Clearfield, Inc. (CLFD) Earnings Call Transcript

Good afternoon, everyone, and welcome to the Clearfield Fiscal Third Quarter 2026 Conference Call. [Operator Instructions] Please note, this event is being recorded. At this time, I'd like to turn the floor over to Gregory McNiff, Investor Relations. Sir, please go ahead.

Thank you. Joining me on today's call are Cheri Beranek, Clearfield's President and CEO; and Dan Herzog, Clearfield's CFO. As a reminder, Clearfield publishes a quarterly shareholder letter, which provides an overview of the company's financial results, operational highlights and future outlook. You can find both the shareholder letter and the earnings release on Clearfield's Investor Relations website. After brief prepared remarks, we will open the floor for a question-and-answer session. 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, shareholder letter 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. With that, I will turn the call over to Cheri. Cheri?

Good afternoon, everyone, and thank you for joining us to discuss Clearfield's results for the third quarter of fiscal 2026. I'll begin with an overview of the quarter and our strategic priorities, and then I'll turn the call over to Dan to review the financial details and outlook. Third quarter net sales were $43.9 million, gross margin was 31.8% and net income per diluted share from continuing operations was $0.22. Our results reflect continued progress executing on our strategic priorities while reinforcing the strengths that have defined Clearfield. We are increasingly focused on positioning the company for its next phase of growth as a strategic digital infrastructure connectivity provider within the data center marketplace. That progress was highlighted shortly after the close of the third quarter when we received our first significant order to support a hyperscale data center project, accelerating our expansion into the data center connectivity market. The initial purchase order totals approximately $22 million, which we expect to begin shipments in early fiscal 2027. Equally important with how this opportunity developed, we became involved early in the design process, working collaboratively to develop a connectivity solution tailored to the end user's deployment requirements. That collaboration led to an expansion of our NOVA platform with the addition of a new panel developed in conjunction with the customer, which we intend to standardize and introduce to the broader data center market later this calendar year. This approach reflects the same design principles that have differentiated Clearfield for years in broadband deployments. As demand for high-density fiber infrastructure continues to grow, we believe our expertise in delivering modular labor-efficient connectivity solutions positions us well to actively engage in this expanding market. While it is too early to predict the size or timing of future opportunities, this initial engagement demonstrates that our strategy is resonating with customers and broadening our addressable market. We believe it represents an important step towards creating long-term shareholder value. Turning to the broadband market. The slow pace of the B program continues to influence customer planning decisions across the broadband industry. while states have made meaningful progress developing deployment plans, continued delays in federal approvals and funding disbursements are affecting both BEAD funded and other commercial projects. These headwinds, combined with higher deployment, labor and material costs as well as the constraint of limited fiber availability have resulted in a slower deployment environment and extended project time lines across much of the industry. The impact of the slower broadband deployment environment is reflected in our bookings for the quarter ended June 30, 2026. Despite these near-term dynamics, we continue to believe the long-term opportunity for fiber deployment remains intact. While the timing of broadband deployments remains uncertain, we continue to invest in technologies that solve our customers' challenges. As broadband, wireless, data center and edge computing networks continue to expand, customers increasingly look for ways to make deployments faster simpler and more efficient. One example of our new technology offerings is our recently announced fault managed power portfolio, which enables customers to deliver both fiber connectivity and power to difficult-to-reach locations through a single coordinated solution. By bringing fiber and power together, customers can reduce deployment complexity and create a more flexible foundation for future network growth. We believe this offering expands the role Clearfield can play in supporting our customers as their network needs continue to evolve. With that, I'll turn the call over to Dan to review our financials and outlook in more detail.

