Clearfield, Inc.

Good afternoon, everyone, and welcome to the Clearfield Fiscal Third Quarter 2025 conference call. All participants will be in a listen-only mode. Should you need assistance, please say no to 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 and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Greg McNiff, Investor Relations. Sir, please go ahead.

Thank you.

Joining me on today's call are Sherry Baranek, Clearfield's President and CEO, and Dan Herzog, Clearfield's CFO. As a reminder, Clearfield publishes a quarterly shareholder letter, which provides an overview of the company's financial results, operational highlights, and future outlook. You can find both the shareholder letter, and the earnings release on Clearfield's investor relations website. After brief prepared remarks, we will open the floor for a question and answer session. 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 expressed in the forward-looking statements. It is important to also note 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, shareholder letter, 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 third quarter results. I will start by briefly reviewing the quarter, discussing Clearfield's long-term strategy, the current state of the industry, and then turn it over to Dan for a summary of our performance and outlook. For more detailed information, please refer to our shareholder letter posted on the IR section of our website. Third quarter net sales of $49.9 million We're up 2% over the same period in the prior year and toward the top end of our guidance range, with Clearfield's segment net sales up 15% year-over-year. We are especially pleased with the Clearfield segment's performance as we focus on our objective of growing faster than the industry and driving market share gains. Despite macro and bead-related uncertainty, the company is poised for continued long-term growth as the industry returns to a normalized cadence. As we've mentioned on previous earnings calls, a trend we have been tracking for some time is a shift of electronics out of the central office to cabinets closer to the end user. As we highlighted last quarter, we designed our FiberFlex cabinet line to address this trend. Our FieldSmart FiberFlex 600 powered cabinet continues to be recognized for its innovative and customer-friendly design. We are also expanding our reach deeper into the connected home. During the last quarter, we announced Tether Smart MFT, which enables Clearfield to address new applications within and beyond the broadband ecosystem. As the industry's smallest, fully sealed, 10-port access terminal, the Tether Smart MFT is purpose-built for fiber-to-the-home, fiber-to-the-business, and 5G backhaul applications. Another key highlight in the quarter is the growing success of our home deployment kits, which combine the innovation of Clearfield's fiber deploy reels with the ease of packaging all components of a home install in a single SKU, and which are being broadly recognized for the labor saving opportunity they provide. We expect these products to contribute significantly to our future revenue growth. This product development reflects our continued focus on innovation that empowers service providers to meet evolving customer needs, whether in rural, urban or suburban environments. However, the industry continues to change rapidly, and our ability to respond to these changes is key to our success. I'd like to take a few minutes to go a little deeper into our long-term vision, which we view as three pillars upon which to build Clearfield's house. Our first pillar is protecting our core. Clearfield serves the needs of nearly 1,000 broadband service providers. Whether they are a 100-year-old independent telco or a competitive startup, our broadband service team is living alongside our customers. We will strive to protect these core customers by ensuring that their product needs for today and tomorrow are met. Our second pillar is to leverage our market position into further opportunity. Our customers are moving into new applications to leverage their fiber infrastructure, and we are committed to growing alongside them. For example, we have a customer which is a significant broadband provider in the Northwest that is currently using our solutions for wireless backhaul. We have another customer in the Midwest that has deployed our products in its data centers, and we are seeing our cabinets extend non-hardened electronics to edge networks. These areas aren't new to Clearfield, but we believe they will be a significantly higher percentage of revenue as our customers adapt their business models. Our third pillar is to target select adjacent markets that we believe will allow us to expand our customer base and drive further growth. The modular nature of our product platforms driven by the Clearview cassette will allow us to take existing products to new customers, as well as design exciting new products for applications in emerging markets. An example of this is our recently announced Tether Smart NFT, which not only serves our existing customer base, but is under review by target customers in the wireless provider markets due to its ultimate configurability. This strategy is how we will expand from enabling a lifestyle of better broadband to our expanded purpose of enabling better broadband and beyond. The goal of this three-pillar approach is to drive revenue growth as well as operational excellence, thereby enhancing long-term shareholder value. Turning to the industry, the fundamentals of the industry remain strong. A leading market research firm projects the fiber industry to grow at a 12% compound annual growth rate over the next five years, with approximately one-third of households expected to gain access to multiple providers. Similarly, industry analysts anticipate that the annual number of homes connected will outpace homes passed. Clearly, artificial intelligence, or AI, represents the next industrial revolution. As the demand for greater processing power continues to grow, communication infrastructure providers will be critical in connecting this ecosystem. Specifically, the power requirements for running AI are driving cloud providers to build multiple data centers, while the need for low latency performance is pushing computing to the edge of that network. Both of these trends will require significant fiber deployments in the coming years. Going forward, we will discuss the investments we are making to ensure our customer base has the equipment and support necessary to meet this growing demand. We believe Clearfield is well positioned to benefit from these industry trends. I'd now like to turn the call over to our CFO, Dan Herzog, who will provide an overview of our financial results for the third quarter of fiscal 2025, as well as to share our outlook for the remainder of the fiscal year.

