Clearfield (CLFD) Q2 2021 Earnings Call Transcript

Clearfield (CLFD -0.74%)
Q2 2021 Earnings Call
Apr 22, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. Welcome to Clearfield's fiscal second-quarter 2021 earnings conference call. My name is Paul, and I will be your operator this afternoon. Joining us for today's presentation are the company's president and CEO, Cheri Beranek; and CFO, Dan Herzog.

[Operator instructions] 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 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 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 and that could cause actual results to differ materially from those in the forward-looking statements.

It's 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 filings 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 controlled by you, the listener.

Please advance forward through the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield's CEO, Cheri Beranek. Please proceed.

Cheri Beranek -- President and Chief Executive Officer

Good afternoon, and thank you, everyone, for joining us today. I hope you all are continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon and to share Clearfield's results for the fiscal second quarter and first six months of 2021. During the second quarter, we saw demand for fiber-fed broadband networks expands across the community broadband market.

As you can see in Slide 4, this robust demand helped drive a 45% increase in net sales to a record $29.7 million. Our growth in the period was again led by double-digit increases from our community broadband and MSO markets, which were up 68% and 60%, respectively. As our performance demonstrates, Clearfield is strongly executing on its brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider requirements. Sales booking started strong in January and accelerated throughout the quarter end, resulting in a 115% increase in backlog growing to $19.2 million on March 31, 2021, versus $9.3 million on March 31, 2020.

We expect to ship the majority of our backlog during fiscal Quarter 3 and have begun to receive longer scheduled orders as service providers establish longer-term deployment plans. Our strong top-line performance and business model leverage helped to produce solid gross profit and net income margins in fiscal Quarter 2. Gross margin dollars totaled a record $12.9 million, up 90 -- excuse me, 59% from Quarter 2 last year. As a percentage of net sales, our 43.6% margin was up from 39.9% in Quarter 2 of last year.

Moving down the P&L. As expected, our expenses increased modestly year over year, resulting in $3.6 million in net income or $0.27 per diluted share. This was a significant improvement from the $750,000 or $0.05 per diluted share in earnings we generated in Q2 of last year. We anticipate expenses to increase slightly in future quarters as we invest in additional resources within our community broadband programs and as business travel limitations start to decrease.

Our robust financial performance in Quarter 2 contributed to a record first half for Clearfield. At a high level, we generated $56.8 million in net sales through our first two quarters of fiscal 2021, which was up 43% from the same period of last year. Our favorable product mix in the period, coupled with our ongoing efficiency measures, helped generate $24.3 million in gross profit, an improvement of 53% compared to last year. We also delivered 42.8% gross profit margin for the period, which was compared to 39.9% last year.

From a profitability perspective, we generated $6.8 million in net income or $0.50 per diluted share, which was a significant improvement compared to $1.2 million, or $0.09, per diluted share in the first half of last year. Looking at our market segments by net sales on Slide 5. Starting first with our core community broadband market. In the second quarter of fiscal 2021, we generated net sales of $20.5 million to this market, which was up 68% from the same period last year.

For the trailing 12 months ended March 31, 2021, community broadband markets net sales totaled $75.5 million, which was up 44% from the comparable period last year. Our MSO business comprised 13% of our net sales in fiscal Quarter 2. From a growth standpoint, we built on the momentum we established over the last several quarters realizing a 60% year-over-year increase in net sales to $4.2 million in the second quarter of fiscal 2021 and a 48% year-over-year increase to $14.6 million for the trailing 12 months ended March 31, 2021. Net sales in our national carrier market was down 15% year over year to $12.1 million for the trailing 12 months ended March 31, 2021.

As I've talked about previously, our position in the national carrier market is related to the continuing demand from fiber-to-the-home and fiber-to-the-business applications. As COVID constraints have limited the deployment of 5G solutions into the access part of the network, net sales to our Tier 1 customers in the second quarter of fiscal 2021 decreased 42% year over year to $2.3 million. Although sales in our Tier 1 markets have not yet experienced the same robust growth as our other markets, we continue to support our sales presence in the Tier 1 national carrier market for both fiber-to-the-home and business as well as 5G initiatives. We shipped several new products into that market during Q2, and are working to gain a stronger foothold with them.