Thank you, Cheri, and good afternoon, everyone. As a reminder, in November, we completed the sale of our Nester Cables business. As a result, all financial results presented for fiscal year 2025 and all prior periods reflect the Clearfield segment as continuing operations only, with [indiscernible] results reported under discontinued operations in our statement of earnings and statement of cash flows and reported as assets and liabilities held for sale in our balance sheet. Third quarter net sales were $43.9 million, an increase of 13% from $38.8 million in the third quarter of fiscal 2025. The increase was driven by higher revenue across the majority of our customer markets. Revenue also increased 28% sequentially, reflecting the seasonal nature of our business. Gross profit margin for the third quarter of fiscal 2026 was 31.8% compared to 35.3% in the third quarter of fiscal 2025 and 32.5% in the second quarter of fiscal 2026. Our gross margin reflected several onetime items during the quarter that on a net basis reduced gross margin by approximately 1.8 percentage points. Operating expenses from continuing operations for the third quarter of fiscal 2026 decreased 6% to $11.4 million or 25.9% of net sales compared to $12.1 million or 31.3% of net sales in the third quarter of fiscal 2025. Operating expenses also decreased 14% or $1.8 million from $13.2 million in the second quarter of fiscal 2026. Net income in the third quarter of fiscal 2026 was $3 million or $0.22 per diluted share compared to net income of $2.3 million or $0.16 per diluted share in the third quarter of fiscal 2025. This compares to a net loss of $500,000 or $0.04 per diluted share in the second quarter of fiscal 2026. We ended the quarter with approximately $155 million in cash, short-term and long-term investments and no debt. During the quarter, we repurchased approximately 31,000 shares for $897,000 as part of our share buyback program. For the fourth quarter of fiscal 2026, we anticipate net sales from continuing operations in the range of $38 million to $42 million. Total operating expenses to remain relatively consistent with our second quarter and net income per diluted share in the range of breakeven to $0.07. As Cheri mentioned, industry demand constraints are forcing us to reduce our guidance for the full fiscal year 2026. We expect net sales from continuing operations to be in the range of $151 million to $155 million and net income per share to a range of $0.14 to $0.21. And with that, we will open the call to your questions.

[Operator Instructions] Your first question comes from Ryan Koontz from Needham.

I wanted to ask about the different customer segments here. Community Broadband had a decent uptick probably a little less than seasonal in -- going from March to June? And can you maybe expand on that, some of the trends you saw? Is it because your customers are holding back capital to wait for be matching? Or is it because they're just in paralysis -- or maybe talk about what's happening in the rural territories.

Right. Ryan, the community broadband marketplace, I think, is principally being affected by 2 different issues. One is BEAD any uncertainty associated with it. And as a result, it's affecting not only the dollars but other dollars that are -- where do they put their capital -- and so there -- because they're waiting for BEAD, they can't put their capital into commercial -- other commercial environments and case speed would come into play. So it's kind of a double-edged sword in that world. But equally, a result is really the lack of fiber in the U.S. I mean we started the year really strong -- we saw really strong quoting activity. Early in the year, we had a really strong backlog as we came into the bookings over the winter months. And then we saw everything kind of take a, oh, we got our bookings and our quoting from the environment, but the lack of being able to get fiber from U.S.-based manufacturing where most of the customers are waiting because they don't want to have multiple. I want to make sure they've got what's available in their inventory for either direction they might go. And so while there is fiber activity happening in the market, it's predominantly with the national carriers, that's who's getting in the business or getting the fiber in the U.S. But you saw that even that Corning earlier this week -- or last week, I guess, it was announced that their total carrier business was up only 1%. So you see the lack of fiber is actually not just in the carriers, it's because of the data centers or have got all the fiber. It's a frustrating approach in which the demand is there, but the market availability to get the fiber to make it happen. Just isn't there yet. And so as a result, the early indicators that we saw in the spring didn't materialize in the summer.

Right. So it sounds like the Tier 2 MSOs are a pretty similar story that you just outlined for Community Broadband?

Exactly. I mean they are the same type of customer that they're not issuing $100 million or $1 billion purchase order according there. They're looking for -- and so they're not a strategic account for the big fiber provider. And as a result, they're getting second fiddle. They're getting allocations and those allocations are significantly less than what they started with. We're seeing these projects either being delayed until next year or significantly reduced in size and scope.