Good afternoon and welcome to Clearfield's Fiscal Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Nick, and I will be your operator for this afternoon. I will now pass the call over to Mr. Matt Glover from Gateway Group. Please go ahead.

Thank you, operator and good afternoon. Joining us for today's presentation are Clearfield's President and CEO, Cheri Beranek, and CFO, Dan Herzog. Following their commentary, we will open the call for questions. I would 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 Field Report, which is available in the investor relations section of the company's website. Please note that during 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's 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, Field Report, and in this conference call. The Risk Factors section in Clearfield's most recent Form 10-Q filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q, provide 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 speaker presents their remarks. With that, I would like to turn the call over to Clearfield’s CEO, Cheri Beranek. Cheri?

Thanks. Good afternoon, everyone and thank you joining us today. It is a pleasure to speak with you this afternoon to share Clearfield's results for the fiscal fourth quarter and full year 2022 And to provide an update on current business conditions and market trends. Clearfield delivered another phenomenal quarter of financial results in the fourth quarter, continuing our trend of record setting financial performance. Total net sales for the fourth quarter were $95 million, which includes a $7 million contribution from Nestor Cables acquired on July 26, 2022. We also set a new record for annual results in full fiscal year 2022 with total net sales of $271 million. We are very proud of these results. It reflects the strong execution and tenacity of our team through a challenging macroeconomic environment and industry labor shortage. The significant double-digit growth in organic Clearfield's quarterly results was driven by a 91% year-over-year increase in community broadband revenue. Clearfield is a major player in delivering high-speed broadband to underserved and unserved communities across the United States. After successfully completing our Now of Age strategic plan in fiscal year 2022. We recently launched its successor, our new Leap Plan to step up our ability to expand capacity and to rapidly scale our business. The rising demand for our scalable craft friendly high-speed broadband solutions is evident when looking at the backlog for organic Clearfield, which increased 142% at fiscal year-end to $160 million. Currently, approximately two thirds of our backlog is expected to ship within the first two quarters of the fiscal year. With our focus on continuing strong execution broadband industry tailwinds that include robust federal subsidies, and our current visibility into our backlog and the pipeline behind it. We are guiding to estimated revenue of $380 million to $393 million, representing…

Thank you, Cheri, and good afternoon, everyone. It's a pleasure to be speaking with you today about our fiscal fourth quarter and full year 2022 results. Looking at our fiscal fourth quarter and full year 2022 results in more detail. Consolidated net sales in the fourth quarter of fiscal 2022 were record $95 million, a 110% increase from $45 million in the same year ago period, and up 33% from $71 million in our third quarter of 2022. This figure includes $88 million from organic Clearfield and a $7 million contribution from the two-month period that we own Nestor Cables, which we acquired on July 26. The increase in net sales was due to higher demand across our core end markets, particularly in our community broadband, multiple system operator and national carrier markets, consistent with our past quarters of fiscal 2022. Strong momentum and sales bookings continued into the fourth quarter of fiscal 2022 resulting in a 148% year-over-year increase in our sales order backlog. Order backlog grew to a record $165 million on September 30, 2022, up from $157 million on June 30, 2022 and up from $66 million on September 30, 2021. As we've previously discussed, we expect the expanded capacity at our Mexico and U.S.-based facilities will enable us to capitalize on the significant revenue opportunities we expect for the quarters ahead. I'll now review net sales by our key markets. Sales to our primary market community broadband comprised 61% of our net sales in the fourth quarter of fiscal 2022 consistent with prior quarters in fiscal 2022. In Q4, we generated net sales of approximately $58 million in community broadband up 91% from the same period last year. In addition for the trailing 12 months ended on September 30, 2022, our community broadband market net sales…