As we have previously communicated, the global pandemic has stalled the introduction and training of our new technologies into the Tier 1 market. As 5G deployment into the access network increase, we are optimistic for increasing net sales among Tier 1 markets moving forward. Net sales to our international market was up 105% year over year in the second quarter and remained flat year over year for the trailing 12 months ended March 31, 2021. As the pandemic begins to get under control, fiber-fed broadband in Mexico and Canada is showing a resurgence in demand.

Net sales in our legacy business was flat year over year in Q2 and down 31% year over year for the trailing 12 months. This lag is a part of our business is highly dependent upon the two key customers in this segment. We believe the business to be fluctuating for normal levels due to the slowdown in the economy related to COVID. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the second quarter of fiscal 2021.

Dan Herzog -- Chief Financial Officer

Thank you, Cheri, and good afternoon, everyone. It's great to be speaking with you today. Now looking at our second-quarter financial results in more detail. As you can see on Slide 7, our net sales in the second quarter of fiscal 2021 increased 45% to a record $29.7 million from $20.4 million in the same year-ago period.

The increase in net sales was primarily due to higher sales in our community broadband, MSO, and international markets, partially offset by decreases in our national carrier markets. Turning to Slide 8. Gross profit for the second quarter of fiscal 2021 increased 59% to $12.9 million, or 43.6% of net sales, from $8.2 million or 39.9% of net sales in the same year-ago quarter. The increase in gross profit dollars was due to higher sales volume.

The increase in gross profit margin was due to a favorable product mix associated with the increased net sales in our community broadband markets and cost reduction efforts across our product lines, including increased production at our Mexico plants as well as manufacturing efficiencies realized from higher sales volumes. As you can see on Slide 9, our operating expenses for the second quarter of fiscal 2021 were $8.5 million, which were up from $7.4 million in the same year-ago quarter. As a percentage of net sales, operating expenses for the second quarter of fiscal 2021 were 28.6%, down from 36.4% in the same year-ago period. The increase in operating expenses on a dollar basis was primarily due to additional headcount and higher compensation costs related to performance compensation accruals and increased stock compensation expense, offset by lower travel and entertainment costs.

Turning to our profitability measures on Slide 10. Income from operations was $4.5 million in the second quarter of fiscal 2021, which compares to $720,000 in the same year-ago quarter. Income tax expense increased to $935,000 in the second quarter of fiscal 2021 with an effective tax rate of 20.4%, up from $190,000 in the second quarter of 2020, which had an effective tax rate of 20.3%. Net income totaled $3.6 million, or $0.27 per diluted share, an improvement of approximately $2.9 million over the $750,000, or $0.05 per diluted share in the same year-ago quarter.

Before I turn it back over to Cheri, I'd like to provide a brief update on the operational measures we've taken to protect and support our business, our personnel, and customers since the COVID-19 pandemic took hold in how we are continuing to effectively navigate the current environment, both reflected on Slide 11. I am encouraged to report that Clearfield continues to remain fully operational. The majority of our nonproduction employees are working remotely, effectively using collaboration tools and video conferencing to stay connected. Our production operations in both the U.S.

and Mexico are operating close to normal while adhering to state and federal government social distancing guidelines. As a precautionary measure, we have multiple contingency plans in the event our ability to operate is diminished or eliminated at either location. As many of you know, we dual-source most of our components to cover multiple points of failure and provide purposeful redundancies to reduce potential risks. While the COVID-19 pandemic has dramatically boosted broadband demand, it has also created supply chain challenges to fulfill that demand.

