Good afternoon. Welcome to Clearfield’s Fiscal Fourth Quarter and Full Year 2020 Earnings Conference Call. This is the conference operator. 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 the 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 and its subsequent filings on Form 10-Q provides description 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 speakers present 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. I hope you are all continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon to share Clearfield's results for the fiscal fourth quarter and full year 2020. The fourth quarter of fiscal 2020 capped off a record year for Clearfield.

From a topline standpoint, this fourth quarter marks the highest quarterly revenue level in our company's history, bringing our total revenue for this fiscal year 2020 to a record $93.1 million.

An integral part of our success has been our employees' unwavering commitment to providing best-in-class products and customer support and none of this could have been accomplished without their dedication to our mission.

Looking more specifically at our fourth quarter for fiscal 2020 results, the $27.3 million in revenue we reported was up 14% year-over-year. This robust growth was driven by solid contributions from our MSO and community broadband markets, which were up 51% and 25% year-over-year respectively.

The record topline performance in fiscal year 2020 Q4 also helped to drive solid gross profit, which totaled $10.8 million. As a percentage of revenue, the 41.2% margin marked this second highest gross profit margin we've achieved as a company in more than two years, just behind the 41.5% we reported last quarter.

From a profitability standpoint, we generated $3 million in net income. We ended the year with a robust order backlog, totaling a record $10.7 million, up 153% year-over-year, providing clear visibility into growth in the new fiscal year.

I'm also encouraged to report that we continue to look at industry best lead-times for our standard products as well. Our solid performance in the fourth quarter drove several additional and noteworthy record results for the year.

In addition to the $93.1 million we generated in revenue, we produced record gross profit of $37.9 million, which totaled 40.7% of total revenue. We also realized strong bottom-line results, generating $7.3 million in net income or $0.53 per diluted share.

The market for Clearfield products was exceptionally strong in the second half of the year and that strength is carried into our new fiscal year. Along that line, I'd like to spend a moment reviewing some of our recent operational updates and progress in our core end markets.

Then our CFO, Dan Herzog will walk you through our financial performance in more detail. Let's look at our market segments by revenue starting first with our core community broadband market. In the fourth quarter, we generated revenue of $18.5 million, which was up 25% from the same period last year.

For the full fiscal year ended September 30th, 2020, community broadband market revenue totaled $59 million, which was up 10% from the comparable period last year. Our MSO business comprise 13% of our total revenue in fiscal Q4.

From a growth standpoint, we built on the momentum we established over the last several quarters, realizing a 51% year-over-year increase in revenue to $3.6 million in Q4 and a 48% year-over-year increase to $12.4 million for the fiscal 2020. Revenue in our National Carrier market was up 18% year-over-year to $14.1 million for the full fiscal year.

As I talked about on past FieldReport, the growth we're seeing in the National Carrier market is related to the continued demand for fiber-to-the-home and fiber-to-the-business applications. Due to ordering cycles, revenue for the fourth quarter was down 19% year-over-year to $3.2 million.

Revenue in our international market was down 16% year-over-year in the fourth quarter and down 37% year-over-year for the full fiscal year. Revenue in our legacy build-to-print business was down 41% year-over-year in Q4 and down 24% year-over-year for the full fiscal year 2020.

Revenue remains near the $4 million level, which is consistent with our expectations for the year. With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the fourth quarter and full fiscal year 2020..

Thank you, Cheri and good afternoon, everyone. Now, looking at our fourth quarter financial results in more detail. Our revenue in the fourth quarter of fiscal 2020 increased 14% to $27.3 million from $24 million in the same year ago period.

The increase in revenue was primarily due to higher sales in our community broadband and MSO markets, partially offset by lowered National Carrier and international sales as Cheri just mentioned. Gross profit for the fourth quarter of fiscal 2020 totaled $11.2 million, or 41.2% of total revenue.

This was an improvement from $9.3 million or 38.8% of total revenue in the fourth quarter last year. The increase in gross profit dollars was due to increased sales volume.

