Clearfield, Inc.

and welcome to the Clearfield Fiscal Second Quarter 2023 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Greg McNiss, investor relations for Clearfield. Please go ahead.

Thank you. Joining me on the call today are Sherry Baranek, Clearfield's president and CEO, Dan Herzog, Clearfield's CFO, and Kevin Morgan, Clearfield's CMO. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It is important to note also that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, earnings presentation, and on this conference call. The risk factor 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 a description of these risks. With that, I would like to turn the call over to Clearfield's President and CEO, Sherry Baranek. Sherry?

Good afternoon, everyone, and thank you for joining us today to discuss Clearfield's results for the second quarter of fiscal 2023. We will also provide an update on our business and current market trends. Before I review our performance and current market dynamics, I want to emphasize that we remain more confident than ever that the long-term demand for fiber broadband remains exceptionally strong as the superiority of fiber as both a technology and an investment is well established. Accordingly, we are focused on positioning the company to capture market share once industry ordering patterns return to more normalized levels. I'll discuss these initiatives in more detail shortly. Clearfield has always differentiated itself on its crisp execution. As demand increased throughout the pandemic, Clearfield was able to respond quickly, driving revenue beyond 40% growth for the previous nine quarters. Moreover, our execution allowed us to move into larger accounts and take share as demand for hardware intensifies. We intend to remain focused on execution as the industry works through the near-term dynamics and prepares for the return to growth led by significant government funding initiatives. Our second quarter fiscal 2023 revenue and net income per share came in relatively in line with our forecast for the quarter. Total net sales for the second quarter were $72 million, which includes the $11 million contribution from Nestor Cable. However, following our first quarter report, what we originally thought was a transition to a more normalized, seasonally driven ordering and deployment pattern by some of our customers, has developed into a much more significant low in demand as inventory is digested. Specifically, we have experienced order pushouts by several large regional service providers and some multiple system operators, MSOs, or cable TV providers who had accumulated an excess inventory position during the pandemic period. In light of this inventory digestion, we expect revenue to be lower than we previously anticipated. Accordingly, we are updating our revenue guidance for fiscal year 2023. We now expect revenue for the full year to be in the range of $216 to $275 million. Additionally, we are updating our 2023 net income per share guidance. We now expect net income per diluted share to be in the range of $1.80 to $2.10. The majority of this downward revision to guidance is due to a pause in orders at the large regional service providers, and to a lesser extent, the MSOs. Of the approximately 120 million in revenue reduction at the midpoint of guidance, a significant portion was due to push outs and orders, while the remainder was due to an inventory overhang related to purchases during the pandemic. As we discussed in our previous earnings call, Throughout the pandemic, our customers ordered products earlier in their deployment schedule to stay ahead of any supply chain challenges. This just-in-case approach, particularly at our large regional service providers, led to growth in our backlog, which reached record levels by the end of fiscal year 2022. As our customers digest this inventory buildup, we are right-sizing capacity levels with this level of demand. In light of this inventory digestion, we expect revenues to be lower than we previously anticipated. In order to provide more visibility into this dynamic, starting this quarter, we will break out revenue contributions from our large regional service provider customers, such as Lumen, Frontier, and Windstream. The historical financials for the new market segmentation can be found in the appendix on slide 22. I want to stress that we have not lost any customers in this segment, and we believe we will continue to take share in this segment when growth returns. We remain confident that long-term demand for high-speed broadband remains strong and that we are well-positioned to benefit from the significant rural broadband build that is still in front of us. While we are right-sizing capacity levels to meet current demand, we are maintaining the infrastructure and processes for long-term growth and continue to design products to address our customers' biggest pain points and reduce the amount of skilled labor required to install. As many of you are aware, our primary end market is community broadband, which is predominantly comprised of Tier 2 and Tier 3 incumbent local exchange carriers, as well as a number of municipalities, utilities, co-ops, and wireless carriers. While there are pockets of excess inventory within this market segment, we believe it has less exposure to these headwinds. I now want to highlight how Clearfield is preparing to take share once we get through this period of inventory digestion. First, we continue to design our product line to be craft-friendly in the field, reducing both the amount of necessary skilled labor needed for the installation and the level of skill required to install our hardware. As illustrated on slide five, The most recent example of this strategy is our C-Change product. C-Change is designed to enable customers to complete their deployments faster and more efficiently, accelerating their time to revenue. As a reminder, labor accounts for approximately 70% of total deployment costs, so these savings can be significant. C-Change has already received significant positive feedback from multiple carriers. Second, the scalable nature of our equipment allows customers to pursue a pay-as-you-grow strategy. Our Clearview cassette 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. Other vendors' equipment is customized to specific parts of the network, an approach which requires more labor to install and resources to manage. This modular and scalable strategy has allowed us to extend our market leadership in underserved rural broadband to become the leading provider. Additionally, we have been able to move up market to larger customers looking to accelerate their deployment cycles and to reduce labor costs. We intend to keep delivering additional craft-friendly products that shorten the deployment time. Combined with superior execution, this proven strategy will allow us to continue taking share. Please turn to slide six. To further enhance our positioning, we have worked to improve our product delivery lead time. During the pandemic, lead times reached a height of 20 weeks due to supply constraints. Lead times now are more in the range of six to eight weeks, and we are targeting long-term lead times of four to six weeks across all product lines, with the exception of active cabinets which still face supply constraints. This work to improve our lead time comes as our customer ordering cycles begin to return to pre-COVID patterns, but at post-COVID volumes. For some additional insights on what we are seeing in the market and the significant long-term opportunity, I would like to welcome our Chief Marketing Officer, Kevin Morgan, to the call. Kevin?