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spk07: Good afternoon. Welcome to Clearfield's fiscal first quarter 2023 earnings conference call. My name is Paul, and I will be your operator this afternoon. I'll now pass the call over to Jackie Kessner from Gateway Group.
spk02: Thank you. 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 provide descriptions 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's President and CEO, Sherry Biernack. Sherry?
spk03: Good afternoon, everyone, and thank you for joining us today. It is a pleasure to speak with our new and returning investors and analysts this afternoon. to share Clearfield's results for the first quarter of fiscal 2023, as well as provide an update on our business and current market trends. Our strong financial performance in the first quarter of fiscal 2023 reflects our ongoing execution on our strategic growth plan, as well as the robust and sustained demand for high-speed broadband. Total net sales for the first quarter were $86 million, which includes an $8 million contribution from Nestor Cables. Our organic net sales growth continues to be driven by our leadership and community broadband and expansion across each of our core end markets. As we continue to execute on our LEAP strategic plan, we aim to strengthen our existing competitive advantages as we build the scale necessary to serve the long-term demand runway for high-speed broadband in unserved and underserved communities nationwide. Based upon consideration of the expected investments and impact of our progress on our lead strategic plan, as well as our ability to manage countervailing headwinds that could develop in customer ordering patterns and component sourcing, we are reiterating our previously stated revenue guidance for fiscal year 2023. In addition, we are introducing 2023 net income guidance of $4.30 to $4.50 a share. Before I review our performance and current market dynamics in greater detail, I'd like to briefly introduce you to who we are and what we do for those of you who may be new to Clearfield and our industry. Clearfield is a leader in the expanding fiber broadband industry. Our goal and underlying value proposition is to enable the lifestyle as better broadband provides. We provide craft-friendly fiber protection, fiber management, and fiber delivery solutions that enable rapid, cost-effective, fiber-fed deployments throughout the broadband service provider space. Our primary end market is community broadband, which is predominantly comprised of Tier 2 and Tier 3 incumbent local exchange carriers and an increasing number of municipalities, utilities, co-ops, and wireless carriers. We also serve service providers in the Tier 1 national carrier market, and multiple system cable TV operators, or MSOs, as well as some international service providers. Pictured on slide four is the Clearview cassette, which has changed the rules of fiber management. This integrated fiber management system is based on multiples of 12 fibers and can be utilized whenever and wherever it is required in the network. Our FieldShield platform offers protected pathways and fiber options that suits the needs of any network deployment. Our entire product line was thoughtfully designed to be craft-friendly in the field, reducing both the amount of necessary skilled labor needed for installation and the level of skills required to install. This enables our customers to complete their deployments faster and more efficiently, accelerating their time to revenue. With these capabilities and the competitive advantages we summarized on slide five, we've expanded our market leadership and underserved rural broadband. To further enhance our positioning, we have worked to improve our product delivery lead times, which represented another key area of industry leadership before the COVID-19 pandemic. Across our industry, pandemic-fueled supply constraints held fiber lead times to a range of 10 to 12 months. By contrast, Clearfield is now targeting lead times within the range of 8 to 10 weeks. I am proud to say that we have already achieved these lead times within the range for all product lines, with the exception of active cabinets, which have been negatively impacted by the longer lead times associated with power conditioning subcomponents used in their manufacturing process. This work to improve our lead times comes as our customer ordering cycles return to pre-COVID patterns, but at post-COVID values. Over the past three years, our customers ordered products early in their deployment schedules to stay ahead of any supply chain challenges as they plan their fiber bills. These advanced orders led to growth in our backlog, which reached record levels by the end of fiscal year 2022. Our customers have moved to staging less equipment in their yards and have now began ordering according to more normalized, seasonally-driven deployment schedules. We believe this trend will continue in 2023 as customers readjust their ordering planning to our improved product lead times and try to match their order timing to their deployment schedules. Consistent with the return of this traditional ordering and delivery patterns, We anticipate approximately 40% of our expected revenue in the first six months of our fiscal year and 60% in the second half. We believe long-term demand remains exceptionally strong. Nearly all of our customers are indicating an increase in the number of homes they are passing and connecting in comparison to the previous year. In addition, the increase in the number of service providers we serve is exciting. For some additional insights on what we're seeing in the market and the significant long-term growth runway for fiber deployments, I'd like to welcome our Chief Marketing Officer, Kevin Morgan, to the call. Kevin?
