Good afternoon. Welcome to Clearfield's Fiscal First Quarter 2023 Earnings Conference Call. My name is Paul, and I will be your operator this afternoon. I'll now pass the call over to Jackie Keshner from Gateway Group.

Thank you. 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-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide descriptions of those risks. As a reminder, the slides in this presentation are controlled by you, the listener. Please advance forward during the presentation as the speakers present their remarks. With that, I would like to turn the call over to Clearfield's President and CEO, Cheri Beranek. Cheri?

Good afternoon, everyone, and thank you for joining us today. It is a pleasure to speak with our new and returning investors and analysts this afternoon to share Clearfield's results for the first quarter of fiscal 2023 as well as provide an update on our business and current market trends. Our strong financial performance in the first quarter of fiscal 2023 reflects our ongoing execution on our strategic growth plan as well as the robust and sustained demand for high-speed broadband. Total net sales for the first quarter were $86 million, which includes an $8 million contribution from Nestor Cables. Our organic net sales growth continues to be driven by our leadership in community broadband and expansion across each of our core end markets. As we continue to execute on our lead strategic plan, we aim to strengthen our existing competitive advantages as we build the scale necessary to serve the long-term demand runway for high-speed broadband in unserved and underserved communities nationwide. Based upon consideration of the expected investments and impact of our progress on our lead strategic plan as well as our ability to manage countervailing headwinds that could develop the customer ordering patterns and component sourcing. We are reiterating our previously stated revenue guidance for fiscal year 2023. In addition, we are introducing 2023 net income guidance of $4.30 to $4.50 a share. Before I review our performance and current market dynamics in greater detail, I'd like to briefly introduce you to who we are and what we do for those of you who may be new to Clearfield and our industry. Clearfield is a leader in the expanding fiber broadband industry. Our goal and underlying value proposition is to enable the lifestyle and better broadband provides. We provide craft-friendly fiber protection, fiber management and fiber delivery…

Thank you, Cheri. It's great to be joining all of you this afternoon. The appetite for high-speed broadband communications has never been greater and shows no sign of letting up. This continues to drive fiber deployments deeper into every corner of society and across all market segments. As Cheri mentioned, we believe our work to maintain our world-class lead times and further progress our lead strategic plan, enhances our position for the robust near-term demand environment. On Slide 6, we've also included the Fiber Broadband Association's strong forecast for fiber deployments over the next decade. In its 2022 fiber provider survey published in December, the Fiber Broadband Association estimated a 10-year annual average run rate of 11.3 million fiber deployments. In 2022 alone, fiber providers passed 7.9 million additional homes, representing a new record for annual deployment. This momentum gives us a powerful foundation for 2023 and the years ahead. As you'll see in the accompanying chart, we're positioned within an accelerating investment cycle that has yet to reach its peak. We continue to view the gradual disbursement of ARPA and RDOF funds and the upcoming distribution of BEAD funding as meaningful, but gradual industry tailwinds to further expand our market opportunity. The data indicated on this slide assumes that 12.3 million new housing units will come online over the next 10 years. Further, 92% of homes are expected to have fiber availability with an additional 34% of homes having 2 or more available fiber connections. As this market continues to expand, we believe our craft-friendly products will continue to play a vital role in translating homes passed numbers in the homes connected revenue for our service providers as they deepen their fiber deployments. Turning back to Clearfield's fiscal first quarter 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 first quarter of 2023.

Thank you, Kevin, and good afternoon, everyone. It's a pleasure to be speaking with you today about our fiscal first quarter 2023 results. So looking at our fiscal first quarter 2023 results in more detail. Consolidated net sales in the first quarter of fiscal 2023 were $86 million, a 68% increase from $51 million in the same year ago period and down 10% from $95 million in our fourth quarter of 2022. This figure includes $78 million from organic Clearfield and an $8 million contribution from Nestor Cables, representing Nestor's first full quarter of contribution since we acquired the business on July 26, 2022. The increase in net sales was due to higher sales across our core end markets, particularly in our community broadband, multiple system operator and national carrier markets, consistent with our performance throughout fiscal year 2022. We recorded a 34% year-over-year increase in our sales order backlog. Order backlog was $136 million on December 31, 2022, up from $101 million on December 31, 2021, and down from $165 million on September 30, 2022. We believe our lead time progress will remain a more meaningful measure of our operational performance going forward. Accordingly we will focus on this metric in lieu of reporting on backlog in future quarters. I'll now review net sales by our key markets. Sales to our primary market, community broadband, comprised 55% of our net sales in the first quarter of fiscal 2023. In Q1 we generated net sales of approximately $48 million in community broadband, up 33% from the same period last year. In addition, for the trailing 12 months ended on December 31, 2022, our community broadband market net sales totaled approximately $192 million, which was up 69% from the comparable period last year. Our MSO business comprised 25% of our net…

