Good afternoon. Welcome to Clearfield's Fiscal Second Quarter 2021 Earnings Conference Call. My name is Paul 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 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 controlled 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 all are continuing to stay safe and healthy. It's a pleasure to speak with you this afternoon. And to share Clearfield's results for the fiscal second quarter and first six months of 2021.

During the second quarter, we saw demand for fiber-fed broadband networks expand across the Community Broadband market. As you can see on slide four, this robust demand help drive a 45% increase in net sales to a record $29.7 million.

Our growth in the period was again led by double digit increases from our Community Broadband and MSO markets, which were up 68% and 60% respectively.

As our performance demonstrates, Clearfield is strongly executing on its brand promise of providing highly configurable fiber distribution and pathway products to meet broadband service provider requirements.

Sales bookings started strong in January and accelerated throughout the quarter end, resulting in a 115% increase in backlog growing to $19.2 million on March 31 2021 versus $9.3 million on March 31 2020.

We expect to ship the majority of our backlog during fiscal quarter three and have begun to receive longer scheduled orders as service providers establish a longer term deployment plan. Our strong top line performance and business model leverage helps to produce solid gross profit and net income margins in fiscal quarter two.

Gross margin dollars totaled a record $12.9 million up 59% from quarter two last year. As a percentage of that sales our 43.6% margin was up from 39.9% in quarter two of last year. Moving down to P&L, as expected, our expenses increased modestly year-over-year, resulting in $3.6 million in net income or $0.27 per diluted share.

This was a significant improvement from the $750,000 or $0.5 per diluted share in earnings we generated in Q2 of last year. We anticipate expenses to increase slightly in future quarters as we invest an additional resources within our Community Broadband programs and as business travel limitations start to decrease.

Our robust financial performance in quarter two, contributed to a record first half for Clearfield. At a high level we’ve generated $56.8 million in net sales through our first two quarters of fiscal 2021 which was up 43% from the same period of last year.

Our favorable product mix in the period, coupled with our ongoing efficiency measures helped generate $24.3 million in gross profit, an improvement of 53% compared to last year. We also delivered 42.8% gross profit margin for the period, which was compared to 39.9% last year.

From a profitability perspective, we generated $6.8 million in net income or $0.50 per diluted share, which was a significant improvement compared to $1.2 million or $0.09 per diluted share in the first half of last year. Looking at our market segments by net sales on slide 5. Starting first with our core Community Broadband market.

In the second quarter of fiscal 2021, we generated net sales of $20.5 million to this market, which was up 68% from the same period last year. For the trailing 12 months ended March 31st 2021, Community Broadband markets net sales totaled $75.5 million, which was up 44% from the comparable period last year.

Our MSO business comprised 13% of our net sales in fiscal quarter two.

From a growth standpoint we built on the momentum we established over the last several quarters, realizing a 60% year-over-year increase in net sales to $4.2 million in the second quarter of fiscal 2021 and a 48% year-over-year increase to $14.6 million for the trailing 12 months ended March 31 2021.

Net sales in our National Carrier market was down 15% year-over-year to $12.1 million for the trailing 12 months ended March 31 2021. As I've talked about previously, our position in the National Carrier market is related to the continuing demand for fiber to the home and fiber to the business application.

As COVID constraints have limited the deployment of 5G solutions into the access part of the network, net sales to our Tier 1 customers in the second quarter of fiscal 2021 decreased 42% year-over-year to $2.3 million. Although sales in our Tier 1 market have not yet experienced the same robust growth as our other markets.

We continue to support ourselves presence in the Tier 1 National Carrier market for both fiber to the home in business as well as 5G initiatives. We shipped several new products into that market during Q2 and are working to gain a stronger foothold with them.

As we have previously communicated the global pandemic has stalled the introduction and training of our new technologies into the Tier one market. As 5G deployments into the access network increase, we are optimistic for increasing net sales among Tier 1 markets moving forward.

Net sales to our International market was up 105% year-over-year in the second quarter, and remained flat year-over-year the trailing 12 months ended March 31 2021. As the pandemic begins to get under control, fiber-fed broadband in Mexico and Canada is showing a resurgence in demand.

Net sales is our legacy business was flat year-over-year in Q2 and down 31% year-over-year for the trailing 12 months. This legacy part of our business is highly dependent upon the two key customers in this segment. We believe that business to be fluctuating through normal levels due to the slowdown in the economy related to COVID.

With that, I'll now turn the presentation over to Dan, who will walk us through our financial performance for the second quarter of fiscal 2021..