spk01: Thank you, Sherry. It's great to be joining all of you this afternoon. The appetite for high-speed broadband communications has never been greater and shows no sign of letting up. This continues to drive fiber deployments deeper into every corner of society and across all market segments. As Sherry mentioned, we believe our work to maintain our world-class lead times and further progress our LEAP strategic plan enhances our position for the robust near-term demand environment. On slide six, we've also included the Fiber Broadband Association's strong forecast for fiber deployments over the next decade. In its 2022 Fiber Provider Survey, published in December, The Fiber Broadband Association estimated a 10-year annual average run rate of 11.3 million fiber deployments. In 2022 alone, fiber providers passed 7.9 million additional homes, representing a new record for annual deployment. This momentum gives us a powerful foundation for 2023 and the years ahead. As you'll see in the accompanying chart, We're positioned within an accelerating investment cycle that has yet to reach its peak. We continue to view the gradual disbursement of ARPA and RDOF funds and the upcoming distribution of BEAD funding as meaningful but gradual industry tailwinds that further expand our market opportunity. The data indicated on this slide assumes that 12.3 million new housing units will come online over the next 10 years. 92% of homes are expected to have fiber availability, with an additional 34% of homes having two or more available fiber connections. As this market continues to expand, we believe our craft-friendly products will continue to play a vital role in translating the home's past numbers and the home's connected revenue for our service providers as they deepen their fiber deployments. Turning back to Clearfield's fiscal first quarter performance, I'd now like to pass the call over to our CFO, Dan Herzog, who will walk us through our financial results for the fiscal first quarter of 2023.
spk11: Thank you, Kevin, and good afternoon, everyone. It's a pleasure to be speaking with you today about our fiscal first quarter 2023 results. So looking at our fiscal first quarter 2023 results in more detail. Consolidated net sales in the first quarter of fiscal 2023 were $86 million, a 68% increase from $51 million in the same year ago period, and down 10% from $95 million in our fourth quarter of 2022. This figure includes $78 million from Organic Clearfield and an $8 million contribution from Nestor Cables, representing Nestor's first full quarter of contribution since we acquired the business on July 26, 2022. The increase in net sales was due to higher sales across our core end markets, particularly in our community broadband, multiple system operator, and national carrier markets consistent with our performance throughout fiscal year 2022. We recorded a 34% year over year increase in our sales order backlog. Order backlog was $136 million on December 31, 2022, up from $101 million on December 31, 2021, and down from $165 million on September 30, 2022. We believe our lead time progress will remain a more meaningful measure of our operational performance going forward. Accordingly, we will focus on this metric in lieu of reporting on backlog in future quarters. I'll now review net sales by our key markets. Sales to our primary market, community broadband, comprised 55% of our net sales in the first quarter of fiscal 2023. In Q1, we generated net sales of approximately $48 million in community broadband, up 33% from the same period last year. In addition, for the trailing 12 months ended on December 31, 2022, our community broadband market net sales totaled approximately $192 million. which was up 69% from the comparable period last year. Our MSO business comprised 25% of our net sales in the first quarter of fiscal 2023. Momentum in the MSO market continues to be strong, with net sales growing 137% year over year and up 152% for the trailing 12-month period. Net sales in our national carrier market for the first quarter of fiscal 2023 increased 67% year over year. On a trailing 12-month basis, net sales in our national carrier market was up 102% from the comparable year-ago period. Net sales in our international market increased 412% year-over-year in the first quarter compared to the same period last year, and were up 126% year-over-year on a trailing 12-month basis due to the acquisition of Nestor cables, which are included in our international sales. Gross profit in the first quarter of fiscal 2023 increased 33% to $31 million or 35.7% of net sales from $23 million or 44.9% of net sales in the same year ago quarter. Our gross profit was affected by our investments to increase capacity for additional growth in the coming quarters and years. These investments include the increased facility costs associated with the addition of the company's new Minnesota and Mexico facilities that came on board late in the second quarter of fiscal 2022 and the continued expansion to outfit these facilities. The company continues its investment in cable manufacturing at its Mexico facility in conjunction with