Thankfully, the strong partnerships we have built with our suppliers globally have and will continue to be crucial. At the outset of COVID, we made the decision to maximize the availability of all product lines at all three of our plants by ensuring that each location can manufacture across the broad product portfolio. We are optimistic that we will be able to procure the necessary components for our growth ahead. However, the pressure on the supply chain by increased demand and global supply chain disruptions caused by the pandemic, the harsh Texas winter, container shortages, the blocking of the Suez Canal, and other logistical issues have shown how fragile the supply chain can be.

In particular, Clearfield's manufacturing requires supplies of raw materials like optical fiber cable and resins necessary for its fiber management product line. That concludes my prepared remarks. I will now turn the call back over to Cheri. Cheri?

Cheri Beranek -- President and Chief Executive Officer

Thanks, Dan. Now looking at our operational initiatives and focus in fiscal 2021 highlighted on Slide 13. Our strategic plan is its multiyear initiative to enable Clearfield to come of age. Our organization has specific and measurable objectives designed to increase our top line, reduce our costs, and expand our reach.

Key to our success remains our loyalty to the providers that have grown alongside us while leveraging new innovations for the integration of wireline and wireless networks as we move into new markets. This brings me to our first pillar, building a better broadband one community at a time. It leverages Clearfield's long-standing customer and partnership relationships to build brand awareness and expertise. As I mentioned, Clearfield was built to facilitate the enablement of pervasive high-speed broadband to underserved and unserved communities.

Clearfield's position within the community broadband market has never been better. Our track record and reputation has positioned us extremely well to continue to grab market share and further capitalize on the expansion that's currently under way. Clearfield remains committed to fulfilling the increased demand of smaller providers across the country. We began investing early last fall in our drop cable production facilities because we anticipated take rates would increase among existing providers as potential subscribers were added to existing networks.

This timely investment has proven to be a meaningful and competitive advantage as we continue to offer superior lead times compared to the competition. In addition, as providers with multistate networks are now building or overbuilding their networks with fiber, we are developing an increasing presence within the Tier 2 community. We anticipate this market-based demand will continue moving forward. A key market driver is the government-financed broadband programs under the Rural Digital Opportunity Fund, or RDOF, that is currently in the planning stages for providers.

In addition, while the recently announced American Jobs plan within the Biden infrastructure bill is still being debated in Congress, the White House's request for $100 billion in funding for sustainable high-speed broadband is a positive reflection on expanded fiber opportunities we believe are possible in the years ahead. Our second pillar is delivering innovation for true 1-fiber deployment. The foundation of 1-fiber deployment began with the development and introduction of the Clearfield cassette. The cassette is the central building block of every element of Clearfield's smart product portfolio.

This 12-port building block is designed in multiple configurations and then manufactured in volume. As it is designed to handle the toughest operating environment, it provides flexibility, as well as reliable performance within the inside plant, outside plant, and access networks, delivering the most scalable fiber management platform in the industry. Clearfield ensures the service providers' investments in capital equipment can grow alongside their subscriber take rate. Reducing the overall footprint of the fiber management element reduces real estate costs and improves the density without compromising critical design elements of access, bend radius protection, physical fiber protection, and route path diversity.

Our third pillar involves scaling operational excellence for a superior customer experience. Our production facilities in Mexico continue to provide meaningful competitive advantages to both Clearfield and our customers. Not only have our Mexico facilities enhance our overall protection capabilities and produce cost effectiveness, but they have also allowed us to deliver product to customers in a time frame that our competition simply can't match. To maintain these advantages, we have systematically added capacity over the last several months to meet the growing demand we are seeing for our products, and we'll continue to evaluate as our need -- for our needs on an ongoing basis.

Looking ahead to the balance of fiscal 2021, the rural broadband market remains ripe for growth and the strategic investments we have made and the presence we have established over the last 10 years will be beneficial for Clearfield. While the volatility of the supply chain potentially causes challenges in the near term, our growing backlog, expanding pipeline, and building the market demand gives us confidence in our ability to realize net sales of $120 million to $125 million in fiscal 2021, which represents year-over-year growth of 32% at the midpoint. As travel reemerges, we anticipate our selling, general and administrative costs will grow moderately. In addition, we will be making strategic investments in additional customer-facing positions in order to maintain our leading customer service programs for our expanding customer base.