Thank you, Cheri. And good afternoon, everyone. It's great to be speaking with you today. Now looking at our second quarter financial results in more detail. As you can see on slide seven, our net sales in the second quarter of fiscal 2021 increased 45% to a record $29.7 million from $20.4 million in the same year ago period.

The increase in net sales was primarily due to higher sales in our Community Broadband, MSO and International markets partially offset by decreases in our National Carrier markets.

Turning to slide eight, gross profit for the second quarter of fiscal 2021 increased 59% to $12.9 million, or 43.6% of net sales from $8.2 million or 39.9% of net sales in the same year ago quarter. The increase in gross profit dollars was due to higher sales volume.

The increase in gross profit margin was due to a favorable product mix associated with the increased net sales in our community broadband markets and cost reduction efforts across our product lines including increased production at our Mexico plants as well as manufacturing efficiencies realized from higher sales volumes.

As you can see on slide nine, our operating expenses for the second quarter of fiscal 2021 were $8.5 million, which were up from $7.4 million in the same year ago quarter. As a percentage of net sales, operating expenses for the second quarter of fiscal 2021 were 28.6%, down from 36.4% in the same year ago period.

The increase in operating expenses on a dollar basis was primarily due to additional headcount and higher compensation costs related to compensation accruals and increased stock compensation expense offset by lower travel and entertainment costs. Turning to our profitability measures on slide 10.

Income from operations was $4.5 million in the second quarter of fiscal 2021, which compares to $720,000 in the same year ago quarter. Income tax expense increased to $935,000 in the second quarter fiscal 2021, with an effective tax rate of 20.4%, up from $190,000 in the second quarter of 2020, which had an effective tax rate of 20.3%.

Net income total $3.6 million, or $0.27 per diluted share, an improvement of approximately $2.9 million over the $750,000 or $0.05 per diluted share in the same year ago quarter.

Before I turn it back over to Cheri, I'd like to provide a brief update on the operational measures we've taken to protect and support our business, our personnel and customers since the COVID-19 pandemic took hold and how we are continuing to effectively navigate the current environment, both reflected on slide 11.

I am encouraged to report that Clearfield continues to remain fully operational. The majority of our non-production employees are working remotely effectively using collaboration tools and video conferencing to stay connected. Our production operations in both the U.S.

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

As many of you know, we do source most of our components to cover multiple points of failure and provide purposeful redundancies to reduce potential risks. While the COVID-19 pandemic has dramatically boosted broadband demand, it is also created supply chain challenges to fulfill that demand.

Thankfully, the strong partnerships we have built with our suppliers globally have and will continue to be crucial. At the outset of COVID, we made the decision to maximize the availability of all product lines at all three of our plants by ensuring that each location can manufacture across the broad product portfolio.

We are optimistic that we will be able to procure the necessary components for our growth ahead.

However, the pressure on the supply chain by increased demand and global supply chain disruptions caused by the pandemic, the harsh Texas winter container shortages, the blocking of the Suez Canal, and other logistical issues have shown how fragile the supply chain can be.

In particular, Clearfield's manufacturing requires supplies of raw materials like optical fiber cable and resins necessary for its fiber management product line. That concludes my prepared remarks. I will now turn the call back over to Cheri.

Cheri?.

Thanks, Dan. Now looking at our operational initiatives and focus in fiscal 2021 highlighted on slide 13. Our strategic plan for this multiyear initiative to enable Clearfield to come of edge. Our organization has specific and measurable objectives designed to increase our top line, reduce our costs, and expand our reach.

Key to our success really is our loyalty to the providers that have grown alongside us while leveraging new innovations for the integration of wire line and wireless networks as we move into new markets.

This brings me to our first pillar; building a better broadband, one community at a time, it leverages Clearfield long standing customer and partnership relationships to build brand awareness and expertise. As I mentioned, if Clearfield was built to facilitate the enablement of pervasive high speed broadband to underserved and unserved communities.

Clearfield's position within the Community Broadband market has never been better. Our track record and reputation has positioned us extremely well. We continue to grab market share and further capitalize on the expansion that's currently underway. Clearfield remains committed to fulfilling the increased demand of smaller providers across the country.

We began investing early last fall in our drop-cable production facilities, because we anticipated take rates would increase among existing providers, as potential subscribers were added to existing networks.

This timely investment has proven to be a meaningful and competitive advantage, as we continue to offer superior lead times compared to the competition. In addition, as providers with multi state networks are now building or overbuilding their networks with fiber, we are developing an increasing presence within the Tier 2 community.

