Good afternoon. Welcome to Clearfield's Fiscal Third Quarter 2022 Earnings Conference Call. My name is Vikram and I will be your operator this afternoon. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the conference over to your host, Sophie Pearson from Gateway Group. Please go ahead.

Thank you. Joining us for today's earnings 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 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, 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 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. Thank you and over to you.

Thanks Sophie. Good afternoon and thank you everyone for joining us today. It is such a pleasure to speak with you this afternoon to share Clearfield's results for the fiscal third quarter of 2022 and also to provide an update on our business and the trends we are seeing in the market. As evidenced by our strong Q3 financial results, including the record net sales of $71.3 million, the demand for high-speed broadband remains robust and continues to accelerate. Not only does our demand for broadband continues to be exceptionally strong, but we continue to execute on our Now of Age strategic plan to expand capacity and to rapidly scale our business to meet the burgeoning market demand. In May 2022, we announced an agreement for the strategic acquisition of finished fiberoptic cable manufacturer, Nestor Cables, a strategic supplier of our FieldShield product line. Our synergistic relationship with Nestor spans over a decade. The acquisition, which closed on July 26 and enables us to vertically integrate the design and supply of FieldShield cable to meet future customer demand. In a few minutes, I will go into greater detail on Nestor's business and what this acquisition means for the future of Clearfield. But first, I would like to welcome the Nestor team to Clearfield. We are so thrilled to have you working alongside. In addition to our record net sales in Q3, we also increased our quarter end backlog by 16% and from the prior quarter to a record $157 million. As I have said previously, we truly believe we are experiencing a once-in-a-generation investment opportunity in our industry, and we believe Clearfield is well positioned to capitalize on this growth. Our product portfolio was carefully developed for this opportunity, and our customers have responded enthusiastically. With our continued strong execution,…

Thank you, Cheri, and good afternoon, everyone. It's a pleasure to be speaking with you today about our fiscal third quarter 2022 results. So looking at our third quarter financial results in more detail. Net sales in the third quarter of fiscal 2022 were a record $71 million, an 84% increase from $39 million in the same year ago period, and up 33% from $53 million in our second quarter of 2022. We had two 10% customers in the period who accounted for 18% and 11% of net sales, respectively. Both of these customers were distributors. Strong momentum in sales bookings persisted into the third quarter of fiscal 2022, resulting in a 289% year-on-year increase in our sales order backlog. Order backlog grew to a record $157 million on June 30, 2022, up from $136 million on March 31, 2022, and up from $40 million on June 30, 2021. As we have previously discussed, we have expanded capacity in our Mexico and US based facilities, which we expect to allow us to capitalize on significant revenue opportunities in the quarters ahead. I'll now review net sales by our key markets. Our core community broadband market comprised 67% of our net sales in the third quarter of fiscal 2022, consistent with prior quarters in fiscal 2022. In Q3, we generated net sales of approximately $47 million in community broadband, up 73% from the same period a year ago last year. In addition, for the trailing 12 months ended on June 30, 2022, our community broadband market net sales totaled approximately $153 million, which was up 77% from the comparable period last year. Our MSO business comprised 15% of our net sales in the third quarter of fiscal 2022. Momentum in the MSO market continues to be strong with net sales growing…

Thanks for the financial update, Dan. Our thoughtfully designed fiber management and fiber connectivity products drive our value proposition. It is our goal to remove the obstacles that will prevent our customers from adopting fiber-lead broadband. Since its founding, Clearfield was built to scale and delivering fiber products to historically underserved or unserved communities has been our priority. Clearfield truly is community broadband, and we were built for this generational opportunity that lies in front of us. As we've previously discussed, Clearfield's Now of Age plan is our multiyear strategic plan to establish Clearfield as the platform of choice for fiber management and connectivity. The three pillars of the Now of Age plan are intended to strengthen and solidify Clearfield's market position within the fiber broadband industry. Our goal is to capture the fiber-to-the-home and business market share that Clearfield was built to obtain, while concurrently powering the innovation for new and existing markets in the years ahead. Accelerating our operating cadence, this pillar reflects Clearfield's commitment to addressing the market's accelerating demand for fiber-fed broadband and to ensure our operations and continue to satisfy our customers' demands. As previously stated, we are in the middle of a historic investment cycle for high-speed broadband, particularly fiber-led broadband. Nearly $65 billion in funding is available through the Infrastructure Investment and Jobs Act, with $42 billion of that amount being allocated to the Broadband Equity Access and Deployment program known as BEAD. That is expected to be distributed in late 2023 and early 2024. Furthermore, the elevated demand in this market is not a short-term event. More new fiber is expected in the next five-year period than all prior years combined. Industry research notes that we are in the third year of an investment cycle that may peak 2024 through 2027. It's…

Thank you. We will now be taking questions from the company's publishing sell-side analysts. [Operator Instructions] We have our first question from the line of Jaeson Schmidt with Lake Street Capital Markets. Please, go ahead.