For the remaining quarters of fiscal 2021, we anticipate net income to be at or above 12% as a percentage of net sales. In summary, our consistent financial performance, highlighted by 13 years of profitability and positive cash flow, demonstrates the durability of our business in a range of environments. Clearfield continues to benefit from and take advantage of robust industry tailwinds and Clearfield's established presence within our key growth markets. We remain confident that demand for fiber-fed broadband will continue through fiscal 2021.

Longer-term, our enhanced Comes of Age plan, which targets growth in fiber-fed broadband and 5G access fiber, positions us for continued success for Clearfield in the years ahead. And with that, we're ready to open the call for your questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

Hey, guys, thanks for taking my questions, and congrats on early impressive results. I want to start with the outlook, which was also really strong. Obviously, expecting some nice growth here in Q3 and Q4. Does this assume any meaningful pickup in the national carrier business? Or is this largely just continued momentum in the community broadband segment?

Cheri Beranek -- President and Chief Executive Officer

It's absolutely based upon community broadband and the strength that we've seen to date within community broadband and the MSO world. The Tier 1 markets, I would say, we've yet to establish true momentum in that area, so that is not part of the growth initiative we go with outlook.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. And then just looking at fiscal '21, some really nice growth expected. I mean when you sit here today, are you at all concerned that there has been some pull forward in demand?

Cheri Beranek -- President and Chief Executive Officer

Jaeson, I would say there might be a little bit of a pull forward, maybe a little bit of what I'd call panic buying to get them -- get people in place for their orders because there certainly have been supply chain initiatives and just general availability concerns. But in general, I wouldn't say this is -- I have no concern about it being -- ongoing or continually viable. This is absolutely a trend and ongoing momentum. It's not -- in our perception, it's not a spike.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. That's helpful. And then just the last one for me, and I'll jump back in the queue. Just want to clarify sort of your comments on the supply chain.

Were you at all impacted by constraints in the quarter?

Cheri Beranek -- President and Chief Executive Officer

Not at this point. Our group, our procurement group has been doing an amazing job. I would call it spinning plates as we kind of walk through issues between bringing in product. I mean I think it's just to me think about the standpoint that we've got, new products coming in on boats, products coming in on air, then you've got both sitting and waiting to unload.

Just trying to be able to put that all together has been a little bit of a challenge, but it did not impact our ability to provide product. If you're alluding to the backlog, that backlog came in. We're -- on our call last in January, we talked about that January had started strong, and it just continued to escalate from there an extremely strong March and providing the same level of general viability as we would on an ongoing basis. And as I indicated in the call, on the preliminary notes, we anticipate to be having majority of the backlog that we have in place shipping in Quarter 3.

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

OK. Thanks a lot, guys.

Cheri Beranek -- President and Chief Executive Officer

You're welcome. Thanks again, Jaeson.

Operator

[Operator instructions] Our next question comes from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Tim Savageaux -- Northland Capital Markets -- Analyst

Hi, good afternoon, and my congratulations as well on the results. And I wanted to focus on your commentary about at least the beginnings of some visibility extending beyond what's normally a pretty short-cycle business for you guys and some orders scheduled farther out into the future. I wonder if you could give us a little more color perhaps on how far that visibility might extend. And maybe relative to the backlog that you saw in the quarter, significant increase, how meaningful that longer-dated demand is, and whether that's also coming from community broadband.

And I'll follow up from there.

