Cheri Beranek - President & CEO Dan Herzog - CFO.

Matt Shea - Northland Securities.

Good afternoon, and welcome to Clearfield's Fiscal Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Dana, 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 now like to remind everyone that 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 this 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 forward-looking statements.

It is important to note also 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, FieldReport and in this conference call.

The Risk Factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission provides descriptions 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. Fourth quarter of fiscal 2018 was an exceptionally strong quarter for Clearfield, as we achieved the highest level of quarterly revenue in the company's history with $22.5 million. This is up 22% over the same period a year ago.

Much of this revenue increase was driven by the continued performance in our Community Broadband business, as we helped these broadband service providers continue to serve their local serving areas as well as enter and capitalize on underserved communities.

As we look back on the year, pairing our fiber management expertise with the acquisition and successful integration of our active cabinet line gave us a strong head start for ongoing new technologies associated with network convergence.

We fully expect that converged networks and the associated fiber requirement to support them are a perfect fit for our active cabinet product line along with our ability to densify fiber at all areas of all networks.

Throughout the year, we have grown our portfolio of certifications and the master purchase agreements and strengthened our team with key hires. I'm excited by the work we've done to steer our ship past some of the choppy waters we've experienced these past two years.

Having successfully put the patent infringement litigation behind us, we've eliminated the cost and distractions associated with it. Having gained this momentum, we're now implementing, what we call, our Coming of Age phase. So with that said, let's jump into our recent operational and market progress.

And then later on in the call, I'll talk more about Clearfield's Coming of Age phase and the steps we're taking to execute this growth strategy. You'll notice in this presentation that we slightly modified how we present each of our markets.

This new presentation consolidates the Tier 1 wireline and wireless components of our national carrier business into one grouping, which is representative of the network convergence underway. We've also separated our Cable TV or MSO business into its own segment because of customer group's unique requirements and initiatives.

Finally, we've consolidated into 1 category the customer groups that make up our core Community Broadband business. Our goal here is to provide a clear sense of how each of our markets and customer classifications make their unique purchasing decisions. With that said, I'll now provide a brief update on each of our market segments.

Starting first with Community Broadband, we achieved $15.1 million in revenue, up 27% from the same period a year ago. As I alluded to earlier, this success was driven by the market adaption, excuse me, of our active cabinet line as well as continued growth in the sales of our traditional product categories.

Recently, we've launched a couple of new product solutions that not only streamline, simplify and reduce the operational cost of deploying fiber, but also expedite service activation. Our national carrier business is our second largest market.

The healthy growth in this market during Q4 was driven by the integration of the active cabinet line as well as the deployment of FieldShield for those residential and business-class customers. Year-over-year, this business grew 50% to $2.4 million for the quarter. Our MSO business remains relatively steady this quarter.

To accelerate this growth, in October, we expanded our manufacturer's representative program by signing 3 successful organizations with long-standing relationships in this market.

As Cable TV operators look to upgrade their networks and push fiber deeper and closer to the edge, we believe we stand a benefit from this increasing desire to quickly and cost effectively carry out these initiatives. Our international market, which is predominantly sales, into the Caribbean market as well as Canada, also remains steady.

We have recently made investments into the Mexican market, which, we believe, will bear fruit in the upcoming fiscal year. Our legacy business, which is predominantly a build-to-print business for copper cable assemblies, continues to serve the needs of a long-standing customer group outside of the broadband marketplace.

With that, I'll now turn the presentation over to our CFO, Dan Herzog, who will walk us through our financial performance for the fourth quarter and full year of fiscal 2018..

Thank you, Cheri. Now looking at our financial results in more detail. Our revenue in the fourth quarter of fiscal 2018 increased 22% to $22.5 million from $18.4 million in the same year-ago period. For the full year, revenue increased 5% to $77.7 million from $73.9 million in fiscal 2017.

The increase for the quarter and year was largely driven by the strong sales of our active cabinet line. The increase for the year was also due in part to stronger sales of our traditional product categories, particularly in our Community Broadband and national carrier business.

With $77.7 million of revenue for the year, we exceeded our fiscal 2018 revenue guidance range of $74 million to $76 million. Looking at our international business for the quarter, revenue decreased 6% to $1.4 million from $1.5 million in the same year-ago period.

For the full year, international revenue decreased 11% to $5.4 million from $6 million in fiscal 2017. The decrease for the quarter and year was due to funding structure changes in Canada as well as project business in Mexico that did not continue in fiscal '18.

Gross profits in the fourth quarter of fiscal 2018 increased 12% as compared to the fourth quarter of fiscal 2017 to $8.6 million or 38.3% of total revenue. The lower gross margins during fiscal Q4 were due to higher sales of our active cabinet line, which carry lower gross margins than our other products.

For the full year, gross profit increased 2% to $31 million or 39.9% of total revenue, which was in line with our guidance of 40% for the year. Our operating expenses for fiscal Q4 were $6.1 million, which were down slightly from the same year-ago quarter. For the full year, operating expenses were $25.9 million compared to $25 million in fiscal 2017.

The yearly increase was largely due to the onetime payment of $850,000 related to the patent infringement settlement. Our operating expenses of 33% of revenue came in at the low end of our guidance range of 33% to 35% of revenue for the full year.

