Clearfield, Inc.

Good afternoon. Welcome to Clearfield's fiscal second quarter 2019 earnings conference call. My name is Savis and I will be your operator this afternoon. Joining us for today's presentation are the company's president and CEO, Sherry 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 Field Report, 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'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, field report, and in this conference call. The risk factor section in Clearfield's most recent form 10-K filing with the Securities and Exchange Commission 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 speaker presents their remarks. With that, I would like to turn the call over to Clearfield's CEO, Sherry Beranek. Please proceed.

Good afternoon, and thank you, everyone, for joining us today. As we turn to slide four, once again, the growth of our active cabinets and traditional product lines continue to drive another strong quarter for Clearfield, with revenue up 13% year-over-year to $19.1 million. As I'll get into on the next slide, we experienced growth in each of our five key markets, particularly in faster-growing applications such as wireless connectivity, Business Class Services, and Multi-Dwelling Unit, or MDU, deployments. As the quarter progressed, we picked up momentum building up our backlog, with bookings outpacing revenue, resulting in an increase of year-over-year backlogs of $800,000, or 17%, creating a strong base upon which to execute for fiscal quarter three, 2019. In addition to the healthy demand we've been experiencing with our acquired active cabinet line, were also receiving strong interest and positive feedback for our new FieldSmart Active Cabinet line, which we launched in February of this year. This new cabinet is based upon the acquired cabinet architecture, but includes a few important enhancements, including increased fiber density required for next generation networks. We didn't recognize revenue from this new product line in fiscal Q2, but just in the first two weeks of this quarter, We received our first orders for these products and have already started shipping this month. Looking further down the income statement, you'll see that income from operations improved to $297,000 despite being negatively affected by a bad debt expense charge after one of our customers, Windstream, filed a Chapter 11 bankruptcy. In addition, gross profit was negatively impacted by tariff costs of approximately $330,000 representing 170 basis points or 1.7% impact on our gross margins. Suppliers who were previously absorbing these extra costs are now passing these tariff costs on to us. We are aggressively qualifying alternative components and reevaluating elements of our supply chain to attempt to negate the consequences of this government action. While no one knows how long these tariff mandates will continue, We are working aggressively to reduce our costs elsewhere and remain confident at this point in maintaining our gross margin forecast for the year. Before I dive deeper into the steps we're already taking to execute along our previously announced coming-of-age plan, I'd like to spend a moment going over our recent operational and market progress. Turning to slide five, as I mentioned on the onset, we had a fairly balanced quarter in terms of growth. with all five key markets experiencing growth on a year-over-year basis. Community broadband was up 3% to $12.1 million from $11.8 million in the same year-over-quarter. While this growth was slightly lower than what community broadband has been experiencing recently, it does not capture the fact that we had several orders coming in very late in the quarter which could not be shipped out and included in our fiscal Q2 results. Recently, this market was slightly impacted with the announced bankruptcy of Windstream in mid-February, which created some distraction and order slowdown within this account. That being said, however, Windstream represents less than a 5% customer, and we don't anticipate this bankruptcy or any associated order slowdowns to materially impact the broader market momentum we're experiencing within community broadband. Turning to our national carrier business, which was up nearly double digits year over year to $2.3 million. We gained incremental footing in this market, principally through the continued adoption of our active cabinets and FieldShield product lines. During the quarter, new material codes were granted for FieldSmart fiber management solutions, which is now approved to ship to two of the top three tier one carriers. We're already shipping FieldShield to all three of these carriers, giving us increased conviction that there is a heightened appetite in this market for alternative and more cost-effective solutions compared to the incumbent solutions. Later, I will describe how we're not only disrupting existing solutions in this market, but designing solutions for 5G, where we have a significant opportunity to establish ourselves as one of the leading players in this next generation of fiber management and connectivity. Turning now to MSO, or cable TV business, which grew 15% year over year, we continue to see strong demand for our solutions, especially as it relates to business class services. Internationally, we experienced one of our strongest quarters, with revenue more than doubling to $2 million, as we experienced a healthy rebound in some of our Latin American markets, particularly Mexico. And last but not least, Our legacy build-to-print business was up 37% year-over-year to $1.2 million. As a reminder, this growth was primarily driven by one of our customers, which has resumed their historical purchasing activity after a one-year lag in their business due to their own internal constraints. As such, we do not foresee a material pickup in revenue for this market going forward. With that, I'll now turn the presentation over to our CFO, Dan Herzog, who will walk us through our financial performance for the second quarter of fiscal 2019.

Thank you, Sherry. Now looking at our financial results in more detail. On slide seven, our revenue in the second quarter of fiscal 2019 increased 13% to $19.1 million from $16.8 million in the same year ago period. The increase for the quarter was largely driven by the strong sales of our active cabinet line as well as continued sales of our traditional product categories. Turning to slide eight, gross profit for the second quarter of fiscal 2019 increased 4% as compared to the second quarter of fiscal 2018 to $7 million or 36.8% of total revenue. Gross profit percentage for the second quarter of fiscal 2019 was down year over year due to the continued strong market adoption of the acquired active cabinet solutions which generally carry lower overall margins. In addition, as Sherry mentioned, gross margin was negatively affected by the absorption of tariff costs that reduced our gross profit by approximately $330,000. That being said, we are continuing to enhance our supply chain and cost structure to attempt to further minimize any potential or actual tariff-related impact. Turning to slide 9, Our operating expenses for Fiscal Q2 were $6.7 million, which were down from $7.3 million in the same year-ago quarter. As Sherry alluded to earlier, included in this $6.7 million is a $210,000 bad debt expense charge we took as a result of Windstream's Chapter 11 bankruptcy. It's worth noting that Windstream filed for bankruptcy protection after losing a court battle with one of its bondholders, not necessarily because of any impending liquidity or solvency issues. Regardless, we continue to work closely with Windstream and there is a possibility that a portion of this amount may be recovered in the future. With respect to the year-over-year decrease in operating expenses, much of it can be explained by the $1.4 million in expenses incurred for the defense and one-time settlement payment related to the patent infringement lawsuit which was settled in fiscal Q2 2018. Reduction in legal expense was partially offset by an increase in compensation expense as a result of additions in headcounts to support the company's growth. Turning to slide 10, income from operations improved to $297,000 in the second quarter of fiscal 2019 from a loss of $526,000 in the same year-ago quarter. As I mentioned earlier, the loss from operations in fiscal Q2 of last year included the one-time settlement fee of $850,000. Income tax expense was $99,000 compared to a benefit of $101,000 in the second quarter of fiscal 2018. The resulting net income of $368,000, or two cents per diluted share for the second quarter of fiscal 2019, was an improvement from a net loss of $305,000 or a loss of 2 cents per diluted share in the second quarter of fiscal 2018. Turning now to our balance sheet on slide 11. During the second quarter, our cash, cash equivalents, and investments increased to $43.5 million from $42.1 million in the prior quarter ended December 31, 2018 due to our strong cash flow from operations. During the second quarter of 2019, we did not repurchase any shares as part of our share repurchase program, which, as a reminder, has approximately $5.4 million remaining out of the total $12 million authorized. We remain opportunistic with how we deploy our capital to generate the highest returns for our shareholders, whether that's through share repurchases or continuing to invest in our business to further reduce our cost structure or enhance our revenue opportunities. Now with that, I would like to turn the call back over to Sherry. Sherry?