Title

Presentation

Clearfield, Inc. beats earnings expectations. Reported EPS is $-0.13, expectations were $-0.31.

Operator: Good day, and welcome to the Clearfield Fiscal First Quarter 2025 conference call. All participants will be in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, 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 today’s call are Cheri Beranek, Clearfield’s President and CEO, and Dan Herzog, Clearfield’s CFO. As a reminder, Clearfield published 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 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 these risks. With that, I would like to turn the call over to Clearfield’s President and CEO, Cheri Beranek.

Cheri?

Cheri Beranek: Good afternoon, everyone. Thank you for joining us today to discuss Clearfield’s results for the first quarter of fiscal 2025. I will start by highlighting some key themes and then turn it over to Dan for a summary of our performance and outlook. We are pleased to share that we reported first quarter fiscal 2025 net sales of $35.5 million, in line with our guidance range, while the net loss per share of $0.13 was smaller than our guidance range. Net sales for our Clearfield segment increased 6% year over year. Our quarterly revenue performance aligns closely with our expectations, reflecting our steady progress towards normalized growth. I would like to briefly discuss some high-level industry trends which we address in more detail in our shareholder letter.

As the rural broadband deployment model evolves, Clearfield continues to adapt to industry dynamics with new products. Our goal is to establish Clearfield as the one-stop shop for active cabinet deployments, similar to our success with passive cabinet lines. To that end, our FibroFlex cabinet line addresses the shift of electronics from the central office closer to the end user. Additionally, our recently announced StreetSmart ReadyConnect terminal addresses key operator needs such as space constraints, ease of installation, and long-term reliability. We have also observed that many operators are initiating new multiyear projects. We view this dynamic as a strong positive signal as it demonstrates a level of demand and commitment independent of government funding and reflects the success of our ongoing efforts to strengthen customer relationships and consistently deliver customer service.

To ensure we are able to address this trend, we continue to work with our customers to establish programs that provide better mutual visibility going forward and ensure we are well-positioned to meet our customers’ needs. Turning to the broadband equity access and deployment or BEAD program, we continue to expect that it will contribute more meaningfully to revenue starting in fiscal 2026. While we acknowledge near-term uncertainties due to the change in the US administration and associated delays, we are pleased with the program’s initial progress and remain optimistic about its long-term potential. Specifically, the NTIA has approved the final proposals for Louisiana, Nevada, and Delaware. Moreover, the majority of these awards went to local fiber providers.

In the near term, we expect the improved outlook driven by the ongoing reduction in inventory, coupled with the shift to the second phase of the enhanced alternative connect American cost model or EA CAM program to serve as the growth catalyst for fiscal 2025. I would also like to address the subject of the introduction of tariffs on Mexican goods. Our Mexican and US manufacturing sites were strategically designed to provide redundancy, cost optimization, and dual sourcing capabilities. In addition, our product lines are BABA compliant, which provides the option for a Build America, Buy American alternative. While we cannot eliminate the potential cost increases of this tariff, our long-term experience managing past tariffs impacts enables us to respond quickly and to mitigate any potential costing increases wherever possible.

Additionally, our agent sourcing program has been in place for over a decade, supported by a strong network of proven suppliers who have consistently partnered with us to optimize our quality and who have been expanding their manufacturing footprints in non-Chinese locations. The tariffs imposed on Chinese goods that went into effect on February 4, 2025, add to the existing tariffs that have been placed upon Chinese products entering the US over the recent years. Given the fluid and uncertain nature of the situation, our priority remains maintaining the strong partnerships and relationships built with our suppliers and customers and optimizing the supply chain to reduce the impact whenever possible. I would now like to pass the call over to our CFO, Dan Herzog, who will provide an overview of our financial results for the fiscal quarter 2025 as well as to share our outlook.

Dan Herzog: Thank you, Cheri, and good afternoon, everyone. I will now review our first quarter results beginning with sales. Consolidated net sales in the first quarter fiscal 2025 were $35.5 million, a 4% increase from $34.2 million in the prior year first quarter and within our guidance range of $33 million to $38 million. This figure includes $29.7 million of Clearfield segment net sales, up 6% year over year, and $5.8 million of Nestor segment net sales, down 6% year over year. Net sales met our expectation as we generated increased revenue from connected homes, highlighting our continued progress towards becoming a comprehensive portfolio supplier for our customers. We anticipate this trend will continue moving towards a two-to-one ratio of connected homes to past homes as operators prioritize cash flow generation over deployments while awaiting government funding.