We anticipate this market based demand will continue moving forward. A key market driver is the government financed broadband programs under the Rural Digital Opportunity Fund or RDOF that is currently in the planning stages for providers.

In addition, while the recently announced American Jobs Plan within the Biden infrastructure bill is still being debated in Congress. The White House has requests for $100 billion in funding for sustainable high speed broadband is a positive reflection unexpanded fiber opportunities we believe are possible in the years ahead.

Our second pillar, is delivering innovation for true one fiber deployment. The foundation of one fiber deployment began with the development and introduction of the Clearview Cassettes. This Cassette is the central building block of every element of Clearfield still smart product portfolio.

This 12 core building block is designed in multiple configurations and then manufactured in volume, as it is designed to handle the toughest operating environments, it provides flexibility, as well as reliable performance within the inside plant, outside plant and access networks.

Delivering the most scalable fiber management platform in the industry, Clearfield ensures the service providers investments and capital equipment and grow alongside their subscriber take rates.

Reducing the overall footprint of the fiber management element reduces real estate costs and improves the density without compromising critical design elements of access, bend radius protection, physical fiber protection and route path diversity. Our third pillar involves scaling operational excellence for a superior customer experience.

Our production facilities in Mexico continue to provide meaningful competitive advantages to both Clearfield and our customers.

Not only have our Mexico facilities enhance our overall production capabilities, and produce cost effectiveness, but they have also allowed us to deliver product to customers in a timeframe that our competition simply can't match.

To maintain these advantages, we have systematically added capacity over the last several months to meet the growing demand we are seeing for our products. And we'll continue to evaluate for our needs on an ongoing basis.

Looking ahead to the balance of fiscal 2021, the rural broadband market remains ripe for growth and the strategic investments we have made and their presence we've established over the last 10 years will be beneficial for Clearfield.

While the volatility of the supply chain potentially poses challenges in the near term, our growing backlog, expanding pipeline and building the market demand is this confidence in our ability to realize net sales of $120 million to $125 million in fiscal 2021, which represents year-over-year growth of 32% as the midpoint.

As travel reemerges, we anticipate our selling general and administrative class will grow moderately. In addition, we will be making strategic investments in additional customer facing positions in order to maintain our leading customer service programs for our expanding customer base.

For the remaining quarters of fiscal 2021, we anticipate net income to be at or above 12% as a percent of net sale. In summary, our consistent financial performance highlighted by 13 years of profitability and positive cash flow demonstrates the durability of our business and a range of environments.

Clearfield continues to benefit from and take advantage of robust industry tailwinds, and Clearfield's established presence within our key growth markets. We remain confident the demand for fiber-fed broadband will continue through fiscal 2021.

Longer term or an enhanced Comes of Age plan with target growth in fiber-fed broadband and 5G access fiber positions us for continued success for Clearfield's in the years ahead. And with that, we're ready to open the call for your questions. Operator..

[Operator Instructions] Our first question comes from Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question..

Hey, guys, thanks for taking my questions. And congrats on early impressive results. Want to start with the outlook, which was also really strong. Obviously expecting some nice growth here in Q3 and Q4.

Does this assume any meaningful pickup in the National Carrier business? Or is this largely just continued momentum in the Community Broadband segment?.

It's absolutely based upon Community Broadband and the strength that we've seen today within Community Broadband and the MSO world. The mature one markets, I would say, we've yet to establish true momentum in that area. So that is not part of the growth initiative or growth outlook..

Okay. And then just looking at fiscal 2021, some really nice growth looks back did.

I mean, when you sit here today, are you at all concerned that there has been some pull forward in demand?.

Jaeson, I would say there might be a little bit of a pull forward maybe a little bit of what I'd call panic buying to get some stuff, get people in place for their orders, because there certainly have been the supply chain initiatives and general availability concerns.

But in general, I wouldn't say this is -- I have no concern about it being ongoing or continually viable. This is absolutely a trend and ongoing momentum. It's not, our perception is not a spike..

Okay, that's helpful. And then just the last one for me, and I'll jump back into queue, just want to clarify some of your comments on the supply chain.

Were you at all impacted by constraints in the quarter?.

Not at this point, our group or procurement group has been doing an amazing job. I would call it spinning plates, as we kind of walk through issues between bringing in product.

And I think it's just to me think about the standpoint that we've got, your products coming in on boat with their products coming in on airs, then you’ve get boats sitting in waiting to unload. Just trying to be able to put that all together has been a little bit of a challenge. But it did not impact our ability to provide products.

