Clearfield (NASDAQ:CLFD) Q2 2020 Earnings Call

0:00 Thank you for standing by. With that, I will turn the call over to Clearfield CEO Sherry Beranek. Please proceed.

0:16 Good afternoon and thank you everyone for joining us today. As you can see, some of the things we just take for granted in earlier times when we're in a situation like this, we do our best that we can. Thank you for sticking with us. Dan and I are both at our own prospective homes and doing the normal routine that most people are doing today, which is social distancing, work from home, and the remote life that is now becoming our new normal. We were pleased that due to the critical role Clearfield Solutions play in supporting the communications infrastructure, Clearfield operations have been classified as critical sector work. We have continued to be fully operational since the beginning of 2020, despite the unprecedented global business closures and slowdown caused by COVID-19.

1:11 We continue with production operations in both the US and Mexican manufacturing facilities and have established multiple contingency plans in the event our ability to operate would be diminished or is eliminated at either location. As of today, our employees are healthy and we have no reported COVID-19 cases. However, this of course can change at any time. The second quarter was a strong period for Clearfield as we achieved the highest level of revenue for any fiscal Q2 in our company's history at 20.4 million, which was up 5% sequentially and 7% year over year. This trajectory is consistent with our expectations and was driven by strong contributions from our national carrier and MSO markets, which were up 66% and 75% year over year respectfully.

2:05 In terms of efficiency, we realized another quarter of solid gross profit margin at nearly 40%, which is the highest level in eight quarters. This achievement reflects the success of the operational efficiency initiatives that we've implemented across the organization over the last six months. particularly the cost reduction efforts across our product lines and the expanded use of our Mexico manufacturing plant. From a production standpoint, we too saw a healthy increase in our order backlog in the second quarter which increased 61% sequentially and 62% from the same year-ago period to $9.3 million. For the most part, we continue to book at industry-leading lead times for standard products.

2:50 Now before I turn the call over to our CFO, Dan Herzog, to discuss our financial performance in more detail, I'd like to spend a moment reviewing some of our recent operational updates and market progress. Although COVID-19's impact began to deepen in March 2020 here in the United States, we did not experience any particular customer ordering delays or changes in ordering patterns. Looking at our market segments by revenue more closely, starting with our core community broadband market. In the second quarter, we generated revenue of $12.2 million, which was consistent with the same period last year. On a trailing 12-month basis ended March 31, 2020, community broadband market revenue totaled $52.2 million, which was down 3% from the comparable period last year. Our national carrier business was our second largest market, comprising 19% of total revenue in Q2 and 17% of our total revenue for the trailing 12-month period.

3:55 From a growth standpoint, we built on the momentum we established over the last several quarters, realizing a 66% year-over-year increase in revenue to $3.9 million in the second quarter and a 46% year-over-year increase to $14.3 million for the trailing 12-month period. As I spoke to you on the Q1 field report, the primary factor driving this growth is the continued demand from fiber to the home and fiber to the business application. We believe the momentum in our national carrier market to date validates the strategic investments we've made to capitalize on the Tier 1 market, including the 5G opportunity. In addition to the positive results we experienced in our national carrier market, We realized another quarter of double-digit growth in our MSO or cable TV market.

4:47 In fiscal Q2, we generated $2.6 million in revenue, which was up 75% year over year and generated $9.9 million for the trailing 12-month period, which was up 23% year over year. Revenue in our international market was down 51% year over year and down 25% on a trailing 12-month basis. The decline was primarily due to delayed orders that we expect to recognize later in the fiscal year. Revenue in our legacy bill to print business was down 39% in the second quarter and down 8% over the trailing 12-month period. On a trailing 12-month basis, total revenue was $4.2 million, which is consistent with our expectations for this business, to operate at approximately $4 million in annual run rate for the foreseeable future.

5:41 With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the second quarter of fiscal 2020.

5:51 Thank you, Sherry, and good afternoon, everyone. Now, looking at our second quarter financial results in more detail. Our revenue in the second quarter of fiscal 2020 increased 7% to $20.4 million from $19.1 million in the same year ago period. The increase in revenue was primarily due to higher sales in our Tier 1 and MSO markets, offset by lower international sales, as Sherry mentioned. Gross profit for the second quarter of fiscal 2020 totaled $8.2 million, or 39.9% of total revenue. This was an improvement from $7 million, or 36.8% of total revenue in the second quarter of fiscal 2019. The increase in gross profit dollars was due to increased sales volume while the increase in gross profit percent was due to cost reduction efforts across our product lines, including expanded use of our Mexico manufacturing plant and efficiencies realized from our supply chain programs.