Our strong bottom-line performance and continued gross margin improvements were primarily driven by lower excess inventory reserve driven by improved utilization and recoveries of previously reserved inventory. We recently opened a new facility in Estonia, accelerating MicroDuct production from near zero to a projected $7 million for the current fiscal year. This growth aligns with our strategy to enhance European operations by focusing on higher-margin solutions. We believe that the inventory overhang within our primary market, community broadband, has predominantly cleared. Based upon these trends, we are reiterating our fiscal 2025 outlook of net sales in the range of $170 million to $185 million. We anticipate Clearfield segment annual revenue growth to be in line with or above industry forecasts of 12.5% for fiscal 2025.

While Europe continues to face economic challenges and geopolitical tensions, we are anticipating improved margins but flat annual revenue in our Nestor segment for fiscal year 2025. In line with the strong quoting activity for the build season we have observed, we anticipate second quarter fiscal 2025 net sales in the range of $37 million to $40 million. Due to some unexpected cost savings in the first quarter fiscal 2025, we anticipate second quarter gross margins to be more closely aligned with our original first quarter assumptions. We expect to generate a net loss per share in the range of $0.16 to $0.21 in the second quarter of fiscal 2025. As Cheri noted, we are actively monitoring the evolving tariff situation and diligently developing contingency plans.

However, due to the uncertainty of the tariff situation, our full year 2025 and second fiscal quarter guidance does not yet account for any potential impact they may have on our business operations. And with that, we will open the call to your questions.

Operator: Thank you. And at this time, we will be conducting our question and answer session. It may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, and our first question comes from Ryan Koontz with Needham. Please state your question.

Matt Cavanagh: Hi there. This is Matt Cavanagh on for Ryan. You saw strength in large regional this quarter. Could you please expand on how many customers were material in that segment? And whether they are buying connected products, passing products, or a mix of both?

Cheri Beranek: Hi, Matt. You know, our large regionals, that is a multiple number of providers, so it is more than one. But it is about a handful. I would say it is more I would look at that more as kind of project and lumpy business, you know, within it and that you saw that, you know, we had large regions were down last quarter, so they are up this quarter. They tend to take off of their purchase orders bigger numbers at one period of time to consolidate shipping costs and the like. So I would look at that less as a trend and more as a continuation of our opportunities to work with those providers. And the product lines are predominantly still on passing homes. So we still have room to grow there in regard to working with those portfolio customers or those customers to create them into portfolio customers so they take a broader range of our product line.

Matt Cavanagh: Yeah. Great. Thank you.

Cheri Beranek: Yeah. Yeah. Yeah. Good yeah, good stuff. Go ahead. I was gonna say it is probably, you know, in the neighborhood of three that are over a million dollars in sales. So it is not and then, like I said, half a dozen or more total. So I would not like I said, it is it is it is trend I am like the fact that it is not a single customer, but I would be careful to identify it as being, too big of a of a of a jump at this point.

Matt Cavanagh: Great. Thanks. That is really helpful. And to follow-up, I understand you are not guiding for the full year, but what kind of visibility do you have going into the rest of the fiscal year as it relates to customer forecasts, new designs, orders, and lead times going forward?

Cheri Beranek: Yeah. Well, we are really pleased right now under the level of quoting activity that we saw, you know, at the tail end of last year or the quarter, you know, November and December. And now, you know, in the January period, just a level of people getting reengaged quoting for this summer, you know, acknowledging that, you know, that they, you know, no longer have the inventory that they had last year. So that is just really an exciting, you know, period for us. I think that is part of the visibility and that we do not because of our lead time, which is about, you know, on average, about four weeks for most products. The customers are not in a position of really looking at providing long-term purchase agreements or purchase contracts.

What we are looking to do is putting together kind of supply agreements via rather than necessarily, you know, you know, long-term purchase orders. But we are seeing some better trends of them talking to us about their needs for the year long-term orientation, and then getting like I talked about, some of the projects in there are multiyear projects. And so, you know, we are seeing some because of that visibility into not only this year, but next year as well. Which is really You We we need to give give it a little bit of time to see all of the, you know, other external factors, how that influences next year. But right now, you know, definitely seeing positive indicators.

