Cheryl Beranek - CEO and President Daniel Herzog - CFO.

Tim Savageaux - Northland Capital Markets.

Good afternoon. Welcome to the Clearfield's Fiscal Second Quarter 2018 Earnings Conference Call. My name is Hector and I will be your operator this afternoon. Joining us for today's presentation are the company's President and CEO, Cheri Beranek; and CFO, Dan Herzog. Following their commentary, we will open the call for questions.

I would like to remind everyone this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website. This call is also being webcasted and accompanied by a PowerPoint presentation called the FieldReport, which is also available in the Investor Relations section of the company's website.

Please note that during the course of the call, management will be making forward-looking statements regarding future events and the future financial performance of the company. 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's important to note also that the company undertakes no obligation to update such statements. The company cautions you to consider risk factors that could cause actual results to differ materially from those in forward-looking statements contained in today's press release, FieldReport, and in this conference call.

The risk factors section in the Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission provides examples of those risks. As a reminder the slides in this presentation are not controlled by the speaker but rather by you the listener. Please advance forward through the presentation as the speaker presents their remarks.

With that, I would like to turn the call over to Clearfield's CEO, Cheri Beranek. Please proceed..

Good afternoon and thank you everyone for joining us today. During the quarter we took significant steps to improve Clearfield's financial and market position.

First we settled litigation associated with claims of patent infringement which allows us to put these expenses behind us and to concentrate on the development and acceptance of our market leading product technologies.

Second, we acquired an exciting new product platform of powered cabinets that expands our portfolio of fiber management offerings and total addressable market.

However, our revenue for the first half of the fiscal year has been disappointing primarily due to some of the spending process in the market that we are continuing to experience with our tier one wireline, wireless, and international customers.

A merger related review and slow down in spending at our largest tier one customer continued into the second quarter. We are seeing revenues with other tier one customers improve however not at a rate to compensate for the slowdown.

Recently we named a Chief Revenue Officer whose 20 year experience in the tier one wireline, wireless, and international markets adds greater focus and sharpen strategy to our market development efforts. We believe his appointment dedicates the required resources to address and succeed in this changing market dynamic.

Stepping back a minute so to review the quarter at a high level our fiscal two results as I mentioned came in below our expectations. Bookings while slower to grow in the early parts this quarter did pick up in the quarter end. In total bookings were $19.5 million exceeding shipments by $2.7 million.

While our core wireline business continued its strong momentum by growing year-over-year more than 20% for the quarter, this quarter was affected by ongoing sluggishness in the overall spending environment. In addition the markets make ready for 5G deployments continue to put downward pressure on our sales efforts.

Our total revenue of $16.8 million represented a 5% decrease compared to the same year ago period. Yet we continue to invest in growing our business. During the quarter we released two exciting new products.

As service providers are looking for faster ROI, we launched a new small count fiber distribution hub which leverages the scalability of our patented Clearview Cassette.

In addition our new aerial terminal brings the flexibility of our FieldShield fiber delivery system to environments looking to further reduce the cost of deployment through overhead rather than varied distribution.

Legal fees incurred in the quarter included a onetime settlement expense of $850,000 and professional expenses of $450,000 associated with the patent infringement law suit. These fees which total $1.3 million negatively impacted our net income for the quarter.

With the settlement of the law suit we expect our legal fees in the second half of the year will return to normalized levels.

But before I talk more about our overall progress as well as our future growth strategies and outlook I will turn the presentation over to our CFO, Dan Herzog who will walk us through the full financial performance for the quarter. .

Thank you Cheri. Now looking at our financial results in more detail. Our revenue in the second quarter of fiscal 2018 decreased 5% to 16.8 million from 17.7 million in the same year ago period. The decrease as Cheri mentioned was driven primarily by lower sales to our tier one wireline, wireless, and international customers.

The decline in sales to these customers was partially offset by a more than 20% increase in sales to our core wireline base of tier three and municipal network customers. Looking at our international business, revenue decreased 57% to 765,000 from 1.8 million in the same year ago period.