Thank you, Sherry, and good afternoon, everyone. I will now review our third quarter results, beginning with sales. Third quarter net sales of $49.9 million were up 2% over the same period in the prior year and toward the top end of our guidance range. With Clearfield segment, net sales up 15% year over year. Gross margin for the period improved from 21.9% to 30.5%. driven by continued improvements in overhead absorption, recoveries of previously reserved excess inventory, as well as optimized capacity for current and growing product lines at our North American facilities. Net income per share of $0.11 was above our guidance range and reflects a significant improvement from the year-ago period. We continue to make progress on improving product costs while also managing the cost structure of our Nestler segment. Despite lower revenue, driven by a redirected focus among broadband service providers toward operating rather than building out networks in some targeted countries in Europe, we saw a modest year-over-year improvement in gross profit margin for the Nestor segment in the third quarter. As bookings have continued to outpace shipments through third quarter, lead times decreasing with deployments continuing in a healthy fashion we are increasing our fiscal 2025 outlook for net sales in the range of $180 million to $184 million. As Sherry noted, we anticipate annual revenue growth for the Clearfield segment to be in line or above industry growth, while we expect annual revenue from our Nestor segment for fiscal 2025 to fall slightly year over year as we continue to focus on improving margins. For our fourth fiscal quarter of 2025, We anticipate net sales in the range of $47 million to $51 million and net income per share in the range of $0.03 to $0.11. The net income per share range is based on the number of shares outstanding at the end of the third quarter and does not reflect potential share repurchases completed in the fourth quarter. Our guidance reflects the evolving tariff situation currently in place, which we do not believe will materially affect our operating results. And with that, we will open the call to your questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. If you would like to ask a question, please press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality.

Once again, that is star and then one to join the question queue. And our first question today comes from Ryan Koontz from Needham & Company.

Please go ahead with your question.

Great. Thanks for the question. I wanted to ask about what I typically do around product mix and for your core Clearfield business. Are you still seeing abnormally high connected home relative to what you consider norm? Are you seeing it come back in more into balance? Any thoughts on that?

We're definitely seeing the product mix for the past home come back to a more normalized cadence. I think that's reflective of the fact that there were a lot of cabinets that were sitting in yards over the course of last year, and we're not seeing that as much this year. So we're definitely seeing an increase in cabinet sales. That said, we are seeing also an increase in the connected home as we enhance our share of and the connected home revenue. So it's a little bit of both in regard to where we see the product mix for this year over last year.

Great. And just reflecting to last year, I know there were some inventory impacts to last year, and the core business is up a bit, I think. I think you said teens percentage year over year. Is that still aligned with what you've – coming out of this quarter, what you've said before that – the core Clearfield business is up double digits over last year on the inventory impacts last year?

Right. Clearfield, our Clearfield segment is up 15% year over year for the quarter. And so even though the total revenues showed a 2% increase, total revenues were negatively impacted by, unfortunately, our performance under the nester segment. Clearfield continues to do very strong in our markets, principally driven this year and this quarter by our large regional and MSO business.

Got it. And your new product introduced for Connected Home?