Matt Cavanagh: Great. Thanks, Cheri. That is it for me.

Operator: Well, alright. Thank you. And our next question comes from Tim Savageaux with Northland Capital Markets. Please state your question.

Tim Savageaux: Tim Savageaux, Northland Capital Markets. Your line is open. You might be muted. Go ahead.

Tim Savageaux: Okay. Sorry about that. Good afternoon, and congrats on some solid-looking results.

Dan Herzog: Thank you.

Tim Savageaux: I just answered my own You are welcome. You guys answered my own question here, but when you talk about growth for the you are basically separating out Nestor when you are talking about your overall guidance range and then Clearfield segment growth of twelve and a half. Am I looking at that the right way?

Cheri Beranek: Right. Right. So, yeah, I think the yeah, we really have such two different business and two different markets that we felt it was appropriate at this point to provide some more visibility to our shareholders than what we had been providing previously. The, you know, the US market is in a better position than the European market, and, certainly, our position in the US market is far more developed than anything that we have in in in Europe. We are very optimistic about our position in community broadband and leveraging our positioning community broadband. And we have grown, you know, with and and advance of the market in the US and see every reason that we would continue in that fashion. The from a Nestor standpoint, we are really proud of the work that is being done to to to reinvent and maybe that is the yeah.

To reinvent Nestor into a higher value-added solution provider. They have always had a very strong quality program for their cable, and it is just the lack of demand for cable right now against some of the Asian dumping that is happening in in Europe that we have really had them focus on new products and new product designs that are higher gross margin. Really proud of the MicroDucts world. You know, and and looking strategically at the right kind of products. As an example, MicroDuct is a higher margin product because you cannot ship MicroDuck cost-effectively. It is like shipping air. So you do not have the, you know, the the price competition from the agents that you do if you are providing cable. So it is a it is a much better long-term solution.

So yes, you can look at the forecast as being Nestor as flat revenues and then looking at the Clearfield segment as growing at market or above market rates.

Tim Savageaux: Got it. That is super helpful. I am sure I got that. Wanna come back to the part of the commentary around many operators initiating new multiyear projects I wonder if you can give us some more color there do not know if that oversets with the the regional question that that you were just discussing or whether this is a a large number of smaller carriers, but can give us, you know, a cup you know, an example or two or just a feel for what you are seeing there. And and the breadth of that.

Cheri Beranek: Right. It is more community broadband. So not in I mean, large regionals have always had some really nice multiyear project. We are seeing some of the smaller emerging regionals talk working with us on multiyear agreements. I mean, I think it is you know, as an example, TDS is in a really good place. To start their bills. They are smaller. They are regional, but you know, not a big one, but have not been involved in the fiber market yet. And we are have been actively working with them for a couple of years now on their fiber plans and have been a provider for them for, you know, historical deals, you know, non-big fiber to the home, you know, for, you know, over a decade. So that is an exciting one that we are working on.

In community broadband, what we are seeing on the multiyear builds are really or some of them are are new, municipal and or utility who have not been involved previously. And then seeing kind of the emergence of of venture funding. And VC capital in some of these spaces where they are looking to to Clearfield because of our cost savings and have a a more more pragmatic look because of the multiyear build. There are certainly some in the space who are who are building to flip their networks, and they tend to have a much more cost-centered approach rather than a long-term operating approach. And so we certainly are facing some of those headwinds. But we know who our core customer group is, and and who they will be as they start emerging into this space.

And and the the fact that there are more providers today than there were a year ago, I think, is one of the most exciting parts about community broadband because it is not only growing with the market, but it is the number of new entrants and who need the support of a of a company like Clearfield who has to be done the street to support them.

Tim Savageaux: Great. And one more me, And that is on the sort of dynamic versus homes past versus home homes connected that you been called out in the release or shareholder letter or both And I guess I wanted to see you know, obviously, you have said in the past you you know, generate more revenue from from a home connected, but you know, where are we in the process of that Can Homes Connected Metric building. And what sort of implications does that have for the business? Things like positive for the top line or anything on margins, etcetera.