6:52 Our operating expenses for the second quarter of fiscal 2020 were $7.4 million which were up from $6.7 million in the same year-ago quarter. As a percentage of total revenue, operating expenses in Q2 were 36.4% compared to 35.3% in the same year-ago period. The increase in operating expenses was primarily due to increased compensation costs and the costs associated with product testing required for Tier 1 certifications. Income from operations was $720,000 in the second quarter of fiscal 2020 in comparison to $297,000 in the same year go quarter. Income tax expense increased from $99,000 in the second quarter of 2019 to $190,000 in the second quarter of fiscal 2020. In the second quarter of fiscal 2020, net income totaled $748,000 or 5 cents per diluted share which is an improvement from $368,000 or 2 cents per diluted share in the same year-ago quarter.

7:59 During the second quarter, our cash, cash equivalents and investments increased $1.6 million to $48.4 million from $46.8 million in the prior quarter ended December 31, 2019. Thank you for joining us. During the quarter, we repurchased 41,796 shares of our common stock for an aggregate value of approximately $429,000.

8:49 Our board and management team will continue to evaluate how we deploy our capital to generate the highest returns for our shareholders. To further ensure our financial stability during these uncertain times, we have suspended our share repurchase plan. That concludes my prepared remarks. I will now turn the call back over to Sherry. Sherry?

9:11 Thanks, Dan. Over the last two years, we've been executing on our coming of age plan, which is our three-year strategic plan designed to strengthen our core business and position our company for disruptive growth opportunities, specifically around 5G. As our financial and operational performance in Q2 demonstrated, we're now starting to realize the results of this plan I'll now spend a moment providing a brief update on our three major initiatives within it. In terms of our first initiative, expanding our core community broadband business, we are seeing emerging opportunities with utilities, in which we expect our unique, modular architecture will help us capitalize on these opportunities and grow our share in this market. Further, we expect to be successful in working with service providers who will benefit from the expanded funding programs for broadband deployment sponsored by the federal government.

10:04 In terms of our progress enhancing our operational effectiveness, our success in this area was most clearly demonstrated by the 40% gross profit margin we realized in the quarter. In addition to benefiting from the cost reduction efforts across the product lines, as Dan mentioned, we are continually looking for ways to improve our manufacturing capabilities and supply chain efficiency. During Q2, we signed a lease for a second manufacturing facility in Mexico, which has doubled our square footage and allows us to establish lean manufacturing initiatives by dedicating one facility to connectivity and the other to splicing operations associated with our enclosures. The COVID-19 impact in Mexico caused temporary delays in our ability to begin shipping product from the facility but did not significantly impact the planned level of revenue shipped this quarter. Based on our current assessment, we believe we can commence shipping from the facility in the coming weeks.

11:01 In terms of our competitive position, we recently introduced home deployment kits, which are designed to ease the task of fiber to the home deployment and reduce install time by approximately 30 minutes per home. In addition, these products can be installed directly by the homeowner within their own structure, providing for a contact-free installation. The third initiative of our plan involves capitalizing on our 5G opportunities within the wireline markets of national carriers and all wireless markets. In the second quarter, we introduced the StreetSmart portfolio of fiber management products to support 5G small cell densification. Serving as the demarcation point between the backhaul fiber provider and the mobile network operator, the StreetSmart fiber handoff box creates a secure carrier class separation between the wireline and wireless fiber connection.

11:56 From our vantage point, including conversations with customers and other industry participants over the last several weeks, 5G builds are still committed, and we've even seen some Tier 1 players increase their 5G-related CapEx budget for this year despite the COVID-19 uncertainties. In response to the changing landscape created by the COVID-19 pandemic, Clearfield has instituted multiple policies to protect the safety of our employees, to adapt to new trends in the global workforce, and to ensure the long-term viability remains intact. I am also encouraged to report that there have been no layoffs, all non-production employees are able to do their jobs remotely, and that our production operations are working at normal capacity while adhering to state and federal government guidelines.

12:52 As we move through the fiscal third quarter, our non-production employees are all working remotely. We are actively promoting and demonstrating our product solutions through video conferencing and other methods. We dual source the majority of our components and as of now, most of our supply chain partners remain operational and have continued to provide the necessary components for our products. We have increased our stocking position in each plant to ensure dual manufacturing sites. We have invested in additional manufacturing equipment and personnel to provide alternative capacity on one location or the other should we have an illness breakout in one or both of our production sites. We are providing hazard pay and productivity bonuses and have relayed out our plant floor to allow for social distancing.

