Clearfield, Inc.

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, Sherry Baranek, 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 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, 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 Forms 10-Q provides descriptions of those risks. As a reminder, the slides in this presentation are controlled. Use a 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 CRO, Sherry Baranek.

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 four, the continued demand for fiber-fed broadband drove 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, 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 RDoS, 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 30th, 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 times have stretched to 8 to 10 weeks for certain product categories. Over the next several quarters, we will be working to normalize our lead time 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 totaled 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 program, 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 first sales. 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 five, in the third quarter of fiscal 2021, we generated net sales of $27.4 million for our core community broadband markets. which was up 64% from the same period of last year. For the trailing 12 months ending June 30th of 2021, community broadband market net sales totaled $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 30th. Net sales to our national carrier market for the trailing 12 months ending June 30th, 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 application. As COVID constraints have limited the deployment of 5G solutions into the access part of the network, net sales to our Tier 1 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 1 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 1 customers has resulted in a reduction in their CapEx funds 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 1 market. As pandemic restrictions are lifted, we are optimistic that our Tier 1 revenues will rebound. Net sales in our international market 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 its 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.

Thank you, Sherry, 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 seven, 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 eight, 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 nine, our operating expenses for the third quarter 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 44 cents per diluted share, an improvement of approximately $3.1 million over the $3 million, or 22 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 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 Sherry. Sherry?