Yahoo Finance Clearfield, Inc. (NASDAQ:CLFD) Q2 2024 Earnings Call Transcript
Clearfield, Inc. (NASDAQ:CLFD) Q2 2024 Earnings Call Transcript May 2, 2024
Clearfield, Inc. misses on earnings expectations. Reported EPS is $-404.04692 EPS, expectations were $-0.53. CLFD isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, greetings, and welcome to the Clearfield Fiscal Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg McNiff, Investor Relations for Clearfield. Please go ahead, sir.
Greg McNiff: Thank you. Joining me on the call today are Cheri Beranek, Clearfield's President and CEO; and Dan Herzog, Clearfield's CFO. As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward through the presentation as the speaker presents their remarks. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.
It is important to also note that the company undertakes no obligation to update such statements, except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, earnings presentation and on this conference call. The Risk Factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. They are also summarized on Slide 2 of the earnings presentation. With that, I'd like to turn the call over to Clearfield's President and CEO, Cheri Beranek. Cheri?
Cheri Beranek: Good afternoon, everyone. Thank you for joining us today to discuss Clearfield's results for the fiscal second quarter 2024. We also intend to provide an update on our business and current market trends. Please turn to Slide 4. While we view 2024 as a transition year, we believe that the quarter ending in March represents the beginning of a gradual recovery as broadband service providers continue to deploy equipment and long-term demand remains robust. In the following slides, I will discuss the latest market data, which supports this year. Total net sales for the second quarter of fiscal 2024 were $36.9 million above the high end of our guidance range, driven by higher-than-expected sales from our community broadband customers, as this customer segment was the least impacted by the inventory overhang.
Dan will discuss our financial results for the quarter in more detail shortly. I would note that while we continue to expect ordering patterns for the remainder of the year to be impacted by the inventory overhang predominantly in our large regional and MSO accounts, we have seen a pickup in quoting activity in our second quarter across all markets that is more consistent with the traditional build season. While we believe the recovery will be a gradual process, we remain focused on positioning Clearfield to take share when ordering patterns return to a more normalized cadence. We also continue to expand and enhance our product portfolio. As we announced in February, our newest active cabinet delivers a right sized small footprint option for roll expansion.
The small form factor of the FiberFlex 600 is designed to configure the numerous applications, including remote passive optical network distribution, wireless base stations with fiber backhaul aggregation and active network equipment with backup power needs, utilizing a flexible layout. This is Clearfield's latest and smallest sized option in the FiberFlex series. With its small form factor, the FiberFlex 600 will give our customers more flexibility in how it is deployed in the outside plant, helping to overcome permitting and right away challenges as they look to deploy fiber broadband in less populated areas. As with our CraftSmart and FieldSmart products, we are working to ensure these products and all other Clearfield offerings will be compliant with the Build America, Buy American Act, known as BABA, as required by the Broadband Equity and Access Deployment Program legislation, known as BEAD.
I want to provide a brief update on the BEAD process. As many of you know, the states have started announcing RFPs. While this is a great progress, we do not expect to recognize any significant revenue from customer participation in the BEAD program until calendar year 2025. Turning to the overall industry outlook as illustrated on Slide 5, industry forecasts from RBA indicate that the next 5-year period will see up to 59 million additional homes passed with fiber, which equates to a 12.5% compound annual growth rate. Of these 59 million homes, roughly a third are forecasted to have access to more than 1 fiber provider. We believe the introduction of a 2-fiber competition among providers is a very healthy development and expands our total addressable market.
Coming back to Clearfield's performance, I'd now like to pass the call over to our CFO, Dan Herzog, who will walk us through our financial results for the fiscal second quarter 2024.
