Good afternoon. Welcome to Clearfield's Fiscal First Quarter 2022 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 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, sales 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 the subsequent filings on Form 10-Q provides descriptions 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. We hope you are all continuing to stay safe and healthy considering the recent surge of COVID. It is a pleasure to speak with you this afternoon to share Clearfield's results for the fiscal first quarter of 2022 and to provide an update on the business and market trends. Clearfield delivered another record-setting financial performance in fiscal first quarter of 2022 in a market that continues to evolve and grow with each passing quarter. As we have mentioned in our prior calls, we are in the middle of a truly remarkable investment cycle for broadband deployment. Since our founding, Clearfield has worked diligently to build an advantageous position in the community broadband market with a reputation for superior customer service and a craft-friendly product. As our record financial results demonstrate, we are well positioned to continue benefiting from the growing demand for fiber-to-the-home and fiber to the business due to our steadfast commitment to best-in-class customer service, high-quality products and our ability to swiftly adapt to the needs of our customers. Our product offerings, which are designed to reduce the time and skill required for the delivery of optical cable are now being recognized by a growing group of customers as a means by which to accelerate moving existing subscribers off copper and adding subscribers due to the bandwidth and lower latency that fiber-fed broadband enables. The continued robust demand for fiber-fed broadband helped us to achieve a quarterly record of $51 million in net sales for the fiscal first quarter of 2022. Community Broadband, our largest customer market, grew 81% over the prior year quarter. It's worth noting that community broadband now represents an increasing gamut of markets. This includes municipalities, utilities and even suburbs and urban neighborhoods that…

Thank you, Cheri, and good afternoon, everyone. It's a pleasure to be speaking with you today about our first quarter of fiscal year '22 results. So looking at our first quarter financial results in more detail. Net sales in the first quarter of fiscal '22 increased 89% to a record $51 million from $27 million in the same year ago period and up 13% from $45 million in our fourth quarter of 2021. While revenue increased, sales bookings, again, continued their momentum in the first quarter of fiscal '22 resulting in a 1,036% year-over-year increase in our sales order backlog. Order backlog grew to a record $101 million on December 31, 2021, up from $66 million on the previous quarter ending September 30, 2021, and up from $9 million on December 31, 2020. Looking in more detail at net sales by our markets on Slide 8, our core community broadband market comprised 70% of our net sales in the first quarter of fiscal 2022. In Q1, we generated net sales of approximately $36 million in our community broadband, up 81% from the same period last year. In addition, for the trailing 12 months ended on December 31, 2021, our community broadband market net sales totaled $114 million, which was up 69% from the comparable 12-month period last year. Our MSO business comprised 18% of our net sales in the first quarter of fiscal 2022. From a growth standpoint, the positive momentum we have established in this market over the last several quarters continues to endure. In this market, we realized a 202% year-over-year increase in net sales to $9 million in the first quarter of fiscal 2022 and delivered a 92% increase in trailing 12-month net sales to approximately $25 million. Net sales in our national carrier market for the…

Thanks for the financial update, Dan. The Clearfield value proposition is driven by our thoughtfully designed fiber management and fiber connectivity products. Since our founding, Clearfield was built to scale. As we mentioned earlier, Clearfield has been positioned from the beginning to provide fiber products to communities that have historically been underserved or unserved. We have made it our goal to remove the obstacles that would prevent our customers from adopting fiber-fed broadband. As previously stated, we are in the middle of an historic investment cycle for high-speed broadband and fiber led broadband in particular. We are often asked about the sustainability of the demand for high-speed broadband and how long this elevated demand might last. The chart on Slide 14, put together by Jefferies Research shows the anticipated increase in government funding through 2025. This chart has been updated since last quarter with the enactment of the nearly $65 billion in funding that is available through the Infrastructure Investment and Jobs Act passed by Congress and enacted in November. The scale of this funding opportunity is simply enormous. As Clearfield was built to address the needs of the underserved and unserved community broadband market, the main target of this incremental government funding. We believe we are well positioned to capitalize on any new government funds that are dispersed to our markets over the next decade. To further demonstrate that the exponential increase in demand for fiber and Fed broadband is sustainable. The chart on Slide 15 shows the long-term forecast for new fiber-to-the-home through 2025. It is estimated that broadband providers will reach more homes with fiber in the 2021 to 2025 period, an estimated 16.8 million homes than the combined total number of homes for all years through 2020. This is truly noteworthy. It shows that the elevated…

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

Congrats on the results and updated guidance. I really want to start with that backlog number, obviously, a massive jump both sequentially and year-over-year. You did note that it was very broad-based across over 200 customers. But just curious if there were any other dynamics going on. Was this due to kind of year-end budget? Just trying to figure out what really drove that big jump?