Increase in gross margin was due to more favorable product mix and cost reduction efforts across our product lines as well as expanded use of our Mexico manufacturing plants, which included adding a second facility in the second quarter of fiscal 2020. Also efficiencies realized from our supply chain programs and lower tariff costs.

Our operating expenses for the fourth quarter of fiscal 2020 were $7.6 million, which were up from $7.1 million in the same year ago quarter. As a percentage of total revenue, operating expenses in fiscal year 2020 Q4 were 27.7% compared to 29.7% in the same year ago period.

The increase in operating expense dollars was primarily due to higher costs related to performance compensation accruals. In terms of our profitability measures, income from operations was $3.7 million in the fourth quarter of fiscal 2020, which compares the $2.2 million in the same year ago quarter.

Income tax expense increased to $786,000 in the fourth quarter of fiscal 2020, up from $511,000 in the fourth quarter of 2019. Net income totaled $3 million or $0.22 per diluted share an improvement from $1.9 million or $0.14 per diluted share in the same year ago quarter. Turning now to our annual results.

Revenue for fiscal 2020 increased 9% to $93.1 million from $85 million in fiscal 2019. As Cheri mentioned, the increase in revenue was driven by growth across our key markets, especially from our community broadband customers, which was up 25% or approximately $3.7 million compared to the prior year.

Gross profits for fiscal 2020 totaled $37.9 million or 40.7% of total revenue. On a dollar basis, this was a 16% improvement from the $32.7 million or 38.4% of total revenue we reported in fiscal 2019. The increase in gross profit data was due to increased sales value.

The increase in gross profit percent was due to a favorable product mix and cost reduction efforts across the company's product lines, including increased production at its Mexico manufacturing plants and efficiencies realized from supply chain programs in lower tariff costs.

Our operating expenses for fiscal 2020 were $29.5 million, which was up 7% from $27.5 million in fiscal 2019. As a percentage of revenue, operating expenses for fiscal 2020 was 31.7%.

The increase in operating expense dollars was primarily due to additional personnel and higher performance based compensation accruals as well as higher external sales commissions and agents fees, offset by lower stock based compensation expense in travel, entertainment and marketing costs due to COVID-19 restrictions.

Income from operations total $8.4 million in fiscal 2020, and improvement from $5.2 million in fiscal 2019. Income tax expense was $1.9 million, which was up from $1.4 million in fiscal 2019.

Taken together, the resulting net income for fiscal 2020 was $7.3 million, or $0.53 per diluted share, which was an improvement from $4.6 million, or $0.34 per diluted share we reported last year. And finally, now turning to our balance sheet.

At quarter end, our balance sheet remains strong with $52.2 million in cash, cash equivalents and investments. As I mentioned on recent field reports, our Board of Directors suspended the company's share repurchase plan in April to further ensure our financial stability through the current COVID-19 operating environment.

Our board and leadership team will continue to evaluate our capital allocation strategy for our shareholders. I'd like to spend a few moments providing an update on how we continue to effectively navigate the COVID-19 pandemic and the operational measures we've taken since March of this year.

I am encouraged to report that Clearfield remains fully operational despite the unprecedented business closures and slowdown caused by the global health crisis. Our non-production employees are working remotely using collaboration tools and video conferencing to stay as connected as possible. Our production operations in both the U.S.

and Mexico are working as normal, while adhering to state and federal government's social distancing guidelines. As a precautionary measure, we have multiple contingency plans in the event our ability to operate is diminished or eliminated at either location.

We dual source most of our components to cover multiple points of failure and have purposeful redundancies to remove the potential risks. Thankfully, as of today, many of our supply chain partners remain operational and have continued to provide the necessary components for our products.

Our supply chain remained intact; thanks to our team's forward planning to ensure sufficient safety stock inventory levels at both our Minnesota and Mexico facilities.

As Cheri has indicated previously, we made the decision to maximize the availability of all product lines at all three of our plants by assuring that each location can manufacture across our broad product portfolio.