the Nestor Cables acquisition, which is expected to be operational in our second fiscal quarter. Gross profit was also affected by a full quarter of lower gross profit realized in our Nestor Cable's cable manufacturing business. The company expects to operate at these gross profit percentage levels for several quarters with improving margins as revenue levels increase later this calendar year. Operating expenses for the first quarter of fiscal 2023 were $13 million, which were up from $10 million in the same year-ago quarter. In addition to the increase from the first full quarter of Nestor Cable's operating expenses in general, increased areas reflect higher compensation costs, travel and entertainment, stock compensation, and professional fees. As a percentage of net sales, operating expenses for the first quarter fiscal 2023 was 15% down from 19% in the same year goal period. Our current OPEX at less than 15% of sales reflects our continued strong operating leverage. Net income in the first quarter of fiscal 2023 increased 37% to $14.3 million from $10.4 million in the same year-ago period and was down from $17 million in the fourth quarter of fiscal 2022. As a percentage of net sales, net income for the first quarter of fiscal 2023 was 17%. down from 20% in the same year-ago period and down from 18% in the fourth quarter of fiscal 2022. In terms of our balance sheet, we had $2.2 million in capital expenditures, mainly to support our expanding capacity and continued facility build-outs, and our inventory balance increased from $82 million to $90 million in the first quarter. While we expect to continue increasing inventory this year, We do not expect to do so at the same levels as it did during fiscal year 2022, resulting in improved free cash flow in the fiscal year ahead. As a reminder, we did use approximately $16.7 million of our line of credit in July of 2022 to fund the Nestor acquisition and paid that amount off in the first quarter of fiscal 2023, leaving a zero balance draw on the line. In addition, we further enhanced our liquidity position through closing an upsized $120 million public offering of our common stock on December 9, 2022. Under the terms of the offering, we sold 1.2 million shares at a public price of $100 per share. Including the underwriters' full exercise of the option to purchase up to 180,000 additional shares We sold a total of 1.38 million shares of common stock at closing for net proceeds of $130.3 million after expenses paid in connection with the offering. The additional capital grants us greater flexibility to pursue our longer-term growth objectives and be opportunistic as further growth opportunities arise. We can continue investing in our inventory, CapEx, infrastructure, and other necessary strategic areas at a larger scale, as well as ensure that we have the working capital position to effectively compete for larger customer opportunities. We appreciate the support of our new and existing shareholders as we continue to advance our strategic progress. That concludes my prepared remarks for our first quarter of fiscal 2023. I will now turn the call back over to Sherry. Sherry?
spk03: Thanks for the financial update, Dan. As I mentioned earlier in the call, we have continued to make progress on our new multi-year strategic plan LEAP, which is a successor to our previous now of age plan. The LEAP plan is our roadmap to how we will scale up the company in order to seize the opportunity Clearfield was built to achieve. How we expect to jump higher, farther, and with greater force. With that said, I'd like to review our progress on each of our LEAP plans for tenants, one for each letter. The L is to leverage our decade-long excellence in community broadband, the market on which we have focused since our founding in 2008. Through our deep understanding of this market and our customers' base of regional operators, we've proven to be an agile partner that can evolve with the broader market and grow alongside our customers. Earlier this month, we announced that we had reached the milestone of shipping 50 million fiber ports of our craft-friendly Labor Light family of Clearview Cassettes, Field Shield Assemblies, and Eurac terminals. The vast majority of these fiber ports have been deployed throughout the networks of our community broadband customers. Reaching this milestone underscores that success in the fiber broadband market is as much about execution as it is innovation. Through further improving our scale, we are deepening our commitment to providing our customers the products and support they need, when they need it, to take their fiber broadband networks as far as they can go. Our E is to execute capacity growth in advance of the market opportunity. Building upon our previous strategic work to augment capacity for ongoing growth, we will continue making progress on these enhancements and developing our supply chain partnerships to maintain our market leadership. Having expanded our manufacturing footprint in both Minnesota and Mexico last year, we are leveraging the in-house cable manufacturing capabilities brought by our acquisition of Nestor