Thanks, Dan. As I mentioned in our opening remarks, we recently launched our new multi-year strategic plan Leap after successfully executing on our previous Now of Age plan. To us Leap means jumping higher, further and with greater force. The Leap plan is our roadmap to how we will scale as a company in order to seize the opportunity Clearfield was built to achieve. There are four tenants in our Leap plan, one for each letter. The L is to leverage our decade long excellence and community broadband. We are a leader in community broadband fiber connectivity and has been focused on serving this market since we were founded. We make decisions by listening to our clients and understanding their evolving needs. Building on our decade plus of proven success in this market. We've demonstrated that we can nimbly adapt to a changing marketplace and grow with our customers as they grow. One building block of this tenant is our innovative Fast Path approach. Fast Path uses in cassette splicing to significantly reduced fiber distribution hub cabinet class and speed up installation time. This enables broadband providers to pass twice as many homes as a competition, while also reducing the time to turn up new dwellings by 50%. We were able to leverage our deep expertise in community broadband to develop a solution that is particularly well suited for this market were faster fiber deployments are a clear competitive advantage. The E is to execute capacity enhancement. This tenant is the successor to the Now of Age pillar augmenting capacity for ongoing growth. For Clearfield, maintain its leadership position continue to gain market share from competitors and grow the business overall, our capacity must continue to expand to address the significant market demand for fiber broadband. There are several recent…

Thank you. [Operator Instructions]. First question comes from Jaeson Schmidt, Lake Street. Please go ahead, sir.

Hey, guys. Thanks for taking my questions. And congrats on some really impressive results and a fantastic outlook. Want to start Cheri with kind of your most recent comments there towards the end about some uncertainty in the second half of your fiscal year. Is this what your customers are already telling you or are already seeing? Are these concerns more due to just the general macro uncertainty out there?

This is more general macro environment in that there's the continuing commentary from everyone about, how are we going to put this all together? But not any specific individual organization.

Okay. That's helpful. And then the migration of the Nestor products to Mexico. You mentioned early calendar, next calendar year, when should we expect to see any potential gross margin benefit from some of these cost savings?

Probably 12 months. Yes, it's a not a short-term expectation there. We'll start manufacturing, as I said in the first quarter, but that's predominantly to enhance capacity. We will not be reducing the amount of product that we're manufacturing in Finland. We're actually going to be increasing that and using the Mexican plant for augmentation at this point in time. And then over the course of the next 12 months, we'll be looking at when the crossover point comes where it's more effective than to be building more in Mexico than Finland.

Okay. Got it. And then just the last one for me, and I'll jump back into queue. If I recall correctly in the past, I think you mentioned you thought about 5% or so of your revenue was a result of the government programs such as RDOF, when you look into fiscal 23, what do you think this percentage could potentially be?

I actually don't see 23 growing hugely. Certainly the [indiscernible] funds and the RDOF funds are beginning to enter, our world and we'll see more of that in 23. But the big stuff, the stuff associated with the Infrastructure Act that unfortunately is a long-involved process. Now in November is the whole orientation around the Infrastructure Act is that it's going to be distributed through the states and distributed through the states based upon map, unserved and underserved communities. So those maps are being released now in November but released under the guidance that they will have six months by which to review and challenge them, meaning that we won't see distribution of funding probably until next summer, which means we probably won't see builds until late next year and into 24. So, unfortunately, I don't think the Infrastructure Act is going to be a big part of the bills for next year. But I do believe that what we're seeing today interact organics investment, private equity investment, municipal investment, private public partnerships, all of those are underway and making very good progress.

Okay. Appreciate the color. Thanks a lot, guys.

You're very welcome.

Thank you. Next question will be from Ryan Koontz with Needham & Company. Please go ahead.

Good afternoon and congrats on a phenomenal quarter. Within the community broadband segment there, are you still acquiring a number of new customers in that segment? Or is it more same-store sales? Is it more customers are spending more on their fiber builds?

Oh, it's both. We're definitely seeing our existing customer group starting to get into -- some of them are still struggling a little bit to get into the groove and to establish a cadence, but many are beginning to expand the number of solutions that they're able to meet the doors, are able to penetrate. And then we're seeing a number of new companies both new startups that are kind of new to our industry in general, as well as new spaces that are new to Clearfield that have been in the market in the past but are now using our products for the first time.

It's great color. Thanks. And on the cable front really nice pickup this quarter there obviously, how would you characterize that the split between drivers behind fiber to the home versus more of the active cabinet DAA type deployments.

Right. With the community, the biggest portion of that is still Tier 2 cable TVs going to fiber-to-the-home. And that is the smaller regional cable providers who are committed to fiber-to-the-home. But there's a growing amount of revenue coming from more of the larger cable operators looking to reduce the size of their serving area by penetrating their fiber deeper and increasingly using our active cabinets.

