Clearfield, Inc.

Good afternoon. Welcome to Clearfield's fiscal third quarter 2020 earnings conference call. My name is Darrell, 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 is important to note also that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, 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 description 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 through the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield CEO, Cheryl Beranek. Please proceed.

Good afternoon, and thank you, everyone, for joining us today. I hope everyone is safe and healthy during these truly unprecedented times. The third quarter of fiscal 2020 was a strong quarterly performance for Clearfield, as we achieved the highest level of revenue for any quarter in our company's history. The $26 million we reported for Q3 was up 27% sequentially and 19% year over year. This robust growth was driven most significantly by contributions from our MSO and community broadband markets, which were up 48% and 22% year over year, respectfully. The record top-line performance in the quarter helped produce record gross profit, which totaled $10.8 million. As a percentage of revenue, the 41.5% marked the highest gross profit margin we've achieved as a company in more than two years. Both of these achievements were due to a favorable product mix in the quarter, as well as the continued realization of the operational efficiency initiatives we've implemented since the start of fiscal 2020. This includes the expanded use of our Mexico manufacturing plants, a reduction in tariff costs, and the cost reduction efforts across our product lines. All of these measures have helped increase our efficiency and enabled us to keep our operating expenses relatively stable while driving our top line. In fact, the $3 million of net income we generated in the quarter was the highest quarterly level in several years. We ended the quarter with a robust order backlog of $8.5 million, which was down slightly from the prior quarter end, but up 68% from the same period last year. I'm also encouraged to report that we continue to book at industry-leading lead times for our standard products. Before I turn the call over to our CFO, Dan Herzog, I'd like to walk through our financial performance in more detail, spending a moment reviewing some of our recent operational updates in progress in our core end markets. I'm encouraged to report that Clearfield did not experience any particular customer ordering delays or negative changes in ordering patterns during fiscal Q3 due to COVID-19. Within that context, let's look at our market segments by revenue, starting first with our core community broadband market. In the third quarter, we generated revenue of $16.7 million which was up 22% from the same period last year on a trailing 12-month basis ending June 30, 2020. Community broadband market revenue totaled $55.2 million which was up 3% from the comparable period last year. Our national carrier business was our second largest market comprising 15% of our total revenue in fiscal Q3 and 17% for the trailing 12-month period. From a growth standpoint, we built on the momentum we established over the last several quarters, realizing a 19% year-over-year increase in revenue to $3.9 million in the third quarter and a 37% year-over-year increase to $14.9 million for the trailing 12-month period. As I've addressed within prior field reports, the growth we're seeing in the national carrier market is related to the continued demand from fiber to the home and fiber to the business applications. We believe the momentum in our national carrier market to date validates the strategic investments we've made to capitalize on the Tier 1 market. In addition to positive results we experienced in our national carrier market, we realized another quarter of double-digit growth in our MSO or cable TV market. In fiscal Q3, we generated $3.7 million in revenue, which was up 48% year-over-year. For the trailing 12-month period, we generated $11.1 million from this market, which was up 38% year-over-year. Revenue in our international market was down 47% year-over-year and down 35% on a trailing 12-month basis. The decline in this quarter was primarily related to currency conversion rates, which have yet to return to their pre-COVID level. This has made our products temporarily cost prohibitive, causing customers to delay purchasing decisions. Revenue in our legacy builder print business was down slightly in the third quarter and down 5% over the trailing 12-month period. On that trailing 12-month basis, total revenue was $4.2 million, which is consistent with our expectations for this business to operate at approximately 4 million annual run rate for the foreseeable future. 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 2020.

Thank you, Sherry, and good afternoon, everyone. Now looking at our third quarter financial results in more detail, Our revenue in the third quarter of fiscal 2020 increased 19% to $26 million from $21.9 million in the same year-ago period. The increase in revenue was primarily due to higher sales in our community broadband, MSO, and national carrier markets, partially offset by lower international sales, as Sherry just mentioned. Gross profit for the third quarter of fiscal 2020 totaled $10.8 million, or 41.5% of total revenue. This was an improvement from $8.4 million, or 38.4% of total revenue, in the third quarter last year. The increase in gross profit dollars was due to increased sales volume. The increase in gross margin was due to a more favorable profit mix, as well as cost reduction efforts across our product lines, including expanded use of our Mexico manufacturing plant and efficiencies realized from our supply chain programs. Our operating expenses for the third quarter of fiscal 2020 were $7.2 million, which were up from $6.9 million in the same year-ago quarter. As a percentage of total revenue, operating expenses in Q3 were 27.8% compared to 31.4% in the same year-ago period. The increase in operating expenses was primarily due to the higher compensation costs and costs associated with product testing required for Tier 1 certification. offset by lower travel, entertainment, and marketing costs due to COVID-19 restrictions. In terms of our profitability measures, income from operations was $3.6 million in the third quarter of fiscal 2020, which compares to $1.5 million in the same year-ago quarter. Income tax expense increased to $763,000 in the third quarter of fiscal 2020 up from $454,000 in the third quarter of 2019. In the third quarter of fiscal 2020, net income totaled $3 million, or 22 cents, per diluted share, an improvement from $1.3 million, or 10 cents per diluted share, in the same year-ago quarter. During the third quarter, our cash, cash equivalents, and investments remained consistent at $48.4 million compared to the prior quarter end. We believe the $48.4 million of cash on hand and short-term investments, along with cash flow from operations, is sufficient to meet our working capital and investment requirements for beyond the next 12 months. As I mentioned on our last field report, our Board of Directors suspended the company's share repurchase plan in April to further ensure our financial stability through the current COVID-19 operating environment. Our board and leadership team will continue to evaluate our capital allocation strategy for our shareholders. That concludes my prepared remarks. I will now turn the call back over to Sherry. Sherry?