Clearfield, Inc.

Good afternoon. Welcome to Clearfield's fiscal fourth quarter and full year 2021 earnings conference call. I will be your operator this afternoon. Joining us for today's presentation are the company's president and CEO, Sherry Varnek, and CFO, Dan Herzog. Following their commentary, we will open the call for questions. I would 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 description of those risks. As a reminder, the slides in this presentation are controlled by 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, Sherry Bareneck.

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 fourth quarter and full year of 2021. Clearfield delivered record-setting financial performance in the fourth quarter and for the full fiscal year 2021 in a market that is changing dramatically. We are in the middle of a historic investment cycle. Due to our consistent focus on customer service, quality products, and our ability to nimbly respond to customers' changing needs, we believe Clearfield has built an advantageous position in the broadband market and continues to benefit from the rising demand for fiber. The continued demand for fiber-fed broadband drove a 66% year-over-year increase in net sales and community broadband, our largest customer market, which helped us achieve $140.8 million in net sales for fiscal year 2021. Our growth in the period was led by double-digit increases from our community broadband market, which was up 64% in the fiscal fourth quarter. The community broadband market has historically been unserved or at least underserved. This market demand is being addressed with organic growth, with existing customers that are putting their own money or financing into their networks, and government-funded programs that are substantial and getting bigger. Bookings led shipments. by $55.6 million for the 12-month period, creating a backlog of $66.4 million as of September 30th, 2021. For those of you who are new to the story, the image on the right shows our patented Clearview cassette that is the foundation of our scalable and modular fiber management platform. Clearfield provides fiber protection, fiber management, and fiber delivery solutions that enable the rapid and cost-effective fiber-fed deployment through the broadband service provider space. We primarily serve the community broadband market, mainly Tier 2 and Tier 3 communications providers, though we also serve customers in the Tier 1 market and multiple system or cable TV operators, often called MSOs. Our product portfolio is focused on scalable, modular deployment that allows speedy deployment through a reduction in the amount of necessary skilled labor. At Clearfield, our mission is to enable the lifestyle that better broadband provides. This was made abundantly clear over the last 18 months as people were working and going to school from home. High-speed broadband is increasingly essential to be able to participate in this modern society. And fiber-fed broadband in particular is being recognized as the answer for future-proof connectivity to the American home and business. We are now in a position where everyone wants to be able to deploy fiber. The demand could be exponential. However, the market can only grow as long as there are technicians and engineers available to meet the demand. Industry professionals estimate that we need to double the number of trained technicians and engineers in the U.S. market. to deploy all the broadband that is required. However, these professionals have also said they believe we can only grow the number of technicians by about 15% a year. As a result, the deployment of high speed broadband through fiber will be extended. The market for fiber fed broadband is not only demand based, but also supplier based. Suppliers are seeing their fiber networks are easier to maintain and generate more revenue per subscriber. So this is truly a perfect storm of catalysts that will help drive Clearfield's future growth. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the fourth quarter and full fiscal year 2021.