Thanks for the financial update, Dan. As I mentioned earlier in the call, we have continued to make progress on our new multiyear strategic plan, LEAP, which is a successor to our previous Now of Age plan. The LEAP plan is our roadmap to how we will scale up the company in order to seize the opportunity Clearfield was built to achieve, how we expect to jump higher, farther and with greater force. With that said, I'd like to review our progress on each of our LEAP plans for tenants, one for each letter. The L is to leverage our decade-long excellence in community broadband, the market on which we have focused since our founding in 2008. Through our deep understanding of this market and our customers' base and regional operators, we've proven to be an agile partner that can evolve with the broader market and grow alongside our customers. Earlier this month, we announced that we have reached the milestone of shipping 50 million fiber ports of our craft-friendly labor light family of Clearview cassette, FieldShield assemblies and YOURx-Terminal. The vast majority of these fiber ports have been deployed throughout the networks of our community broadband customers. Reaching this milestone underscores the success in the fiber broadband market is as much about execution as it is innovation. Through further improving our scale, we are deepening our commitment to providing our customers with products and support they need when they need it to take their fiber broadband networks as far as they can go. Our E is to execute capacity growth in advance of the market opportunity. Building upon our previous strategic work to augment capacity for ongoing growth, we will continue making progress on these enhancements and developing our supply chain partnerships to maintain our market leadership. Having expanded…

[Operator Instructions] Our first question is from Paul Silverstein with Cowen and Company.

Cheri, Dan, what do you all expect -- what contribution are you expecting from Nestor in the March quarter? Is it consistent with the $8 million you did in December? Or is it something meaningfully different than that?

Yes, it's going to go up in the next quarter. I mean it's important to remember that Nestor is very much affected by the seasonal nature of our business and probably even more so than we are. And so you're going to see their numbers about $8 million in this quarter. It will probably be double that by the summer, growing second quarter to probably 10%, 11%, up to as much as 15% in the summer months. And their gross margins are going to be affected significantly by that. So we're going to see gross margins now at about 11%, 12% by the summer months, will be up in the high teens, kind of averaging in that middle, about 15%. We said when we acquired the company that they're a commodity-based business. So the gross margin percentage will go down, but the gross margin dollar contribution would be accretive. This quarter that wasn't the case because of the downness of the winter months, but we still continue to expect that accretive nature throughout the year.

You're anticipating -- let me get to the real question. So if I take $10 million to $11 million in the -- $10 million for March. That would imply organic, if I did the math right, based upon your 40-60 split, your reiteration of $380 million to $393 million and what you did in the first quarter, that would imply organic somewhere in the neighborhood, if I did the math correctly, $56 million to $61 million, which in turn would translate to 23% decline to 17% decline sequentially. On a year-over-year basis, if I do the math right, that would imply 5% to as much as 15% growth if you hit those numbers for Nestor and for the larger company. That would be deceleration down from over 50% year-over-year in the December quarter. And I appreciate the return of a more seasonal business pattern. But, I guess, I'm trying to understand the dramatic decline in growth, what would drive such a dramatic -- I appreciate that everyone is going to go back to more normal order patterns. The backlog wasn't sustainable. But the numbers suggest a significant collapse in backlog in a very -- I mean, we can see the numbers, but in a very compressed -- and I'm trying to understand, if we look at linearity, including through the 30 days of the current quarter, is business continuing to soften as you go forward in time? Or is it more of a stabilization? Let me let you respond.

Correct. Yes. Thank you, Paul. I think I would call it an alignment in that we talked about 90 days ago at the end of the fiscal year that we were going to see for the first time in 2 years, bookings were going to be less than shipments. And that was a result of the world of coming back to post -- pre-COVID world, the way of doing things and ordering patterns, and we are going to start into that process. As people -- as our customers align their inventory positions and their forecast positions in regard to product alongside the labor conditions, we're seeing a bit of a bubble or perhaps even an inventory swell at this point in the market. And so we think it's very much a -- it's not a softening of the market, and that demand is very high. It's an alignment of what's actually available with labor.

