Clearfield (CLFD) Q3 2021 Earnings Call Transcript

Clearfield (CLFD 1.10%)
Q3 2021 Earnings Call
Jul 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 third-quarter 2021 earnings conference call. My name is Victor, and I'll be your operator for this afternoon. 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, 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 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 filing with the Securities and Exchange Commission and its subsequent filings on Forms 10-Q provides descriptions of those risks.

As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward to the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield's CEO, Cheri Beranek.

Cheri Beranek -- President and Chief Executive Officer

Good afternoon, and thank you, everyone, for joining us today. I hope you are continuing to stay safe and healthy. It is a pleasure to speak with you this afternoon and to share Clearfield's results for the fiscal third quarter and first nine months of 2021. Our record-setting financial performance in the third quarter and first nine months of fiscal 2021 again demonstrates Clearfield's unique positioning in the broadband market and our ability to capitalize on the robust growth factors.

Fiber-fed broadband is being recognized as the answer for future-proofed connectivity to the American home and business. As you can see on Slide 4, the continued demand for fiber-fed broadband builds a 49% increase in net sales year over year to a record $38.7 million. Our growth in the period was led by double-digit increases from our community broadband, which was up 64% as our performance demonstrates that Clearfield continues to strongly execute on our company's brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider requirements. Moreover, the labor-saving practices that are instrumental to Clearfield's architecture are being recognized by service providers throughout the broadband marketplace.

Our customers, no matter if they are local exchange carriers, overbuilders, cable providers, rural electrical utilities or new to this market, recognize that fiber is the only technology to provide symmetrical upstream and downstream performance. Currently, there are multiple government-funded programs that are accelerating broadband deployment such as the Rural Digital Opportunity Fund or RDOF, which will start to be deployed later this summer and fall. In addition, the proposed Bipartisan Federal Infrastructure Framework looks promising toward enhancing the funding available to future-proof broadband deployment. Sales bookings, which accelerated at the end of second quarter, continued their momentum in the third quarter, resulting in a 377% year-over-year increase in backlog, growing to a record $40.3 million on June 30, 2021.

We expect to ship most of our backlog in our current quarter ending in September. Additionally, we have previously mentioned, due to the challenges in the global supply chain, resulting in unprecedented lead times, we are working with our customers to place longer lead time purchase orders to ensure the availability of components and materials from our supply chain. Based on current supply chain dynamics, lead time has stretched to eight to 10 weeks for certain product categories. Over the next several quarters, we will be working to normalize our lead times to the more historic levels of four to six weeks from receipt of purchase order.

Continuing with our financial overview. Our strong top line performance and business model leverage helped produce solid gross profit and net income margins in fiscal Q3. Gross margin dollars totalled a record $17.1 million, up 59% from Q3 of last year. As a percentage of net sales, our 44.2% margin was up from 41.5% in Q3 of last year.

As we communicated last quarter, our expenses increased modestly year-over-year, resulting in a $6.1 million in net income or $0.44 per diluted share. This was a significant improvement from the $3 million or $0.22 per diluted share in earnings we generated in Q3 of last year. We anticipate our expenses to increase slightly in future quarters as we invest in additional resources within our community broadband programs, particularly in customer-facing roles and as business travel begins to increase. Our robust financial performance in Q3 contributed to a record nine-month period for Clearfield.

We've generated $95.5 million in net sales through the first three quarters of fiscal 2021, which was up 45% from the same period of last year. Our favorable product mix in the period, coupled with our ongoing efficiency measures, helped generate $41.4 million in gross profit dollars, an improvement of 55% compared to last year. We also delivered 43.4% gross profit margin for the period, which was up compared to 40.6% last year. From a profitability perspective, we've generated $12.9 million in net income or $0.94 per diluted share, which was a significant improvement compared to $4.2 million and $0.31 per diluted share in the first three quarters of last year.

Looking at our market segments by net sales on Slide 5. In the third quarter of fiscal 2021, we generated net sales of $27.4 million for our core community broadband market, which was up 64% from the same period of last year. For the trailing 12 months ending June 30, 2021, community broadband market net sales totalled $86.1 million, which was up 56% from the comparable period of last year. Our MSO market comprised 11% of our net sales in fiscal Q3.

From a growth standpoint, we built on the momentum we've established over the last several quarters, realizing a 19% year-over-year increase in net sales to $4.5 million in the third quarter of fiscal 2021, a 38% year-over-year increase to $15.3 million for the trailing 12 months ending June 30. Net sales to our national carrier market for the trailing 12 months ended June 30, 2021, were down 22% year over year to $11.6 million. As we've talked about previously, our position in the national carrier market is related to the continuing demand for fiber-to-the-home and fiber-to-the-business applications. As COVID constraints have limited the deployment of 5G solutions into the active part of the network, net sales to our Tier One customers for the third quarter of fiscal '21 decreased 14% year-over-year to $3.4 million.