Cables. Most recently, we are adding another microdeck line in Finland to generate additional revenue and to improve margins from our current facility. This new line will enhance Nestor's capacity and will allow us to run our manufacturing at a higher and more efficient level. The A in our lead plan is to accelerate infrastructure investment. This tenant represents our underlying investment in our organizational infrastructure as we continue to grow the business and manage our expanding capacity. To support the significant growth we have generated over the last two years, we focus in investing in our quality teams and systems. This includes adding supply chain and quality personnel, as well as placing quality engineers earlier in the overall process. As I've said in the past, we can grow as fast as our quality systems will allow. Our investments in this area have played a meaningful role in our top line growth expansion, and we expect them to help facilitate additional progress. More broadly, we may add personnel to our sales, product management, and manufacturing teams as we work to improve lead time. We will also continue to expand Clearfield College. to provide online and in-field training support as our industry navigates the ongoing shortage of trained labor in the market. Finally, the P in LEAP stands to position innovation at the forefront of our value proposition. Through increasing the cadence of our product expansions and emphasizing innovation in our product designs, we aim to build upon the craft-friendly nature of our products. We will soon be announcing an additional new product in the coming weeks that we believe further enhances our promise on innovation. More to come on that front. We intend to introduce additional fiber management and fiber connectivity solutions that align with federal and state funding program requirements. These will help facilitate swift and streamlined installations for our customers as they extend the depth and breadth of the fiber broadband access in their networks. As our first quarter financial results indicate, We have continued to make strong progress on our strategic plan amid a robust demand environment for fiber-fed broadband. Our operational agility allows us to be flexible in an evolving market, and we have built a strong foundation from which to address the long-term demand runway for high-speed broadband across our markets. We believe our continued work to leverage our deep expertise in community broadband, enhance our capacity, accelerate our infrastructure investments, and prioritize innovative product design enables us to both address existing demands and prepare for the longer-term tailwinds of state and federal funding. With our current visibility into our current pipeline, we are reiterating our previous top line guidance of estimated revenue of between $380 million to $393 million, representing a 40% to 45% growth rate over fiscal year 2022. In addition, we are introducing fiscal year 2023 net income guidance of $4.30 to $4.50 a share. We continue to expect our revenues to follow year-over-year seasonal patterns, resulting in expected strong year-over-year growth in the first half of this fiscal year. We remain underway with improving our product lead times as we further improve capacity and reduce order backlogs. While we still expect to see higher levels of billed activity in the second half of the year, we will closely monitor the availability of labor that our customers need to proceed with their planned network bills. And with that, we are ready to open the call to your questions.
spk07: Thank you. We will now be conducting a question and answer session. If you would like to ask your question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
spk06: Thank you.
spk07: Our first question is from Paul Silverstein with Cowan & Company. Please proceed with your question.
spk10: Thanks. Sherry, Dan, what do you all expect? What contribution are you expecting from Nestor in the March quarter? Is it consistent with the $8 million you did in December, or is it something meaningfully different than that?
spk03: It's going to go up in the next quarter. I mean, it's important to remember that Nestor is very much affected by the seasonal nature of our business, and probably even more so than we are. And so, you know, you're going to see their numbers about 8 million this quarter. It'll probably be double that by the summer. You know, growing second quarter to probably 10, 11, up to, you know, as much as 15 in the summer months. And their, you know, their gross margins are going to be affected, you know, significantly by that. So we're going to see gross margins now at about 11%, you know, 11, 12% by the summer months. They'll be up in the high teens. kind of averaging in that middle, about 15%. We said when we acquired the company that they're a commodity-based business, so the gross margin percentage would go down, but the gross margin dollar contribution would be accretive. This quarter, that wasn't the case because of the downness of the winter months, but we still continue to expect that accretive nature throughout the year.