All right. And I can do the math, I guess, after the call, but help me out, the 10% to 11% gross margin [indiscernible] for Nestor, how much of it -- was it to overall gross margin? If we look at the 35.7%, whatever the number?

Nestor is probably about 2.5% this quarter. So I mean, they were -- affects that. So it's important to, when we look at fourth quarter of last year, that's really not a comparative number because we didn't have any of the new facilities up and we were at complete capacity. Over the course of the last year, we've been adding a considerable level of capacity, the buildings themselves in March of last year and now adding continual building enhancements. And probably one of the biggest investments that we've made is about a 25% increase in our labor force since summer of last year. And so even though we knew that the winter was going to be more seasonal, we made a conscious investment in people to ensure cross-training of resources and labor capacity availability. And so while it might be a little unsettling for this first quarter, it's absolutely to our -- to plan as to where we're at from a gross margin standpoint so that we can prepare for the summer and into next year on the capacities that are going to be necessary.

All right. I appreciate the response. Before I pass it on, I would just respectfully submit, I think you're making a mistake in respect to your plan to stop disclosing backlog, even assuming lead times, you're better engaged with your business as you maintain, again, I would urge you to continue providing that. But let me pass along. I appreciate the responses.

Our next question is from Jaeson Schmidt with Lake Street Capital Markets.

Just following up on that line of question. I just -- what gives you the confidence that second half snapback will come and that this inventory correction or issue or digestion, whatever you want to call it, is just sort of a 1 quarter issue?

Yes. What we're seeing is an absolute continued demand from every customer that they want to increase the number of homes that they are connecting and passing and aggressively working with the contractor community and the labor community to find additional resources and to train additional resources. So we're actively involved in that process and helping them gain the knowledge and the training tools by which to enhance the labor availability that's out there. I think there's really a -- I would call it almost like a review of household conditions when you come back in at the end of the year and you're kind of working through your calendar and you're looking to see what's out there versus what you have. And so all of our customers, I think, are just kind of making that refresh. I think it's the continual demand push that they all continue to want to be the first fiber out and that commitment of across the board that there was still growth in every part of our marketplace. The other thing I want to make sure that, I think, reiterate is the fact that when we walked into this year, as we identify the 40% to 45% growth rate for the year, we said we would come out extremely strong in the first quarter, at a 70% growth rate over last year. And that growth rate would deescalate over the course of the year to the end of the year at a 20% to 25% increase over last year and then working for us to continue at that position. So I think it's important for us as a community to identify that the industry is going through a complete readjustment to this one sort of weird lifetime situation that we call the pandemic. And so there isn't really a model by which to justify or to really even compare it to from a trend statement.

And I understand there's a lot of dynamics out there. Just curious, when you did provide that original fiscal '23 guidance, what had you been thinking the split would be? I mean now you think it's going to be 40-60, but what were your sort of the initial expectations?

Yes, I was thinking a little closer to 45-55. So just a little bit of a readjustment so that we'd be pushing out second quarter and seeing that more at the tail end of the year. So it's important to look, again, that next quarter, we're probably looking at 30%, 35% increase over last year, which again, is an amazing level of increase on an organization from a marketplace that's growing at about 12% to 15%. So we're just trying to normalize our patterns and put everything together.

And then just last one for me. Just looking at gross margin. Obviously you're going to kind of remain at these levels for the next several quarters. So does that mean we shouldn't expect a step-up until sort of that December quarter timeframe? Or could you start to see improvement in September?

Yes. We're anticipating an improvement in September. And as we get back up to levels similar and beyond of last year, in that fourth quarter where everything was clicking and people were taking their inventory positions for the winter. So yes, absolutely, fourth quarter is where we should be signing.

Our next question is from Ryan Koontz with Needham & Company.

I wanted to ask about your assumptions in the March quarter and this new kind of customer order pattern and booking behavior. What are your assumptions going into March? Do you feel like March can still be a period where you would expect your backlog to soften a bit and then pick up during the peak construction season? Or what's your kind of general mindset there? I know you don't plan to give backlog out, but any kind of insights would be helpful there.

Sure. Of course. The backlog went down about $30 million from -- over the course of the last 90 days. And as we talked about, that was anticipated and planned for that we had hit a very high $160 million, and I think we're just a little under $130 million at this point. I said at that point that we were aiming to get to a backlog that was consistent with about 1x revenue for the quarter. So March backlog will go down a little bit as well as we get to more of this cadence in which we are ordering a product or our customers are ordering products in the period in which they're deploying. So while that -- well, it's in a normalized world, that might see that this reduction in backlog is a bad thing. But in a post-COVID world, I really believe this is a return to normal necessity that kind of walks through this bubble during this period of time.