13:39 In addition, we've established a COVID task force among the production workforce to ensure all health needs are being addressed. However, these are highly uncertain times and the pandemic will undoubtedly create circumstances beyond our immediate control. Our contingency plans may not be sufficient to meet customer demand and they could result in a potentially significant increase in manufacturing costs. Due to these economic uncertainties, we received a $3.7 million loan under the Payroll Protection Program within the Coronavirus Aid Relief and Economic Security or CARES Act. The loan bears interest at a fixed rate of 1% and will be forgiven if Clearfield meets certain conditions. The PPP loan provides us with an additional layer of financial protection of continuing to employ all of our team members throughout this period of significant uncertainty.

14:37 As we move through the fiscal third quarter, our business remains strong with production currently stable and operational. We believe we have the right plan and foundation in place to ensure we successfully navigate these uncharted waters, backed by our nearly $50 million in cash and investments, industry-leading solutions, and a world-class team. We remain confident these factors will enable us to capitalize on the disruptive growth opportunities within the fiber optics industry, both in the near term and long term as well. I'm very proud of our team. Our team has seamlessly adapted to today's dynamic working environment. We've built a highly resilient business as evidenced by our strong results in Q2, as well as our ability to continue supporting the critical needs of our customers during a time that is challenging for many businesses, regardless of industry.

15:28 As of today, Clearfield's business remains strong with bookings in the fiscal third quarter of 2020, outpacing the levels realized in the fiscal second quarter of 2020. However, the lack of visibility in the broader global markets and intensifying demand uncertainty could potentially disrupt Clearfield's supply chain and customer ordering patterns, as well as reduce the overall demand for its products in the near term. Recognizing this reality, Clearfield's leadership team and board of directors believe it is prudent and necessary to temporarily withdraw the company's fiscal 2020 financial guidance until such time that visibility returns to pre-COVID-19 levels. and with that, we're ready to open the call for your questions. Operator, I turn it to you.

16:16 Thank you. We will now be taking questions from the company's publishing sell-side analysts. If you would like to ask a question, please press star one on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. One moment please while we poll for your questions. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.

17:03 The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove yourself from the queue. One moment, please, while we poll for your questions. Our first questions come from the line of Tim Savageau of Northland Capital Markets. Please proceed with your questions. Hi, this is actually Steven on for Tim. I was wondering if you could give us any color on what drove the increase in backlog

17:39 A couple of things. The increase in backlog was a lot more orders and a lot more orders in the tail end of the quarter in March. The backlog is driven across the company that's in community broadband, MSO, as well as in the carrier business. We didn't quite have the, some of it came a little bit late in the month of March and some of it was associated with what we're doing in Mexico and that the COVID virus didn't allow us to open up the second plant because the construction team that was dedicated to our plant got called to a Mexican federal project. But it's long-term, consistent overall business.

18:29 Okay, thanks. That's great. And then can you just Let us know. The traffic increases due to the pandemic, are those positively impacting your business or pushing anything out?

18:44 When you say traffic, broadband traffic? Yes, correct. Right. I think we're certainly seeing a level of high interest from our service provider customers whose their customers are asking for service turn up. And I think there's no better time right now to demonstrate just how crucial broadband connectivity is and how much it drives our day-to-day lives. I think we're seeing a little bit of uptick in second quarter, but not a lot in that that's still kind of in front of us. We're seeing our service providers see a level of take rates that they haven't previously seen because people need it and are demonstrating through it. So I think it's both a short-term and long-term opportunity for us because of the recognition of those The success of what that delivers.

19:37 That's great. Thank you so much. You're very welcome. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate you're in the question queue. One moment, please, while we poll for questions. I'd now like to turn the call back to CEO Sherry Beranek for her closing comments.

20:16 Thank you, everyone. I appreciate you joining us today. We as a company traditionally take questions from our covering analysts. If you have a question that has not been addressed in today's information, please feel free to reach out to us. by sending an email to myself personally, which is cberanek at clfd.com, or to our IRR firm, which is ir at gateway.com. I ask you to stay safe, wash your hands, and social distancing is not a choice. It's a requirement. Thanks so very much. Bye for now.

20:57 Goodbye. Thank you for joining us today for Clearfield's Fiscal Second Quarter 2020 Earnings Conference Call. may now disconnect.