This decrease was driven by delays in the anticipated orders from the Central and Latin America or Calix [ph] region as well as the delay of the Canadian government's connect to innovate funding programs. Gross profit for the fiscal second quarter of 2018 decreased 9% to 6.8 million.

At 40.3% of total revenue, gross profit percent was lower than the same quarter last year but within our target range of 40% to 42%. For the second half of fiscal 2018 we are anticipating slightly lower margins as we assimilate the acquired powered cabinet line into our manufacturing processes.

While this percentage may fluctuate from quarter-to-quarter due to the factors previously mentioned, we believe gross margins will hover around the lower end of our target range throughout the rest of fiscal 2018 Our operating expenses for fiscal Q2 were 7.3 million which were up 19% from the same year ago quarter.

Professional expenses associated with the acquisition of the powered cabinet line contributed 70,000 to this amount. However the increase was primarily due to the 1.3 million in expenses incurred through the defense of the patent infringement lawsuit which included a onetime settlement of $850,000.

Moving forward we expect our legal expenses will return to normalized levels and operating expenses for fiscal 2018 will range between 35% and 37% of revenue. Net loss for this fiscal second quarter was 300,000 or $0.02 per diluted share compared to net income of 900,000 or $0.07 per diluted share in the same year ago quarter.

The net loss for the period was a direct result of the litigation in one time settlement expenses associated with the lawsuit. Turning now to our balance sheet. During the fiscal second quarter our cash, cash equivalents, and investments decreased to 35.6 million from 46.2 million in the prior quarter ended December 31, 2017.

The decrease in cash and investments was primarily due to our 10.4 million acquisition of the powered cabinet line from Calix which Cheri will go into more detail. We also repurchased a total of 18,682 shares utilizing 225,000 in cash.

As of March 31, 2018 we have repurchased an aggregate of 388,885 shares for approximately 5.1 million under the program leaving approximately 6.9 million available within our 12 million stock repurchase program.

Now with that I would like to turn the call back over to Cheri for her insights into our operations for the fiscal quarter as well as our outlook and strategic initiatives for the remainder of fiscal 2018. Cheri. .

Thanks Dan. Top line revenue has been disappointing. As part of our efforts to enhance and diversify our top line we are excited to welcome Rosa Burns as Clearfield's Chief Revenue Officer. Rosa comes from 3M and will bring a lot to the table with her international and Tier 1 experience.

She will bring focus, strategy, and enhanced execution to our model. It's important to note that Clearfield continues to serve the needs of hundreds of smaller Tier 3 and municipal service providers. Revenues to this market segment were up more than 20% in the second quarter.

Kevin Morgan, our Chief Marketing Officer has been leading marketing programs such as the launch of the online campus of Clearfield College. Clearfield College expands our presence in the distribution channel that serves the needs of not only the wireline market but also the wireless and cable TV marketplaces.

Consistent with our Phase 3 strategy we completed the acquisition of the powered cabinet line from Calix. This expansion of our products fleet expands our total available market through technology and client enhancement.

With the distraction of the patent lawsuit behind us and the infrastructure investments that are new Chief Revenue Officer will lead, Chief Operating Officer Johnny Hill will focus on the integration of the powered cabinet line and extending our product design methodologies to 5G.

We believe this focus will improve our long-term profitability and position in the marketplace and prepare us for immediate and multi-year growth opportunities. The acquisition of the powered cabinet line strengthens our core wireline and wireless position while extending our product portfolio to new markets.

The acquisition also helps us to be involved earlier in the sales cycle and to help accelerate our expansion into the Tier 1 market. While the acquisition had a minimal effect on our fiscal Q2 revenue we are actively integrating the solution into our product mix and manufacturing facilities.

With revenue expected to scale to our $10 million annualized forecast, we believe further integration of this product line will help drive incremental profitability due to the products top line contribution and low incremental SG&A spend. In short the acquisition represents a major step in Phase 3 of our growth strategy.

Our ultimate focus for this product line is to adapt it to formulate a new modular architecture for the industry's 5G deployments. 5G is the gateway to the Internet-of-Things, driverless cars and the interoperability of next generation communications. But 5G is only possible with fiber.

