Clearfield, Inc. (NASDAQ:CLFD) Q1 2024 Earnings Call Transcript February 1, 2024
Clearfield, Inc. beats earnings expectations. Reported EPS is $-0.00035, expectations were $-0.4. Clearfield, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. And welcome to Clearfield’s Fiscal First Quarter 2024 Conference Call. All participants will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Greg McNiff, Investor Relations for Clearfield. Please go ahead.
Greg McNiff: Thank you. Joining me on the call today are Cheri Beranek, Clearfield’s President and CEO, and Dan Herzog, Clearfield’s CFO. As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward through the presentation as the speaker presents their remarks. 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, earnings presentation, and on 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 a description of these risks. They are also summarized on Slide 2 of the earnings presentation. With that, I would like to turn the call over to Clearfield’s President and CEO, Cheri Beranek. Cheri?
Cheri Beranek: Good afternoon, everyone, and thank you for joining us today to discuss Clearfield’s results for the fiscal first quarter 2024. We also intend to provide an update on our business and current market trends. Please turn to Slide 4. I noted last quarter that while the industry is facing several near-term macroeconomic and seasonal headwinds, broadband service providers continue to deploy equipment and long-term demand remains as strong as ever. In the following slides, I will preview recently released market data that demonstrates this case as well as the basis for our optimism regarding the long-term outlook. Consistent with our optimism, Clearfield repurchased 436,000 of its shares for approximately $12 million in the first quarter ended December 31, 2023.
Total net sales for the first quarter of fiscal 2024 were $34.2 million above the high end of our guidance range, driven by higher-than-expected sales from our large regional service provider customers, due to their ordering of complementary products to support their inventory mix needed for current deployment. Dan will discuss our financial results for the quarter in more detail shortly. While we continue to expect the next few quarters to remain challenging due to the inventory overhang across the industry, we remain focused on positioning Clearfield to take share when ordering patterns return to a more normalized cadence. To that end, we are expanding and enhancing our product portfolio in order to reduce the overall cost of fiber deployment by making the process as efficient as possible.
We recently announced the addition of an innovative vault to our current product portfolio, which is designed to reduce the cost of shipping and storage by approximately 67%. Feedback from our recently introduced CraftSmart FiberFirst Pedestal and also the FieldSmart FiberFlex Active Cabinet designed to be installed in rural areas has been exceptionally positive. Both products are now shipping and reflect another step toward our goal of providing our customers with alternative choices that continue to streamline fiber deployment. In addition, we are working to ensure these products and all other Clearfield product offerings will be compliant with Buy America, Build America, known as BABA. As the BEAD awards are expected to translate to initial deployments near the end of this calendar year.
As shown on Slide 5, recently published data from RVA, an independent research firm analyzing data in the North American fiber broadband industry, recently reported that the industry passed 9 million households in 2023, nearly 1 million more than the year before. Furthermore, this total included 3 million households which already had access to one fiber service provider. The fact that approximately 35% of the households passed in 2023 already had access to one fiber provider confirms our view that the competitive landscape for broadband service is healthy and that our total addressable market is larger than a single fiber connection for each U.S. household. As many of you know, the $42.5 billion BEAD program is now underway with the maps released and the value of the monetary award divided per state.
Slide 6 illustrates the relationship between the government disbursement and service provider deployment. As you can see, the year is projected to be the largest disbursement year of government funding. However, we expect these funds to translate into deployments and revenue over the next several years. As illustrated on Slide 7, industry forecasts from RVA indicate that the next five-year period will see up to 12 million additional homes passed with fiber because of the Federal funding initiatives, these programs will bring high-speed internet access to unserved and underserved areas that will boost the forecasted total homes passed in the next five years in the U.S. market to over 57 million homes. Coming back to Clearfield’s 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 2024.
Dan Herzog: Thank you, Cheri, and good afternoon, everyone. Please turn to Slide 9 to look at our fiscal first quarter 2024 results in more detail. Consolidated net sales in the first quarter of fiscal 2024 were $34.2 million, a 60% decrease from $85.9 million in the same year ago period. The year-over-year decrease in total net sales was due to the ongoing industry dynamics that we commented on throughout the past year and that our peers in the marketplace have reported over the last several quarters. We remain focused on reducing costs and improving margins at Nestor by investing in more efficient manufacturing equipment and introducing higher margin plug-and-play connectivity products. We continue to be focused on labor utilization as well as driving efficiencies for enhanced productivity in order to improve gross margins at all our manufacturing locations.
Order backlog declined 68% to $43.5 million on December 31, 2023 from $57.3 million on September 30, 2023 and $136.3 million on December 31, 2022. As our visibility remains limited, we continue to collaborate with our customers to align their open orders with their deployment schedules. As a reminder, the winter season is typically our lower order booking and revenue quarters. Our lead times are now less than four weeks across most product lines. We continue to expect backlog to become less of an indicator for future sales as most orders will be fulfilled within the quarter they are received. Turning to Slide 10, I will now review net sales by our key markets. Sales to our primary market, community broadband, comprised 36% of our net sales in the first quarter of fiscal 2024.
An image depicting a group of technicians inspecting a communication equipment system in a data center.
In Q1, we generated net sales of approximately $12.3 million in community broadband, down 67% from the same period last year. Net sales for the first quarter in our large regional service providers market were $7.9 million, comprising 23% of our total net sales, and declined by approximately 47% in the first quarter of this fiscal year versus the prior year first quarter. Net sales in our MSO business were $5.2 million and comprised 15% of our net sales in the first quarter. Net sales declined by approximately 75% in the first quarter of this fiscal year versus the prior year first quarter. Net sales in our national carrier market for the first quarter decreased to $1.3 million, accounting for 4% of total net sales, and declined by approximately 48% in the first quarter of this fiscal year versus the prior year first quarter.