Got it. And then, maybe a question for Dan here on the gross margin compared, can you help us understand on an organic basis -- how Clearfield organic compared sequentially there on the Clearfield margins?

Yes. So Clearfield, organic would be just under for the quarter, just under 42%.

Okay.

So, maintain pretty good steady.

Yes. That’s great. That's awesome. And as we think about next year, Cheri relative to the nice guide you laid out there, how should we think about your OpEx plans? And sounds like some you have some pretty aggressive hiring plans in different areas. Should we think about the model remaining pretty consistent with what you've communicated before in terms of your OpEx approach around the 50% range?

Right. Yes. That's absolutely -- exactly what we're targeting.

That's it. Super thanks. Okay, back in the queue.

Thank you. [Operator Instructions]. Our next question will be from Greg Mesniaeff of WestPark Capital. Please go ahead.

Thank you for taking my question and congrats on a great quarter and the guide. Question on your customer profile. Are you seeing any growing interest from larger carriers for your products? And part two of that question would be, are any of your larger mainstream competitors starting to sniff around in the smaller tier market that you are dominating in?

If you look at some of the material that I guess I call your attention to, I think it's Slide four or nine, I think, shows some of the increase in regard to our national carrier business and how it relates to our overall growth, national carrier, the big guys increased 100%, from 12 million to 25 million, for the period, and represents about 6% of our business. And I think, one of the things that was crucial to our product line and our positioning in the marketplace is that while our product -- while our initial solutions were used by small carriers, it was because that was our target at the time that we started the company, where the product lines are meant to scale to the largest of networks and are effectively used in many of them. In regard to community broadband, our larger competitors have always been part of the community broadband initiatives. However, they were using products and continue to use products that are more designed for larger, more density cities and communities rather than for the diversity of networks, and the lack of density, in more rural markets, and so as a result, our products continue to have that competitive advantage.

Thank you for that color. And just a quick numbers question. Did you disclose, what are the DSOs in the quarter sales outstanding?

We didn't disclose those will come out in our K, but they increased this year, or I'm sorry, this, this quarter here to around -- I think it's around 50.

Great. Thank you.

You are welcome.

Thank you. Next question will be from Tim Savageaux of Northland Capital Markets. Please go ahead.

Hey, congratulations, as well on the great results. And I'll follow up right there on the receivables front. And just wanting to see to what extent the acquisition contributed to that increase. And maybe, ask a question about kind of overall shipment linearity throughout the quarter. And then I have a couple of follow ups.

Yes. Nestor did not contribute that much to the DSO a little bit. But Clearfield continues to do business with larger and larger customers. And while they may be under 10%, they may only slightly under 10%. And some of those customers, and the larger they are sometimes you have a little bit longer payment terms. And that's pretty standard in the industry. And then, as far as shipping linearity, we were pretty consistent, if you just take the quarter, take out the 7 million of Nestor, you take out the quarter, I think we average about winning 9. And that's, we were right within that range of 29 to 30 each month of the quarter.

Great. And kind of got to another question of mine there about customers, which is historically been pretty well distributed for you guys. Is that commentary for the quarter and you're finishing up the year here? I'm assuming no 10% customers for the year, but I guess I'll ask the question or the quarter?

One for the year.

Great. Okay. And moving on to cable, and it's a pretty impressive kind of step function here really the last couple of quarters. I wonder if you can give us any color on kind of how you expect that to proceed going forward. Right? You've been moving up pretty significantly here. Is this kind of a new run rate or do you expect that cable number to bounce around a little bit with given the bigger operators who are working with?

Parts of that business are consistent on a month-to-month with a long-term scheduled manufacturing program. So that will be consistent and then on top of that, the regional carriers tend to be more project based with a little more volatility in regard to their world. And because they're regional, and many are located in more northern climates and with excessive cold that we've had now, sort of early this quarter, I think we'll see the rate of cable TV go down just a little bit more consistent with our overall growth projections rather than the explosion that we've seen in the last six to nine months.

Right. That's very, very helpful. And I guess last question, for me is sort of coming back on the competitive side. I think we did see something out of Corning and Nokia trying to target the rural broadband market with via distributor. I imagine you've had a chance to see that, and I'd be interested in if you had any more specific comments about expectations for increased competition from those larger guys, as we head forward here? Thanks.