spk10: You're insisting on Let me get to the real question. So if I take 10 to 11 million, I assume 10 million for March, that would imply organic, if I did the math right, based upon your 40-60 split, your reiteration of 38 to 393, and what you did in the first quarter, that would imply organic. Somewhere in the neighborhood, if I did the math correctly, 56 to 61 million, which in turn would translate to 23% decline to 17% decline sequentially. On a year-over-year basis, if I did the math right, that would imply 5% to as much as 15% growth if you hit those numbers for Nestor and for the larger company. That would be deceleration down from over 50% year-over-year in the December quarter. And I appreciate the return of a more seasonal business pattern. But I guess I'm trying to understand. the dramatic decline in growth, what would drive such a dramatic fall? I appreciate that everyone's going to go back to more normal order patterns. The backlog wasn't sustainable. But the numbers suggest a significant collapse in backlog in a very, I mean, we can see the numbers, but in a very compressed. And I'm trying to understand, if we look at linearity, including through the 30 days of the current quarter, is business continuing to soften as you go forward in time, or is it more of a stabilization? Let me let you respond.
spk03: Thank you, Paul. I think I would call it an alignment in that we talked about 90 days ago at the end of the fiscal year that we were going to see for the first time in two years bookings were going to be less than shipments. And that was a result of the world of coming back to post-pre-COVID world of way of doing things and ordering patterns. We were going to start into that process. As our customers align their inventory positions and their forecast positions in regard to product alongside their labor conditions, we're seeing a bit of a bubble or perhaps even an inventory swell at this point in the markets. And so we think it's very much a, it's not a softening of the market and that demand is very high. It's an alignment of what's actually available with labor.
spk10: All right. And I can do the math, I guess, after the call, but help me out. The 10 to 11% gross margin set up for Nestor, how much of a hit was it to overall gross margin? If we look at the 35.7, whatever the number was.
spk03: Nestor's probably about 2.5% this quarter. So, I mean, they were a fact that, you know, it's important to when we look at the fourth quarter of last year, that's really not a comparative number because we didn't have any of the new facilities up and we were at complete capacity. Over the course of the last year, we've been adding a considerable level of capacity to buildings themselves in March of last year and now adding continual building enhancements And probably one of the biggest investments that we've made is about a 25% increase in our labor force since summer of last year. And so even though we knew that the winter was going to be more seasonal, we made a conscious investment in people to ensure cross training of resources and labor capacity availability. And so, you know, while it might be a little unsettling for this first quarter, you know, it's absolutely to plan, you know, as to where we're at from a gross margin standpoint so that we can prepare for the summer and into, you know, next year on the capacities that are going to be necessary.
spk10: All right. I appreciate the response. Before I pass it on, I would just respectfully submit I think you're making a mistake in respect to your plan to stop disclosing backlog, even assuming at times you're a better gauge of your business as you maintain. Again, I would urge you to continue providing that. But let me pass it on. Appreciate the responses.
spk02: Very good. Thanks.
spk07: Thank you. Our next question is from Jason Schmidt with Lake Street Capital Markets. Please proceed with your question.
spk04: Hey, guys. Thanks for taking my questions. Just following up on that line of questioning, what gives you the confidence that that second half snapback will come and that this inventory correction or issue or digestion, whatever you want to call it, is just sort of a one-quarter issue?
spk03: What we're seeing is an absolute continued demand from every customer that they want to increase the number of homes that they are connecting and passing. and aggressively working with the contractor community and the labor community to find additional resources and to train additional resources. So we're actively involved in that process and helping them gain the knowledge and the training tools by which to enhance the labor availability that's out there. I think there's really a, you know, I would call it almost like a review of of household conditions when you come back in at the end of the year and you're kind of working through your calendar and you're looking to see what's out there versus what you have. And so all of our customers, I think, are just kind of making that refresh. I think it's the continual demand push that they all continue wanting to be the first buyer out and that commitment of across the board that there was still growth in every part of our marketplace. You know, the other thing I want to make sure that I think reiterate is the fact that when we walked into, you know, this year, you know, as we identified the 40 to 45% growth rate for the year, we said we would come out extremely strong in first quarter, you know, at a 70% growth rate over last year. And that that growth rate would de-escalate over the course of the year you know, to the end of the year at a 20 to 25% increase, you know, over last year, and then working for us to continue at that position. So I think it's important for us as a community to, um, identify that the, you know, the industry is going through a complete readjustment to this one sort of weird lifetime situation that we call the pandemic. And so, um, it, there isn't really a model by which to judge this by or to really even, um, you know, compare it to from a trend statement.