Dan Herzog: Thank you, Cheri, and good afternoon, everyone. Please turn to Slide 7 to look at our fiscal second quarter 2024 results in more detail. Consolidated net sales in the second quarter of fiscal 2024 were $36.9 million, a 49% decrease from $71.8 million in the same year ago period but above our guidance range of $29 million to $33 million. The year-over-year decrease in total net sales was due to lingering inventory headwinds we have talked about in the past. As we transition into the build season, we anticipate a gradual uptick in orders more closely aligning with traditional ordering patterns. Throughout this transition phase, we remain focused on reducing costs and enhancing margins across the company. In Europe, this effort involves strategically investing in more efficient manufacturing equipment and introducing higher margin plug and play connectivity products.
Additionally, we continue to be focused on labor utilization for enhanced productivity in order to improve gross margins at all our manufacturing locations, alongside efforts to reduce our inventory levels to enhance cash flow from operations. Order backlog increased 9% to $47.2 million on March 31, 2024 from $43.5 million on December 31, 2023. This quarter stands out as the first time in several quarters where our backlog has shown a sequential increase. We interpret this as an encouraging indicator of normalizing ordering patterns during a build season, while customers continue to work through their inventory. We are continuing to collaborate with our customers to align their open orders with their current deployment schedules. As a reminder, we expect backlog to become less of an indicator for future sales as most orders will be fulfilled within the quarter they are received.
Our lead times average 4 weeks across most product lines. Turning to Slide 8. I will now review net sales by our key markets. Sales to our primary market, community broadband, comprised 43% of our net sales in the second quarter of fiscal 2024. In Q2, we generated net sales of approximately $16.1 million in community broadband, down 52% from the same period last year. As Cheri mentioned, our community broadband market experienced a sequential uptick of 32%, driven by a gradual increase in orders, including some new customers in the space as providers are preparing for the upcoming build season. Net sales in our MSO business were $5 million, which comprised 13% of our net sales net sales in the second quarter and decrease by approximately 50% in the second quarter of this fiscal year, versus the prior year second quarter.
Net sales for the second quarter in our large regional service provider market were $3.2 million comprising 9% of our total net sales and declined by approximately 75% in the second quarter of this fiscal year versus the prior year second quarter. These customers continue to have a concentration of inventory from which they are deploying. Future quarters could be lumpy in this segment due to product mix concentrations and potential changes in their deployment strategies. Net sales in our national carrier market for the second quarter were $2.1 million accounting for 6% of total net sales and were relatively unchanged in the second quarter of this fiscal year versus the prior year second quarter. Finally, net sales in our international market were $9.9 million and comprised 27% of total net sales in the second quarter.
Net sales in this market decreased by approximately 24% in the second quarter of fiscal 2024 versus the prior year second quarter. Revenues in Northern Europe were affected by a late spring and some economic issues in Finland. We anticipate a sequential increase in this market due to seasonality. As illustrated on Slide 9, gross profit margin in the second quarter declined to 7.7% of net sales from 32.8% of net sales in the same year ago quarter. Our gross margin continues to be impacted by unabsorbed overhead in our manufacturing facilities and an increase in reserves for excess inventory due to the current low levels of demand. As mentioned on the prior quarter earnings call, noncash excess inventory charges in the second quarter did increase sequentially by $1.5 million to about $5.2 million in the quarter.
While we continue to expect revenue and gross margin in the second half of fiscal 2024 to be impacted by elevated inventory levels at our customers, we believe the second fiscal quarter represents the bottom of our customers' inventory digestion phase. As we transition into the build season, we expect order volumes and patterns to gradually improve. This anticipated increase in capacity utilization should subsequently result in improvements in gross margin levels. Now please turn to Slide 10. Operating expenses for the second quarter were $12.6 million, up from $11.5 million in the same year ago quarter. The company continues to strategically invest in the organization yet with a prudent and disciplined approach to its cost controls. As a percentage of net sales, operating expenses for the second quarter were 34.1%, up from 16% in the same year ago period due to lower sales volumes.