We continue to support our sales presence in the Tier One national carrier market for both fiber to the home and business as well as for the 5G initiative. Business uncertainties at one of our Tier One customers has resulted in a reduction in their capex spend in the consumer market for fiber to the home, resulting in a slower pace of their spend with us. In addition, as we have previously communicated, the global pandemic has stalled the introduction and training of our new technologies into the Tier One market. As pandemic restrictions are lifted, we are optimistic that our Tier One revenues will rebound.

Net sales in our international markets were up 233% year over year in the third quarter compared to the same period of last year and up 64% year over year for the trailing 12 months, ending June 30, 2021. We have seen a strong resurgence in demand for fiber-fed broadband in Mexico and Canada and as purchases in the previous year were negatively affected by COVID-19. Net sales in our legacy business were down 8% from Q3 last year and down 32% year over year for the trailing 12 months ending June 30, 2021. As we have mentioned previously, our legacy sales are highly dependent upon two customers in this segment.

We believe the business to be fluctuating from normal levels due to the continued impact of COVID. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the third 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 third quarter financial results in more detail. As you can see on Slide 7, our net sales in the third quarter of fiscal 2021 increased 49% to a record $38.7 million from $26 million in the same year ago period and up from $29.7 million in our second quarter of 2021.

The increase in net sales was primarily due to higher sales in our community broadband; international; and multiple system operators, MSO or Cable TV markets, partially offset by decreases in our legacy and national carrier markets. Turning to Slide 8. Gross profit for the third quarter of fiscal 2021 increased 59% to $17.1 million or 44.2% of net sales from $10.8 million or 41.5% of net sales in the same year ago quarter. The increase in gross profit margin was due to a favorable product mix associated with higher net sales in our community broadband markets and cost reduction efforts across our product lines, including increased production at its Mexico plants as well as manufacturing efficiencies realized with increased sales volumes.

As you can see on Slide 9, our operating expenses for the third quarter of fiscal 2021 were $9.4 million, which were up from $7.2 million in the same year ago quarter. As a percentage of net sales, operating expenses for the third quarter of fiscal 2021 were 24.4%, down from 27.8% in the same year ago period. The increase in operating expenses consisted primarily of higher compensation costs related to performance compensation accruals. Turning to our profitability measures on Slide 10.

Income from operations was $7.7 million in the third quarter of fiscal 2021, which compares to $3.6 million in the same year ago quarter. Income tax expense increased to $1.7 million in the third quarter of fiscal 2021 with an effective tax rate of 22.1%, up from $763,000 in the third quarter of 2020, which had an effective tax rate of 20.3%. Net income totaled $6.1 million or $0.44 per diluted share, an improvement of approximately $3.1 million over the $3 million or $0.22 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 and 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. While the majority of our non-production employees are continuing to work remotely, effectively using collaboration tools and video conferencing to stay connected, we are beginning to work toward a hybrid work model that will see most employees returning to the office a few days a week later this quarter. Our production operations in both the U.S. and Mexico are operating at full capacity, and we have been able to increase headcount while adhering to state and federal social distancing guidelines.

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 global suppliers 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 our broad product portfolio. We are optimistic that we will be able to procure the necessary components for our growth ahead.

However, the pressure on supply chain by increased demand and global supply chain disruptions 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 this quarter. I will now turn the call back over to Cheri.

Cheri?

Cheri Beranek -- President and Chief Executive Officer

Thanks, Dan. Now as highlighted on Slide 13. We'd like to share an update to our multiyear strategic plan as we look at our operational initiatives and focus for the balance of fiscal 2021 and beginning of fiscal 2022. Three years ago, Clearfield launched its Coming of Age plan, which we completed successfully.

This past year, our team has been working diligently through the Comes of Age initiatives we have previously discussed in order to establish market readiness for the expanding market requirements for the fiber-fed broadband and 5G access fiber build-out. Today, we are introducing the next phase of our plan that we call Now of Age that advances our ongoing mission to establish Clearfield as a platform of choice for fiber management and connectivity. The multiyear plan is designed to capture the fiber-to-the-home and business market share Clearfield was built to obtain while delivering the innovation for new and existing markets for the years ahead. The first pillar of the Now of Age plan is accelerating our operating cadence.

This is Clearfield's commitment to respond to the market's heightened post-pandemic demand for fiber-fed broadband. As evidenced by our explosive 45% growth over the first three quarters of fiscal 2021 and the 377% increase of year-over-year growth in order backlog, Clearfield stands ready to serve our service provider customers as they capture and deploy the private and public funding that will soon become available. We will continue our active investments in systems and process development to enable an agile work environment as speed of delivery has been and will continue to be paramount to our success. The second pillar, amplifying bold and disruptive growth.