We'll have a couple of things. I think as we noted in the materials this quarter, we did have 2 10% customers who are regional service providers. And because they run multi-state networks and have much more long range in their planning cycles, we expect to be able to have those regional service providers continue at a pretty significant clip as we move forward, and they are a meaningful percentage of that backlog. I think the other thing that we saw is that customers, wherever they looked, were finding that product is becoming difficult to get in a quick turn basis and really wanted to ensure that they would work with us to provide the actual products that they individually needed. And so a really broad base of companies are looking at their environments and really want to be able to establish the network of supply chain that they need and they're looking at how to do it in a more effective way. And so we have a nice take-up of plug and play technology, labor light technology, the kinds of products that we can produce for them in a quick turn environment, and our in cassette splicing within our cabinets is really being widely respected because it has been demonstrated to be easy to train and to reduce the amount of time per deployment so that they can place twice as many cabinets as they were doing previously.

Okay. That's really helpful. And just following up on some of those comments, I'd just be curious to get your take on what you think inventory levels are at distributors. And you did note everyone's sort of worried about being able to source components. Are you at all concerned or seeing any sort of double ordering from customers?

We have very limited amount of inventory at distributors and that most of our product is even if it shifts through distributors is predominantly shipped on a drop ship basis so that we know exactly where it's going. So we have not, at this point, really established a stocking program for distributors. We really ask our distributors to be the eyes and ears, oftentimes a logistical partner for ordering and single point of ordering access for all their needs. That's really what the distributor has done for us. We've not seen, in general, double ordering. What we have seen is customers who need to kind of look at their world and as they order early and then need to kind of look at their world and say, okay, I might tweak this a little bit. I might have to change these orders. And so we've been cognizant of that. But at the same time, due to the modularity of our product line, that hasn't caused an inventory risk for us, but rather just allows those customers to continue to tweak their plan and to work the plan based upon the design that they finalize into the build season.

Okay. Got it. And then just the last one for me, and I'll jump back in the queue. As it relates to the capacity expansion in Mexico, just curious how we should think about that potentially impacting gross margin? Or is this a situation where you're not kind of transferring any product lines and I mean there really wouldn't be any sort of headwinds there?

We’re significantly – we intend to be able to manufacture everything that we’re doing in the facility in Mexico. And so it is absolutely a cost reduction opportunity for us. But we also are in a world in which supply costs are going up. And so we’re trying to use the Mexican facility as a means by which to lower our labor costs and by lowering our labor costs, try to keep our pricing to our end customers as flat as possible. So our philosophy is that we are a manufacturing partner, a supply chain partner for our customers. And that as we cost-reduce solutions, we try to keep that as transparent to our customers and not have to increase pricing to them. So odelling gross profit forward. There’ll be a little bit of a hit in probably not yet this quarter much because that will come online in March. But the quarter of April through June, it might have a 1% hit just because of the overhead that hasn’t going to be quite absorbed, maybe 1%, 1.5%. But odelling forward, we’re in a good place. I mean we’re – we could have some hits, but it’s in a good place right now.

[Operator Instructions] Our next question comes from Ryan Koontz with Needham.

Congrats on the incredible results. The -- as far as your great bookings go, how would you quantify or qualify the impact from ARPA and RDOF subsidy programs and the strength you're seeing here in the near term?

As it relates to the backlog, our performance to date and the backlog, there really isn't a lot in there. Some of the early stuff, the state associated stuff is a little bit. But mostly, we're at a point where we're just starting to talk to customers who are planning their networks with government funding dollars. So we think we'll see some impact due to the government initiatives and funding programs probably late third quarter and into fourth quarter. But really, that's about '23 and beyond.