spk04: Okay. No, that's helpful, and I understand there's a lot of dynamics out there. Just curious, when you did provide that original fiscal 23 guidance, what had you been thinking the split would be? I mean, now you think it's going to be 40-60, but what were your initial expectations?
spk03: I was thinking a little closer to 45-55, so just a little bit of a readjustment. so that we'd be pushing out second quarter and seeing that more at the tail end of the year. So it's important to look, again, that next quarter we're probably looking at 30%, 35% increase over last year, which, again, is an amazing level of increase on an organization from a marketplace that's growing at about 12% to 15%. So we're just trying to normalize our patterns and put everything together.
spk04: Okay. And then just last one for me, just looking at gross margin, obviously going to kind of remain at these levels for the next several quarters. So does that mean we shouldn't expect a step up until sort of that December quarter timeframe, or could you start to see improvement in September?
spk03: Yeah, we're anticipating an improvement in September. And as we get back up to levels similar and beyond of last year, in that fourth quarter where everything was clicking and people were taking their inventory positions for the winter. So, yes, absolutely. Fourth quarter is where we should be shining. Okay.
spk04: Thanks a lot, guys.
spk06: You're welcome.
spk07: Thank you. Our next question is from Ryan Kuntz with Needham & Company. Please proceed with your question.
spk05: Hi, good afternoon. Thanks for the questions. I wanted to ask about your assumptions in the March quarter and this new customer order pattern and booking behavior. What are your assumptions going into March? Do you feel like March can still be a period where you're you would expect your backlog to soften a bit and then pick up during the peak construction season? Or what's your kind of general mindset there? I know you don't plan to give backlog out, but any kind of insights would be helpful there. Thanks.
spk03: Sure. Of course. You know, the backlog went down about 30 million over the course of the last 90 days. And, you know, as we talked about, that was anticipated. And planned for that we had hit a very high $160 million, and I think we're just a little under $130 million at this point. I said at that point that we were aiming to get to a backlog that was consistent with about one times revenue for the quarter. So March backlog will go down a little bit as well as we get to more of this cadence in which we are ordering product or our customers are ordering product in the period in which they're deploying. So while that, you know, while it's in a normalized world that might see that this, you know, reduction in backlog is a bad thing, but in a post-COVID world, you know, I really believe this is a return to normal necessity that's going to walk through this bubble during this period of time.
spk05: Gotcha. That's helpful. If we could reflect on the strength in the quarter from the cable segment. It looked like it was real strong. Is that coming from your active cabinets into the DAA or your fiber to home customers? And maybe give us a color on the strength there.
spk03: Yeah, it's coming from both areas in that the different types of cable companies, both the regional as well as the national, have different philosophies on how they can best provide high-speed broadband to their customers and do the architecture of our product line that allows us to support whether it's a pond-based deployment or a non-pond-based deployment, you know, active cabinets versus the Eurex terminal. You know, we're actively involved in both. And both have, you know, similar high gross profit margins. And we're excited about all of that opportunity, you know, moving forward. Like everything else in our space, I think we'll probably see some bubbles with that over the course of the next couple of quarters. But the demand is absolute and really exciting to see the cable community come and play.
spk05: All right, terrific. And in terms of your latest quarter and bookings, any mix shifts there between passings and connected home in the product lines?
spk03: You know, we're starting to see a more initial increase in the connecting and that people are looking at their standpoint that they made the investment in the passing of the homes and now by connecting the homes, they can turn that into a revenue producing customer. That's a higher rate of revenue for them. So it's still passing of the home is still a higher percentage of our revenue, but definitely seeing connecting of homes increasing and seeing it's exciting to see the success of those deployments take place.
spk05: And one last one, any new commentary around the RDOF and ARPA contributions to your recent business? Is it still gaining momentum and kind of where do you feel like we are relative to those programs contributing?