Thank you, Sherry, and good afternoon, everyone. It's great to be speaking with you today. Now, looking at our fourth quarter financial results in more detail. Net sales in the fourth quarter of fiscal 2021 increased 66% to a record $45.2 million from $27.3 million in the same year goal period and up from $38.7 million in our third quarter of 2021. As Sherry mentioned, the increase in net sales was due primarily to higher sales in our community broadband market, which totaled 67% of our revenue for the fiscal fourth quarter of and increased 64% year-over-year. Our MSO market grew 90%, and our international market grew 221% year-over-year as well. Looking more in detail at net sales by our markets on slide 8, in the fourth quarter of fiscal 2021, we generated net sales of $30.3 million to our core community broadband market, which was up 64% from the same period last year. For the full fiscal year ended September 30, 2021, community broadband market net sales totaled $97.9 million, which was up 66% from the comparable period last year. Our MSO business comprised 15% of our net sales in fiscal Q4. From a growth standpoint, the positive momentum we have established over the last several quarters has endured. In the MSO market, we realized a 90% year-over-year increase in net sales to $6.9 million in the fourth quarter of fiscal 2021 and delivered a 51% year-over-year increase to $18.6 million for fiscal year 2021. Net sales in our national carrier market for the full fiscal year ended September 30, 2021 were down 15% year-over-year to $11.9 million. As we've discussed 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. Net sales to our Tier 1 customers in the fourth quarter of fiscal 2021 increased 12% as compared to the fourth quarter of fiscal 2020 to $3.6 million as the deployment of 5G solutions into the access part of the network have begun to recover from previous COVID-related delays. We continue to support our sales present in the Tier 1 national carrier market for both fiber to the home and business, as well as for 5G initiatives. Business uncertainties at one of our Tier 1 customers has resulted in a reduction in their capex spend in the consumer markets 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. We are optimistic that our Tier 1 revenues will rebound as pandemic restrictions continue to be lifted. Net sales in our international market were up 221% year-over-year in the fourth quarter compared to the same period last year, and up 132% year-over-year for the full fiscal year ended September 30, 2021. As we discussed on our previous call, we have seen a strong resurgence in demand for fiber-fed broadband in Mexico and Canada, as purchases that had been delayed by the COVID-19 pandemic begin to resume. Net sales in our legacy business were up 3% from Q4 of last year, but down 20% year-over-year for the full fiscal year ended September 30, 2021. As we have previously mentioned, 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-related issues. On an annual basis, net sales for fiscal 2021 increased 51% to a record $140.8 million from $93.1 million in fiscal 2020. As mentioned, this increase in net sales was primarily due to higher sales in our community broadband, MSO, and international markets in the fiscal year. Sales bookings continued their momentum in the fourth quarter, resulting in a 522% year-over-year increase in sales backlogs. Backlog grew to a record $66.4 million on September 30, 2021, up from $26.1 million on the previous quarter ending June 30, 2021, and up from $10.7 million at September 30, 2020. Gross profit in the fourth quarter of fiscal 2021 increased 75% to $19.7 million, or 43.6% of net sales, from $11.2 million or 41.2% of net sales in the same year-ago quarter. The increase in gross profit margin was due to a favorable product mix and customer mix, as well as improved manufacturing efficiencies realized with our increased sales volumes. Gross profit for fiscal 2021 increased 61% to $61.2 million or 43.5% of net sales from $37.9 million or 40.7% of net sales in fiscal 2020. The increase in our annual gross profit margin was also due to the same factors as our quarterly gross profit margin improvement, along with a full year of higher utilization of our lower cost manufacturing center in Mexico. Operating expenses for the fourth quarter of fiscal 2021 were $10.4 million, which were up from $7.6 million in the same year-ago quarter. As a percentage of net sales, operating expenses for the third quarter of fiscal 2021 was 22.9%, down from 27.7% in the same year-ago period. The increase in operating expenses consisted primarily of higher compensation costs due to increased personnel and higher performance-based compensation, as well as increased travel expenses. Operating expenses for fiscal 2021 were $35.9 million, which were up from $29.5 million in fiscal 2020. The increase in operating expenses for the year consisted primarily of higher compensation costs due to increased personnel and higher performance-based compensation, as well as higher stock compensation expense. As a percentage of net sales, operating expenses for fiscal 2021 was 25.5%, down from 31.7% in fiscal 2020. Net income in the fourth quarter of fiscal 2021 increased 144% to a record $7.4 million from $3 million in the same year-ago period and up from $6.1 million in our third quarter of 2021. As a percentage of net sales, net income for the fourth quarter of fiscal 2021 was 16.4%, up from 11.2% in the same year-ago period. Net income for fiscal 2021 increased 179% to a record $20.3 million, or $1.47 per diluted share, an improvement from $7.3 million, or 53 cents per diluted share, in fiscal 2020. As a percentage of net sales, net income for fiscal 2021 was 14.4%, up from 7.8% in fiscal 2020. That concludes my prepared remarks in our fourth quarter of fiscal 2021. I will now turn the call back over to Sherry. Sherry?

