Clearfield, Inc.

Good afternoon. Welcome to ClearFuse Fiscal First Quarter 2021 Earnings Conference Call. My name is Shamali, and I will be your operator this afternoon. Joining us for today's presentation are the company's President and CEO, Cheryl 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 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 factors section in Clearfield's most recent Form 10-K, Filing 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. 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 CEO, Cheryl Beranek. Please proceed.

Good afternoon, and thank you, everyone, for joining us today. I hope you are all continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon to share Clearfield's results for the fiscal first quarter of 2021. The first quarter of fiscal 2021 was an exceptionally strong start to our new fiscal year. As you can see on slide four, the $27.1 million we generated in revenue was a 40% increase over last year and marked the highest revenue level for any fiscal first quarter in Clearfield history. Our growth in the period was again led by double-digit increases from our community broadband and multiple system operator, also known as MSO or cable TV markets. which were up 71% and 30% respectfully. Our extended and ongoing strong top line performance over the last several quarters has enabled us to exceed the $100 million revenue level on a trailing 12 month basis for the first time. The surging demand and need for high speed internet access accelerated by COVID-19 is prevalent across the country. Our track record and reputation in the community broadband market has positioned us extremely well to take share and further capitalize on the expansion that is currently underway, as our base of independent telephone providers is joined by utilities and municipalities in delivering high-speed broadband to consumers and businesses. Clearfield is helping these emerging providers meet the growing demand by providing our traditional products as well as helping them deploy innovative solutions like our home deployment kits, which extend our field proven fiber management expertise and leading edge fiber connectivity performance all the way into the home. As evidence of the success of this initiative, During this past quarter, we secured a near million-dollar order for home deployment kits by an electric co-op within our community broadband market. We recognized a portion of this win as revenue in Q1, and the balance is reflected in our $8.9 million backlog at quarter end. The robust industry trends we have experienced since last year have continued now into fiscal 2021. supported by sustained demand for broadband couples with government programs such as the Coronavirus Aid Relief and Economic Security Act, also known as the CARES Act, that are helping to fund to accelerate these deployments. While the expansion currently underway is due in part to some pull-forward bills that work-from-home consumers are demanding, it nonetheless may accelerate due to the launch of the Rural Digital Opportunity Fund or Ardoff Program. Ardoff will finance up to $20.4 billion of gigabit speed broadband over the next 10 years to homes and businesses that would previously not be economically viable. It is worth mentioning that the $19.8 million of revenue we generated in our community broadband market for Q1 includes dollars associated with the CARES Act that does not reflect any contribution from the recent awards related to RDOF. In terms of our MSO market, much of our work in this area is an extension of what we are doing in community broadband. Tier 2 MSO carriers, or the regional players, are expanding their deployments of fiber community by community. We are working to penetrate the national MSO market and are proud of a recent approval of our new 288 pre-assigned FDH Pond Cabinet by one such carrier. Our top line performance in fiscal Q1 also helped to drive solid gross profit dollars, which totaled $11.4 million in this most recent period. As a percentage of revenue, our 42% margin was up from the 41.2% we reported in the prior quarter and marked the highest gross profit margin we have achieved as a company in more than two years. As it relates to our gross margin profitability in Q1, we had a favorable revenue mix in the quarter associated with the increased revenue in community broadband markets. In addition, meaningful efficiency gains were realized from our operations in Mexico. Moving down the income statement, expenses increased slightly from last year's first quarter resulting in $3.2 million in net income or $0.23 per diluted share. This was a significant improvement from the $0.5 million or $0.04 per diluted share in earnings we generated in Q1 of last year. We anticipate expenses to increase slightly in future quarters as we invest in additional resources within our community broadband programs. In addition to our encouraging financial performance, we also made meaningful strides advancing our product portfolio. This included achieving Telcordia certification for our aerial strand-mount FDH, as well as receiving approval by the national carrier of the aerial FDH for use in its networks. Due to the COVID crisis gripping our country and market, the launch of our new technologies into the Tier 1 market faces headwinds associated with product introduction and training. As 5G deployments into the access network increase, we foresee increasing revenue among the tier one market moving forward. Looking at our market segments by revenue on slide five, starting first with our core community broadband market. As I mentioned previously, In the first quarter, we generated revenue of $19.8 million, which was up 71% from the same period last year. For the trailing 12 months ended December 31, 2020, community broadband market revenue totaled $67.2 million, which was up 29% from the comparable period last year. Our MSO business comprised 11% of our total revenue in fiscal Q1. From a growth standpoint, we built on the momentum we established over the last several quarters, realizing a 30% year-over-year increase in revenue to $3 million in the first quarter of fiscal 2021 and a 49% increase year-over-year to $13.1 million for the trailing 12 months ended December 31, 2020. Revenue in our national carrier market was up 8% year-over-year to $13.7 million for the trailing 12 months ended December 31, 2020. As I've talked about on past field reports, 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 access part of the network, revenue for the first quarter of fiscal 2021 slipped 12% year-over-year to $2.7 million. Revenue in our international market was down 8% year-over-year in the first quarter and down 34% year-over-year for the trailing 12 months ended December 31, 2020. Weakness continued in the Caribbean and Mexican markets. However, revenue in the Canadian markets saw an exceptionally strong rebound. We are optimistic of seeing increasing revenue in international markets moving forward. Revenue in our legacy markets was down 58% year-over-year in Q1 and down 39% year-over-year for the trailing 12 months ended December 31, 2020. This legacy part of our business is highly dependent upon the industrial drivers of two customers in this segment. We believe the business to be fluctuating from 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 first quarter of fiscal 2021.

