mainly Corning and Comscope.
Corning and Comscope are predominantly our competitors. The high-volume, low-mix, and they do it very well. What we do is low-volume, high-mix, and we do it really well. And so we think of a standpoint of an opportunity that might be a $5 or $10 million opportunity to be able to have a unique type of, let's say, splice panel, as an example, or a new type of panel for port density. If it's a $5 or $10 million opportunity, that's big business for us to be able to bring it in. But for our competitors, that's nuisance. And so being able to innovate and innovate so that we're lowering our customers' labor costs resonates regardless of if you are, you know, the smallest data center in the country or some of the largest.
Yeah, that's real exciting.
It is really exciting.
As we move toward edge compute, I've always thought the telco central office was the one place you have power, fiber access, close to the customer.
Exactly, right. I mean, I always think of downtown Minneapolis. I mean, you go right by the Lomond central office, right across the street from the Hennepin County government separate. I mean, they just, they share a block. And you can see that duplicated across the country in central offices, in every large community. And then, you know, I was in Hawaii last year, and we see the same thing in Hawaii, in that they're not going to be data centers, but they are going to need to provide data center connectivity to their customers and to be able to get more of the artificial intelligence and the ability for that compute world. You know, we were in Hawaii because Hawaiian Telephone is one of the pioneers in this market. They identified that last year they put a stick in the ground and said they were going to be the first state to pass every home and business in that entire state. And they're doing it with Clearfield Cabinets, and it'll be complete this fall. And what they did is they did the hardest service areas first, you know, in small farms and rural communities. And just their commitment to the lifestyle, the commitment to the opportunity was fabulous. And so I think it's, you don't, when you think of Clearfield, you know, maybe you think of, you know, cows and kitchens. But I think you should really think of Clearfield as being anywhere that fiber is needed where perhaps innovation is required to get it there.
Yeah, that's great. Great. You know, some changes going on in the industry here in terms of some of the larger SPs are starting to gobble up, some of the midsize. How are you guys navigating some of this consolidation in your customer base?
Yeah, staying very close to them. You know, we've built the company based upon ensuring that every single customer that we had a relationship with, whether their fiduciary relationship was direct or through distribution, we still had that technical relationship. And so as our customers like Lumen and Frontier or TDS or Unity or whoever else is out there, that's part of the means by which, as the big guys look at acquiring their footprint, as T-Mobile buys Loomis and Metronet, those are the customers upon which we built Clearfield. Today, I would say that we're kind of in a neutral position. It's business as usual. It hasn't opened a door, but it hasn't closed one either. We look at it as our customers are being acquired because of their fiber footprint and because they know how to do fiber. And they know how to do fiber faster than the companies upon which they're being acquired from. And so with that, I think it creates an open-door opportunity for Clearfield to grow into the national carriers. It's when we chose, it's not that our product lines wouldn't be approved or effective or certified in a large network because we went through all the telecordia certifications years ago. It's that we couldn't play against Comscope Recording based upon their rules. But we can have an opportunity to offer different types of national carrier business. You see our national carrier business has been growing incrementally, but slowly. But today we think there's an opportunity for that to grow at a more accelerated base. We just have not yet been able to prove that out.
Yeah, great. Well, super. Any kind of final commentary? What do you think investors are missing about the Clearfield story today that you would relay?
I think it's fiber to anywhere. And it's fiber to anywhere. If anything, I think, has been demonstrated over the course of the last weeks with the investment of NVIDIA into Corning is that fiber is here to stay. Fiber is not – there isn't an end to this business when every home is passed. It's just simply the beginning of the means by which to use that network to be able to have more and more communication shared. and that fiber isn't about, and the internet isn't about connecting people. It's about connecting machines so that people can have more information. And Clearfield is one of the providers to help make that happen. We're not at the scale of Corne, and we never will be, in that we are not a producer of the fiber itself. But we are a means by which to get that fiber deployment done faster. And there is a part of this market that absolutely needs That's what we're going to be introducing.
That's great.
Thanks for joining. You're welcome. Thank you very much. Thanks.