This strategic decision has allowed us to meet the growing customer orders and enable us to continue to fulfill our increased order backlog going forward. That concludes my prepared remarks. I will now turn the call back over to Cheri.

Cheri?.

Thanks, Dan. At no time in our history has the need for high speed broadband connectivity been more apparent than during the COVID crisis. working remotely often from home, has blurred or even permanently altered the business versus consumer distinction with all networks now carrying business critical and entertainment data at the same time.

COVID has accelerated the need for and deployment of broadband. Clearfield is well positioned in all of our markets to take advantage of this opportunity. As I mentioned earlier, our record results for Q4 and fiscal 2020 were driven by strong performance in our MSO and community broadband markets.

We saw customers in these areas push forward with their purchasing decisions and deployments in response to COVID-19, which has highlighted the need for high speed broadband front and center, for both consumers and businesses alike.

Much of our success since March has been with our existing customers, especially our base of community broadband providers, where we already had great rapport. These companies have looked to us to help them address the surging demand and need for high speed internet access.

As you can see from this slide, COVID's effect on broadband demand is accelerating. In February of this year, market research for firm Omdia published its report for wireline broadband access equipment revenue in 2021. Estimating approximately $8.6 billion would be spent on equipment.

Then in July after a dip in 2020, Omdia updated its forecast for 2021, noting that the market would strongly rebound with growth of 20%. While COVID has validated the need for broadband, the marketplace as responded with accelerated build plans.

Now, shifting gears to our Coming of Age plan, which is most of you know, is our three years strategic plan designed to strengthen our core business and position our company for disruptive growth opportunities.

As our overall performance in fiscal year 2020, Q4 and fiscal 2020 indicate we are realizing demonstratable results from our commitment to and execution of this plan. And with that, I'll spend a moment providing a brief update on our three major initiatives within that plan.

In terms of expanding our core community broadband business, Q4 represented a continuation of Clearfield customers accelerating their purchasing decisions and deployments in response to COVID-19. This trend has carried into fiscal 2021 supported by continued demand for broadband and the government programs helping to fund these deployments.

Clearfield position within the community broadband market has never been better. Our track record and reputation has positioned us extremely well to take market share and further capitalization on the expansion that's currently underway.

New projects have been initiated as part of the Coronavirus Aid Relief and Economic Security Act, also known as the CARES Act.

The other major government funding program is the RUS, Rural Digital Opportunity Fund or RDOF, which is a 10 year program designed to bridge the digital divide to efficiently fund the deployment of broadband networks in rural America.

The FCC will direct up to $20.4 billion over 10 years to finance up to gigabit speed broadband networks in unserved rural areas, connecting millions of American homes and businesses to digital opportunity.

On October 8, the Wireline Competition Bureau and the Office of Economics & Analytics in coordination with the rural broadband options Task Force, and now also release a final eligible Census Blocks, including certain Census Blocks primarily located in price capped carrier territories that based on data from June 9 -- June 2019, and a subsequent challenge process were not served by the incumbent price cap carrier, or an unsubsidized competitor with voice and broadband at speeds of 25 megabits or higher.

To give you a better sense of the economic opportunity available here. Let me explain. Through the RDOF program, approximately 540,000 homes will be connected annually.

The products we provide represent an opportunity to Clearfield of $35 per home passed, and with a conservative estimate of 40% of homes past connecting to the service, an additional opportunity of $185 per home connected. This is over $50 million of an annual opportunity for Clearfield morals.

Moreover, it is not a question of yes, but rather how and when these homes will be connected, regardless of the variable inputs Clearfield is well positioned to capitalize on this opportunity.

In addition, a major initiative for 2021 is extending our reach within community broadband into electrical co-ops, rural utilities and municipalities that are not currently being serviced by rural telephone companies, and are still underserved by the major carriers.

As part of this effort, our strategy is to partner with established distributors in these target markets, which we anticipate securing in the coming months. Turning to our second pillar, enhancing our competitive position and operational effectiveness.