In our commitment to continue delivering market-changing products for current and future market requirements, we are introducing a small form factor, black drop Clearfield drop cable solution that reduces the size, weight and environmental impact of a direct fiber solution. As the number of connected homes continue to expand next year and beyond, we believe this product and many others will be instrumental in addressing the craftperson's need for flexible and easy to handle fiber solutions. Our third pillar, augmenting capacity for ongoing growth. It's our commitment to scaling Clearfield's operations to meet this burgeoning demand.

To that end, we are currently expanding our manufacturing network of contract manufacturing partners. We are also broadening our global network of supply chain partners for all sourced components to assure we can meet customer demand. We look forward to announcing future developments regarding Clearfield's own manufacturing footprint in the coming quarters. In 2020, the world changed fundamentally, and so did the data requirements that makes the world go round.

As COVID-19 swept the globe, nearly every aspect of life from work to working out moved online, and people depended more and more on apps and the Internet to socialize for education and to entertain themselves. Before quarantine, just 15% of Americans work from home, now over 50% do, and this trend shows no sign of stopping. State and federal programs have responded to enable all Americans to have effective high-speed broadband, and we've been thrilled to see the preference that fiber has earned in these deployments. This chart was prepared principally by Jefferies Research, and it illustrates the level of funding that is expected over the next four years.

The chart does not include the infrastructure bills currently in Congress that are reported to add an additional $65 billion in investment to our market, effectively doubling the value of subsidies that are shown here. Clearfield is poised to benefit from this incremental funding as it represents government dollars that will both enable environments that were previously not economically viable for fiber investment to come online as well as encouraging their broadband service provider to accelerate their rate of deployment in their existing footprint. We are very optimistic about growth potential. The market presence we have established over the last 10 years, along with our recent strategic investments, will enable us to respond to market demand and to grow with our customers.

While the supply chain remains volatile and may post challenges in the future, our strong financial performance and $40.3 million backlog gives us confidence to increase our net sales guidance for fiscal 2021 to $130 million to $135 million, which represents year-over-year growth of more than 40%. We anticipate our selling, general and administrative costs will grow moderately as increased travel resumes and we add additional customer-facing position. We anticipate net income as a percentage of total net sales to be consistent with year-to-date levels. While very early in our Now of Age plan, we believe with current demand, new government initiatives and overall market strength, our current market forecast will translate to projected annual net sales of $150 million to $160 million in fiscal year 2022, representing growth of 15% to 20% over our projected fiscal year 2021 revenues.

We will be able to provide more clarity to this guidance in coming quarters as we work to minimize supply chain and capacity challenges and as the timing of some of these government funding programs becomes more clear. In summary, our record-setting financial performance for fiscal Q3, which extends our track record of consistent profitability and positive cash flows over the last decade, reflects the strength of our business in a range of environments. Clearfield continues to benefit from and take advantage of robust industry tailwinds and our established and expanding presence within our key growth markets. We remain confident the demand for fiber-fed broadband will persist through fiscal 2021 and into fiscal 2022.

Our recently launched Now of Age plan, in which we offer the maturity and capacity to scale the expanding marketplace of 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. Please proceed with your question.

Jaeson Schmidt -- Lake Street Advisors -- Analyst

Thank you guys for taking my questions. I just want to start with how you're thinking about seasonality going forward. We're just showing you reconcile such strong demand across the community broadband segment and within the backdrop of that normal kind of weather-related seasonality you guys typically see in the winter months.

Cheri Beranek -- President and Chief Executive Officer

I think we'll continue to see traditional seasonality. There's no reason to expect that we won't. I think there's still the level of traditional budgeting and traditional weather as you relate it. I think one caveat, however, to that is due to the just really networkwide, marketwide demand that is just exploding for all markets.

I think we might see more placement of orders in anticipation of getting ready, that we might see orders and potential revenues that will be placed for kind of inventory readiness so that they can maximize and ensure their availability. So as a result, I think we might see a little uptick in the second quarters of next year that we wouldn't have normally seen.

Jaeson Schmidt -- Lake Street Advisors -- Analyst

OK. That's really helpful. And then I know you called out some government-funded programs, specifically RDOF. But when we look at your fiscal '22 guidance, is that baking in a meaningful contribution from some of these programs?

Cheri Beranek -- President and Chief Executive Officer

No, it isn't. As I indicated earlier, we really have a limited vision of that as you watch in the marketplace. There's a lot of conversation going out right now between a couple of senators with the FCC and their frustration that seven to eight months after the initial RDOF release being appropriated that no monies have been distributed. Now we've seen some business with people moving forward using kind of their own bank roll and using some subsidiary financing.

But until we get some, real broad knowledge of where that's going to go, there's not a significant level of RDOF dollars in our forecast.