If you're alluding to the backlog, that backlog came in when we were we were on our call last in January, we talked about that January had started strong. And it just continued to escalate from there and extremely strong March and in providing the same level of a general viability as we would ongoing basis.

And as I indicated in the call, the preliminary notes, we anticipate to be having majority of the backlog that we have in place shipping in quarter three..

Okay. Thanks a lot, guys..

You're welcome. Thanks again, Jaeson..

[Operator Instructions] Our next question comes from Tim Savageaux with Northland Capital Markets. Please proceed with your question..

Hi, good afternoon, and my congratulations as well on the results. I wanted to focus on your commentary about at least the beginnings of some visibility extending beyond what's normally a pretty short cycle business for you guys. And some orders scheduled farther out into the future.

I wonder if you could give us a little more color perhaps on how far that visibility might extend. And maybe relative to the backlog that you saw in the quarter significant increase, how meaningful that longer dated demand is, and whether that's also coming from Community Broadband..

Tim, what we see happening in this space is, is people from a legacy standpoint, over the course of, I'd say, the last five years, many of our customers would look at this, and would identify for us, this is what we're anticipating this year.

What we're seeing now is a commitment to build out their entire networks, and having multi-year initiatives that they're committed to building out and passing the majority of their homes, working through projected take rates, because in the past it was more of an orientation of a kind of a build strategy that was success based.

Whereas today, I think the success is ensured, because broadband tick rates are so high. And so there's a longer term commitment to those bills. As it relates to our backlog, a little of that is staged deployment.

And that's for bills that were orders that we were getting in March, some from some larger suppliers that were looking at helping us stage our bills and giving us orders that were not long, long-term, but saying I want X to in March, Y in April, Z in June, so that they could get into the production schedule.

And we're working to ensure that all of our customers can get the products that they need, and not put ourselves in a position or our customers in a position where customers might see stockpiling equipment and coming at the expense of others.

So we're really trying to work collaboratively with all of our customers, so that we can really help ensure they get the products that they need..

Okay, thanks. And you mentioned kind of RDOF being in the planning stages, obviously awards have been made.

From your perspective is there any dynamic or potential dynamic around kind of spending or planning occurring now, kind of in perhaps in advance of actual receipt of funds, or a lot of these projects are separate and distinct from what you might see in your kind of current or core community Broadband customer base..

Yes, I mean, revenue to-date has very isolated. There's some pockets of our loss related business, but principally. This is -- we do not see RDOF funds in our current revenues or in our backlog.

What we see on the RDOF world is people now getting their plans together, putting out their engineering drawings, really going into markets where they haven't been involved in before. So we believe we're going to start to see that revenue in the very tail end of quarter three, and then in a more meaningful basis in quarter four.

But basically, that's a calendar year 2022 opportunities starting and what the feds have asked for and hoping for is that we can see 40% of those funds that have been allocated to happen in the first three years. So I really think that shows significant opportunity for 2022 and 2023, as well..

Great. Thanks for that. Over on the Tier one side of the business, we have seen some dynamics with various of the Tier one carriers getting a pretty early and fast start to the year.

Now, understanding that your Tier 1 customer base doesn't always match up with some of the kind of near term strength we've seen at least high level spending numbers from guys like AT&T and Horizon.

But maybe you can give us a little more color on the dynamics around your Tier one business and what might be driving that to the extent it's not just some of the C-band stuff or fiber to the home deployments, larger carriers that you’re doing?.

There's a lot of money being spent by the wireless carriers, especially as it relates to C-band, the C-band work where they spent a fortune on spectrum. And that C-band work for deployment is principally going to be based at the tower, it's not going to be based at the small cell.

So that's good for the incumbent provider that has those towers and its good for the consumer because it means that they'll get a you get 5G service on their cell phones faster. It means that our opportunity for 5G, which is going to be small cell based has been delayed into the year and potentially into next year.

The challenge is, I think that if not, that doesn't mean that that revenue isn't going to be there. It means that true 5G performance that we want to see in regard to true low latency and the high speed as well as is still coming.

But it has been the reason that we have seen a lack of the same kind of growth has not shown up in the Tier one base because of it..

Got it. Thanks very much. I'll pass it on and congrats once again..

You're welcome. Thank you..

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

Thank you, Paul. And thank you, all of you for joining us today. We look forward to updating you again soon on our progress. Happy spring and talk to you soon..

Thank you for joining us today for Clearfield's fiscal second quarter 2021 earnings conference call. You may now disconnect..