Our execution in this area over the last several quarters is perhaps most evident in our increasing gross profit.

One of the chief underlying drivers for this expansion is related to the investments we've made to our operations in Mexico, which are starting to yield beneficial results, both in improved efficiencies, and cost effectiveness, while we're able to build any product in all three of our manufacturing plants, Minnesota and the two in Mexico.

We're also focused on optimization. In addition to process improvements, our success here has largely been a function of the efforts of our manufacturing teams. It's been an extremely busy year for them, and we are truly grateful for all of their efforts.

Also encouraging, we found further opportunities to realize improved productivity from our plans to drive costs down even further. We're currently launching an extensive training and optimization program to reduce our manufacturing class by improving floor utilization and overall labor capacity.

To be sure, we are still seriously investing in our current human capital to not only care for their work quality of life, but also to complete their health needs. This means supporting our workforce in all measures of their daily lives to ensure their families have what they need to get through these challenging times due to COVID.

Like many organizations, our people are our greatest asset. So it's incredibly important we continue to invest in our most precious resource. As the fiber to anywhere company, Clearfield is accelerating cost effective fiber site deployments with the industry's most craft friendly fiber management and pathway product.

With the launch of our FieldSmart Fiber Delivery Point Indoor 288-Port Wall Box, Clearfield now offers every service provider their optimal configuration for FTTH deployments. Clearfield is the only fiber management provider in the industry to provide enclosures designed for strand mounts, below grade, in-building and Outside Plant.

Further with the addition of these new products, Clearfield continues to allow service providers to scale their networks as demand or conditions allow or not with the push toward accelerated deployment, the tools to turn up networks rapidly, all with the same architecture and design principles.

The third initiative of our Coming of Age plan involves capitalizing on disruptive growth opportunities within the wireline markets of National Carriers and all wireless markets. Our position in the Tier 1 market remains solid.

In our success growing our National Carrier business by 18% in fiscal 2020 reflects the return on the strategic investments we've been making over the last couple of years. We continue to execute on our operational initiatives, including rolling out product lines, like the StreetSmart transition box to address the opportunities within this market.

That said, the Tier 1 market has been progressing slower than some of our other end markets. While the National Carriers remain committed to capital equipment expenditures, COVID has impacted the deployment plans for 5G both in the near and mid-term.

In the second half of our fiscal year, we saw a temporary pause in new deployments by the carriers because of these restrictions. However, deployment of optical components specifically related to optimizing existing fiber assets to meet exploding bandwidth requirements as picked up.

Longer-term, we're investigating adjacent product categories to expand our total addressable market.

Consistent with our approach of being a fiber to anywhere company, we're looking at investing in product categories or areas that may not be fiber rich today, but ones that would allow us to introduce products to the market that would enable the lifestyle ubiquitous broadband provides.

Our comprehensive financial and operational performance in fiscal 2020 speaks to the resiliency of our business, as well as our strategic positioning within our customer base and industry. Our success in Q4 specifically has given us significant momentum starting Q1 of fiscal year 2021, giving us a bullish outlook for the next year.

The business case for optical fiber markets for 5G and access networks deployment couldn't be more evident. While we are currently unable to provide a concrete financial forecast for the upcoming fiscal year, due to the ongoing volatility from COVID. We are confident the demand for fiber-fed broadband will continue in fiscal 2021 and beyond.

Based on our robust bookings and pipeline of business, we currently anticipate a strong first quarter of fiscal 2021 compared to the same year ago period. And with that, we're ready to open the call for your questions.

Operator?.

Thank you. We will now be taking questions from the company’s publishing sell-side analysts. [Operator Instructions] And our first question is from the line of Jaeson Schmidt with Lake Street. Please proceed..

Hey, guys. Thank you for taking my questions. Cheri, just want to follow-up on your last comments in the prepared remark -- remarks.

I mean, how should we think about just general seasonality in fiscal 2021 just given the momentum you've seen, and it sounds like expect to continue to see here in the near term?.