Got it. Super helpful. And how about the pickup in cable, it sounds like some really nice momentum there. Can you maybe walk us through the applications and the types of customers that are starting to boost your cable business?

Mostly in the cable TV business, what we're seeing is a strong leadership in what we would call Tier 2 operators. The operators who are investing in their networks and not the national carriers yet, but companies like Midcontinent, companies like Cable ONE who are really committed to their particular communities and who are investing in fiber-fed broadband alongside their DOCSIS implementation. We're also starting to see an emerging amount of work also coming from the larger carriers who are just deepening their fiber networks for future opportunities. So hub collapses, active cabinets with fiber installed. Just a means of protecting what they have and trying to make sure that their customers' experience remains positive to try to minimize churn in their subscriber base.

So it sounds like a combination of kind of DOCSIS upgrades and as well as new fiber-to-the-home builds in cable?

Absolutely. That's exactly right.

Great. And on your product mix, are you seeing much of a mix shift there between your passings product versus connected products? Any kind of mix shifts going on there for you?

I would say right now, we are a little bit heavier in the products associated with passing the home. So that’s going to be outside planned products like cabinets and terminals. I think that’s a little bit seasonal and we will, especially in the backlog, we’re seeing more orientation for the summer builds about the connectivity, the drop cables and the connectivity products. Also because the take rates typically as a step 1, step 2. They’re going to pass the homes first and then come in and identify market to the individual owners, homeowners for who’s the – take their fiber due to some of the shortage of fiber. What we’re seeing is not a lot of make-ready for drag cable and that they’re actually marketing to the individual home owner before they provide the fiber service.

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

And I'll add my congratulations. And you mentioned seasonality a moment ago. And while your guidance has increased nicely, I imagine you expect some here in the periods where you normally see weather or other seasonal drivers. So I wonder if you can talk about that. We've seen different type of seasonal results than we have in the past from various suppliers. I wonder what Clearfield is expecting there. And then it looks like at this point, you're expecting your first quarter to be kind of the high watermark for the year. I wonder how I can reconcile that with your tripling capacity in Mexico coming online? And what are the puts and takes there?

We're very optimistic for the long term. And as I said, this is, I think, truly just the beginning. And with the funding initiatives that are coming forward for '23 and beyond, we have every indication of being -- we're going to be ready and have the capacity by which to be ready at that point. That said, I think the materials that we currently -- or the backlog that we currently have is majority of it is scheduled to ship in the next 6 months. And so we do have capacity in theory available to expand beyond some of the forecasted numbers that we put in place. However, it is becoming increasingly difficult to obtain additional product and inventory positions. And so we're taking -- using our cash to take the inventory that we need, but simple things like , which right now has -- there's a global shortage of , right? We use that on every product that we ship. And so those kinds of things could slow us down or potentially create a problem for the delivery of some of the backlog that we have. So we're still conservative and we want to make sure that we -- until we can stabilize some of the supply chain challenges that just kind of come out of like a curve ball. We've got to be cautious about kind of the long-term numbers that we put out there.

Got it. And understood on kind of maybe staying on that front a little bit, and you historically targeted annual growth rates, what, double digits, mid-teens, obviously, are well above that last fiscal year. But given all the changes that you're kind of noting in terms of the amount of fiber to be deployed, the broadband subsidies, I mean, should we -- and understanding these numbers will move around. But should we be thinking about kind of a new elevated baseline for the growth of the company over the next few years?

That would be – while we don’t have long-term financial guidance. That certainly would be our call in that we’re investing in the capacity, in the systems, the materials, the buildings to be able to respond to both the private equity financing of these networks as well as the government-funded ones. And so we believe there will be demand that will allow us to grow beyond our historical compounded annual growth rate. And it’s now our job as a management team by which to execute toward that.

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 remarks.

Thanks so much. It’s been a wonderful pleasure to be able to speak with you today. The quarter has been fabulous. The team has been fabulous. I can’t thank our procurement groups or manufacturing groups enough as well as our sales organization that just continues to be able to stay in front of the customer and provide the resources that are necessary. And I want to thank you, the investors who are – we don’t take your support for granted, and we will continue to work to earn it every day moving forward.

Thank you for joining us today for Clearfield's Fiscal First Quarter 2022 Earnings Conference Call. You may now disconnect.