Nimble innovation has been and continues to be a cornerstone of our business strategy. I am pleased the investments we're making this quarter in people and product will position Clearfield for this type of growth in 2019 and beyond.

Given the continuing developments and associated spending causes we are experiencing in the market, we are updating our guidance for the full fiscal year. The outlook for second half revenue is $40 million to $42 million resulting in annual revenue guidance of $74 million to $76 million.

This represents 5% to 10% revenue growth for the six month period and flat to 2% growth for the year-over-year period. The fiscal year outlook if gross profit margins to be at least 40% and operating expenses to be between 35% and 37%.

Due to the 2017 tax reform legislation which has lowered the corporate tax rate, Clearfield expects net income for the year as a percentage of revenue to be between 3% and 5%. The update to the financial outlook is lower than our original guidance issued at the beginning of the year.

While this is disappointing we've put the negative pressures of the patent lawsuit behind us and expanded our total available market with the acquisition of a strategic product line.

Moreover the enhancement of Clearfield's management team was dedicated focus on new market and revenue development will enhance our ability to lead the market and product innovation. Throughout this entire process our goals have always remained the same.

Revenue and market share expansions in 2019 and beyond while continuing our long track record of profitability. Now with that we're open -- ready to open the call for your question. Operator. .

[Operator Instructions]. Our first question comes from the line of Tim Savageaux with Northland Capital Markets. Please proceed with your question..

Hi, good afternoon, couple questions. First off, I know you mentioned or reiterated the 10 million kind of annualized forecast for the cabinet business you acquired.

I wonder what sort of assumptions you are factoring in to second half guidance specifically with regard to acquisition contribution and I'll follow up from there?.

Excuse me, the $10 million forecast is based upon the work that we have done with the company that owned the product line before with Calix and some of the vision that they had in regard to the product line moving forward.

There is some level of seasonality built into the powered cabinet program and that as the powered cabinet is placed in the outside plant the late spring certainly did not help us any in that program. We did have a little bit of a slow start in that supply chain logistical issues.

It had us starting shipments later in the quarter than we had anticipated. We acquired the product line in late February and we really didn't start shipping of any significance until March..

Okay, well I will take that to mean that you'll be what you're seeing in the second half of your fiscal year is below that kind of annualized run rate that you're targeting because of that sort of slowish start and with implying I guess a little bit stronger organic revenue growth, along those lines I know you mentioned 20% as growth for the kind of core Tier 2, Tier 3 business for the year, although that comes off a pretty weak performance last year, I wanted to talk about kind of more normalized growth expectations for that kind of core eye like [ph] business for the year or really heading forward and what sort of trends you're seeing there whether access to the government funding is driving an uptick or what the overall kind of dynamics are in that Tier 3 customer base?.

Yeah, what we are starting to see certainly we put Tier 2 into the Tier 3 space and we're starting to see some significant gains for us in that Tier 2 environment as some of those organizations while they are not huge in regards to increases they are opportunities for us to be able to have a little bit more the national footprint.

We have as an organization continued to take share I believe in the Tier 2, 3 space because it has gone very much unappreciated from our large competitors who are very focused on meeting the needs, just a couple of the very large Tier 1 environments.

Our -- a big part of our initiative in that Tier 3 space is municipal build and we really see our experience in the Tier 3 community as being a forerunner to the next generation to fiber to the home deployment which are those municipal city utility infrastructure environments that have had some type of billing arrangement, customer service arrangement with their community and are taking that right away opportunity and doing build outs across their communities and countries and Clearfield has worked with distributors across the country to be there and in position to take that as their next growth initiative.

So, we don’t see the 20% growth rate in the Tier 3 space to be as much of an anomaly as it is an expansion of what is considered Tier 3 to being a broader growth initiative of the smaller communities who are not having their broadband needs met by Tier 1.

Tim I want to just provide some clarifications for you back in regard to that powered cabinet business and that's that we did see -- while we had a slow ramp up in second quarter we do have a nice backlog that represent -- it's a small percentage of our backlog and that our organic business is still 80% or more of our existing backlog.