Thank you, Sherry, and good afternoon, everyone. It's great to be speaking with you today. Now, looking at our first quarter financial results in more detail, as you can see on slide seven, our revenue in the first quarter of fiscal 2021 increased 40% to $27.1 million from $19.4 million in the same year ago period. The increase in revenues was primarily due to higher sales in our community broadband and MSO markets, partially offset by decreases in our legacy and national carrier markets. Turning to slide eight, gross profit for the first quarter of fiscal 2021 totaled a record $11.4 million, or 42% of total revenue. This was an improvement from $7.7 million, or 39.9% of total revenue, over the first quarter last year. The increase in gross profit dollars was due to higher sales volume. As Sherry mentioned, the increase in gross margin was due to favorable product mix associated with increased revenues into community broadband and cost reduction efforts across our product lines, including increased production at our Mexico manufacturing plants and efficiencies realized from supply chain programs. As you can see on slide 9, our operating expenses for the first quarter of fiscal 2021 were $7.7 million, which were up slightly from $7.3 million in the same year-ago quarter. As a percentage of total revenue, operating expenses for the first quarter of fiscal 2021 were 28.3% compared to 37.8% in the same year-ago period. The increase in operating expenses on a dollar basis was primarily due to higher wages and compensation costs related to performance compensation. Turning to our profitability measures on slide 10, income from operations was $3.7 million in the first quarter of fiscal 2021, which compares to $401,000 in the same year go quarter. Income tax expense increased $684,000 in the first quarter of fiscal 2021, up from $123,000 in the first quarter of 2020. Net income totaled $3.2 million, or 23 cents per diluted share, and improvement from $501,000, or 4 cents per diluted share, in the same year-ago quarter. Before I turn it back over to Sherry, 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 remains fully operational despite the unprecedented business closures and slowdown caused by the global health crisis. Our non-production employees are working remotely, using collaboration tools and video conferencing to stay connected. Our production operations in both the US 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 we talked about last quarter, We dual source most of our components to cover multiple points of failure and provide purposeful redundancies to remove potential risks. Thankfully, as of today, many of our supply chain partners remain operational and have continued to provide the necessary components for our products. Our supply chain remains intact thanks to our team's forward planning to ensure sufficient safety stock inventory levels at both our Minnesota and Mexico facilities. As Sherry has indicated previously, 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. This strategic decision has allowed us to meet the growing customer orders and enable us to continue to fulfill our order increased backlog going forward. That concludes my prepared remarks. I will now turn the call back over to Sherry. Sherry?