Cheri Beranek: Right. Yeah. We have built Clearfield really on a with a reputation of being a strong cabinet supplier. You know, and that our passive cabinets are you know, really are world-class and can compete against the biggest companies in the world. Go I mean, it goes back to the days where the cabinet line was chosen by Google. And so we can see our our history of of quality in in passing homes. Historically, you know, we were not cost-effective and connect a home because we had to buy product from Corning or CommScope or one of our competitors in order to manufacture drop tables. And that is a re and it and then we had to buy connectors from them as well. And so we really could not compete historically unless it was a special run, a special distance, or quick turn.

Now with our own cable manufacturing line and the development of our own connectors as well as some of the emergence now of of OptiTAP compatible solutions that are available on the market. Marketplace. You know, we can certainly be cost-effective, and we can we can continue to be able to provide custom links and quick turn in moldings that we did historically as well. And so we have approached kind of a a fifty-fifty split between the revenue associated with homes connected in past currently. That is kind of the the threshold that, you know, we are at today. There is to know, with the amount of revenue per home available at a forty percent take rate, you know, we should be closer to a two-to-one ratio if we had a broader number of customers who are also using our product lines to connect.

And so that has been a big initiative for us last year and one that we continue And I think we are going to see an even bigger opportunity there as people work down their inventory levels. And while Clearfield’s revenues are down, our inventory levels are down, one of our obstacles still remains, competitors’ inventory levels. That are are either are some of our existing customers or prospective customers are holding. So long term from a margin standpoint, connected home products and past home products are very similar. So it does not influence our gross profit that way. But it does influence gross profit because connected home products are have a high labor count. And so the higher the labor count, the more and and the better our overhead is absorbed So we look to that to be one of the good ways for us to be able to utilize the capacity and resources that we have built over the years.

Tim Savageaux: Great. Thanks very much.

Cheri Beranek: You are welcome.

Operator: Thank you. And our next question comes from Scott Searle with Roth Capital Partners. Please state your question.

Scott Searle: Hey. Good afternoon. Thanks for taking the questions. Sherry, Dan, nice to see, looks like, putting to the bottom from a revenue standpoint here in building going forward. Maybe just to dig in on the community broadband opportunity. Know, down sequentially in December, which is consistent with, I think, what other vendors saw during the quarter. But I am wondering now as you start to engage and look out over the course of calendar twenty five, Are you seeing that start to build back up being driven by EA CAM, Are these beads potential bead customers that are building out in non-bead markets? You know, what what is kind of the profile right now that is starting to come back in terms of those build cycles? Because it is still sort of a pre-bead environment right now.

Cheri Beranek: Mhmm. Yeah. Definitely prebead. You know, we are seeing, you know, requests for BABA pricing. So there is a lot of people doing planning and quoting and getting involved in the b program as we have moved you know, as each of the different states move to the next level. So quoting activity for bid is up from above the orientation, but certainly not business yet. But the quoting activity that I referred to earlier is not just about the BABA compliant. It is really across the board. It does include e cam business, but it includes a a number of nongovernment funded initiatives. So it could be more venture funded or or private privately backed within the the company itself. And I think that is the part of the business that has always been the most exciting for me.

Even though beta is big money, what is exciting to me is the fact that you know, you when you are using your own money and you are investing in your own networks, and you find that fiber is the best return on investment, that naturalized supply and demand is the most healthy way to build a business and and I think that is the long-term viability of our organization. So, yeah, I will you know, I think really exciting in that way. The community broadband initiative I would say that one of the things that surprised us a little bit right now is how much how how how good it feels in regard to how early in the year people are are getting ready for the bill season, their commitment to it. And being able to want to make sure that they know what they are going to order and how they are going to order it.

So I am anticipating that we are going to have a really good booking quarter. The probably, you know, our quarter this last last quarter was, you know, like, a one-to-one booking ratio of approximately, like, our backlog went up about a million. I am anticipating, you know, a guess I am getting a little bit out of my skis here, but I will I will go for it. I think we will have a backlog bigger on than the what it is today when we go into next quarter. You know, getting ready for build season to and and making sure that we have the materials in place that people are needing.

Scott Searle: That is great. Very helpful. And and Sherry, just to clarify, though, so for community broadband, you you would expect sequential growth then going forward over the next couple of quarters. Absent beef. Right? For beef for you, you have been consistent on this point. Yeah. Fiscal twenty six. Okay. And and maybe if I could and and this I I know this has been sort of murky out there from a market standpoint, but the bead process. Right? We have got Mhmm. Three states that have actually been approved by the NCIA. They are expected to be some changes within the organization. Does the bid process continue? What are you hearing back from the states in terms of how the process is going to evolve, change, know, going forward.