Turning to Slide 11, net loss in the second quarter was $5.9 million, compared to net income of $10.4 million in the same year ago period and net loss of $5.3 million in the first quarter of fiscal 2024. Our net loss was heavily affected by our reduced volume levels, which in turn resulted in lower gross profit percentage and was also affected by the noncash inventory reserves I mentioned earlier. As illustrated on Slide 12, our balance sheet remains healthy with $149 million of cash, short term and long-term investments and just $2 million of debt. We had $2 million in capital expenditures in the quarter, mainly to support our manufacturing operations and $4.4 million year-to-date. Our inventory balance decreased from $95 million at the end of first quarter of fiscal 2024 to $84 million in the second quarter of fiscal 2024.
Our cash, short-term and long-term investments reflect a reduction of $20 million from December 31, of which $15.5 million was associated with the repurchase of shares in the second quarter. While we recorded the use of $3.2 million in our cash flow from operations in the second quarter, year-to-date, we have generated $4.6 million from operations. Our healthy balance sheet continues to ensure our readiness to competitively pursue larger customer prospects and strategic opportunities to enhance our market product portfolio. Likewise, our strong cash balance positions us to manage the business for the long-term and through our share repurchase program, reinvest for the long-term. Please turn to Slide 13. We anticipate third quarter fiscal 2024 net sales to be in the range of $40 million to $44 million.
We expect to generate a net loss per share in the range of $0.31 to $0.38. This loss per share range is based on the number of shares outstanding at the end of the second quarter and does not reflect share repurchases in the third quarter. While our visibility remains limited beyond this quarter, we are encouraged by signs indicating ordering patterns are beginning to normalize with the onset of the build season and could follow the historical trend that our revenue in fiscal third and fourth quarters have been consistent with each other. As I indicated earlier, we repurchased an additional $15.5 million 00,000 in stock in the second of our share buyback program, which represented 543,439 shares at an average price of $28.48. Our belief in the value of our company and the market opportunity remains unchanged as demonstrated by the size and scale of our buyback program.
As such, our Board of Directors has increased our share buyback authorization from $40 million to $65 million giving us $30.4 million authorized for additional repurchases when added to the $5.4 million repurchase amount available as of March 31, 2024. This increase in our buyback authorization is a clear and proactive commitment on our part, driven by our strong conviction that our current share price is not reflective of our long-term opportunity. That concludes my prepared remarks for our fiscal second quarter 2024. We appreciate the support of our investors as we continue to work to drive shareholder value. I will now turn the call back over to Cheri.
Cheri Beranek : Thanks for the financial update, Dan. Turning to Slide 15, I would now like to provide a brief update on our multiyear strategic plan, which we have labeled LEAP. As a reminder, LEAP is our roadmap for how we intend to capitalize on the significant opportunities ahead when industry demand returns to a more normalized cadence. Clearfield continues to build our product offerings to be craft friendly with the inherent goal of reducing the cost of deployments by improving installation time. To aid in this process, we have long provided in field as well as classroom and online training through Clearfield College. In March, Clearfield announced the availability of an app-based 3D interactive training tool that provides an easy way to streamline the installation process.
This solution is delivered on the built platform and is available at no extra charge. The animated guides were developed in response to the Clearfield customer base and will help reduce installation errors, time and field issues by ensuring field technicians have access to the information they need right at their fingertips. This training tool is exactly what cyber technicians are in need of, offering interactive guidance for step-by-step instructions without relying on manuals. We believe this is how today's workforce and particularly new hires can learn how to install Clearfield products correctly, so that our customers can move quickly from deployment to service availability. Today's workforce is more tech savvy and digitally oriented, making it ideal to develop an installation tool that aligns with their preferred methods of learning and consuming information.
The availability of Clearfield instructions in the BILT app is part of the company's commitment to improve workforce development practices and tools. As the industry works to increase the fiber technician workforce, this 3D interactive based tool makes it easier to onboard and attract the newer generation of technician. Both voice and text guidance for Clearfield products are immediately available in English, Spanish and German. Anyone can download the free built app worldwide from the App Store or Google Play. As we expressed last quarter, we remain confident that the long-term demand for fiber is as strong as ever, and Clearfield is well positioned to help service providers meet that demand. And with that, we will open the call to your questions.
Operator: [Operator Instructions] Our first question is from the line of Ryan Koontz with Needham & Company.
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