Cheri Beranek -- President and Chief Executive Officer

Tim, what we see happening in this space is people from a legacy standpoint over the course of, I'd say, the last five years, many of our customers would look at their business and would identify for us, this is what we're anticipating this year. What we're seeing now is a commitment to build out their entire networks and having multiyear initiatives that they're committed to building out and passing the majority of their homes, working through projected take rates. Because, in the past, it was more of an orientation of kind of a build strategy that was success-based, whereas today, I think the success is ensured because broadband take rates are so high, and so there's a longer-term commitment to those builds. As it relates to our backlog, a little of that is staged deployment and that's for builds that were -- orders that we were getting in March.

Some from some larger suppliers that we're looking at helping us stage our build and giving us orders that were not long, long term, but saying I want X in March, Y in April, D in June. So that they could get into the production schedule. And we're working to ensure that all of our customers can get the products that they need and not put ourselves in a position -- or our customers in a position where customers might see stockpiling equipment and coming at an expense of others. So we're really trying to work collaboratively with all of our customers so that we can really help ensure they get the products that they need.

Tim Savageaux -- Northland Capital Markets -- Analyst

OK, thanks. And you mentioned kind of RDOF being in the planning stages. Obviously, awards have been made. From your perspective, is there any dynamic or potential dynamic around kind of spending or planning occurring now kind of in -- perhaps in advance of actual receipt of funds? Or are a lot of these projects separate and distinct from what you might see in your kind of current or core community broadband customer base?

Cheri Beranek -- President and Chief Executive Officer

Yeah. I mean revenue to date has -- is very isolated. There's some pockets of RDOF-related business. But principally, this is -- you do not see RDOF funds in our current revenues or in our backlog.

And what we see on the RDOF world is people now getting their plans together, putting out their engineering drawings, really going into markets where they haven't been involved in before. So we believe we're going to start to see that revenue in the very tail end of Quarter 3 and then on a more meaningful basis in Quarter 4. But basically, that's a calendar-year 2022 opportunity starting. And what the Feds have asked for and are hoping for is that we can see 40% of those funds that have been allocated to happen in the first three years.

So I really think that shows significant opportunity for 2022 and '23 as well.

Tim Savageaux -- Northland Capital Markets -- Analyst

Great. Thanks for that. And over on the -- over on the Tier 1 side of the business, we have seen some dynamics with various of the Tier 1 carriers getting a pretty early and fast start to the year. Now I'm understanding that you're Tier 1 customer base doesn't always match up with some of the kind of near-term strength we've seen in at least high-level spending numbers from guys like AT&T and Verizon.

But maybe you can give us a little more color on the dynamics around your Tier 1 business, and what might be driving that to the extent it's not some of the C-band stuff or fiber-to-the-home deployments that the larger carriers are doing.

Cheri Beranek -- President and Chief Executive Officer

Yeah. There's a lot of money being spent by the wireless carriers, especially as it relates to C-band, the C-band work. I mean, they spend a fortune on Spectrum, and that C-band work for deployment is principally going to be based at the tower. It's not going to be based at the small cell.

So that's good for the incumbent provider that has those towers, and it's good for the consumer because it means that they get 5G service on their cellphones faster. It means that our opportunity for 5G, which is going to be small cell-based has been delayed into the year and potentially into next year. The challenge -- I think, that it's not -- that doesn't mean that, that revenue isn't going to be there. It means a true 5G performance that we want to see in regard to true latency and the high speed as well is still coming, but it has been the reason that we have seen a lack of the same kind of growth has not shown up in the Tier 1 base because of it.

Tim Savageaux -- Northland Capital Markets -- Analyst

Got it. Thanks very much. I'll pass it on, and congrats once again.

Cheri Beranek -- President and Chief Executive Officer

You're welcome. Thank you.

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 comments.

Cheri Beranek -- President and Chief Executive Officer

Thank you, Paul, and thank you all of you for joining us today. We look forward to updating you again soon on our progress. Happy spring, and talk to you soon.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Cheri Beranek -- President and Chief Executive Officer

Dan Herzog -- Chief Financial Officer

Jaeson Schmidt -- Lake Street Capital Markets -- Analyst

Tim Savageaux -- Northland Capital Markets -- Analyst

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