But we've now got the processes in place by which to put those products in the field. I think there's going to still be a few opportunities for us to be able to improve that performance and that some of the lead times that those product lines have gone through in the past have been a little bit more lengthy than we're used to.

We're used to being able to get product out the door in eight to ten days. And some of the build processes for those product lines have been longer because they're more outsourced.

So part of our third quarter initiative is to be able to integrate those manufacturing process into our supply chain and improve the availability of our getting product out the door in a more rapid basis..

Okay, and just to follow up kind of on a Tier 2, Tier 3, it looks like starting on how you kind of interpret your guidance on a quarter-to-quarter basis, you're looking for a fairly strong and typical seasonal uptick on the Ilec [ph] side kind of into the second half or in Q3 in particular, would that be sort of fair to say that you would see a continuation of the historical pattern of stronger activity in the summer months?.

Absolutely assuming we have -- we're looking at 40 million to 42 million for the second half of the year. Typically our third quarter is rated a little bit higher and that not only are they building but they're also positioning products into place to make sure they can continue their labor force. .

Right, okay, and then last question following up on the Tier 1 front, obviously that's come in lower than expected and we've heard from I guess peers across the access market Adtran, in particular that review is taking longer than expected.

I wonder if you have any kind of updated thoughts on timeline there where you might see some degree of relief on the Tier 1 fronts and maybe on cable and wireless as well, I know your softness there is not necessarily connected to first thing happening in AT&T but there does seem to be a resumption of activity across the wireless side and is it possible that by the September quarter you get a little more life on the Tier 1 side from [indiscernible] in particular?.

Yeah, as you know our peers in the marketplace are pretty well defined. The challenges right now in that Tier 1 space and it is the reason that we didn't lower our outlook at this point for the year and that it is the level of confidence that we have in what they're doing isn't there and that there is just no visibility to it.

And so there I think there is certainly an opportunity that our guidance could be low and we're going to work hard to make that the case. But without a strong level of visibility within that target account we thought it was more prudent to outlay what the numbers that we put together.

There is some really fun stuff happening in the cable markets and the opportunity within our product line to be able to use those technologies and to work within those environments to deepen fiber, to use the existing -- because that line as well as FieldShield because we don’t talk an awful lot enough about.

FieldShield is a very disruptive technology and that it reduces the amount of labor that's put into place so they can turn up not reduce the amount of spend they have in labor per quarter but they can use that spend to increase the number of homes they are turning up and accelerating their rate of return and their subscribers footprint.

So I'm pretty bullish about third and fourth quarter in the cable TV marketplace. We've got some fun activities in place and I'm hopeful to be able to present some numbers to you in the fourth quarter that represent that..

Okay, but on the Tier 1 front is it fair to say you have basically taken that out for the year kind of assume really no improvement from the current sort of 5% revenue or not even that, just kind of on an absolute basis sort of no improvement throughout the year?.

Yeah, we do do business with a broader number of customers than simply the one but that one Tier 1 has been the majority of our activity.

That said we have seen an uptick of business with the other carriers but as you know that those sales cycles can be can be significantly long and so at this point we have taken care with the -- put the Tier 1 product line is basically back more to the pilot stage and trial stage rather than the deployment stage that we were anticipating. .

Got it, thanks very much. I will pass it on. .

Thank you, bye now. .

[Operator Instructions]. This concludes our question-and-answer session. If your question was not taken you may contact Clearfield Investor Relations team at clfd@liolios.com. The company will post the most relevant questions and answers in the four investor section of Clearfield's website.

I'd now like to turn the call back to CEO Cheri Beranek for her closing comments..

I just want to thank everybody for joining us on today's call and I wanted to thank you first our employees, our partners for their continued support. I would also like to thank our shareholders who have supported the company's evolution to this next phase of growth. With that we look forward to updating you on to our progress soon..

Thank you for joining us today for Clearfield's fiscal second quarter 2018 earnings conference call. You may now disconnect..