Thanks, Dan. Since its founding, Clearfield has focused its product line on fiber management and fiber connectivity solutions. while providing labor savings and being craft friendly. As slide 17 points out, we aim to remove the obstacles that would inhibit our customers from adopting fiber-led broadband. As I mentioned, there is a significant shortage of qualified technicians and engineers in the U.S. market. Our products are thoughtfully designed to reduce the skill level required for installation, as well as the overall time needed to deploy these networks. Moreover, in addition to our product categories, we provide on-site labor training to support these deployments. Our Clearfield College training courses are available virtually as well as in person. So it's the combination of our high-quality, craft-friendly products and our steadfast focus on customer service, including training, that drives the Clearfield value proposition. As I mentioned earlier, we are in the middle of a historic investment cycle for high-speed broadband and fiber-led broadband in particular. On our previous quarterly call, we mentioned over 50% of Americans now work from home, while just 15% of the population did so prior to the COVID-19 epidemic. To provide everyone a sense of the enormous scale of the potential funding opportunity, slide 18 shows a chart put together by Jeffries Research, that shows the anticipated increase in government funding over the next four years. This chart has been updated since last quarter because the expected funding amount has expanded. It's also worth noting this chart does not include the infrastructure bills currently in discussion in Congress that are recorded to add additional investments into our market, effectively doubling the value of subsidies shown here. Clearfield is in a strong position to benefit from these incremental funding programs as they represent government dollars that will target the underserved and unserved community broadband markets that have been economically unviable for fiber investment, in addition to encouraging the broadband service providers to accelerate their rate of deployment in their existing footprint. Given the position Clearfield enjoys in the community broadband market, we believe this truly is a huge opportunity for Clearfield. Now as highlighted on slide 19, we'd like to share an update to our multi-year strategic plan. As we discussed on our last call, Clearfield has entered the now of age phase of its strategic plan with the three pillars that we've identified will establish Clearfield as the platform of choice for fiber management and connectivity. As a reminder, our now of age 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. Accelerating our operating cadence. This is Crystal's commitment to address the market's exponential demand for fiber fed broadband. Our ability to deliver our products on time to our customers is crucial. To meet this huge demand over the course of fiscal year 2021, we were able to grow 51% with our current facilities. And now with the investment we recently made in our Mexico plant, we are prepared to increase our footprint by three times early in our second quarter as we move into expanded facilities now being built for Clearfield. So we are well positioned to be able to meet the growing opportunities before us in fiscal 2022 and beyond. I'd like to share one recent case study that exemplifies how we've approached this pillar. CIRSO recently had an opportunity to work with a leading Tier 2 provider because their incumbent supplier could not provide them with the product they needed. We came in and were able to supply the product in a time frame that met their needs. Their engineers completed a study that showed due to labor savings, they could place twice as many cabinets per week as was being done previously. As a result, we were able to win a supply agreement to provide our passive optical network cabinets for at least 50% of this particular deployment. This case shows that customers need suppliers who can provide product on time and, equally important, can reduce their labor required so that the time to revenue can accelerate. Moving on to the second pillar, amplifying bold and disruptive growth, is our commitment to continue delivering market-changing products for current and future market requirements. The best proof point that we are delivering on this covenant is the $66.4 million backlog that we mentioned earlier on this call. We are bringing our fiber management expertise to the market, and customers have responded enthusiastically. We have 200 customers in our current backlog, including several distributors representing additional customers, with demand spread so that a quarter of those have orders of greater than $100,000. We are growing large economies, certainly, but we are not dependent upon a single customer. Finally, our third pillar, augmenting capacity for ongoing growth, is our commitment to scaling Clearfield operations to meet the incredible demand for high-speed broadband. The key here is our agility and the ability to adapt to our customers and their changing needs. We listen to what our customers have been saying about the changes in the market and the issues they currently face with the global supply chain. As a result, we have evolved from being a rapid response supplier to a trusted supplier focused on meeting our customers' longer-term planning and larger-scale deployment. We have entered into agreements with our customers to provide material that they need to their promised ship date. Our customer service skills and production planning provide us a competitive advantage to this market dynamic. Course disadvantage is also subject to our ability to manage suppliers who still have supply chain issues due to the pandemic environment. So we have learned to adapt to this new market dynamic, and we are building share as a result. We remain very optimistic about our company's growth potential. Demand for high-speed broadband, especially fiber-fed broadband, continues to be very strong. we are making meaningful progress toward the goals we set in our now-of-age plan. From the beginning, Clearfield's culture, our focus on customer service and delivering high-quality, craft-friendly products was built for this kind of opportunity and our value proposition endures. With the overall market strength and current visibility we have into our backlog, we believe we can deliver projected annual net sales of $162 million to $169 million in fiscal 2022, representing growth of 15% to 20% over fiscal year 2021 revenues. Including within the backlog are gains within the Tier 2 market, as well as other strategic accounts that have multi-year bills. The nature of these purchase orders in our sales backlog not only enhances our visibility, but strengthens our relationships with service providers on their longer-term strategic multi-year initiatives. Notably, this fiscal year 22 outlook does not reflect significant sales volume using funding from government programs like ARDOF or the infrastructure package in Congress. In addition, with the visibility we have into our current sales backlogs, we expect an unceasingly strong fiscal first quarter. we will be able to provide more clarity to our 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, we concluded our fiscal 2021 setting new records for financial performance. We are very proud of our track record of consistent profitability and positive cash flow over the last decade. We remain confident the demand for fiber-fed broadband will persist in fiscal 2022 and in the years to come and are actively committing our capital to expand our production capacity and grow and manage our global supply chain to meet that growing demand. We will continue to make progress on our now-of-age plan that positions us for continued success. The opportunity ahead of us is tremendous. and we will continue to execute on our proven strategy to grow our market share. And with that, we're ready to open the call for your questions. Operator?