spk03: Still gaining momentum, but still very early. This is all almost entirely privately funded. So, and that's why, you know, we're comfortable making the capacity enhancements that we are. You know, one of the things that's very frustrating as an industry, right, is how long it takes for government money to fund through the programs and get into the market. You know, we've seen it time and time again in regard to, you know, 2012, 2008. I mean, all of those times we were excited about the money and then we had to wait two years. So we know it's coming. We just haven't seen a lot of it yet.
spk06: Okay, great. I'll pass it on. Thanks so much. Thanks, Ryan. Thank you. Our next question is from Tim Savageau with Northland Capital Markets. Please proceed with your question. Hi, good afternoon. Can you hear me? Yep, there you are. Okay.
spk09: Great. Sorry about that. And actually, my question was on capacity. So that's a good place to pick it up. And you've obviously been on this capacity addition plan for a couple of quarters now, but you have made some additional kind of increases. So, you know, I wonder if you can give a sense of where you stand from a kind of quarterly revenue capacity standpoint. Currently, you're looking for some record quarters in the second half of the fiscal year, but if you want to take it from what you just reported or what you expect here in the current quarter, where are we from a capacity utilization standpoint and where do you expect that capacity to be by fiscal year end?
spk03: Right. I would say what we try to do from an operational standpoint is set metrics as to where we want to be by the end of each quarter and so that we can make incremental investments along the way. And so I think we're probably at about $105 million today. And by the year end, we expect to be closer to $130 million, maybe $135 million. quarterly, which puts us, you know, at about a $500 million, you know, rent rate by the end of the year.
spk06: Great.
spk09: And in terms of getting there, I mean, is that more kind of adding people? Are you pretty well set from a facility standpoint or, you know, as you continue throughout the year, how you kind of address the facility aspect of it, if at all?
spk03: Right. Yeah, the facilities are in place, but we need to continue to augment, you know, the facilities and the infrastructure surrounding it. You know, for example, bringing in the ability to produce optical cable inside of the facility means bringing in higher power capabilities. You got to bring in the new lines and we're bringing in water, you know, under the floor so that we can, you know, actually produce the the cable and the flushing lines that are necessary for cooling the cable as it comes out of the extruder. So those are the incremental costs that we don't think about, but those are what we're in place right now. We're also looking at a standpoint of just kind of the infrastructure around it, and you wouldn't think of this as affecting the capacity, but it's the it's the procurement teams and it's the software systems around it and it's the process development to ensure that we do this in a systematic process-based way. And we have been very successful over the course of the last two years growing at the rate that we have, but we have to take a step back and look and say, how are we going to make this sustainable and how can we scale this? And I think that's an important element for us to look at from a gross profit standpoint is, you know, this company was designed to scale, but there's still a standpoint of infrastructure that needs to be put in within it. And so it's that strong foundation to ensure quality. And so there'll be people, there'll be systems, there'll be some software within it. And that's so that we can grow long term. So we've got a little bit of catch up to do from what we perhaps should have done a year ago. just didn't have, you know, the wherewithal because of how quickly we were going to take that step back.
spk06: Okay.
spk09: In terms of the, you know, you seem to be going back, I guess, to maybe your more traditional seasonality going back several years now where you had, I guess, you know, a quarter in there somewhere that was up you know, 20, 30% sequential, something like that on a, on a seasonal basis. That's the way we should kind of look at this in context, just at a much higher revenue level.
spk03: Right. Obviously. Yeah. I mean, I think that's how hard you describe it as being pre COVID conditions at post COVID levels. And there's always been seasonality to our business. It's just that it was hidden the last two years. And so I think I want to go back to a statement that Jason asked, how do I have the confidence that the back half of the year is going to follow through? And it's really doing this the last 15 years in that that's the traditional normalized pattern. And so the only caveat to that is in a post-COVID world, how quickly will we get back to that normalized pattern?
spk06: Got it. Thanks very much. You're welcome.
spk07: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Our next question is from Scott Sorrell with Roth Capital Partners. Please proceed with your question.