If you could reflect on the strength in the quarter from the cable segment? It looked like it was really strong. Is that coming from your active cabinets into the DAA or more of your fiber-to-the-home customers? And maybe give us some color on the strength here.

Yes. It's coming from both areas in that the different types of cable companies, both the regional as well as the national have different philosophies on how they can best provide high-speed broadband to their customers. And due to the architecture of our product line that allows us to support whether it's a PON-based deployment or a non-PON based deployment, active cabinets versus the YOURx-Terminal, we're actively involved in both. And both have similar high gross profit margins, and we're excited about all of that opportunity moving forward. Like everything else in our space, I think we'll probably see some bubbles with that over the course of the next couple of quarters, but the demand is absolute. And really exciting to see the cable community come in play.

And in terms of your latest quarter and bookings, any mix shifts there between passings and connected home in the product lines?

We're starting to see more, an additional increase in the connecting and that people are looking at their standpoint that they made the investment in the passing of the homes. And now by connecting the homes they can turn that into a revenue-producing customer that's at a higher rate of revenue for them. So I would -- it's still, passing of the home is still a higher percentage of our revenue, but definitely seeing connecting of homes is increasing and seeing it's exciting to see the success of those deployments take place.

And one last one. Any new commentary around RDOF and ARPA contributions to your recent business? Is it still gaining momentum? And kind of where do you feel like we are relative to those programs contributing?

It's still gaining momentum, but still very early. This is almost entirely privately funded. So -- and that's why we're comfortable making the capacity enhancements that we are. One of the things that's very frustrating as an industry, right, is how long it takes for government money to fund through the programs and get into the market. We've seen it time and time again, in regard to 2012, 2008, I mean, all of those times, we were excited about the money and then we had to wait 2 years. So we know it's coming. We just haven't seen a lot of it yet.

Our next question is from Tim Savageaux with Northland Capital Markets.

And actually, my question was on capacity. So that's a good place to pick it up. And you've obviously been on this capacity addition plan for a couple of quarters now, but you've made some additional kind of increases. So I wonder if you can give a sense of where you stand from a kind of quarterly revenue capacity standpoint currently, clearly, you're looking for some record quarters in the second half of the fiscal year. But if you want to take it from what you just reported or what you expect here in the current quarter, where are we from a capacity utilization standpoint? And where do you expect that capacity to be by, call it, fiscal year-end?

Right. Tim, I would say we're -- what we try to do from an operational standpoint is set metrics as to where we want to be by the end of each quarter, and so that we can make incremental investments along the way. And so I think we're probably at about $105 million today. And by the year-end, we expect to be closer to $130 million, maybe $135 million quarterly, which puts us at about a $500 million run rate by the end of the year.

And in terms of getting there, I mean, is that more kind of adding people? Are you pretty well set from a facility standpoint, I guess, as you continue throughout the year, how you kind of address the facilities aspect of it if at all?

Right. Yes. The facilities are in place, but we need to continue to augment the facilities and the infrastructure surrounding it. For example, bringing in the ability to produce optical cable inside of the facility means bringing in higher power capabilities, you got to bring in the new lines, and we're bringing in water under the floor so that we can actually produce the cable and the flushing lines that are necessary for cooling the cable as it comes out of the extruder. So those are the incremental costs that you -- that we don't think about, but those are what are in place right now. We're also looking at a standpoint of just kind of the infrastructure around it. And you wouldn't think of this as affecting the capacity, but as the procurement teams and it's the software systems around it and it's the process development to ensure that we do this in a systematic process-based way. And we have been very successful over the course of the last 2 years growing at the rate that we have, but we have to take a step back and look and say, how are we going to make this sustainable and how can we scale this? And I think that's an important element for us to look at from a gross profit standpoint is this company was designed to scale, but there's still a standpoint of infrastructure that needs to be put in within it. And so it's that strong foundation to ensure quality. And so there'll be people, there will be systems, there'll be some software within it. And that's so that we can grow long-term. So we've got a little bit of catch-up to do from what we perhaps should have done a year ago. Just didn't have the wherewithal because of how quickly we were going to take that step back.