The home deployment kits are doing really well.

And we're – Same as CC Clear, what it was called, the –

They're called the home deployment kits. And so these provide the opportunity to actually connect the physical home with our drop cables and with a device that sits on the home itself. And by doing that, the one installer can do the work that was previously done by two. And so we're seeing some trials that have been underway now turning into trials ongoing revenue and new trials being started in different places. So we see that as a significant revenue opportunity for us. We see it demonstrated this year, and they're excited about where it's going to go.

Great. Thanks for that. And then on the Amphenol acquisition of Comscope's connectivity business and cabling, any commentary there on what you think that means for the industry?

Well, congratulations to Comscope for figuring out, you know, how to be able to rebalance, you know, their financial situation. I think it's good for the industry that we don't have companies in financial distress. And so Amphenol's acquisition of Comscope I do think is good for the fiber industry. As they pointed out, their focus is the, you know, the hyperscalers, you know, the Amazons, the Googles. and their deployment of fiber for AI. That's not a target of Clearfields, and so we see Comscope's focus there today and under the acquisition of Amphenol as being positive for them and not detrimental to us. In fact, our focus on AI is really part of our third pillar. It's the opportunity for not be serving inside of those data centers, but to work with our community broadband service providers, our large regionals, and our MSOs to help provide the fiber that's going to have to connect those data centers together.

All right, great. Just one last one maybe for Dan. On the gross margin, you mentioned consumption of E&O reserves on the quarter. Was that material on the Clearfield side? Any idea how many basis points it was to a gross margin?

Yeah, it was probably about a – last year we had, I think, a $1.7 million expense. This quarter we had like a $1.1 million gain, and I think there's about a 1.7% effect on it. And I do that based on our run rate. Like if we would have just considered our run rate of recoveries –

from we we beat that you know we had like 1.6 million in recoveries and we've been running about 500k so i figured that a bit of a 1.7 or 8 of a change from from our run rate got it maybe one more for you dan on on supply chain uh you've mentioned maybe some tight supply if you saw extended lead times any particular area you can point us to where you see tightness in supply chain

I think that Sherry wants that one.

Yeah, no problem. I would say that our challenges still go to battery backup and some rectifiers associated with the active cabinet business. And so much of that is related to tariffs and is related to managing how that's brought into the country. We've been absorbing those costs rather than passing them along. We're managing that aspect of it. The challenge just is it creates extra time issues on the border, things that have been difficult for us to get around. But like I said, our lead times have been better. On most situations, it's just those electronic challenges for the active cabinets.

Are you seeing any light in the tunnel as far as onshoring or bringing it to North America? I know there was some.

Yeah, right. I think the challenge there is just the timing and how long the onshoring could take. So we're considering alternative suppliers at this point.

Got it. Great. That's all I've got. Thank you.

Our next question comes from Jason Schmidt from Lake Street. Please go ahead with your question.

Yeah, thanks for taking my opportunities. Sherry, I just want to expand on sort of that data center opportunity you highlighted in the script. When you think about that market as a whole, how should we be thinking about that market impacting the P&L in a more sizable way? Is that a kind of fiscal 26 story? Is it beyond? How are you looking at that?

Yeah, I'd say there would be some, I mean, we have revenue today in the data center space, but not in the the big hyperscale space that is causing the big numbers at Comscope and Corning. That's not a space that we've chosen to participate in because it would be detrimental to just the lumpiness, how it affects our factories and our ability to really protect our core. We do believe we can participate in both the data centers that our customers are building as well as the data centers in our customers' markets that are going to need to be connected. I think that we're going to start to see some of that revenue slightly in 26, but more importantly in 27. At least that's what we're seeing at this point in time. We do have new products under development, and we have made some investments in product marketing resources to evaluate the right needs that we have there. So those are some exciting new additions that we've put into the organization to better position us, not to bring out like products, but to bring out products foundationally using the modularity of the Clearview cassette that are fundamentally different. So there's a long runway yet in data centers, and we want to make sure that we do it the right way.