Cheri Beranek: Right. The I mean, the program I mean, it has been very clear that the program is is going to to change, but I do not think the the process necessarily is going to change. You know, the the parts of the program that have been very deliberately I mean, I guess I was gonna use the word attacked, but reviewed. Are some of the incremental overhead costs that were added. The costs associated with administration, the environmental reviews, you know, the the certainly, the the diversity and equity issues are certainly gonna be removed. So more of the funding will be used for direct build unless for some of the with the current administration calls, you know, the socialized the social program aspect of it. So, you know, all of our service providers are believing that that will change, and and most of them are supporting those changes be because it it streamlines their process.

And puts more money in in their in their potential pocket. I would as it relates to some of the bead review and the words that are coming out from our the new NTIA administrator that, you know, she is not as necessarily, you know, fiber friendly as the people in the past. You know, I I think that the past administration was a were fiber advocates, but I do not think they were fiber at all cost. We have always believed, and supported that it is the BED program was a heterogeneous program, that we use the right technology for the right space. Some homes cannot be economically reached by fiber, and we knew that from the beginning and are expecting that those awards will be next. But I hope that, you know, the administration will look at at this as being an infrastructure build for long-term enhancements, you know, and not a quick turn I want to make somebody happy.

Program. We can absolutely go to a satellite program, turn it on today, and improve a lot of people’s performance for a short period of time. But it will not work long term because we do not have the density know, the satellites do not have the density to offer it. The and it is not it is not building infrastructure five years from now. Those satellites have to be replaced, and then know, there will be more money put, you know, put into it. So we are hoping that school heads will prevail, and the right decisions will be made that will most cost-effective long term.

Scott Searle: Very helpful. And and if I could just finish up on gross margins, Dan, You know, this quarter down a little bit sequentially. It sounds like some onetime benefits are not there, but you know, implied in the the back half of the fiscal year guidance is is an uptick in revenues. Could you give us an idea of what we should be expecting from a gross margin standpoint And then just to clarify the earlier BABA compliant comments. Under the the Mexican facility under the Makuladura arrangement, does that make QBABA compliant so that know, there would not be any any necessarily implications to manufacturing in that current facility if in fact there were Mexican tariffs? Thanks.

Dan Herzog: Yeah. Hi, Scott. The the the fact that it is, Aqiladura does not change, you know, it is still across the border. So you are still gonna be considered you know, know, for, manufactured in Mexico, and there are certainly rules around Sometimes it is This country of origin, how much comes from the US that is in and labor below the labor is done in Mexico. So there are some rules around that that we navigate, but it does change the fact that we still have to go through to hit the fifty-five percents or whatever the rules are for the BABA things. As far as the the margins, you know, they are they are gonna be a little bit volume dependent. We did have nice. Nice absorption, nice labor-heavy products this quarter, some one-time thing that helped us out.

We will probably be a little bit more consistent with what our first quarter guide was, which, you know, I think, what your analyst estimates were were were pretty correct, but so so we will not be significantly higher here or in the second quarter. However, as the volume goes up, as we head towards our guidance level, then you will be getting into the lower twenties to the mid-twenties. Certainly, by the the fourth quarter, that is the that is the goal.

Scott Searle: Great. Thanks so much.

Operator: Thank you. And there are no further questions at this time. I will now turn the call back over to Cheri Beranek for closing remarks.

Cheri Beranek: Thank you. We are pleased to be in a position to be delivering on the you know, the forecast that we had originally provided and the guide the overall market trends that we indicated, you know, nearly a year ago. We are in the in the U-shaped recovery that we anticipated. We see that U-shaped recovery being part of our build season and are looking forward to seeing the uptick of that U in third and fourth quarter as the build season commences. And then as we move forward into next year. Knowing that this year, our build season will come on top of an EA CAM program, and then next year, the B program will be layered in on top. So this U-shaped recovery that we saw a year ago or anticipated a year ago is here. We are excited to be a major player within it and we look to our shareholders to stay patient with us, a little bit longer as the market corrects itself. Yeah. Excuse me. And I look forward to speaking with you again in the next quarter.

Operator: Thank you. And that concludes today’s conference. All parties may disconnect. Have a good day. Thank you.