In terms of the, you seem to be going back, I guess, to maybe your more traditional seasonality going back several years now, where you had, I guess, a quarter in there somewhere that was up 20% to 30% sequential, something like that on a seasonal basis. Is that the way we should kind of look at this in context just at a much higher revenue level obviously?

Exactly, yes. I mean I think that's how I try to describe it as being pre-COVID conditions at post-COVID levels. And there's always been seasonality to our business. It's just that it was hit in the last 2 years. And so I think I want to go back to a statement that Jaeson asked, how do I have the confidence that the back half of the year is going to follow through. And it's really, doing this the last 15 years, in that that's the traditional normalized pattern. And so the only caveat to that is in a post-COVID world, how quickly will we get back to that normalized pattern.

[Operator Instructions] Our next question is from Scott Searle with ROTH Capital Partners.

Just to dive in on the gross margin again. It sounds like most of the -- beyond the mix issue that there is a labor content issue here until you get capacity up at the facilities that's kind of weighing on the near-term results. Is that the way to think about it until we get into the second fiscal half of this year?

Absolutely. In that we're making the addition of those people in advance of needing them. So our efficiencies and utilization on the floor is not at the level that you target. But what it does allow us to do is to move those people around so that they're not trained on a single line, which is what we did when we brought everyone on board last year in the second quarter is we hired people and we put them on one line, and we made sure that they could optimize that one line, but it doesn't allow you to scale. What you need to do is you need to train all of those people on all of the different functions and process steps in the fiber termination process in order to really have the flexibility to ensure these lead times that are so crucial to our long-term success. And so it's an investment in people and the training that will allow us to hit those 6 to 8 week lead times this summer. That's still far more than what we were doing. In pre-COVID we were working on lead times in 3 to 4 weeks. I don't think that's in our future. That's a whole -- that's not necessary. But 6 to 8 weeks should be our goal, and we'll have the labor force by which to do that based upon the investments we're making right now.

And just a follow-up, I guess, and catalyze a couple of the earlier comments. You're looking for 30% to 35% growth in the second fiscal quarter, which kind of implies like you said, normal seasonality is sequentially down December to March before we see that recovery into the second half of which you're expecting a 60% plus split being skewed towards the back half of the year. Is that correct?

Absolutely. You can completely take it.

And then -- so just to dig in on the back half, and I know it was asked earlier, but the comfort level there, what you're seeing in terms of the engagement from a customer standpoint, requesting of shipments. And it doesn't sound like RDOF is really built into those expectations. I'm kind of curious where that fits either into the backlog or your thought process around a ramp-up in the second half of the fiscal year?

Right. I mean, I never count on government money in my projections because it's just -- there's too much variability and lack of accountability to meeting of a date. And so that has definitely been -- that's still not in those numbers. And the other thing that is affecting these numbers is one of the things that I mentioned is in regard to our backlog, excuse me, in our lead time of coming down with the exception of active cabinets and our availability of sourcing rectifiers. You don't think of Clearfield as being a chipset affected company, but the components that are in the rectifiers for power conditioning are in extremely long lead time positions, and it's been frustrating for our revenue models and for our customers to not be able to get those products as they would like to see them. And so that's one of the other reasons for the back half of the year coming back on board is as the chipsets and the rectifiers become more readily available, the amount of our active cabinet business will be a much more significant part of our total revenue plan.

And just to follow-up on that, Cheri, the active cabinets carry a higher gross margin as well?

They're pretty similar to the rest of the cabinet, the rest of the line. So no, I wouldn't call them higher, but they will be pretty -- they're close to, in the same 40% to 43% kind of margin.

But in terms of the revenue guidance and extrapolating that into the back half, you're starting to get back into that, bracket it, $110 million to $120 million range. Okay.

Yes. So look, I would make -- look at it from a standpoint, I think, of it seeing the significant -- because I'm just not sure where those rectifiers are going to come in and the amount of backlog that we have for powered cabinets that, definitely, the fourth quarter is going to be that step up in that the availability of some of those materials is going to allow fourth quarter to be a higher number than what you would normally expect.

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 over to Ms. Beranek for closing remarks.

Thank you all for the opportunity to speak with you and for the questions from our analyst community. Definitely a year of transition and a year of being able to come back into these normalized patterns. And so I invite shareholders to contact Gateway, our IR firm, and welcome the opportunity to speak with you because I could not be more excited about the revenue plan in front of us and the opportunity by which to become a significant player in high-speed broadband. See you, until next quarter.

Thank you for joining us today for Clearfield's Fiscal First Quarter 2023 Conference Call. You may now disconnect.