Okay, that's really helpful. And then just as a follow-up, how should we think about OPEX trending the remainder of this calendar year?

Yeah, OPEX, you see our – Yeah, go ahead, Dan. Sorry.

No, I was going to say OPEX probably trending slightly up here for our fourth quarter. It's – We've got some trade show and some travel things going on, a little bit higher variable costs at the end of the quarter as we ramp up our year-end audits and a lot of consulting things regarding administrative things.

Gotcha. Thanks a lot, guys.

Yep. Once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and two. Our next question comes from Tim Savageau from Northland Capital Markets. Please go ahead with your question.

Hey, good afternoon.

I have a question on the smaller carrier markets or really kind of the U.S. markets in general. So you saw a small increase, I think, amongst your smaller community broadband customers and But short of what you might typically see seasonally, and I know you referenced pull-ins in large regional. I mean, was there some of that dynamic at work amongst the smaller carriers as well? Or how would you, you know, characterize kind of what you're seeing here for both June and September as kind of a maybe less than normal seasonal build?

Right. Yeah, the small carriers are the ones who have been the most impacted by the level of uncertainty associated with BEAD. So you've got small carriers who are not in a position to jockey. Lots of different builds. I mean, they're going to put their engineering and development resources into the area that they think is going to be the most likely or most prominent. And so we're definitely seeing some carriers who would have been building expecting to have received BEAD funding for fiscal year 2025. not building at all because they didn't have their engine, not because they're not dedicated or committed to fiber, but because they didn't have those other areas engineered and designed for deployment. So that's really frustrating on our part to see, but it doesn't mean that we're going to lose that revenue. It just means that that revenue has been, you know, delayed because of the uncertainty associated with the mess that has been created in the beef program.

Got it.

Maybe along those lines, you mentioned kind of industry forecasts for this, you know, low double-digit type growth rate. I know historically Clearfield has been targeting growth, you know, normalized post these big ups and downs in the same range. I mean, is that a reasonable place to start as we look out to fiscal 26 in terms of growth expectations and might this revenue pushing out a bit? you know, add to that or, you know, have a positive impact on that level of growth out in 26?

Yeah, I think for at this point in time with the uncertainty with BEAD still out there, I'm comfortable with an outlook that's around the industry norms. We have been very clear that our goal is to grow as fast as the industry or faster in order to be able to take share. And we're in a position, I think, where we see that happening in all of our territory, in the large regions and in the MSOs with really significant growth year over year. And then in community broadband, I think we're going to see community broadband providers not putting all of their eggs in one basket and not being entirely dependent upon bead financing. So next year will be more more balanced than that. I would encourage you though to separate the growth initiatives on the numbers between the Nester segment and the Clearfield segment. And so that's why we brought out in this quarter some clarity around the last two quarters really around some clarity around what is Clearfield's organic revenue and what has been the incremental revenue associated with the Nester acquisition in Europe. So industry growth rates are a little higher for the Clearfield segment and then flat for – it will be a little incrementally down in fourth quarter for Nestor, but for next year flat as we focus that organization on improving cost structures through a change in product mix so that that organization can reestablish profitability.

Okay.

Got it.

And last one for me, you know, you're guiding kind of flat here for September. Any notable moves among your, you know, end markets below that that are worth calling out, up or down?

We've seen – I'd say while we had – traditionally, we saw third and fourth quarters being where we saw the most of our revenues or most of our ordering patterns. Things came in a little bit earlier this year as people reestablished their buying trends. I think our fourth quarter, we're going to see strong kind of continual demand from the clear fill segment with the European, unfortunately, continuing to be weak. And so, you would see a similar mix between Clearfield and Nestor segment revenue in the upcoming quarter. In fact, perhaps a little bit higher Clearfield revenue than what we saw in third quarter.

Okay, thanks very much.

Thank you.

Once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2. And at this time, in showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Thanks, Sandy. And thank you, all of you who are listening to the call today, either live or recorded. We do not take your trust in our management team lightly. We are very bullish on what we're doing and confident in our strategic plan. I look forward to outlining that further for you in the months and quarters ahead. And again, thank you for your support.

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.