Hey, guys. Thanks for taking my questions and congrats on the really impressive results. Just want to start with that backlog number. Just curious, if the composition of that backlog is pretty similar to the revenue breakdown you saw this past quarter or I guess, just year-to-date?

The backlog is pretty consistent with third quarter and some increase in regard to longer-term solutions, we're seeing in the market that more and more customers are looking to actually place long-term scheduled orders into next year. So that will be the only caveat. Other than that, it's pretty consistent with where we've been at in the last quarter.

Okay. That's helpful. And Cheri, I know you alluded to some just overall supply and labor constraints. Curious, if there was some demand that you were unable to ship in the June quarter? And I guess, relatedly, how are you guys thinking about that overall backdrop? Do you expect any improvement as we progress through the remainder of this calendar year?

Yes. Well, we haven’t had labor that has affected our manufacturing ability to ship. I mean, we've had actually an amazing time to -- and a much more accelerated rate of bringing people onboard in both Mexico and in Minnesota. So from our perspective, we've been able to achieve labor. But I have spoken with several customers, some of our larger customers who are experiencing a challenge to be able to get new people into the market. And we're seeing a very accelerated need for training. And I expect that problem to actually get a little worse before it gets better because we're really at this point where people are ready to kind of get some things in place and now it will turn into winter and we'll have to figure out how the build season is affected next spring. So I think we've got kind of 12 months of kind of uncertainty around labor demand -- in our labor availability amongst service providers and contractors at the end, but we are investing in an aggressive program to accelerate training programs available from Clearfield to help support the installation of our products and looking to significantly increase the -- our investment in application engineers and other training resources to help alleviate some of that concern from our customer base.

Okay. Got it. And then just the last one for me, and I'll jump back into queue. Just a clarification. I know the new guided range does not include any contribution from Nestor Cables. However, are you expecting any revenue from them, or was the guided range just given so it would be on an apples-to-apples basis?

We felt it was important for it to be apples-to-apples. And with the rate of our accelerated growth and the amount of organic growth that we are recording, we wanted to make sure that the shareholders would be able to see that very clearly. The Nestor Cables is a -- their financial audits -- were done in Finland to finish accounting standards. So we're referencing the revenue that they were able to achieve in fiscal year 2021, which is what actually was dited on a more international basis, which was €31 million. They have some level of seasonality to their business. It will start to tick down now in September and October in that they do most of their business in Northern Europe. So they're going to have some capacity available for us. We anticipate there probably will be $5 million or $6 million in revenue from Nestor in the period ending in September. The profitability is much more difficult to walk through because there's all of these integration valuation issues bringing the fair value review, the depreciation review. So, we'll be able to give a much more clean and accurate vision of what that -- with the integrated program of Nestor as a part of Clearfield means when we announced year-end financials in November.

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

Thanks. Mr. Peter.

Thank you. We have next question from the line of Ryan Koontz with Needham & Company. Please go ahead. Q – Ryan Koontz: Thanks for the question. I'm merely out of superlatives here for Clearfield just a spectacular quarter. Big congrats to the team. So keep it up.

Thanks. Q – Ryan Koontz: Just hoping, Cheri you can help us understand what's happening with the inflection we're seeing in both the national carriers and the MSOs. Are these new wins for the companies? Are these existing programs, your task to that are gaining more budget? Are you displacing other vendors? Maybe any kind of color there across those two segments, it would be great.

Our ability to execute in the national carrier business is really exciting for us, because it represents the fact that we can use the same product line in community broadband as we do in national carriers. We've said that from the very beginning that the product lines scale from the smallest to the largest of networks and especially as it relates to the cabinet infrastructure that as we pass more and more homes than the national carrier markets that we work with are starting to really put -- get their app together and be able to move forward. So it is a variety of work in passing homes with the national carrier market and using the existing product portfolio. In the cable TV space, in the MSO market, it's really an extension of the work we've already been doing in the Tier 2 markets. The Tier 2 service providers continuing in the cable market to extend their fiber reach and to be able to support their highly dense markets with a higher concentration of fiber as a proactive rather than a defensive move. And we're also seeing some success and really exciting success with our active cabinet business in the cable TV market. So that's a new level of win for us of active cabinets in cable TV as they bring their electronics further out into the network and to be able to capture some of this -- protect what they currently have and really invest in where they're going. So we see both of those programs as long-term opportunities that we can support at current levels and grow into as their needs expand.

Makes a lot of sense. The cable guys are moving to the distributed access architecture and need to power all those remote nodes, so makes a lot of sense.

Yes. Yes.

And then how about on the -- go ahead, Cheri.

And then a lot of cables they are going to file with that. So we're excited that active cabinets is actually build connectivity and the demand for connectivity that we can then provide as well.

Right. Great. And then on the subsidies, are you -- what kind of -- I know you probably can't give us a number, but can you give us on the revenue contribution for the subsidies from either ARPA or RDOF? Are they material yet? Where are we in the cycle for those two earlier programs?