Thank you. We will now begin taking questions from the company's publishing sell-side analysts. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.

Again, if you'd like to ask your question, it is star, then one. Our first question today will come from Jason Schmidt with Lake Street. Please go ahead.

Hey guys, thanks for taking my questions. Congrats on being able to lift that guidance. Just curious, just given the momentum you're seeing in the current backdrop, how we should be thinking about seasonality in fiscal 22 or if that is even on the table this year?

I think as we address seasonality, it's going to be covered. It's a little bit different than normal. I think we're going to see a very, you know, an unseasonably strong first quarter. And I think we'll see diminished seasonality from what we've seen historically because of the fact that we're seeing longer-term perspectives and orders. And some of our customers are looking to put product in inventory so that they can be ready for the summer build. So in general, I think we'll see a little bit less of a dominance on the summer and a little bit more consistent quarter to quarter. At least that's the visibility at this point.

Okay, that's helpful. And then just as a follow-up, I know you mentioned traction with the Tier 2 accounts, but does fiscal 22 guidance or the lift to guidance assume any significant contribution from Tier 1 players?

It does not include anything significant from Tier 1 at this point. We are continuing our sales efforts and we have been in discussion with several Tier 1 suppliers to help them deal with their capacity limitations and that there has been some challenges at the Tier 1 level for their incumbent suppliers to meet demand. You know, we're aggressively continuing to work in that area, but we also are constrained in some of the Tier 1 opportunities, you know, due to supply chain issues associated with PVDF and other plastics.

Okay. Thanks a lot, guys. Thank you. Good to talk to you, Jason. Again, if you'd like to ask a question today, it is star then one, star then one to ask your question.

There being no questions at this time, this will conclude our question and answer session. If your question was not taken, you may contact Clearfield's investor relations team at clfd at gatewayir.com. And I'd like to turn the call back over to Ms. Baranek for any closing remarks.

It was a wonderful opportunity to present these numbers for you today. I just want to absolutely call out the amazing work of Clearfield's employee community, the execution on our strategy and the execution to deliver product in this scalable fashion. I think it's extraordinary and I couldn't be more proud of what they're doing. I also wish all of you, I'm very grateful for your support as we approach the Thanksgiving season and wish you and your families a very blessed opportunity to spend time together. Until next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.