spk08: Good afternoon. Thanks for taking the question. Hey, just to dive in on the gross margins again, you know, it sounds like most of the beyond the mix issue, that there is a labor content issue here until you get capacity up at the facilities that's kind of weighing on the near term results. Is that the way to think about it until we get into the second fiscal half of this year?
spk03: Absolutely. In that, you know, we're making the addition of those people in advance, you know, of needing them. So our efficiencies and utilization, you know, on the floor is not at the level that you target. But what it does allow us to do is to move those people around so that they're not trained on a single line, which is what we did when we brought everyone on board last year in the second quarter is we hired people and we put them on one line and we made sure that they could optimize that one line. But it doesn't allow you to scale. What you need to do is you need to train all those people on all of the different functions and process steps in the fiber termination process. in order to really have the flexibility to ensure these lead times that are so crucial to our long-term success. And so, um, it's that investment in people and the training that will allow us to hit those, you know, six to eight week lead times this summer. Um, you know, that's still far more than what we were doing pre COVID. We were working on lead times in three to four weeks. I don't think that's in our, in our future. That's a whole, that's not necessary. But six to eight weeks, you know, should be our goal. And we'll have the labor force by which to do that based upon the investments we're making right now.
spk08: Okay. And just to follow up, I guess, and catalyze a couple of the earlier comments, you know, you're looking for 30 to 35% growth in the second fiscal quarter, which kind of implies, like you said, normal seasonality is sequentially down December to March before we see that recovery into the second half of which you're expecting a 60% plus split. you know, being skewed towards the back half of the year. Is that correct?
spk03: Absolutely. You get completely taken.
spk08: Gotcha. And then, so just to dig in on the back half, I know it was asked earlier, but the comfort level there, you know, what you're seeing in terms of the engagement from a customer standpoint, requesting of shipments, and it doesn't sound like RDOF is really built into those expectations. I'm kind of curious where that fits either into the backlog or your thought process around a ramp up in the second half of the fiscal year.
spk03: Right. I mean, I never count on government money in my projections because there's too much variability and lack of accountability, you know, to meeting of a date. And so that is definitely been, that's still not in those numbers. And the other thing that is affecting these numbers is, you know, one of the things that I mentioned in regard to our backlogs, our lead time is coming down with the exception of active cabinets and our availability of sourcing rectifiers. You don't think of Clearfield as being a chipset affected company, but the components that are in the rectifiers for power conditioning are in extremely long lead time positions and it's been been frustrating for our revenue models and for our customers to not be able to get those products as they would like to see them. And so that's one of the other reasons for the back half of the year coming back on board is as the chipsets and the rectifiers become more readily available, the amount of our active cabinet business will be a much more significant part of our total revenue plan.
spk08: And just to follow up on that, Sherry, active cabinets carry a higher gross margin as well?
spk03: They're pretty similar to the rest of the lines. So, no, I wouldn't call them higher, but they're closer in the same 40% to 43% kind of margin.
spk08: Gotcha. But in terms of the revenue guidance and extrapolating that into the back half, you're starting to get back into that one 10 to 120 million range.
spk03: Okay. Yes. So I would look at it from a standpoint, I think, of it seeing the significance, because I'm just not sure where those rectifiers are going to come in, and the amount of backbone that we have for powered cabinets, that definitely the fourth quarter is going to be that step up in that the availability of some of those materials is going to allow fourth quarter to to be a higher number than what you would normally expect.
spk06: Okay, great. Thanks. I'll get back in the queue.
spk07: At this time, this concludes the company's question and answer session. If your question was not taken, you may contact Clearfield's investor relations team at clfd at gatewayir.com. I'd now like to turn the call over to Ms. Baranek for closing remarks.
spk03: Thank you all for the opportunity to speak with you and for the questions from our analyst community. Definitely a year of transition and a year of being able to come back into these normalized patterns. And so I invite shareholders to contact our gateway, our IR firm, and welcome the opportunity to speak with you because I could not be more excited about the revenue plan in front of us. and the opportunity by which to become, you know, a significant player in high-speed broadband. Yeah, until next quarter.
spk06: Thank you for joining us today for Clearfield's fiscal first quarter 2023 conference call. You may now disconnect.
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