The net income for the fourth quarter was up 49% to $1.9 million or $0.14 per diluted share from $1.3 million or $0.09 per diluted share in the same year-ago quarter. For the full fiscal year 2018, net income totaled $4.3 million or $0.32 per diluted share compared to $3.8 million or $0.28 per diluted share in fiscal 2017.

With a net income margin of 5.5%, we exceeded our guidance range of 3% to 5% for fiscal 2018. Turning now to our balance sheet. During the fourth quarter, our cash, cash equivalents and investments decreased slightly to $35.5 million from $36 million in the prior quarter ended June 30, 2018.

During the fourth quarter, we repurchased a total of 34,776 shares, utilizing $389,000 in cash. As of September 30, 2018, we have repurchased an aggregate of 523,794 shares for approximately $6.6 million, leaving approximately $5.4 million available within our $12 million stock repurchase program.

Now with that, I would like to turn the call back over to Cheri.

Cheri?.

one, expanding our core Community Broadband business; two, enhancing our competitive position and operational effectiveness; and three, capitalizing on disruptive growth opportunities, particularly within the converged network of the Tier 1 national carrier market. Together, these initiatives can be viewed as the 3 legs of a stool.

During some quarters, some legs will be longer than others, but as we measure and track our success with the mid and long term, all 3 initiatives will play a critical role in growing the company.

With regards to the first growth driver, as we mentioned earlier, in fiscal year '18, we continue to expand on our market-leading position in the Community Broadband market.

We believe we could continue experiencing 8% to 12% growth next year in this market, especially with some of the new products we have launched in our push-to-win more business-class service projects. As we move from these short-term projects to longer-term programs, some quarters might have lower gross margin than others.

We will concurrently work on the second leg of the stool, which is enhancing our competitive position and operational effectiveness. Not only will we continue to invest in our product suite to meet the evolving needs of our customers, but we will also look to maintain and reduce our cost structure.

Knowing that we will have certain price pressures, particularly when gaining further traction in the Tier 1 market, we are proactively dedicating resources to deal with this challenge and to ensure we can continue to have healthy margins and still grow profitably.

Finally, growth driver number three relates to capitalizing on disruptive growth opportunities that can scale our business.

While we are still early in this process, we are laying the groundwork to not just grow with the proliferation of 5G in Japan and open-computing initiatives, but to also become a leading supplier within these high-growth markets. The excitement is increasing around the future of 5G networks and with good reason.

The promise of 5G is very encouraging, but this evolution will place huge demands on six wireline networks. In fact, the promise of 5G was gigabit speed connections with 1 millisecond latency characteristics will not be achievable without a robust fiber network.

In order to achieve the promise of 5G performance, modern 5G network designs dictate that wireless signals be brought onto fiber as soon as possible. Fiscal year '19 for Clearfield is about preparing for 5G, that is, we do not anticipate a significant revenue from the 5G initiative within this next fiscal year.

The patented technologies or the Clearview Cassette along with the industry's only user-defined feeder fiber distribution ratio made Clearfield a strong contender for the fiber footprint expansion that will accompany the 5G make-ready build-out. We look forward to providing more updates as we make additional progress on this initiative.

In closing, our record revenues for the fiscal fourth quarter helped us end the year on a strong note, and we have a healthy backlog to execute entering fiscal 2019. Our revenue guidance for fiscal 2019 is $83 million to $87 million.

Embedded in this estimate is our expectation that the Community Broadband business will experience continued strong growth, while we also make further inroads in some of our other target markets and customers, including the national carriers and MSOs.

As we move from projects to programs and gain additional visibility into our customers' purchasing pattern, we will update our guidance accordingly. We anticipate gross margins for fiscal 2019 to hover around our Q4 levels of 37% to 38%.

This lower margin outlook is a result of the lower margins associated with active cabinets and pressures due to the import tariffs on Chinese goods in the near term.

The lower margin outlook is also due to our sales strategy to aggressively price our cabinets and panels in environments where we believe significant revenue opportunity exists for follow-on sales comprising additional cassettes and optical components at a later time.

We expect our operating expenses to grow modestly to support the sales growth initiatives we have in place. As a result, we expect net income as a percentage of revenue to remain between 3% and 5%, underscoring our commitment to continue growing profitably and responsibly.

Ultimately, we will remain disciplined with how we deploy capital, and we will look to carefully build a roadmap that will guide us toward higher revenues and market share in this Coming of Age phase. Now with that, we're ready to open the call for your questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Tim Savageaux from Northland Securities..

This is Matt Shea on for Tim Savageaux here today. Just one question for me. Wondering if you could walk through or put a little color on the CommScope, Arris merger and kind of the impacts that it's having..

Well, that's a curveball question I didn't expect. I mean, it's intriguing to listen to a man at the $6 billion cash acquisition and an opportunity for some very large providers in this marketplace to combine the operations. We wish them well. That's a part of the marketplace that their integration of support is kind of outside of our share.

How we compete with CommScope is really at the connectivity space, and we'll continue to aggressively pursue our market, the broadband carriers within it, and we look forward to competing with them..

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

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

Thank you again for joining us today. I want to thank our shareholders, who have supported the company's evolution into this next phase of growth. And I'd also like to thank our suppliers, our sales partners and our employees, who continue to play a pivotal role in their Coming of Age opportunities.

We look forward to updating you again on our progress soon..

Thank you for joining us today for Clearfield's Fiscal Fourth Quarter and Full Year 2018 Earnings Conference Call. You may now disconnect..