Yes, I think the normal seasonality of a business kind of coming down in the first quarter, we're not seeing at this point. I mean, we came into the quarter with an extremely strong backlog of over $10 million, with the great majority of that backlog scheduled to ship in the first quarter.

So we're seeing a really strong first quarter, we think parts of that are related to the CARES Act. I mean, there's some requirements within the CARES Act for bills to be completed by 12/31.

We were worried that there's probability that that will be extended, but at this point in time, people aren't kind of pushing toward getting things done this first quarter. So I'm thinking first quarter is going to be really strong. That's the outlook that we provided for the forecast.

Second quarter, I think we're going to see some of the normal new challenges associated with budgeting and forecasting and weather. But it's going to be -- the demand right now out there in Community Broadband and for fiber in general is really strong, we're very optimistic for the full year..

Okay. That's helpful.

And just given the strength you've been seeing, do you think this is more of a function of sort of a rising tide across the industry? Or do you guys think you're still taking share in your select markets?.

I think it's both. I mean, certainly across the entire marketplace, you see a lot of our -- the companies that we partner with, companies like Calix, companies like ADTRAN, Nokia, I mean, their business in the access market is definitely up. And so we're taking advantage of that market increase in market demand.

But I also believe, we're uniquely positioned due to our strength and market share in Community Broadband to take advantage of that.

We have a very in depth and established sales team that has -- is heavily distributed throughout the marketplace, coupled with our what we call our smart guys, our application engineers who are out in the field, to help organizations who are predominantly been underserved or who are new to fiber, to be able to design and run their networks.

So I think the marketplace is strong. And I think we're taking advantage of that strength of demand as well as achieving additional share throughout the process..

Okay. And then just last one for me, and I'll jump back into queue.

How should we think about OpEx going forward? It was up here sequentially in September, is this sort of a new level in fiscal 2021?.

See, until we get a little bit of seasonality of fourth quarter expenses due to compensation increases for achievement of a revenue threshold. But that said, we're scaling organization, we need to continue to be able to build into our resources as well as build into the infrastructure of our company. So our SG&A levels will not climb significantly.

But the percentage of business is probably pretty consistent at fourth quarter levels..

Okay. Perfect. Thanks a lot, guys..

You're welcome..

And our next question is from the line of Tim Savageaux with Northland Capital Markets. Please go ahead..

Thanks very much, and good afternoon and congratulations on the strong results. We certainly have been seeing that, fairly broad based across especially the rural fiber access space. And I kind of want to follow-up on that sort of high level.

It's an interesting forecast that you featured in the field report and I kind of want to follow-up on that sort of high level. It's an interesting forecast that you featured in the field report talking about 20% growth in the industry. And that seems to be somewhat of a recurring theme.

With regard to some of your recent results, your community broadband has been growing in excessive, at least the last couple of quarters. And to the extent that you don't see normal seasonality in the first quarter, you'll be growing well above that level as well.

So that 20% mark seems to be kind of a reasonable target in my view for maybe gauging the company's growth potential in fiscal 2021, I'd be interested in your thoughts on that?.

I think there's potential by which to get there. There's definitely some strong demand to put that in place. If you look at that chart from the metrics, I'm pronouncing that correctly. But it calls for that increase in calendar year 2021. So we're a little bit ahead of that right now.

What makes me comfortable that we've gained share is that, that showed a pretty heavy reduction in 2020, in regard to reduction of demand. So feel good about where we're at and kind of capitalizing on it.

I think the challenge right now in getting too far ahead of ourselves for forecasting 20% for the year, is just the uncertainty of the market that we're living in.

The COVID world issues associated potentially with deployment, with having enough availability of labor and resources to associate with we need to -- not get too far out of our in front of our skis. Appreciate the opportunity and the execution that are necessary.

We're continuing to invest, as we pointed out in the multiple facilities so that we can continue to fulfill on these requirements. So we're not getting a long-term guidance, opportunity. But the longer we get into the year, the more comfortable I'll feel with capitalizing on that market demand..