Jaeson Schmidt -- Lake Street Advisors -- Analyst

OK. That makes sense. And then just the last one for me, and I'll jump back into queue. Just as it relates to inflationary pressure, just curious if you're seeing anything there.

And if so, are you passing along these increased costs to your customers?

Cheri Beranek -- President and Chief Executive Officer

The biggest cost pressures we're seeing are in resins of plastics. And so when you have a product line that is extensively plastics, such as walts or pedestals, those costs are exorbitant, and we've seen 40% and 50% and more percent increases on that world. And we do provide involved to our customers. While we don't manufacture them, we do customize them for particular pin-outs in particular setting patterns, and so our customers recognize the supply chain dynamics.

And while they're not happy about it, they do understand the necessity for us to pass those cost increases on. As it relates to our overall total revenues, those are relatively insignificant. I mean they're less than probably 3% of our total revenue base, but they are a product requirement in order to setting the cabinets that we produce. Otherwise, we've seen some price pressures in sheet metal, some price pressures in labor.

At this point, we've been able to absorb those and pass just things only when it's a significant amount. I think that's an ongoing challenge that we're going to have to deal with. I think we've been extremely fortunate at this point. I mean we've worked very hard to achieve our 44% gross profit level.

But I think we're going to need to continue to work as we have been in order to keep that there. I don't see the trend pattern of our accelerating gross profit percentage increasing. But I do think gross profit dollars will increase as our revenue to line debt.

Jaeson Schmidt -- Lake Street Advisors -- Analyst

OK. Thanks a lot guys.

Cheri Beranek -- President and Chief Executive Officer

Thank you.

Operator

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

Tim Savageaux -- Northland Capital Markets -- Analyst

Good afternoon and congratulations on some spectacular results here. And my first question is on the drivers of those results in the quarter and maybe in your going forward guidance for fiscal '22 as well. And you've been talking about this a little more recently, are increased fiber builds among slightly larger, call them, Tier Two carriers getting to be a meaningful driver, either short term or anticipated into next year? And I'll follow up from there.

Cheri Beranek -- President and Chief Executive Officer

We've been very pleased with the recognition by the Tier Two providers of the value proposition that Clearfield offers in that most of the Tier Two providers did not have an extensive fiber network previously. These were organizations that had the opportunity to really look from the beginning at craft-friendly, time-saving product line. And their engineers have recognized the value that Clearfield and our product line can offer. You'll find when the Q comes out that we don't have a single customer this quarter that represents more than 10% of our revenue.

But they are definitely a growth trend for the organization, and we're very pleased and proud to be working with them.

Tim Savageaux -- Northland Capital Markets -- Analyst

OK. Well, just to follow up on that. Could we speculate that perhaps as a group, the Tier Two carriers are approaching or exceeding the 10% of revenue? Or can you give us any sense of...

Cheri Beranek -- President and Chief Executive Officer

Definitely, yes. I think they're definitely approaching it, and I think they'll be called out in future quarters.

Tim Savageaux -- Northland Capital Markets -- Analyst

Great. And you kind of hinted this or made reference to it in some of your comments. But we've seen a number of kind of state-level broadband initiatives, some employing federal funding, announced fairly recently. Are you starting to see opportunities kind of derive from those efforts, maybe separate from whatever you might expect with RDOF? And could we say a similar thing with regard to expectations built into your guidance for next year? You characterized them as fairly modest for RDOF if you look at, and obviously, probably nothing for whatever is working through Congress right now.

But if you look at those state-level initiatives, are those becoming more important for you as a growth driver?

Cheri Beranek -- President and Chief Executive Officer

Yes, I mean most of the state initiatives have somewhat started. I mean we saw some revenues in our existing states or that's the wrong way to put it. I mean we do business across the country in almost, I think, 48 of the 50 states, but there's certainly been more prevalence in some of the core markets like Iowa that have had a higher level of state funding than we're already seeing. Moving forward, some of the new programs in the south and the northeast, the program that was announced or approved in California this week, those are still very early, and they're not included in our guidance.

Tim Savageaux -- Northland Capital Markets -- Analyst

Great. Thanks very much. I'll pass it on.

Cheri Beranek -- President and Chief Executive Officer

Welcome.

Operator

[Operator instructions] Ladies and gentlemen, 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 -- President and Chief Executive Officer

Thank you very much. As our operator has indicated, I will be happy to take any questions from investors. However, I do like to do that on a time-sensitive basis, so please send those questions to Gateway, and we'll be able to follow up at another time. But I thank all of you for joining us today.

We absolutely look forward to updating you again soon on our progress.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Cheri Beranek -- President and Chief Executive Officer

Dan Herzog -- Chief Financial Officer

Jaeson Schmidt -- Lake Street Advisors -- Analyst

Tim Savageaux -- Northland Capital Markets -- Analyst

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