They're less than 5% of our revenues very, very, very early.

Got it. Helpful. And then on the product mix in the quarter, any -- as far as kind of passing versus connections versus historical mix any difference there?

No difference, still very heavily weighted towards passing of homes and so the architectures associated with cabinets and the like. And that's really what is reflected in the gross margin. We knew that we were going to see some impact in profitability and gross profit associated with the new buildings. But we did see with this kind of record increases in cabinet business that rate of inflationary cost per sheet metal has outpaced our ability to reduce the cost structure and the manufacturability of those. We'll be addressing that over the next probably six months, but it is an unfortunate kind of statement of fact of where we're at, sheet metal is a significant part of our cost structure. It's not one of our core competencies. We can design phenomenal sheet metal enclosures, but we don't actually then sheet metal. And that's something that we've had to be able to deal with in this last quarter in a more accelerated rate.

Right. So when you said, unfortunately, you're looking to probably pass along price increases areas where you're feeling some pain there?

Yes. We're hoping to be able to actually hold prices most of the way through, in a partnership with our service provider customers. So any increase in revenue from us won't be because of price increases there. Some places we'll need to. But as a statement of kind of across platform, we're going to hold it where we can.

That's great. That's all the questions I have. Thanks so much, Cheri.

Thank you.

Thank you. We have next question from the line of Tim Savageaux with Northland Capital Markets. Please go ahead.

Hi, good afternoon, and I'll – pardon me – add my congratulations on the strong results. My first question is around capacity or capacity utilization. You've had a lot of new manufacturing capability coming online in the US and in Mexico. I think you tripled your capacity down there. But as we look at the strong third quarter results, I mean, can you relate that and whether you're fully scaled up now or where you might be shortly here total revenue capacity? Where are you running now? And what capability might you have going forward in terms of overall revenue capacity? And I have a follow-up.

We were extremely pleased on how rapidly we were able to execute to the strategy that we've been calling forward really for the last 9 months to 12 months that we were making a very significant investment in real estate and we were we're able to execute in both the – in an environment where labor we sort where contractors were difficult to deal with that we were able to build those facilities on schedule that we're working with. A team of managers that were able to bring those people on board, and to bring them on board effectively, so that we could get the revenue out in place. What you'll see really from us is each month, we are adding to our capacity. One of the things that has been critical to our ongoing commitment to quality is to grow at a pace that you can ensure quality design and quality manufacturing. So each month of each quarter is a little bit bigger than the one before, pending sheet metal and so attending other components to be able to ship. And so we were able to ship more than we expected in the third quarter, because we were able to expedite some sheet metal, be able to get some things in place. We are bringing on additional suppliers to be able to lessen that issue. But at the same time, we've got every day, there's a different commitment in the different suppliers that we need to manage. And so our – once we can get the bomb on the floor, we are having amazing commitment to lead time and commitment to manufacturing capacity, but it's getting all the materials in place. And so that's why you see such a significant increase in inventory as well. We didn't build this facility for one year. We built it for this generational infrastructure development. There's more CapEx that's required to fully utilize the building, this market is growing somewhere between 12% and 15%. We saw companies like Calix and Corning announced numbers this week that were about 17%, 18% of a market. So we're going to grow at least that amount over an annual basis. And I can't give you a finite number because it's really product specific, but we believe we can grow with this market in Denso.

Great. Thanks for all that color. And if I could just follow up back on the Tier 1 side where you obviously had a pretty impressive increase there. And I guess, should we look at that as some sort of significant penetration of one of these larger guys you've been chasing for a while something that you can kind of build on after this sort of step function higher, or maybe something that might be a little more lumpy over time and can you say whether you're you've got one major customer driving that or multiple national carriers that you've seen increases with?

This is not project business. So it is ongoing revenue that is being charged out for delivery on a monthly basis. And so it is a significant part of backlog at about the same percentage rate as what you've seen here and that we started shipping that product early in the quarter, and we'll continue to be able to ship it kind of at that rate moving forward. The increase -- we do sell to all of the national carriers in the wireless carriers as well, but the increase is predominantly related to a single carrier.

Great. Thanks very much, and congrats again.

Thank you.

Thank you. 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. Over to you, ma'am.

Thank you. It has been an absolutely amazing time to be able to work with our customers and to work with the Clearfield community to demonstrate this level of success. We were built, as I've said many times before, for community broadband and are thrilled that we're able to provide the equipment necessary for our customers. Moreover, we are now extremely excited about the next stage of Clearfield and the acquisition of Master and what that does for our product portfolio and our opportunity to really be even earlier and more strategically involved with our customers' planning process. We look forward to speaking with you again at the end of our fiscal year. We will report sometime in mid to late November, December as the integration materials are put together. Thanks so much, and good day.

Thank you very much. Ladies and gentlemen, thank you for joining us today for Clearfield's Fiscal Third Quarter 2020 Earnings Conference Call. You may now disconnect your lines.