And that's absolutely fair enough. Following up on the backlog, obviously, an impressive number there. Just I have kind of two questions about that..

Are you still there?.

Can you hear me?.

Nope. There you are.

You're back?.

Am I back?.

Yep. We can hear you now..

Yes. We can hear you. .

Great. Sorry about that. Let's see backlog. Yes. And I guess the questions were I would be interested if the composition of the backlog is skewed in any particular direction in terms of your business segments, or is it pretty well distributed across your typical categories.

And in particular, what you might be seeing in terms of trends on the cable side, heading into calendar year end, obviously, your fiscal first quarter, but there are some indications that maybe they could finish the year pretty strong. I wonder if you're seeing that at all..

We think -- I mean the backlog is strongly distributed across all market categories, with the exception of international. We sell into the Canadian, Latin American Mexico markets. And those markets have been, especially Mexico and South America, Caribbean markets have been very flat.

They've been redeveloped -- redeploying their currency to other places. So you won't see a lot of international in our backlog, although we're optimistic when things stabilized in those spaces that will be better off next year. The rest of it is strong community broadband, cable TV and carrier business.

Like I said, the carrier business is a little bit of a bubble in regard to delayed orders. Our strength at cable TV is predominantly Tier 2, cable TV with some business in Charter and Content, but our strength is predominantly Tier 2.

We're very pleased, as you can know with the numbers that we're putting together and they continue to build there that are operational. The challenge again with -- as we move into the Tier 1 space with cable TV is some of the delayed orders, the more project based business that we haven't quite got into a run rate level yet to forecast.

But I definitely see cable TV responding to some of the funding that's going on in some of the underserved markets, and they're responding to really protect their franchises. So I think that'll certainly be played out next, maybe not in fourth quarter of the calendar year, first quarter of our fiscal year.

But it's certainly something that we've been investing in for a long time and look to reap some of the fruits of that next year..

Great. Thanks. And last question for me, as you maybe consider that overall growth potential in fiscal 2021. I wonder if you could address kind of what kind of assumptions you may or may not be making with regard to new product growth. You mentioned the fiber distribution opportunity.

I don't know if that $50 million was an annualized number, you felt the market opportunity might be for Clearfield, or how you were defining that.

But is there kind of a timeframe that you envision kind of ramping here, maybe towards the back half of the fiscal year?.

Right. That $50 million opportunity is an annual opportunity for our level of product. Certainly, we're not going to achieve 100% market share, but it's pretty exciting to see that kind of new market opportunity really in spaces that you weren't building before because these are difficult regions or underserved or unserved territory.

So they typically have been not economically feasible to be deployed previously. So that's really new market for us. That said, at the end of the calendar year, next year, before you're going to see significant revenue smart off, right. I mean, the auctions are currently underway, till they get awarded, and they're engineered and put in place.

I think we'll start to see revenue on that maybe 4th of July and fourth quarter of next year, our fourth quarter of next year, which really positions us well for fiscal year 2022. And we have been, it's not like we had to put resources in place for any of that, that's where we shine.

We've been building that business for the last 13 years VM and have been augmenting it now with new resources in the utility space, where we haven't been as strong but really is a -- it's a replication of the work that we did in the early days of independent telephone.

There's about 900 different utilities across the country, similar to how 10 years ago there were 900 independent telephone companies underserved works, it's refreshing actually to get back into those early days of pioneering fiber and look forward to it like I said, probably late next year..

Okay. Thanks very much, and congrats once again..

Thank you..

At this time, this concludes the company's question-and-answer session. If your question was not taken you may contact clear fields Investor Relations team at clfd@gatewayir.com. I'd now like to turn the call back over to Ms. Beranek for closing remarks..

Thank you again for joining us today. It's a tumultuous time in our country. I hope you're all safe and appreciative of the country that we live in and look forward to our opportunity to continue to make it a strong organizational environment for all of us to do business. 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 2020 earnings conference call. You may now disconnect your lines..