Certainly the amount of revenue that is coming to community broadband from the Infrastructure Act, i.e., certainly one that is attractive to all of us. And our competitors across the board are looking at that and seeing how they can get a piece of the pie -- a bigger piece of the pie than what they got over the course of the last calendar year. Anyone, all of our competitors are very formidable and very sizable organization. I think Clearfield continues to have an advantage not only because of the product lines, which we promote here, and the time savings and labor savings that we've promoted within the field report. But the one of the things that is really core to who we are is the fact that we built a national sales team for community broadband, which is very distributed across the country. And it's very technical with a very hands-on approach, matched with a team of smart guys via what we call them are smart guys that have come -- either previous employees -- customers who become employees, or many are military personnel who have deployed fiber in the harshest environments. And I think that sales organization, which deals directly with our customer base on a technical perspective, is one of our biggest competitive advantages. Now, we also support our distributors as well, and about 50% of our business does go through distribution based upon customer's request for a financial or fiduciary relationship. But being able to have that technical relationship and that training relationship on a direct basis, I think will be what strengthens our relationship or our revenue opportunities over the long-term. But we certainly respect what our competitors are doing and expect that there's going to be a big enough market there for all of us to get an increasing amount of revenue moving forward.

Great. Thanks and congratulations again.

Thank you.

Thank you. [Operator Instructions]. Next, we have a follow up question from Ryan Koontz, Needham & Company. Please go ahead.

Thanks for the quick follow up. When asked about backlog and composition of backlog, I see that coming down as a percentage of total revenue as your revenue out grows that. Does that mean your lead times are coming down? And what does that mean for your customers as your lead times come down? Does that give you more opportunity for share gain.

Yes. We are even though the backlog went up as a dollar value, we are aggressively working to increase capacity. And whether that is in Minnesota, whether that's in Mexico, whether that's in Finland, capacity increased is core because we see this market just continuing to grow and grow for the next really five to 10 years. And so and in fact, I will talk to people and say we're limited only by our ability to scale as fast as our quality systems will scale. And that's the gating factor for our revenue and our quality systems have done a fabulous job as we've hit to this point. And so we're kind of hit that kind of rhythm now. And I think we're going to see moving forward some normalization. And so as a result, that will mean that our backlog will come down, the dollar value is going to come down as we increased that capacity even to the backlog reduce lead time and provide the opportunity for the organization for our customers to depend upon us more and more as they have in the past. So absolutely, we think that will be a competitive advantage for us. And we will work to be able to -- to not only have limited lead times, but more or equally importantly, is to be able to ship to our promised dates, because we need our service provider customers to be able to really maximize their labor teams. And that ability to shift to those commitment dates, is really core to ongoing savings. And I think, growth for Clearfield.

Sure. That's actually great to hear. And on the mix of backlog, any changes there? Or is it pretty representative of the current mix of revenue in general? Or how would you characterize the mix in the background total?

I mean, the backlog is a little more oriented toward the larger carriers right now. And that we do have -- we changed over the course of the last quarter, 90 days ago, 75% of our revenue was shipping in the next six months. Now we're at about 65%, which means we got more orders associated with those longer scheduled events. And so it's a little bit of a skew toward the larger carriers in cable TV and the national carrier community, but not so significant that it really kind of dwarfs the outlook.

Perfect. Super, thanks for the help.

Thank you. This concludes the company's question-and-answer session. The question has not been taken. You may contact Clearfield Investor Relations team at clfd@gatewayir.com. I would like to turn the call back over to Cheri Beranek for closing remarks.

Thank you, everyone. I've had a wonderful day being able to speak with many of you over the course of the last week. I've also been able to speak with my employees about some exciting things that we're doing and being able to provide their bonus checks and just a time to celebrate. And that's one of the things that I would encourage you all to do is to celebrate with your families, service, share the gratitude you have of being a part of this wonderful broadband community and just a time to share with your families. So Happy Thanksgiving. I'm grateful for your support in Clearfield and grateful for everything that our employees do for our customers.

Thank you for joining us today for Clearfield fiscal fourth quarter and full year 2022 conference call. You may now disconnect.