Finally, net sales in our international market were $6.7 million and comprised 19% of total net sales in the first quarter. Net sales in this market decreased by approximately 35% in the first quarter of fiscal 2024 versus the prior year’s first quarter. As detailed on Slide 11, gross profit margin in the first quarter declined to 13.7% of net sales from 35.7% of net sales in the same year ago quarter. Our gross margin continues to be impacted by unabsorbed overhead in our manufacturing facilities due to lower levels of demand and winter seasonality. The company continues to adjust its production capacity to align to current demand and market conditions. In addition, gross margin was negatively impacted by an increase in reserves for excess inventory, primarily resulting from the lull in demand.
We continue to expect revenue and gross margins in the first half of fiscal 2024 to be impacted by the continued inventory digestion at our customers as well as normal seasonality. As we enter the build season in the second half of fiscal 2024, we anticipate an uptick in demand, which should lead to an increase in capacity utilization that should result in an improvement in gross margins. We continue to work to uphold price discipline as well, while also ensuring the preservation of our long-term customer relationships. Moving forward, we will remain thoughtful in how we address pricing with our customers. Now please turn to Slide 12. Operating expenses for the first quarter were $12.9 million, which were consistent with $12.8 million in the same year ago quarter.
The company remains committed to servicing its customer base and enhancing its long-term market position as seen by the consistency in year-over-year expense, which reflects our continued investment in our operations. As a percentage of net sales, operating expenses for the first quarter were 37.6%, up from 14.8% in the same year ago period due to lower sales volumes. Turning to Slide 13. Net loss in the first quarter was $5.3 million compared to net income of $14.3 million the same year ago period and net income of $2.7 million in the fourth quarter of fiscal 2023. Our net income is heavily affected by our reduced volume levels, which in turn results in lower gross profit percentage. As illustrated on Slide 14, our balance sheet remains strong with $169 million of cash, short-term and long-term investments and just $2 million of debt.
We had $2.4 million in capital expenditures in the quarter, mainly to support our manufacturing operations. Our inventory balance decreased from $98.1 million at fiscal 2023 year end to $94.6 million in the first quarter of fiscal 2024. Our cash, short-term and long-term investments reflect the reduction of just $5 million from September 30, even though $12 million was used for the repurchase of shares in the first quarter. We recorded a cash flow from operations of positive $7.8 million in the quarter. Our strong balance sheet ensures that we are well positioned to effectively compete for larger customer opportunities and to pursue strategic opportunities to enhance our market and product portfolio. Likewise, our strong cash balance positions us to manage the business for the long-term and through our share repurchase program, reinvest for the long-term.
Please turn to Slide 15. Due to limited visibility related to the reasons we’ve discussed over the last several quarters, we will continue to provide quarterly guidance. We anticipate the second quarter of fiscal 2024 net sales to be in the range of $29 million to $33 million. We expect to generate a net loss per share in the range of $0.49 to $0.55. This increased loss over the prior quarter is due to increased inventory reserves for excess inventory, primarily resulting from the lull in demand. This loss per share range is based on the number of shares outstanding at the end of the first quarter and does not reflect share repurchases in the second quarter. As I indicated earlier, we repurchased $12 million in stock as part of our share buyback program in the first quarter, which represented 436,000 shares at an average price of $27.69, leaving approximately $21 million available for additional repurchases.
The significance of our buyback underscores our clear and proactive commitment as we believe in the enduring strength and potential of our company and this market. In the coming quarters, we will continue to make thoughtful and strategic decisions regarding share repurchases driven by our strong conviction that our current share price is not reflective of our long-term opportunity. That concludes my prepared remarks for our fiscal first quarter 2024. We appreciate the support of our investors as we continue to work to drive shareholder value. I will now turn the call back over to Cheri.
Cheri Beranek: Thanks for the financial update, Dan. Turning to Slide 17, I would now like to provide a brief update on our multiyear strategic plan, which we have labeled LEAP. LEAP is our roadmap for how we intend to capitalize on the significant opportunities ahead when industry demand returns to a more normalized cadence. Over the last 12 months, Clearfield’s performance has been negatively affected by a misalignment between our capacity and market needs. We view this mismatch between supply and demand as a temporary challenge that we have addressed through reductions in variable costs. Yet we must and will continue to execute at the highest level. Rural broadband is in our DNA, and the reason we are the leading provider to this customer segment.
As I highlighted earlier, we’re not sitting still. Rather, we continue to develop new labor saving products and align our sales and support staff to the markets where fiber is being deployed. Expect more product announcements to come highlighting these attributes. Listening to our customers and then delivering to their needs is the foundation upon, which our North American business was built. Recently, we hired an executive with significant connectivity experience for our European operations who will work alongside our existing European team to lead our initiatives to cross sell extensions of Clearfield connectivity products. We have also recently hired a senior level operations executive to lead our North American manufacturing and procurement programs as part of our ongoing operational initiatives to drive cost reductions, align capacity to near term demand, and to convert inventory to cash.
In addition of this edge strength to Clearfield’s management team is an investment that will accelerate our ability to deliver strong earnings as market dynamics return to a more normalized pattern. While the near term industry dynamics remain challenging, we also remain confident that the future growth in fiber is absolute and the value proposition that Clearfield brings to the market is as strong as ever. And with that, we will open the call to your questions.
Operator: Thank you [Operator Instructions] Our first question comes from the line of Scott Searle with Roth. Please proceed with your question.
